February 17th, 2021
Contrary to what is often claimed, a US LLC is not quite comparable to a Dutch limited liability company, the B.V (besloten vennootschap). The biggest difference between the two is that the B.V. is a corporation and the LLC is a hybrid entity between a corporation and a partnership.
For US tax purposes the LLC by choice is considered transparent so the LLC itself is not a taxable entity; the check-the-box system in the US allows for an LLC to be treated either as a partnership or as a corporation. When an LLC is checked as a partnership, the participants in the LLC will in this case be taxed directly in their personal income taxes on their share in the earnings of the LLC.
The LLC from a Dutch tax perspective
Under NL tax rules, there is no option to elect to be treated as a pass-through for tax purpose.
Therefore, depending on where the LLC is incorporated in the US, the LLC is considered as a taxable entity in the Netherlands. This means that the LLC is liable for corporate income tax in the Netherlands if the place of effective management of the LLC is located in the Netherlands. The highest corporate tax rate is 25% in the Netherlands (15% tax on the first € 390,000 of profit as of 2022).
Place of effective management LLC
When relocating from the US to the Netherlands with an LLC, it is crucial to determine the place of effective management. The LLC will only be liable for corporate income tax in the Netherlands if the place of effective management is located in the Netherlands.
The place of effective management is where the most important decisions of a company are made. The person or persons making those decisions are usually the director or the board of directors of the company. This means that if the director or the majority of the board of directors of the company relocate(s) from the US to the Netherlands, the company (and its taxability) also relocates from the US to the Netherlands.
For larger corporate organizations, instead of one director, there will be a board of directors in place. And in most cases, not all of the directors will relocate to the Netherlands. In this situation, a dispute can arise over the place of management being either the Netherlands or the US.
Quick checklist below to high-level determine the place of effective management from a Dutch tax perspective:
- >50% of the board of directors in the Netherlands. YES/NO
- These directors can make decisions for the company (e.g.: hire/fire staff, sign contracts, make transactions). YES/NO
- The decisions of the directors are made in the Netherlands. YES/NO
- Important meetings are held in the Netherlands. YES/NO
- The main bank accounts are in the Netherlands. YES/NO
- Bookkeeping is in the Netherlands. YES/NO
The questions in the checklist read from most-to less important. If the answer is YES to most of the questions in the checklist, the place of effective management will most likely be in the Netherlands.
Double taxation
The tax treaty between the Netherlands and the US prevents double taxation. This is the case when both countries levy the same taxes over the same earnings or income. However, the treaty does not prevent the effect of a double taxation in all cases.
For example:
A US person who is a > 50% member of an LLC relocates from the US to the Netherlands. The LLC is checked as a partnership in the US.
For Dutch tax purposes the LLC is non-transparent, but for US tax purposes the LLC is transparent. This translates to a corporate income tax burden in the Netherlands up to 25% and a personal income tax burden in the US. These taxes will be levied of the same earnings in the LLC. The issue in this situation is that these taxes cannot be automatically offset against each other.
As an alternative, the incorporation of a C-Corp or the LLC checked as a corporation in the US should be considered. There are of course downsides to this to consider from a US tax perspective, but the effect of a double taxation can be avoided in this alternative structure.
It is therefore strongly advised to consult a US and NL tax advisor before setting up your such structures. Broadstreet has extensive experience with US and NL corporate structures and liaises often and closely with Dutch based US tax advisors and CPA’s within our professional network. Basically making it your one-stop-shop for tax advice.
Administrative burden
Paying taxes is inevitable and the same goes for filing your tax returns. The Dutch tax authorities (Belastingdienst) have a popular saying when it comes to filing taxes: “We cannot make it more fun, but we can make it easier”. Though toe curling, they do have a point. The burden of filing your tax return should not be more of an ordeal than it already is.
When setting up a tax structure it is therefore not only important to make sure that you are not unnecessarily paying too much taxes, it is also important to make sure that your administrative burden is as light as possible.
In the previously mentioned example about double taxation, not only does the structure lead to an effect of a double taxation, it also leads to a heavier administrative reporting burden in the US. Which leads to higher consulting costs. As costs for consulting and assistance with tax reporting are significantly higher in the US compared to the Netherlands, it is advisable to take this into account when setting up your structure.
Intake
Ultimately, setting up a tax structure is a matter of customization as every company and their management is unique. Depending on the business, an LLC might even be advisable and an Incorporation might lead to a heavier tax burden. In any case, solid and dependable advice is key.
Broadstreet provides an intake service where your situation can be discussed from a Dutch tax perspective. After the intake we will provide you with our high-level conclusions and suggest a plan of action. We can then assist you further with the incorporation, accounting, payroll, tax reporting and everything in between.
