The current Dutch tax classification rules for Dutch and foreign entities (such as partnerships) are quite unique and deviate from international standards. In particular, this has caused ‘hybrid entity mismatches’ in an international context. It is now proposed to overhaul the Dutch tax classification rules for Dutch and foreign entities to bring them more in line with international standards.
Current entity classification rules
Currently, the Netherlands applies very specific entity classification rules to determine whether a limited partnership (either Dutch or foreign) is considered transparent or non-transparent for Dutch tax purposes. The decisive criterion is whether accession or substitution of a limited partner requires unanimous consent of all (general and limited) partners (the ‘consent requirement’). Only if such unanimous consent is required (and in practice obtained), a limited partnership is classified as transparent for Dutch tax purposes. In practice, this means that foreign limited partnerships are often treated as non-transparent from a Dutch tax perspective. Since foreign limited partnerships are considered transparent in many countries, but non-transparent from a Dutch tax perspective, this results in ‘hybrid’ entities.
New rules for Dutch partnerships
As of 1 January 2025, it will be codified in Dutch tax law that all Dutch partnership are transparent for Dutch tax purposes. Non-transparent Dutch limited partnerships (CV) and other types of non-transparent Dutch partnerships cease to exist.
Foreign entities
The Netherlands currently applies the ‘similarity approach’ to classify foreign entities. In short, this approach means that one looks at the most similar Dutch equivalent of the foreign entity (‘corporate resemblance’) to determine the Dutch tax position thereof.
Under the proposal, the similarity approach would remain in force as primary classification rule and would be codified in Dutch tax law. However, due to the revised rules for the Dutch partnership, which would become per se transparent (without consent requirement), many hybrid mismatches will disappear as the Netherlands (in line with most other jurisdictions) would then also regard a foreign partnership as transparent for tax purposes.
For certain situations where the similarity approach does not provide a solution, there would be two new rules:
- For entities with no clear Dutch equivalent, the ‘symmetry approach’ would apply. This means that the foreign entity would for Dutch tax purposes be classified as non-transparent if in the jurisdiction that treats the foreign entity as tax resident, the assets and liabilities as well as income and expenses are attributed to the foreign entity.
- For foreign entities with no clear Dutch equivalent and which are based in the Netherlands, the ‘fixed approach‘ would apply. This means that the foreign entity based in the Netherlands would always be classified as non-transparent entity for Dutch tax purposes, thus becoming a Dutch domestic taxpayer.
Entity classification rules for funds for joint account
In addition, it is proposed to change the tax classification rules applicable to Dutch funds for joint account (FGR) as of 1 January 2025.
To date, an FGR can be classified as tax transparent or tax non-transparent. There are currently three types of FGRs, in short: (i) an FGR in which participations are only transferable to other participants with unanimous consent (transparent), (ii) an FGR in which the participations can only be repurchased by the FGR or transferred to certain close-related family members (transparent) and (iii) an FGR with transferable participations (non-transparent).
It is now proposed that as of 1 January 2025, an FGR may only be non-transparent, if it is (i) regulated following the Dutch Financial Supervision Act (Wet op het financieel toezicht) and (ii) the participations in the FGR are tradeable. In case the participations in an FGR can solely be repurchased by the FGR, the participations would be deemed to be non-tradeable and thus such FGR will be classified tax transparent, even when it is regulated.
Transitional rules
The aforementioned changes mean that non-transparent partnerships and FGRs would be deemed to realise any capital gains in their assets (i.e., a tax triggering moment) when becoming transparent. Similarly, the partners/members in non-transparant partnerships and FGRs are deemed to realise their investment. In practice, this could result in tax becoming due without cash being generated. Therefore, several facilities are proposed to apply as from 1 January 2024: (i) rollover facilities, (ii) a share-for-share merger facility (including a real estate transfer tax (RETT) exemption), or (iii) a deferred payment obligation (spread out over ten years). Any restructurings using those facilities can be carried out during the year 2024 to avoid the tax triggering moment on 1 January 2025. The RETT exemption however only applies in the case of CVs and FGRs that were already in existence on 19 September 2023 at 15:15.
