US-NL Tax Treaty: What DAFT Entrepreneurs Must Know

This is not tax advice. Consult a qualified tax professional for your specific situation.

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As a US citizen running a business in the Netherlands under the Dutch-American Friendship Treaty (DAFT), you're potentially taxable in two countries on the same income. The US taxes citizens on worldwide income regardless of where they live. The Netherlands taxes residents on worldwide income too.

Without relief, you'd pay full taxes twice on everything you earn.

That's where the US-Netherlands tax treaty comes in. It's the agreement that prevents double taxation and determines which country gets to tax what. Here's what DAFT entrepreneurs actually need to know.

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What the Tax Treaty Does

The tax treaty between the US and the Netherlands establishes rules for:

1. Which country taxes which income (business profits, dividends, interest, pensions, etc.)
2. How to avoid double taxation when both countries have taxing rights
3. Special provisions for specific types of income
4. Information sharing between the two tax authorities

The treaty doesn't eliminate taxes. It prevents you from paying full tax to both countries on the same income.

For a deeper look at the treaty's specific articles, see our detailed tax treaty explainer.

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Business Income (Article 7)

This is the most relevant article for DAFT entrepreneurs.

The rule: Business profits of a resident of one country are taxable only in that country, unless the business has a "permanent establishment" in the other country.

What this means for you: Your DAFT business income is earned in the Netherlands, where you live and have your permanent establishment. The Netherlands gets to tax it.

The US still taxes it too (because you're a US citizen). But the treaty, combined with tools like FEIE and the Foreign Tax Credit, prevents actual double taxation.

In practice:

1. You pay Dutch taxes on your business income
2. You report the same income on your US return
3. You use FEIE to exclude it from US tax, OR you take a Foreign Tax Credit for Dutch taxes paid

Either way, you don't pay the full rate to both countries.

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How FEIE Works with the Treaty

The Foreign Earned Income Exclusion (FEIE) lets you exclude up to approximately $130,000 (2025) of foreign earned income from US taxation.

For most DAFT entrepreneurs: If your business income is under the FEIE limit, you exclude it all from US income tax. You still pay Dutch taxes on it, but you owe little or nothing to the US (beyond self-employment tax).

Important: FEIE doesn't apply to self-employment tax. You may still owe US self-employment tax (Social Security and Medicare) on your business income, depending on whether the totalization agreement applies.

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How the Foreign Tax Credit Works with the Treaty

The Foreign Tax Credit (FTC) is the alternative to FEIE. Instead of excluding income, you include it on your US return and take a dollar-for-dollar credit for Dutch taxes paid.

When FTC might be better:

• Your income exceeds the FEIE limit
• You want to maintain IRA contribution eligibility
• Dutch taxes paid are high enough to offset your full US liability

When FEIE is typically simpler:

• Income under the FEIE limit
• Straightforward business income
• You don't need IRA contributions

The treaty enables FTC. Without the treaty confirming Dutch taxes as creditable, the FTC wouldn't work as cleanly.

Pro Tip: You can use FEIE and FTC together in some situations (FEIE for earned income, FTC for other types). But you can't use both on the same income. Your tax accountant can help determine the optimal strategy.

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Self-Employment Tax (Article 24 / Totalization Agreement)

The totalization agreement (separate from but related to the tax treaty) determines which country's social security system you pay into.

General rule for self-employed in the Netherlands: You pay into the Dutch social system (volksverzekeringen), not US Social Security.

But: The IRS has been inconsistent in applying this for DAFT entrepreneurs. Some CPAs advise paying US self-employment tax to continue earning Social Security credits. Others say the totalization agreement exempts you.

This is one area where professional advice is essential. The stakes are significant: self-employment tax is 15.3% of net business income.

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Investment Income (Articles 10, 11, 12)

The treaty has specific rules for different types of investment income.

Dividends (Article 10):

• US dividends received by a Netherlands resident: generally taxed in both countries, but the US tax is limited to 15%
• You get a credit in the Netherlands for the US tax paid

Interest (Article 11):

• Interest is generally taxable only in the country of residence (the Netherlands)
• US-source interest may be exempt from US withholding

Royalties (Article 12):

• Taxable only in the country of residence
• No withholding tax in the source country

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Pension and Retirement Income (Article 18)

This matters for your 401(k), IRA, and eventual Social Security benefits.

401(k) and IRA distributions:

• Generally taxable in the country of residence at the time of distribution
• If you're living in the Netherlands when you withdraw, both countries may have taxing rights
• The treaty provides credit mechanisms to prevent double taxation

Social Security benefits:

• US Social Security paid to a US citizen in the Netherlands is generally taxable only in the US
• This is a favorable provision for American expats

Dutch AOW (state pension):

• Taxable in the Netherlands

For more on how your 401(k) is affected, see our 401(k) guide for expats.

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Capital Gains (Article 13)

Business assets: Gains from selling business property are generally taxed where the business operates (the Netherlands).

Other assets: Gains from selling non-business assets are generally taxable only in the country of residence.

US real estate: If you still own property in the US, gains from selling it are taxable by the US. The Netherlands may also tax it (as worldwide income), but provides a credit for US taxes paid.

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The Savings Clause (Article 24)

Here's a critical provision most people overlook.

The savings clause allows each country to tax its own citizens as if the treaty didn't exist, with certain exceptions.

What this means: The US can tax you on all your income regardless of what the treaty says, because you're a US citizen. The treaty then provides relief through credits and exclusions to prevent double taxation.

In practice: You don't get to pick and choose which country taxes your income based on the treaty. The US taxes everything first (as if there were no treaty), and then you apply treaty benefits through FEIE, FTC, or other mechanisms.

Reality Check: The tax treaty doesn't make your taxes simpler. It actually adds complexity. But it does prevent you from being fully taxed by both countries. The protection is real, even if the paperwork is annoying.

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How the Treaty Affects Your Dutch Return

On your Dutch tax return, you report worldwide income. The Netherlands taxes it under their normal system (Boxes 1, 2, and 3).

For US-source income (interest, dividends, capital gains from US investments), the Netherlands provides credits for any US taxes paid, in line with the treaty.

For Dutch business income, the Netherlands is the primary taxing country. No special treaty adjustments needed on the Dutch side.

The complexity is mostly on the US side, where you need to properly claim FEIE or FTC.

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Key Treaty Takeaways for DAFT Entrepreneurs

1. You'll pay taxes somewhere, just not double taxes on the same income
2. Dutch business income is primarily taxed by the Netherlands; the US provides relief through FEIE or FTC
3. Self-employment tax remains a gray area; get professional guidance
4. Investment income has specific withholding rules depending on the type and source
5. Retirement accounts are generally protected from double taxation
6. Social Security from the US is typically taxed only by the US

For the complete picture on your US tax obligations, see our US taxes guide for Americans in the Netherlands.

For understanding your Dutch tax obligations, see our Dutch taxes guide for DAFT business owners.

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When You Need a Professional

The tax treaty is not something to figure out on your own. The interaction between the treaty, FEIE, FTC, self-employment tax, and the totalization agreement creates a web of rules that even experienced accountants find complex.

At minimum, consult a tax professional your first year filing in both countries. The cost of getting it wrong far exceeds the cost of hiring help.

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We're not immigration lawyers or tax advisors--just Americans who did this. Requirements change, so verify with official sources.