The Dutch-American Friendship Treaty is an agreement between the United States and the Netherlands that allows American entrepreneurs to acquire temporary residency and a work permit in the Netherlands for the purpose of starting a business.
The DAFT treaty also outlines similar reciprocal benefits for Dutch citizens who want to do business in the United States.
In this article, we will cover the details you need to know if you are an American starting a business in the Netherlands under the DAFT, including the different business structures, their pros and cons, and their tax implications.
Benefits of the Dutch-American Friendship Treaty
The Dutch-American Friendship Treaty is also known as the Dutch-American Residency Treaty. If you qualify under this treaty, you can get temporary residency in the Netherlands for 2 years, and then you can renew it for 2 years each time.
Typically, if an foreign entrepreneur wants to start a business in the Netherlands, they must prove that their business is innovative and in the interest of the Dutch economy. This is determined by a points-based test of 300 points.
The test includes questions about the personal experience of the applicant, such as his or her education, entrepreneurship and work experience, the applicant’s business plan, and how the business will add value to the Netherlands. For example, if the business will create jobs, or if the applicant is making a financial investment in the Netherlands.
However under the Dutch-American Friendship Treaty, American entrepreneurs are exempt from the Dutch national interest and points-based test requirements. This is a huge benefit that Americans have over other nationalities moving to the Netherlands.
Another requirement for most foreign entrepreneurs starting a business in the Netherlands is that they must prove that they have “significant capital” available to start their business, which can be tens of thousands of dollars. This requirement is lowered under the Dutch-American Friendship Treaty, so that only €4,500 is required.
Business Structure: ZZP or BV
If you want to move to the Netherlands under the Dutch-American Friendship Treaty, you’ll need to start a business. So you’ll need to decide on a business structure. There are two options: Self-employed (ZZP) or Corporation (BV). It’s best to decide on this structure before moving to the Netherlands. Below, we will explain why, and cover the tax implications of each option.
ZZP stands for zelfstandige zonder personeel, which translates to “independent without staff” or self-employed person. A ZZP business is similar to a sole proprietorship or freelance business in the United States.
This is the option that most freelancers will use to set up a Dutch business. The costs to set up a ZZP are relatively low, and there are tax benefits to this structure.
To start a ZZP, you will need to open a Dutch business bank account and fund it with €4,500. This is called a “minimum capital requirement.” You will need to keep the €4,500 in this bank account for the entire time you are in the Netherlands under the DAFT. The capital in your account can never drop below €4,500. Dutch Immigration can audit you at any time, and if you don’t have the €4,500 in your account, they can revoke your visa. So just think of it like a saving account for the business and plan to keep the funds there, untouched.
Self-employed people get several tax discounts, including the “self employment discount” and the “starters discount.” On top of those, there is also a “small business discount,” which allows 14% of your profits to be tax free.
BV stands for besloten vennootschap, which translates to “private company.” A BV business is similar to a corporation in the United States.
It takes more administrative work and more upfront cash to set up a BV, but there are a few reasons why you might want to consider structuring your business as a Dutch corporation, especially if you expect your business to have upwards of €150,000 in profit annually.
Tax Savings Benefits of the BV
1. The Netherlands has a tax advantage option for highly skilled migrants called the “30% Ruling.” This option is available to people who are recruited from abroad to live in the Netherlands and work as an employee in a corporation. Under the 30% Ruling, 30% of employee compensation is tax free for the first 5 years, and the corporation only pays employer payroll taxes on the 70% that is taxable (unemployment taxes, pensions and national health care premiums). This benefits both employees and corporations, and it’s only available within the BV structure. If you start a BV, you can hire yourself as a highly skilled migrant and qualify for the 30% Ruling.
* Important note: The 30% Ruling is only available within the first 3 months after you move to the Netherlands, so it’s important to make the decision to structure your business as a BV before you move, if you want to take advantage of the 30% Ruling.
2. Employees with the 30% Ruling are exempt from Box 3 “Wealth Tax” on worldwide assets (such as investments, Roth IRA, 529 accounts, U.S. based bank accounts, etc.)
3. Part of the profits can be left in the BV, and taxed at a lower rate annually, 16.5% for 2020 for profits under €200,000.
4. Driver’s license swap – save yourself from hours and hours of driving school with approx cost of €1,500 or more!
5. Tax free reimbursement of international school fees. Your BV can pay for the school, which can be very expensive.
Costs to Set Up a BV
Setting up a BV is a lot of administrative work, and it can be quite costly. Costs you are likely to incur include:
1. The cost to incorporate is approximately €2,500.
2. Payroll- you need to pay yourself the legal minimum salary of €54,781 (for 2020).
3. Payroll taxes – The BV’s employer tax contribution (payroll taxes) will be around 15% of taxable wages. If you are the only employee, and you pay yourself only the legal minimum salary, estimate your employer tax to be about €6,000.
4. Payroll / VAT / bookkeeping – Administration for the BV will cost around €200 per month (ranges widely depending on services!)
5. U.S. tax – As the shareholder of a foreign corporation – which a BV is designated – you are required to file Form 5471 and a host of other international tax forms with your personal annual tax filing. These complex filing requirements have extreme penalties. You can budget around €2,500 for your U.S. taxes, which can be higher if you have other complicating factors in your personal tax return annually.
6. Dutch tax – You have to file a corporate AND personal Dutch tax return. Budget around €2,500 for your Dutch taxes annually.
The tipping point where it makes financial sense to start a BV instead of a ZZP is €150,000 per year in expected profits. If your business will reach that level of profits, the BV with the 30% Ruling will give you significant cost savings.
However, if you have high net wealth to begin with, the savings from Box 3 Wealth Tax alone might cause you to consider going with a BV even if your profits might not reach €150,000 per year.
Once you decide on which structure is right for you, you’ll need to fill out an application with IND (the Dutch Immigration service).
You can read more about how to apply to live and work in the Netherlands as a self-employed person on the IND website here.
Are you interested in moving to the Netherlands under the DAFT? Do you have questions about your specific tax situation? Please contact BNC Tax for a free consultation, or a paid phone call for professional advice.
Want to learn more about tax implications for Americans living abroad? Check out our previous article about the difference between foreign tax credits and the foreign earned income exclusion (FEIE).