As of 1 January 2025, a new law on the qualification of legal forms will come into effect in the Netherlands. This law includes rules for the qualification of foreign legal forms for Dutch tax purposes. The primary goal of this law is to reduce qualification conflicts and ensure (international) consistency in the treatment of foreign entities.

An important part of the new qualification policy is the abolition of the tax liability of Dutch and foreign limited partnerships whose participations are freely transferable (in Dutch open commanditaire vennootschappen, “open CVs”). Under the current Dutch qualification policy, a limited partnership is treated as non-tax transparent if the limited partners’ participations are transferable without requiring the consent of all partners. The amendment ensures that all (open and closed) Dutch and foreign limited partnerships will generally be considered fully tax transparent by default for Dutch tax purposes.

Besides abolishing the independent tax liability of open (foreign) limited partnerships, 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. For cases where this comparative method does not provide a solution, two additional methods are introduced for the qualification of foreign legal forms: the fixed method for Netherlands-based entities (i.e. qualification as non-tax transparent) and the symmetrical method for foreign-based entities that receive income from the Netherlands (i.e. qualification as non-tax transparent only if the entity qualifies as a tax resident in a foreign jurisdiction). This may result in a different qualification from a Dutch tax perspective as of 1 January 2025 (i.e. from transparent to non-tax transparent, or the other way around).

As a result of the change in qualification of an open (foreign) limited partnership, they will be deemed to have disposed of all assets and liabilities to their participants at fair market value and to have ceased all their activities in the Netherlands. All hidden reserves, tax reserves and goodwill will automatically be subject to a final settlement unless allocable to the general partners in the open (foreign) limited partnership. Also the limited partners in the open (foreign) limited partnership are deemed to have disposed of their certificates of participation and loans receivable at fair market value.

Under certain conditions, it is possible to avoid or defer this acute taxation. The transitional regime offers the possibility of using certain tax facilities to defer (acute) taxation. The regime provides for certain conditional facilities, e.g.:

• A roll-over relief mechanism for any tax claims of the open limited partnership on hidden reserves, tax reserves, and goodwill;
• Payment by instalments in up to ten years, if it’s not possible for open limited partnerships to use the roll-over relief scheme;
• A share-for-share merger regime for specific participants, including a temporary real estate transfer tax exemption.

With the new qualification policy entering into force as of 1 January 2025, and the transitional law only available for 2024, it is imperative for taxpayers to review their current situation and assess the impact of the new rules before year-end 2024. If your business has an international holding structure that includes Dutch (business/private) components, and depending on the exact set up of that structure, it may be affected by this new legislation. This may particularly be the case in the situation of:

• a Dutch limited partnership that is non-tax transparent in 2024 and that becomes tax transparent in 2025;
• a foreign legal form, which is non-tax transparent in 2024 as it is comparable to a non-tax transparent Dutch limited partnership, and which becomes tax transparent in 2025;

We have situations in mind such as:

• a Dutch entity holding an interest in a (foreign) limited partnership;
• a Dutch entity holding a 99% interest in a German KG;
• a foreign legal form as defined above, holding an interest in a Dutch entity that becomes transparent in 2025, as a result of which the participants in the foreign legal entity become taxable in the Netherlands; and/or
• Dutch individual investors participating in a foreign legal form as defined above.

Emerging attention points following from the new legislation may be:

• Possibility and advisability to apply transitional facilities in 2024.
• Potential foreign tax liability of foreign investors in the Netherlands, as a result of the (foreign) open limited partnership becoming tax transparent;
• Possibilities to amend the structure by interposing a Dutch or foreign non-tax transparent entity between the (foreign) investor(s) and the open (foreign) limited partnership e.g. to maintain an interest held by the investor in a non-tax transparent entity;
• Valuation of the assets formerly held by the open limited partnership, and availability of data in this regard. Potential (in)applicability of the Dutch participation exemption relating to these assets if it includes entities that do not qualify as a participation at the level of the investor(s).
• Potential transition from Box 2 (income from substantial interests) to Box 1 (income from a business, employment, and housing) for income tax purposes for Dutch resident individuals that are investors in a (foreign) open limited partnership;
• Impact on dividend withholding tax position, e.g. how to assess whether the withholding tax exemption is (still) applicable and review the validity of rulings on this topic; and/or
• Transfer tax implications.

