The Dutch government launched an internet consultation, on March 29, 2021, on the proposal for a new Tax Qualification Policy for Legal Forms Amendment Act (Wet aanpassing fiscaal kwalificatiebeleid rechtsvormen, the “consultation document”) to give interested parties the opportunity to respond to a draft bill. Currently, the Netherlands has a very specific qualification policy which often causes hybrid mismatches in an international context, potentially resulting in income being taxed twice or not at all.
During the legislative process implementing the Anti-Tax Avoidance Directive II (amendment of the Anti-Tax Avoidance Directive to combat hybrid mismatches), the Dutch government already indicated that it would review the possibility to amend the qualification policy of legal forms. This because while the hybrid mismatches can be solved through the measures of the Anti-Tax Avoidance Directive II, the cause of the mismatches is not removed. This consultation document represents a first step in the alignment of the Dutch tax qualification with international standards.
It was initially envisaged that the amendments would enter into force on January 1, 2022; however, given the numerous substantive responses to the consultation document, it is very likely that the bill will not enter into force on that date.
Current Qualification of Dutch Domestic Legal Forms
For certain legal forms, in particular limited partnerships and mutual funds, current Dutch qualification policy differs from that of other countries, and is qualified on the basis of the free transferability of the partnership or fund interests. Currently, open limited partnerships and open mutual funds are considered non-transparent. As such they are subject to Dutch corporate income tax and a withholding agent for Dutch dividend withholding tax and the interest and royalty withholding tax. On the other hand, closed limited partnerships and closed mutual funds are considered transparent and are not independently subject to Dutch corporate income tax, nor are they regarded as a withholding tax agent.
A limited partnership is considered “open” (and thus non-transparent) if the admission and replacement of a limited partner of the limited partnership (other than in cases of inheritance of specific legacy) is possible without prior written consent of all partners of the limited partnership. Based on this, a limited partnership should be considered “closed” (and thus transparent) if prior written consent from all partners, both limited and general partners, is required for the admission of a limited partner and the transfer of a limited partnership interest.
A mutual fund should qualify as transparent if the units of the fund can only be transferred with the prior consent of all unit holders, or if the units can (without the prior consent of all unit holders) only be transferred to the fund itself by way of redemption or to relations by blood or affinity in the direct line of the unit holder (the “repurchase obligation”). In all other cases the mutual fund should be considered non-transparent.
Current Qualification of Non-Dutch Foreign Legal Forms
The qualification of foreign legal forms currently takes place on the basis of the legal form comparison method laid down in a qualification decree. Under this method, certain civil law features of a foreign legal form are compared to those of existing Dutch legal forms. The particular foreign legal form is then, in principle, treated in the same way as the comparable Dutch legal form.
New Qualification Method for Dutch Domestic Legal Forms
Dutch Limited Partnership (Commanditaire Vennootschap (CV))
Under the draft bill, the unanimous consent requirement will be revoked, and all limited partnerships will be regarded as transparent. All the partners of a limited partnership—both general and limited—will become liable to Dutch income tax for their pro rata interest in the limited partnership.
As a result of the open limited partnership becoming transparent, the limited partnership is deemed to have transferred all its assets and liabilities to its limited partners at fair market value. At the same time, the open limited partnership will be deemed to cease all its activities in the Netherlands. These fictions will result in a realization of the corporate income tax claim on the untaxed gains and reserves, tax reserves and goodwill.
As the open limited partnership will no longer be subject to Dutch corporate income tax, the limited partners no longer hold a share in the limited partnership. Therefore, a final settlement of the tax claim is also provided for at the level of the limited partners: a limited partner is deemed to have disposed of its share in (and receivables from) the limited partnership at fair market value at the time immediately before the corporate income taxpayer status of that limited partnership ends.
However, the basic principle of the consultation document is to prevent taxation as a result of the ending of the corporate income taxpayer status of the open limited partnership as much as possible. To achieve this, the proposed transitional rules provide for four tax facilities:
- Rollover facility: upon request the tax claims on all the untaxed gains and reserves, tax reserves and goodwill present in the business of the open limited partnership are passed on to the limited partners. This facility is only available under certain conditions. For example, all the limited partners must be subject to a profit tax for entities, and both the open limited partnership and the limited partners must also be established/resident in the Netherlands or an EU or European Economic Area (EEA) member state.
- Share merger: subject to conditions the limited partners can opt to contribute their interest in the limited partnership into a new EU/EEA holding company in exchange for new shares in that company. The limited partners must record the shares in the holding company at the same value as their share in the open limited partnership directly before the contribution (effective roll-over).
- Payment in installments: in the situation that the aforementioned facilities are not used, it will be possible to pay the resulting tax debt without interest over a 10-year period (provided sufficient security is given).
