The Netherlands’ budget day measures for 2024 include a proposal to partially revise the Dutch tax classification of foreign entities as either transparent or non-transparent to bring it in line with international standards. Specifically, it is proposed to codify the existing classification method for entities that are sufficiently similar to Dutch entities while adding two rules in cases where a foreign entity does not have a Dutch equivalent. It is also proposed to eliminate the open CV (i.e., the “open commanditaire vennootschap”), with the result that a Dutch limited partnership would always be transparent for Dutch tax purposes provided it was not considered a reverse hybrid (i.e., seen as non-transparent by another state, e.g., through an election). This means that a CV (or a foreign equivalent) would never be subject to Dutch corporate income tax; instead, profits and losses of the CV (or a foreign equivalent) would be allocated to the partners regardless of whether the admission/substitution of limited partners requires the unanimous consent of all (limited and general) partners (for prior coverage, see the article in the November 2021 issue of Corporate Tax News).
If enacted, the proposal would be effective from 1 January 2025 and would require changes to the Dutch corporate income tax, personal income tax, dividend withholding tax and conditional withholding tax acts.
Under the Netherlands’ existing rules for classifying an entity as transparent or nontransparent for Dutch tax purposes, a foreign entity is compared to a comparable Dutch entity (such as a public limited company (NV), private limited company (BV), cooperative (coöperatief) and general partnership (vennootschap onder firma) based on the entity’s legal characteristics, and then is treated in the same way as the comparable Dutch entity. A CV currently is considered to be transparent for Dutch tax purposes (i.e., a closed CV) if unanimous consent of all partners is required for admission to the CV or substitution of a limited partner. In practice, foreign limited partnerships are frequently treated as nontransparent from a Dutch tax perspective, resulting in hybrid entity mismatches, i.e., limited partnerships are considered transparent in most countries but nontransparent for Dutch tax purposes, which is out of line with international practice. The Dutch government intends to abolish the unanimous consent requirement for transparent treatment so that all CVs (both Dutch and foreign) would be considered transparent and therefore no longer subject to corporate income tax; instead, the entity’s income would be allocated to the participants and personal income tax levied at their level.
In addition, the distinction between open and closed limited partnerships would be abolished. As explained above, an open CV is one where the partners can freely transfer their interest in the partnership without obtaining the consent of the other partners; this is not possible in a closed CV. As from 1 January 2025, CVs that hitherto qualified as open would no longer be independently taxable for corporate income tax and would no longer qualify as withholding agents for dividend withholding tax and conditional withholding tax purposes.
From a practical perspective, the changes to the rules will have implications, e.g., for the Dutch tax classification of UK limited liability partnership. Currently, such partnerships are typically viewed as tax transparent, particularly where they are professional service firms that rely on collaboration between the partners. Going forward, this may change where a limited liability partnership is effectively managed from the Netherlands, in which case it would be regarded as nontransparent for Dutch tax purposes (under the “fixed method” described above). The transition from transparent to nontransparent will have various tax implications. Limited liability partnerships effectively managed outside the Netherlands would continue to be regarded as tax transparent for Dutch tax purposes.
A second group of entities likely to be affected by the new rules are limited partnerships (e.g., UK, U.S. and certain offshore limited partnerships), which are currently regarded as nontransparent for Dutch tax purposes, even though they are tax transparent in their ‘home’ state. Going forward, such limited partnerships would typically be treated as tax transparent for Dutch tax purposes, a transition that would also have various tax implications.
Because the abolition of the open limited partnership may trigger personal or corporate income tax liability, rollover provisions are proposed for 2024, subject to certain requirements.
Frederik Boulogne
BDO in Netherlands
If enacted, the proposal would be effective from 1 January 2025 and would require changes to the Dutch corporate income tax, personal income tax, dividend withholding tax and conditional withholding tax acts.
