Taxable Or Transparent? Navigating The New Dutch Rules For Entity Classification

Partnerships

Prior to 2025, Dutch tax law distinguished between open and closed limited partnerships based on the unanimous consent requirement (ie all the partners had to agree to the appointment of a new partner). Foreign limited partnerships were deemed to be comparable with Dutch CVs (limited partnerships), and therefore treated the same way for tax purposes. The new decree revokes the unanimous consent requirement, and establishes that all CVs and foreign partnerships are, by default, transparent for tax purposes, regardless of a unanimous consent provision in the partnership agreement of the CV. Also, mutual funds (fonds voor gemene rekening, FGR) and transparent funds[1] are always considered transparent under the decree, taking precedence over the comparison method.

The new rules mean that certain types of partnership which have in the past been treated all or in part as a corporate entity will not be treated as transparent. In particular, this affects the so-called open limited partnership (open CV).

Open CVs

The transition to transparency of open CVs has consequences for both income and corporate tax. The open limited partnership is no longer a separate tax subject, so that all partners (including the limited partners) will now be directly taxed on their share in the results of the limited partnership for income or corporate tax purposes. For the general partners, the abolition of the open limited partnership has no impact on income or corporate tax, as they are already directly taxed on their share in the results of the open limited partnership.

The transition from a separately taxable limited partnership to a transparent limited partnership has no civil law implications. It is solely a change in qualification for Dutch tax purposes.

Transitional Rules

Transitional rules have been implemented for open CVs (and certain previously opaque funds). A primary concern is the potential realisation of unrealised gains, hidden and/or fiscal reserves due to the deemed disposal of assets when an entity shifts from an opaque to a transparent status, which may trigger a taxable charge on the gain. To address this, the transitional regime allows for four facilities:

• Transfer facility: the tax claim on the unrealised gains, the hidden and fiscal reserves, and goodwill present in the open CV (ie the final profit due to the deemed disposal) may be deferred if the assets of the open CV are assumed by the limited partners. Provided that certain conditions are met, they can then record them on their balance sheet for tax purposes against the same book value.

• Share merger facility: the limited partners can defer the tax claim on their share in the open limited partnership to a (new or existing) holding company as long as the value of the share in the CV does not change. No tax is levied on the capital gain in box 1, provided the partner records the acquired shares in the holding company at the same value as the share in the open CV.

• Deferral of tax in asset leasing situations: under this facility, the limited partners can defer the tax claim on the assets made available to the open CV. The assets that are provided by a limited partner to the open CV are deemed to be disposed of. However, this facility offers a deferral of taxation if the limited partner will still receive income from business profits from the CV, provided the CV operates a material business. To retain the tax claim on hidden reserves, equalisation reserves, and provisions, the book value of the assets is carried over to the new business from which the limited partner derives business profits.

• Payment in instalments: the tax payments can be made in instalments up to a maximum time frame of ten years.

Additionally, the transitional rules for the termination of separate taxation of the open CV also applies to foreign partnerships and their participants. A provision has been included in the transitional rules to reflect this. The deemed disposal provisions for participants in the open CV also apply to foreign open CVs (and similar foreign entities) that make taxable profits in the Netherlands. As a result, participants in foreign partnerships with taxable income in the Netherlands are covered by the transitional regime.

Dividend & WHT tax

The termination of the open CV's withholding obligation does not qualify as a taxable event (liquidation) for dividend and withholding tax purposes.

Comparability Of Legal Forms

The new decree establishes a structured approach for assessing the comparability of foreign legal forms.

Comparable Foreign Legal Forms

A foreign legal form is deemed comparable to a Dutch legal form if it aligns in terms of nature, structure, and organisation. The nature is determined by its status under foreign law and the legislative intent behind it. The structure and organisation are assessed based on key legal characteristics outlined in the decree.

The decree also provides a non-exhaustive list of foreign entities presumed to be comparable to Dutch legal forms. However, this presumption can be rebutted if specific circumstances demonstrate otherwise.[2] If a foreign entity is found to be comparable to a Dutch legal form, it must be treated in the same way as the Dutch equivalent for tax purposes. However, if the entity is either non-comparable or simultaneously comparable to multiple Dutch legal forms, it is classified as a non-comparable legal entity.

Non-comparable Foreign Legal Forms

For non-comparable foreign legal forms that do not qualify as an FGR, fund, or partnership, the classification method depends on the entity's place of establishment.

• Fixed method: If the non-comparable foreign entity is established in the Netherlands, it is classified as opaque, meaning it is treated as an independent taxable entity for Dutch corporate income tax purposes.

• Symmetrical method: If the non-comparable foreign entity is established outside the Netherlands, it is classified in accordance with its tax treatment pursuant to the laws of the jurisdiction where it is considered a tax resident.

