Question: I am a US citizen and have been “let go” by my company (in The Netherlands). I will receive a severance payment of EUR 100,000. I have been told that the best thing to do with this is to put it into something called a “Stamrecht BV” to avoid paying 52% tax on this amount. Is this a good idea?

Answer: In short, no. The issue is fairly complex, but the problem comes from the fact that the US does not recognize a Stamrecht BV as a legal income deferral method, so you will likely end up paying double tax. For example, let’s say you receive EUR 100K this year and defer it for 10 years, then withdraw it. Let’s also assume that during that 10 year of deferral you earn EUR 10K per year, so the total in year 11 is EUR 200K. Here is what happens (I’ve assumed the highest tax rates in both countries):

Year 1: Receive EUR 100K and defer to a Stamrecht BV. No NL tax. US Tax EUR 35K.
Year 2-11: Earn EUR 10K per year. No NL tax. US tax EUR 3.5K per year.
Year 11: Withdraw EUR 200K from account. NL tax EUR 104K. No US tax.
Total tax cost: EUR 174K

This is a bit oversimplified, but you probably get the picture by now. You also need to take into account the fact that you need to pay to set up a Stamrecht BV (probably EUR 3-5K in total) and you need to prepare annual statements and file an annual Dutch tax return (around EUR 2K/yr if you do it cheaply). You also need to file Form 5471 (Report of Foreign Corporation) as part of your US tax filings, which many firms charge EUR 1,500 or more to prepare. If you add all this up, you’ve probably ended up with little or nothing for all your trouble.

As harsh as it sounds, the “best” solution I am aware of is to bite the bullet and pay the tax when you receive the payment. This will match the foreign tax credits (so no US tax) and save a lot of administration costs. It also means you have free access to your hard earned cash and can buy that new bakfiets you’ve had your eye on!