Background and current rules in the Netherlands
Typically, a country classifies an entity (such as a public limited company, private limited company, partnership or limited partnership) as transparent or non-transparent for tax purposes. In the former case, tax is imposed on the participants in the entity, whereas in the latter case, tax is imposed on the entity itself. Since most countries have their own classification rules, differences may arise between countries creating mismatches that can be exploited. As described below, the Netherlands has specific classification rules for Dutch and foreign entities that depart from international standards and this can often result in hybrid classifications, so the government has proposed to revise the classification policy for foreign entities.Under the Netherlands’ existing rules for classifying an entity as transparent or nontransparent for Dutch tax purposes, a foreign entity is compared to a comparable Dutch entity (such as a public limited company (NV), private limited company (BV), cooperative (coöperatief) and general partnership (vennootschap onder firma) based on the entity’s legal characteristics, and then is treated in the same way as the comparable Dutch entity. A CV currently is considered to be transparent for Dutch tax purposes (i.e., a closed CV) if unanimous consent of all partners is required for admission to the CV or substitution of a limited partner. In practice, foreign limited partnerships are frequently treated as nontransparent from a Dutch tax perspective, resulting in hybrid entity mismatches, i.e., limited partnerships are considered transparent in most countries but nontransparent for Dutch tax purposes, which is out of line with international practice. The Dutch government intends to abolish the unanimous consent requirement for transparent treatment so that all CVs (both Dutch and foreign) would be considered transparent and therefore no longer subject to corporate income tax; instead, the entity’s income would be allocated to the participants and personal income tax levied at their level.
Proposed changes
Under the proposal, the main rule for classifying foreign entities under Dutch tax law would remain unchanged. As noted above, under the “entity comparison method,” the relevant characteristics of foreign entities are compared with the relevant characteristics of Dutch entities. However, if there is no comparable Dutch entity, two additional methods are proposed:- Fixed method: This method would be used where an entity is established under foreign law and tax resident in the Netherlands; in this case, the entity would be classified as an independently taxable entity subject to corporate income tax.
- Symmetrical method: This method would be used where an entity is incorporated under foreign law and is not tax resident in the Netherlands; in this case, the Netherlands would follow the classification of the entity in the country that considers the entity to be a tax resident there.
In addition, the distinction between open and closed limited partnerships would be abolished. As explained above, an open CV is one where the partners can freely transfer their interest in the partnership without obtaining the consent of the other partners; this is not possible in a closed CV. As from 1 January 2025, CVs that hitherto qualified as open would no longer be independently taxable for corporate income tax and would no longer qualify as withholding agents for dividend withholding tax and conditional withholding tax purposes.
From a practical perspective, the changes to the rules will have implications, e.g., for the Dutch tax classification of UK limited liability partnership. Currently, such partnerships are typically viewed as tax transparent, particularly where they are professional service firms that rely on collaboration between the partners. Going forward, this may change where a limited liability partnership is effectively managed from the Netherlands, in which case it would be regarded as nontransparent for Dutch tax purposes (under the “fixed method” described above). The transition from transparent to nontransparent will have various tax implications. Limited liability partnerships effectively managed outside the Netherlands would continue to be regarded as tax transparent for Dutch tax purposes.
A second group of entities likely to be affected by the new rules are limited partnerships (e.g., UK, U.S. and certain offshore limited partnerships), which are currently regarded as nontransparent for Dutch tax purposes, even though they are tax transparent in their ‘home’ state. Going forward, such limited partnerships would typically be treated as tax transparent for Dutch tax purposes, a transition that would also have various tax implications.
Because the abolition of the open limited partnership may trigger personal or corporate income tax liability, rollover provisions are proposed for 2024, subject to certain requirements.
Comments
The proposed measures are particularly significant for major foreign investors (PE funds) operating in the Netherlands, investment funds managed predominantly by U.S. firms in which large Dutch institutional investors and family offices invest and the many limited partnerships engaged in business activities in the country. Large global LLPs with operations in the Netherlands also may be affected. As a result, it is important for tax groups with Dutch entities in their structure to carefully review the Dutch tax consequences of the proposals.Frederik Boulogne
BDO in Netherlands