Trusts

In the case of trusts, the place where the trustees are established is considered the place of establishment for tax purposes. If trustees are located in the Netherlands, meaning the management is situated in the Netherlands, the Dutch tax authorities will treat the trust as opaque, classifying it as an independent taxable entity for corporate income tax purposes. However, the Explanatory Notes clarify that entities established in the Netherlands with a non-comparable legal form, such as APVs (Afgezonderd Particulier Vermogen, or separated private assets), are subject to corporate income tax only "if and to the extent that they operate a business."

Under the Dutch Personal Income Tax Act[3], the assets, liabilities, income, and expenses of an APV are considered to belong to or be enjoyed by the person to whom they are attributed. An exception to this attribution applies to the part subject to the so-called "attribution stop."[4] According to this attribution stop, an APV is not transparent for tax purposes to the extent that its assets or profits belong to an APV’s business, and that business income is subject to profit taxation in the jurisdiction(s) where the business is operated. This is also stipulated in the Dutch Corporate Income Tax Act in the case of an APV established in the Netherlands with a foreign legal form comparable to a Dutch foundation[5], and an APV established in the Netherlands with a foreign legal form that is not comparable to a Dutch legal form. [6]

This dual approach ensures a balanced taxation strategy for APVs: profits are taxed either at the entity level (for business-related income), or at the individual level (for non-business-related income) to whom they are attributed. This approach aligns the taxation of APVs with the qualification methods levying either income tax or corporate income tax, and preventing double taxation in the Netherlands.

Bottlenecks In Classification

Despite the efforts made in the new decree, several classification conflicts remain unresolved, as it does not offer a comprehensive solution for all potential discrepancies.

Open CVs

One significant issue arises when foreign countries treat the previously transparent open CV (now considered a transparent limited partnership in the Netherlands) as opaque. This creates a situation where foreign income is taxed at the CV level in those jurisdictions, while in the Netherlands, the income is taxed at the individual partner's level. Unfortunately, the individual cannot claim a tax credit for this tax paid abroad, as the credit is typically available only to the CV itself.

LLCs

Additionally, the classification of American LLCs creates uncertainty. The ‘check-the-box’ system allows an LLC to elect whether to be treated as fiscally transparent or not, but the decree lists the LLC as comparable to a Dutch BV or NV, which leads to potential classification mismatches unless rebutted.

LLPs

Similarly, LLPs are included in the decree as non-comparable entities, but if they opt for fiscal transparency and establish tax residency in the Netherlands, they will be treated as opaque, even though they are considered transparent in the US.

Sondervemögen

Moreover, the Dutch Supreme Court's ruling on the treatment of German Sondervermögen (special assets) based on the number of participants introduces further complexity. The court has determined that the treatment of these entities depends on the number of participants, meaning that for Dutch tax purposes, one Sondervermögen may be treated differently than another. This opens the door for similar challenges with other foreign legal forms, making the classification process more intricate and potentially leading to more complex tax scenarios.

Critical Challenges

While the introduction of the Decree on the Comparison of Foreign Legal Forms marks a significant attempt to streamline the Dutch tax treatment of foreign entities, it is far from a comprehensive solution. The decree offers a structured approach to the classification of foreign legal forms, aiming to reduce mismatches and mitigate the risk of double taxation. However, several critical challenges remain unaddressed. The treatment of certain entities, such as open CVs, LLCs, LLPs, and Sondervermögen, continues to create potential for classification conflicts, leading to situations where entities may face double taxation or inconsistent tax treatment across jurisdictions.

In light of these persistent issues, the decree appears more as an incremental step rather than a definitive resolution. Further refinement is necessary to address the remaining gaps. Until these challenges are addressed, businesses and tax professionals may continue to face significant complexity and potential risks in the classification of foreign legal forms under Dutch tax law. If you have investments into or from the Netherlands through one of these entities, it will be advisable to review whether the treatment changes as a result of the new legislation.

[1] A transparent fund can be defined as a fund established to obtain benefits for the participants by investing or otherwise utilising funds on a collective basis, unless the fund is a mutual fund (Fonds voor gemene rekening).

[2] Explanatory Notes to the Decree

[3] Article 2.14a Wet IB (PIT Act) 2001.

[4] Article 2.14a Wet IB (PIT Act) 2001, paragraph 7.

[5] Article 2 Wet VPB (CIT Act) 1969, paragraph 1, sub e, jo. paragraph 8.

[6] Article 2 Wet VPB (CIT Act) 1969, paragraph 1, sub h, jo. paragraph 8.

Juliëtte Slotboom
Juliëtte is a Tax Advisor with Graham, Smith & Partners, specialising in international and corporate taxation. She has previous experience at other international tax law firms, and achieved her Bachlelor's and Master's degrees in Tax Law from Leiden University.