Consultation on adaptation of tax qualification rules for legal entities

31/03/21

This article was last updated on 5 July 2021

On 29 March 2021 the Dutch Ministry of Finance published a consultation document which includes proposed amendments to the Dutch qualification rules for Dutch and foreign entities. The consultation period ended on 26 April 2021.

The aim of the proposal is to reduce the number of hybrid mismatches in an international context. In particular, the proposed rules should result in less hybrid mismatches due to the asymmetric qualification of entities. Discrepancies in the fiscal qualification of entities between countries may result in income either being taxed twice (i.e. at the level of the entity and at the level of its participants) or not at all.

After the consultation, it has been decided that the legislative proposal will not be part of the 2022 Budget Day tax plan, but published separately somewhere in the winter 2021/2022.

What does this mean for your organisation?

If your company has an international structure including the Netherlands it may be affected by the proposed rules, especially if it includes:

a non-transparent Dutch limited partnership (CV), or
a foreign entity that is not comparable to an existing Dutch legal form.

Private investors could also be affected.

Under the proposed rules, the ‘consent requirement’ is revoked as it is the source of many hybrid mismatches in the Netherlands. Based on the ‘consent requirement’, a Dutch CV is considered non-transparent for Dutch corporate income tax purposes if the admission or replacement of limited partners is possible without the consent of all other partners (limited as well as general partners).

Based on the proposed measures of the consultation documentCVs will always be transparent under the new rules.

The number of hybrid mismatches should reduce quite considerably and more flexibility is expected for organisations pursuing a transparent Dutch CV structure. Yet, it is important to analyse existing structures to avoid unexpected outcomes.

Dutch CVs and comparable foreign limited partnerships

The ‘consent requirement’ that currently rules the qualification of a Dutch CV as either transparent or non-transparent, is revoked under the proposed legislation. Consequently, a Dutch CV will always be treated as tax transparent and will not be liable to Dutch corporate income tax nor to Dutch withholding tax. Instead, as of 1 January 2022 the CV’s partners will become liable to Dutch - corporate or personal - income tax for their participation in the CV. This qualification will equally apply to foreign limited partnerships that are comparable to a Dutch CV.

For CVs and comparable foreign limited partnerships that currently qualify as non-transparent for Dutch corporate income tax purposes, the change to transparency (by fiction) results in the transfer of their assets and liabilities to the partners. In order to avoid a sudden tax cash-out, the consultation document includes various reliefs including conditional roll-over provisions and payment extensions.

Dutch funds for joint account (‘FGRs’) and comparable funds

The consultation document also proposed changes to the tax regime for transparent and non-transparent funds for joint account (fondsen voor gemene rekening, FGR). In the meantime, the State Secretary has announced in a letter to parliament that he will remove these changes regarding the FGR regime from the bill and review this regime in connection with the recommendations arising from the intended evaluation of the collective investment schemes (‘fiscale beleggingsinstelling’ (fbi-regime) and ‘vrijgestelde beleggingsinstelling’ (vbi-regime).

Foreign entities not comparable to a Dutch legal entity

Currently, foreign entities are classified as either transparent or non-transparent for Dutch tax purposes, based on their similarities to Dutch legal entities. According to the proposal, this classification policy will be maintained.

For foreign entities that are not comparable to a existing Dutch legal entities, the proposal contains two approaches:

Fixed approach - if the foreign entity has its place of effective management in the Netherlands, such entity will be considered non-transparent (and thus liable to Dutch corporate income tax).
Symmetry approach - if the foreign entity does not have its place of effective management in the Netherlands, the qualification follows that of the jurisdiction in which the entity is established.

The latter occurs in the situation where a Dutch entity holds an interest in the foreign entity or vice versa.

The consultation document mentions the UK Limited Liability Partnership (LLP), Irish Unlimited Company (ULC) and German Kommanditgesellschaft auf Aktien (KGaA) as examples of entities that are not comparable to a Dutch legal entities. In addition, e.g. also the French Société en Nom Collectif (SNC) is not comparable to a Dutch legal entity.