Any US national is aware of the existence of the IRA. Is any Dutch resident US national aware that during their time in the Netherlands, the IRA payments are taxed in the Netherlands?
IRA payment taxed in the Netherlands
The Individual Retirement Account (IRA) is next to the 401K is a pension type of account. The thing with pension contributions is that these are tax deductible. However, the benefit from that pension is then also regarded a taxable benefit.
The US Dutch tax treaty determines in article 19 which country can tax the benefits from a pension arrangement. Sub 1 states that the country where the person is a tax resident at the moment the benefit is received, can tax that benefit.
Article 19 sub 2 however states that if that person was a US resident during a five year period before this payment, the US Government can tax this pension benefit. Mind you, it is rather specifically stated in that article, we simplified the content. Please read the actual text before you commit yourself to anything.
IRA payment – court case
A US national planned to move to the Netherlands. Before his move he contacted the Dutch tax office and inquired what would happen if an IRA payment was taken up during the Dutch stay. The Dutch tax office replied in an email message that the IRA payments are taxed in the Netherlands. However, the payments are subject to US tax only if paid within a five year period from date of migration to the Netherlands.
The US national paid out shortly after arriving in the Netherlands USD 520.674 from the IRA account. The US tax office charged USD 143.072. In the 2017 Dutch income tax return the IRA payment was reported and a double taxation relief claimed based on the email message of the Dutch tax office.
The Dutch tax office denied the double taxation relief. That resulted in the US national going to court. The court ruled that it was correct that the Dutch tax office had not provided the double taxation relief. Article 25 of the US Dutch tax treaty states that if both the US and the Netherlands charge tax over this same source of income, the USA needs to step back. In other words, not charge tax over this income.
Court case conclusion
More simple stated, the conditions of article 19 sub 2 with the five year criteria were not met. Hence no double taxation relief was provided. The court did agree with the US national that the Dutch tax office informed him incorrectly. That based on that information he has taken his actions which now resulted in this bad outcome. Based on that information provided to him trust was build that this information was correct. Consequently the court ruled in his favour due to this exception, that a full double taxation relief is to be applied.
Tax is exciting
We think tax is exciting. Surprised we are that the Dutch tax office provides statements in an email message about a tax position. We are always told ‘We do not provide tax advise’ by the Dutch tax office. Now you also understand why, as also the Dutch tax office can be wrong. Checking is easier than creating.
The other aspect of this court case is to read article 19 sub 2 to the t in order to successfully make a claim on it. Article 19 sub 2 makes that both the US and NL can tax the same. Article 25 makes that US needs to withdraw on this taxation. One important lesson learnt today.