A Dutch resident opaque entity is liable to Dutch corporate income tax and obliged to withhold Dutch dividend withholding tax on dividend distributions and a conditional withholding tax on interest and royalties. A transparent entity is not liable to these taxes. In such cases, the income is attributed to the participants of such entity.
The proposed changes regard both the qualification of Dutch limited partnerships (commanditaire vennootschappen in short: CVs) and funds for joint account (fondsen voor gemene rekening in short: FGRs) and the qualification of foreign limited partnerships and foreign entities that have a legal form which is incomparable to any Dutch legal form. The changes may have important implications and may require corporate restructurings. Even though it is currently a consultation proposal only, it is expected that the consultation will not lead to material changes and that the draft bill to be sent to Parliament will be along the lines of this proposal. The new rules are expected to enter into force on 1 January 2022.
In this blog we give you an overview of the proposed new rules.
Changes in CV-qualification
Currently, a CV is treated as tax transparent if admission and substitution of a limited partner requires unanimous consent of all (general and limited) partners. ‘Admission’ and ‘substitution’ is interpreted broadly for these purposes and includes amongst others any potential change in the relative interest between the limited partners. In other cases a CV is treated as opaque for (corporate income and dividend withholding) tax purposes.
This rule is also used to qualify foreign limited partnerships. As the requirement of unanimous consent is very specific for the Netherlands and usually not applied by other jurisdictions, foreign limited partnerships are currently often deemed to be opaque in the Netherlands, unless the documentation is adapted to include this specific requirement. This might lead to a mismatch with the qualification abroad, where such partnerships is often treated as transparent. This so called hybrid mismatch might lead either to double taxation or double non-taxation. As this is deemed undesirable, the government proposes to change the Dutch qualification rules.
Under the new rules, the requirement of unanimous consent is abolished. Instead, all CVs will be transparent as of 2022. The same will apply to foreign limited liability partnerships resembling the CV, such as the Luxembourg SCSp and SCS.
Consequences for CVs that are currently opaque and their limited partners
Dutch resident CVs that are currently opaque, will no longer be liable to Dutch corporate income tax as of 2022. The government proposes that these CVs are deemed to have transferred all their assets and liabilities at fair market value to their participants at the end of 2021. This means that, in principle, the change of law triggers a taxable event and the opaque CV is taxed on the differences between the book value and fair market value of its assets and liabilities (including hidden reserves, fiscal reserves and goodwill). Limited partners in the CV are deemed to have alienated their participation in the CV at fair value in 2021. Depending on whether or not the participant is an individual or an entity, where the participant is resident and the size of the participation, this may trigger Dutch taxation.
However, if certain requirements are met, the limited partners and the CV can file a joint request not to levy Dutch corporate income tax from the CV upon losing its opaque status. In that case, the participants will have to take over the tax position (including book values) of the CV. The requirements for this roll-over tax treatment include amongst others that both the CV and all limited partners are tax resident in the European Union (EU) or European Economic Area (EEA), that all limited partners in the CV are liable to Dutch or a foreign profit tax for entities and that neither the CV nor the limited partners are entitled to a carry forward of losses.
A limited partner that exchanges its participation in the CV for a shareholding in a company that is resident in the EU or EEA is not liable to tax as a result of the CV becoming transparent if the shareholding is recognized for Dutch tax purposes at the same book value as the former participation in the CV. This exchange must take place before 31 December 2022 or before the Dutch corporate income tax return over 2021 is filed if that is done before 31 December 2022 and will have retro-active effect until the moment just before the CV was no longer liable to Dutch corporate income tax. Each limited partner can decide to implement this exchange individually. Thus, it is neither necessary that all limited partners do this, nor that all limited partner use the same company. In case some limited partners are individuals, this step can also be used to subsequently avoid a direct Dutch tax liability of the CV upon becoming transparent. If all individuals make use of this possibility, the request not to levy Dutch corporate income tax at the level of the CV which was discussed before, can be filed.
In case the CV and the limited partners cannot make use of the provisions described before, for example because not all limited partners are resident in the EU or EEA, they may opt to pay the tax that becomes due upon the CV becoming transparent in ten yearly instalments. In order to apply for this deferral, the tax payer must provide security. However, no interest will be due. This payment in instalments is optional: it is also allowed to pay the tax at once.
Changes in FGR-qualification
Currently, FGRs are also transparent if they meet either the requirement of unanimous consent or if, in short, the participations in the FGR can only be repurchased by the FGR and not be transferred otherwise. An FGR is opaque if it does not meet this criterion. It is proposed to abolish this requirement for FGRs as well. However, unlike CVs, an FGR can remain opaque if it meets the requirement that the FGR issues participations to obtain funds for collective investments and that these participations can either be traded on a regulated market such as Euronext or NPEX, or that the FGR is obliged to repurchase or repay the participations at regular intervals upon request of the participants. This must follow from the terms and conditions of the fund.
If the participations of a FGR can, in fact, only be transferred to the fund, or to family members of the participant or his partner, the FGR is transparent. The FGR can, for that reason no longer be used as a family fund to avoid ultimate beneficial ownership rules or the annual Dutch income tax on savings and investments (‘box 3’).
Qualification rules for foreign entities
The Netherlands qualifies foreign entities based on the question what Dutch legal form they resemble. The foreign entities are treated accordingly for tax purposes. For example, a foreign limited liability company resembles the Dutch besloten vennootschap (BV) which is opaque, for which reason the foreign limited liability company will also be non-transparent for Dutch tax purposes. This is also the case if it is treated as transparent in its country of residence. Above, we already noted that foreign limited liability partnerships resembling the Dutch CV would become transparent for Dutch tax purposes by default as per 1 January 2022 by reason of the discontinuation of the unanimous consent requirement.
However, in cases where a foreign entity does not resemble any Dutch legal form, it is proposed that as of 2022 the Netherlands will follow the qualification of the entity in its country of incorporation in case such entity has an interest in an entity that is liable to Dutch corporate income tax or if an entity liable to Dutch corporate income tax has an interest in such foreign entity.
In addition, it is proposed that a foreign entity that is tax resident in the Netherlands and does not resemble any Dutch legal form will always be treated as opaque. This means that such entity will be liable to Dutch corporate income tax and obliged to withhold Dutch dividend withholding tax and the conditional withholding tax on interest and royalties.
Examples of foreign entities that do not resemble any Dutch legal entities are for instance the UK limited liability partnership (LLP), the Irish Unlimited Company (ULC) and the German Kommanditgesellschaft auf Aktien (KGaA). Therefore, for these entities the new qualification rules will apply as of 2022 if the proposal is enacted.
Timeframe
The proposal is open for consultation until 26 April 2021. It is expected that the legislative proposal will be sent to Parliament either before the summer or on budget day (21 September 2021) in order for it to enter into force on 1 January 2022. It is not expected that the proposal will change much after consultation, but we will keep you informed on important changes.
In the meantime, feel free to contact us if you would like to discuss the possible implications of this proposal and the actions to be taken in your specific case.
