Proposed changes to fiscal qualification of legal forms

On 29 March 2021, a public consultation was announced regarding a legislative proposal which may have consequences for the fiscal qualification of Dutch limited partnerships (commanditaire vennootschap or ‘CV’) and foreign legal forms.

The current rules for the qualification of such partnerships may contribute to tax evasion and the anonymisation of assets. The proposed legislation aims to prevent this. The proposed legislation is currently open for consultation. It will not be formally presented to the Dutch House of Representatives until the consultation has been completed. The intended date of entry into force is 1 January 2022.

Dutch limited partnership (CV)

A CV can currently be considered as either ‘open’ or ‘closed’. A closed CV is not subject to Dutch Corporate Income Tax (‘CIT’) and for tax purposes, its assets are attributed to its partners. In such a case, the CV is considered to be transparent for tax purposes. By contrast, an open CV is subject to CIT. Its limited partners are seen as shareholders, just as would be the case for a limited company (besloten vennootschap or ‘BV’).

The assets of an open CV are not attributed to the limited partners. Instead, these assets are subject to CIT at the level of the open CV itself. Whether a CV is regarded as open or closed, depends upon the agreements regarding the admission of limited partners.

Under the proposed legislation, an open CV will no longer be considered a taxable entity for the purpose of CIT, as of 1 January 2022. The end of the liability for CIT would involve a final levy of CIT with regard to hidden reserves, fiscal reserves and goodwill. Under the proposal, there is a possibility to postpone taxation, or pay it over the course of a ten-year period.

As of 1 January 2022, the assets of every CV would, for fiscal purposes, be attributed to its partners. For individuals who are limited partners, the assets or the income from the assets, would be subject to Dutch Personal Income Tax in box 1, 2 or 3, depending on the nature of the assets of the CV.

Foreign legal forms

In cross-border situations, it can sometimes occur that the Netherlands views a foreign legal form as independently subject to taxation, whereas a different country treats this legal form as transparent for tax purposes. The reverse situation can also occur. A so-called conflict of qualification can lead to a double deduction of costs, or a deduction of costs without the corresponding income being taxed at the level of the recipient. This is referred to as a hybrid mismatch.

As a result of the legislative proposal, foreign legal forms that are comparable to a CV will be seen as transparent for tax purposes.

If the foreign legal form is not comparable to a Dutch legal form, the legislative proposal combats the hybrid mismatch in two ways:

  1. The Netherlands always follows the qualification of the country of incorporation of the foreign legal form;
  2. A foreign legal form that is based in the Netherlands is always subject to Dutch CIT.

 

The legislative proposal in a nutshell

All CVs will be fiscally transparent as of 1 January 2022. The assets of the CV are consequently attributed to the partners.
From 1 January 2022, an open CV will no longer be subject to CIT. This may lead to the imposing of a final levy. This final levy can be postponed under certain conditions.
All foreign legal forms that are comparable to a CV will be regarded as transparent for tax purposes as of 1 January 2022, because all Dutch CVs will become transparent for tax purposes. In cases of a foreign legal form that is not comparable to a Dutch legal form, the Netherlands will follow the qualification of the foreign country.

If you have any questions about the legislative proposal, its consequences and options in your specific situation, please contact our tax advisors.