On 29 March 2021, the Dutch government started an online public consultation with respect to a proposed bill to amend tax classification rules for certain domestic and foreign legal entities (incl. partnerships), aiming to avoid hybrid entity mismatches in an international context. The intention is that these rules enter into force as of 1 January 2022.
Current tax classification rules for legal entities
For Dutch tax purposes, (foreign) legal entities are currently classified as either transparent or non-transparent, based on specific classification criteria corresponding with the similarities to Dutch legal entities. As a result of these rules, the outcome often differs from the classification in other countries, causing hybrid entity mismatches (the same entity is considered transparent in one country and non-transparent in the other). A Dutch limited partnership (CV), but also a foreign limited partnership, is currently considered non-transparent for Dutch tax purposes if the accession or substitution of a limited partner does not require unanimous consent of all (general and limited) partners. However, in many other countries limited partnerships are considered transparent, often causing a hybrid mismatch.
As of 1 January 2020, the Netherlands already implemented the EU Anti-Tax Avoidance Directive 2 (ATAD 2) in its legislation. These rules provide for minimum standards to neutralize the consequences of hybrid mismatches, but do not affect the actual cause of such mismatches. With the proposed changes in tax classification rules for legal entities, the actual cause of many hybrid mismatches should be eliminated.
The proposal
The proposal aims to change the classification rules for the Dutch CV and Dutch mutual fund (FGR), and to add two supplementary approaches to classify foreign legal entities. In short, the following changes in legislation are proposed:
- The current non-transparent Dutch CV will cease to exist. Consequently, all existing non-transparent Dutch CVs will become transparent, in principle causing a taxable event upon such conversion without generating any actual income.
- FGRs are currently transparent or non-transparent, but the legal classification criteria will be changed. An FGR is proposed to be transparent, unless the participations in the FGR are traded on a regulated stock exchange or the FGR has the obligation to repurchase or repay its own participations. Specific additional rules are proposed for family FGRs.
- Two supplementary approaches are introduced to classify foreign legal entities without any similarities to Dutch legal entities:
- If such foreign legal entity is established in a foreign country, the classification of the entity in that country is followed by the Netherlands (symmetry approach).
- If such foreign legal entity is based in the Netherlands, the entity will be considered non-transparent for Dutch tax purposes (fixed approach).
Transitional rules for Dutch CVs
Following the proposed changes, all existing non-transparent Dutch CVs will become transparent. By fiction, such CV will be deemed to have transferred its assets and liabilities to its partners at fair market value at the moment that its classification is changed to transparent. Furthermore, the CV will end being subject to Dutch corporate tax. As a result, any (hidden) reserves upon this moment will be subject to Dutch corporate tax. For this purpose, several tax facilities (subject to conditions) are proposed (roll-over, share-for-share merger or deferral of payment over 10 years).
Concluding remarks
When setting up a new structure, both current rules and the proposed changes should be taken into account. Furthermore, the effect on existing structures could be substantial and should be carefully assessed as soon as possible. The proposal is expected to impact many structures, especially those with Dutch non-transparent CVs, which are widely used for different purposes, such as collective investments, shipping, real estate or anonymization. To the extent that there are adverse consequences, restructuring should take place prior to 1 January 2022 (assuming the proposed legislation will be adopted and enter into effect as of 1 January 2022).
The legislative proposal has not yet been submitted to the Dutch parliament, and is still subject to consultation (until 26 April 2021).
Contact
Please contact your trusted adviser at AKD if you have any further questions.
On 29 March 2021, the Dutch government started an online public consultation with respect to a proposed bill to amend tax classification rules for certain domestic and foreign legal entities (incl. partnerships), aiming to avoid hybrid entity mismatches in an international context. The intention is that these rules enter into force as of 1 January 2022.
Current tax classification rules for legal entities
For Dutch tax purposes, (foreign) legal entities are currently classified as either transparent or non-transparent, based on specific classification criteria corresponding with the similarities to Dutch legal entities. As a result of these rules, the outcome often differs from the classification in other countries, causing hybrid entity mismatches (the same entity is considered transparent in one country and non-transparent in the other). A Dutch limited partnership (CV), but also a foreign limited partnership, is currently considered non-transparent for Dutch tax purposes if the accession or substitution of a limited partner does not require unanimous consent of all (general and limited) partners. However, in many other countries limited partnerships are considered transparent, often causing a hybrid mismatch.
As of 1 January 2020, the Netherlands already implemented the EU Anti-Tax Avoidance Directive 2 (ATAD 2) in its legislation. These rules provide for minimum standards to neutralize the consequences of hybrid mismatches, but do not affect the actual cause of such mismatches. With the proposed changes in tax classification rules for legal entities, the actual cause of many hybrid mismatches should be eliminated.
The proposal
The proposal aims to change the classification rules for the Dutch CV and Dutch mutual fund (FGR), and to add two supplementary approaches to classify foreign legal entities. In short, the following changes in legislation are proposed:
- The current non-transparent Dutch CV will cease to exist. Consequently, all existing non-transparent Dutch CVs will become transparent, in principle causing a taxable event upon such conversion without generating any actual income.
- FGRs are currently transparent or non-transparent, but the legal classification criteria will be changed. An FGR is proposed to be transparent, unless the participations in the FGR are traded on a regulated stock exchange or the FGR has the obligation to repurchase or repay its own participations. Specific additional rules are proposed for family FGRs.
- Two supplementary approaches are introduced to classify foreign legal entities without any similarities to Dutch legal entities:
- If such foreign legal entity is established in a foreign country, the classification of the entity in that country is followed by the Netherlands (symmetry approach).
- If such foreign legal entity is based in the Netherlands, the entity will be considered non-transparent for Dutch tax purposes (fixed approach).
Transitional rules for Dutch CVs
Following the proposed changes, all existing non-transparent Dutch CVs will become transparent. By fiction, such CV will be deemed to have transferred its assets and liabilities to its partners at fair market value at the moment that its classification is changed to transparent. Furthermore, the CV will end being subject to Dutch corporate tax. As a result, any (hidden) reserves upon this moment will be subject to Dutch corporate tax. For this purpose, several tax facilities (subject to conditions) are proposed (roll-over, share-for-share merger or deferral of payment over 10 years).
Concluding remarks
When setting up a new structure, both current rules and the proposed changes should be taken into account. Furthermore, the effect on existing structures could be substantial and should be carefully assessed as soon as possible. The proposal is expected to impact many structures, especially those with Dutch non-transparent CVs, which are widely used for different purposes, such as collective investments, shipping, real estate or anonymization. To the extent that there are adverse consequences, restructuring should take place prior to 1 January 2022 (assuming the proposed legislation will be adopted and enter into effect as of 1 January 2022).
The legislative proposal has not yet been submitted to the Dutch parliament, and is still subject to consultation (until 26 April 2021).
Contact
Please contact your trusted adviser at AKD if you have any further questions.