We note that the above lists are non-exhaustive.

In addition to the above, the tax qualification rules for a mutual fund (Fonds voor Gemene Rekening, “FGR”) will also be amended as of 1 January 2025. Under the new qualification rules, the definition of a mutual fund will be aligned with the concepts of investment fund and fund for collective investment in transferable securities under the Dutch Financial Supervision Act (Wet financieel toezicht, “WFT”). Based on guidance provided by the Dutch Ministry of Finance, this means that a mutual fund will only be considered tax-non transparent from a Dutch perspective if it qualifies as a regulated collective investment fund under the WFT and the participations are freely transferable, i.e. transferable other than by way of repurchase by the mutual fund itself. For non-Dutch EU funds the Dutch Tax Authorities appear to take the position that they should not qualify under the Dutch WFT, but as AIF or UCITS under the local implementation of the AIFMD or UCITSD. Still more guidance from the Dutch Ministry of Finance and/or the Dutch Tax Authorities on the qualification of foreign funds under these new rules is expected before the end of 2024.

Priority rule
With the new legislative framework, partnerships will generally be considered transparent. However, this does not apply if they qualify as a mutual fund. This is because the legislative change introduces a priority rule, meaning that if a foreign entity qualifies both as a mutual fund and as a partnership, it will be treated as a mutual fund. This rule ensures that mutual funds qualification takes precedence over the qualification of the legal form. In general, and as mentioned above, a partnership will be considered a mutual fund if the entity is a collective investment fund as defined in the WFT. In addition, the rights of participation must be tradable (which is not the case when transfer is only allowed back to the mutual fund itself, the so-called inkoopvariant).

Because of the new legislation, foreign partnerships that qualify as a mutual fund will be treated as such, irrespective of the qualification of their legal form. This means that such foreign partnerships may possibly remain non-transparent for Dutch tax purposes from 1 January 2025 onwards. Alternatively, it is also possible that a foreign legal form that is transparent in 2024, because it is comparable to a tax transparent Dutch limited partnership, may become non-transparent in 2025 if it qualifies as a Dutch mutual fund (FGR) under the new set of rules.

We recommend to review the current structure of entities that may be affected by these changes and to assess the impact of the new rules. Specific attention should be given to whether those entities meet the Dutch mutual fund criteria and how the priority rule will affect them. In this context we note the introduction of a transitional rule. This, in short, entails that a mutual fund is deemed to be a fund with a redemption mechanism (the earlier mentioned “inkoopvariant”) with effect from 1 January 2025, if there was already an intention to restructure before that date and the fund meets the condition for being a redemption fund by 31 December 2025.

The transition to the new qualification regime also raises complexities for groups that are subject to the Pillar Two rules. The changes to the qualification regime, resulting in a change of the qualification of group entities from tax-non transparent to tax transparent and vice versa, may shift the location of where income or tax is reported for Pillar Two purposes. Likewise, it may impact how such income is taxed for local tax purposes, automatically raising the question of how this translates into the jurisdictional effective tax rate (“ETR”) computation required under Pillar Two. The transitional measures, too, raise complexities as they provide that assets are transferred for Dutch tax purposes which could be transferred for financial reporting purposes at a later stage – thus potentially leading to mismatches and an impact for the annual ETR.

As the law will enter into effect on 1 January 2025, taxpayers are left with a few weeks to prepare for the upcoming amendments and potentially invoke the transitional facilities. We therefore recommend reviewing your situation as soon as possible.

For any further information or detailed analyses of how these changes may affect your specific situation, please contact us. We are available to discuss the potential impact and explore restructuring options to mitigate any unintended tax consequences of the current Dutch tax policy.