New qualification policy for legal forms
Core
A separate bill will amend the Dutch qualification policy for legal forms. An important part of the bill is the abolition of the tax liability of Dutch limited partnerships whose participations are freely transferable (Dutch open limited partnerships, open CVs) (open commanditaire vennootschappen). The so-called consent requirement (a limited partnership is open if transfer of the participations is possible without the consent of all partners) is uncommon in an international context, which may cause qualification differences in cross-border situations. Although the hybrid mismatch measures following from the ATAD2 Directive already address any double taxation resulting from such qualification differences, this bill also removes the cause of this type of hybrid mismatches.
Besides abolishing the independent tax liability of open CVs - and foreign legal forms similar to open CVs - the Dutch qualification policy for foreign legal forms will be enshrined in law. Like under current law, the main rule is a comparative method for legal forms. This means that a comparison is made based on certain civil law characteristics of Dutch legal forms for qualification of an entity incorporated under foreign law. For cases where this comparative method does not provide a solution, two additional methods are proposed for the qualification of foreign legal forms: the fixed method for Netherlands-based entities and the symmetrical method for foreign-based entities that receive income from the Netherlands.
Below, we first discuss the codification of the Dutch qualification policy and then elaborate on abolition of the tax liability for open CVs and the corresponding transitional law.
Codification of Dutch qualification policy
The qualification of a foreign entity for Dutch tax purposes takes place on the basis of the comparative method for legal forms. A foreign entity is treated similarly for tax purposes as a Dutch entity with a comparable legal form. Under the proposed law, this method will be retained as the main rule for income tax, corporate income tax, dividend withholding tax and the conditional withholding tax. A decree will provide a framework for assessing when a foreign entity has a legal form comparable in nature and structure to that of an entity incorporated under Dutch law.
For foreign legal forms similar in nature and structure to Dutch open CVs, the comparative method for legal forms will lead to a different outcome than under current law. By abolishing the tax liability of open CVs, comparable foreign entities will be transparent for Dutch tax purposes, just like Dutch open CVs. The fact that CV-like entities are not independently taxable under the proposed law is further evidenced by the omission of the phrase "and other companies whose capital is wholly or partly divided into shares" from articles 2 and 3 of the Dutch 1969 Corporate Income Tax Act (Wet Vpb 1969). In comparison with the consultation bill, omitting this sentence clarifies that partnerships whose capital is divided into shares are also transparent under the proposed law.
While the comparative method for legal forms is sufficient for most qualification issues, it does not provide a solution in all cases. Two additional qualification methods are proposed for situations where the legal form of a foreign entity is not comparable to that of an entity incorporated under Dutch law.
- For foreign entities established in the Netherlands, the so-called ‘fixed method’ will apply: if the entity is not comparable to a Dutch entity, it will be classified as independent (non-tax transparent).
- Foreign entities that are not resident in the Netherlands but do receive Dutch income are qualified as non-tax transparent under the ‘symmetrical method’ if they are also non-tax transparent in their state of residence. This only applies if the entity is actually considered resident in that state. This is a change from the consultation bill, which followed the qualification of the state of incorporation. Foreign entities without a comparable Dutch legal form that are not considered independently liable for tax under the symmetrical method are therefore considered transparent for Dutch tax purposes.
Cancellation of the independent tax liability of Dutch open CVs
Under current Dutch qualification policy, an open CCV is treated as non-tax transparent if the limited partners’ participations are transferable without requiring the consent of all partners. This tax liability applies only to the limited partners. Profits accruing to the general partners are taxed directly at the level of the general partners. The government proposes to drop the consent requirement and thus the independent tax liability of open CVs. This will make all (open and closed) CVs, and similar foreign legal forms, fully transparent for Dutch tax purposes. The proposal is intended to take effect from 1 January 2025.
For income tax and corporate income tax purposes, consequences will be attached to CVs becoming transparent. Although CVs do not cease to exist under civil law as they become transparent, the proposed transitional law regulates by fiction that they are deemed to have transferred their assets to the partners at fair market value immediately prior to their tax transparency. In addition, open CVs are deemed to have ceased to receive taxable profits in the Netherlands at the same time. The effect of this transfer and cessation fiction is that open CVs are subject to mandatory final corporate income tax settlement of the profits attributable to them.
In addition, after an CV has become transparent, the limited partners no longer hold a share in it. The proposed transitional law therefore provides that a limited partner is deemed to have disposed of their share in the CV at fair value at the time immediately preceding the termination of an CV’s tax liability. For limited partners’ interests not covered by the participation exemption, this generally results in taxation, as in the case of individuals holding a substantial interest in an open CV. Finally, limited partners and the persons associated with them are subject to a notional disposal in box 1 for income tax purposes, relating to assets they have made available to the open CV.
Under certain conditions, it is possible to avoid or defer acute taxation following from cancellation of an CVs’ tax liability. The proposed transitional law provides for four facilities that can be used in 2024:
- Roll-over relief scheme: the tax claim pertaining to the business of the limited partnership is transferred to the limited partners who are liable to corporate income tax. This facility can only be used if all limited partners are non-tax transparent (or become non-tax transparent under this bill) and are actually subject to corporate income tax. The limited partners take over the assets of the limited partnership at the same carrying value on their tax balance sheet.
- Share-for-share merger: limited partners can roll over the tax claim on their share in an CV to a (new or existing) holding company by depositing their share in the CV into the shares in a holding company. No income tax is due on the gain on the disposal of the share, provided the partner recognises the interest acquired in the holding company at the same value as their share in the open CV. In this context, an exemption from transfer tax also applies, provided that it is an CV that already existed on Budget Day 2023 (19 September 2023, 15:15h) and the property is not subsequently contributed by a new limited partner.
- Roll-over relief scheme in disposal situations: limited partners can roll over the tax claim on the asset made available to the open limited partnership if the asset is actually used unchanged in the business from which the limited partner will receive business profits.
- Payment by instalments in up to 10 years, if it is not possible for open CVs to use the roll over relief scheme.