- Rollover facility for situations of making assets available: in the situation that a limited partner, as substantial interest holder, makes assets available to an open limited partnership and this partner does not make use of the share merger, the period for which the assets are made available will end on the date on which the open limited partnership is no longer regarded as a corporate income taxpayer. This will, in principle, result in a tax claim. It has been proposed to make it possible, upon request and subject to conditions, for this tax claim to (also) be rolled over by means of a specific rollover facility.
Dutch Mutual Fund (Fonds voor Gemene Rekening (FGR))
According to the consultation document, surveys have shown that in practice the current two variants of the mutual fund are both needed. Therefore, it has been proposed to keep both the open and closed mutual fund. However, a new definition is proposed for the mutual fund, as a result of which the classification of a fund as “open” or “closed” may change. A mutual fund will be considered open and thus non-transparent if it raises capital for collective investment, in exchange for participation certificates, and whereby:
- the participation certificates are traded on a regulated market as referred to in Section 1:1 of the Financial Supervision Act or a comparable trading platform; or
- the mutual fund is obliged to regularly redeem or repay the participation certificates out of the mutual fund’s assets at the request of the shareholders (repurchase obligation).
Should a non-transparent mutual fund change into a transparent mutual fund, similar to the limited partnership, this results in a transfer of the assets and liabilities to its shareholders. Contrary to limited partnerships, the consultation document does not include transitional rules for mutual funds.
Exception for Family Funds
Under the consultation document, a mutual fund that is used to manage assets for a group of family members and relatives (family fund) is, by definition, no longer non-transparent for Dutch tax purposes. In short, there is a family fund if the persons entitled to a share in the profit actually only transfer their participation certificates within the limited circle of family members and relatives.
New Qualification Method for Foreign Legal Forms
It has been proposed to retain in principle the current legal form comparison method for foreign legal forms, but with the following comments:
- In future, all limited partnerships that are comparable to a Dutch limited partnership will be transparent.
- Two additional qualification methods will be introduced for foreign legal forms for which there is no comparable Dutch legal form: the symmetrical and the fixed method.
The fixed method offers a solution for the situation in which an entity incorporated under foreign law for which there is no comparable Dutch legal form is established in the Netherlands. For these cases, the fixed method prescribes that this entity must always be regarded as a domestic taxpayer for Dutch corporate income tax purposes.
The consultation document includes several examples of foreign entities for which there is no comparable Dutch legal form available: the limited liability partnership (LLP), incorporated under the laws of the U.K., the unlimited company (ULC), incorporated under Irish law, and the Kommanditgesellschaft auf Aktien (KGaA), incorporated under German law.
The symmetrical method applies to a foreign entity for which there is no Dutch equivalent that is subject to a profit tax in its state of incorporation, and that receives income from a Dutch source, has an interest in a Dutch corporate income taxpayer or a Dutch corporate taxpayer has an interest in such an entity. The Netherlands then, for corporate income tax purposes, follows the tax classification of the state of incorporation of the foreign entity. If that foreign entity receives income from a Dutch source, the entity is regarded as a foreign taxpayer. If a Dutch taxpayer has an interest in that foreign entity, the foreign entity is considered non-transparent and the participation exemption can apply under certain conditions.
Contrary to domestic legal forms, the consultation document does not include transitional rules for the qualification of foreign entities (no roll-over facilities).
Responses to the Consultation Document
The consultation period ended on April 26, 2021. With 35 parties responding to the consultation, a very large number of stakeholders shared their concerns. We have addressed some of these concerns below.
The general trend is that parties are content with the initiative to change the qualification method to reduce the number of hybrid mismatches. However, the date of entry into force of January 1, 2022 encountered considerable resistance as there would be insufficient time to address the proposal.
Further, it was often commented that it is unclear how the proposal interacts with other taxes, in particular real estate transfer tax. Given that many limited partnerships (domestic and foreign) hold real estate, the effect on real estate transfer tax and the possibilities to invoke transitional rules should be addressed.
In several responses it is also stated that the proposal (effectively) provides that the mutual fund and limited partnership can no longer be used as an anonymization structure for family funds. The biggest criticism is that tax laws should not be used to challenge this type of structures as they are not used to hide information from the authorities, but from the general public.
Moreover, various institutional investors currently use a transparent Dutch mutual fund as a pooling instrument. The tax transparency is based on the repurchase obligation. This repurchase obligation is fundamental for Dutch pension funds as it provides that the investment portfolio can be re-balanced (increase or decrease their interest in the mutual fund to align their investment with the pension obligations) without the mutual fund becoming non-transparent. On the basis of the consultation proposals, mutual funds with a repurchase obligation will become non-transparent which would substantially decrease the possibilities for Dutch pension funds to collectively invest on a fiscally transparent basis.
Another of the concerns also is that numerous foreign limited partnerships are currently regarded as foreign taxpayers in the Netherlands in investment structures. As a result of these partnerships becoming transparent, all investors participating in such partnerships would become foreign taxpayers in the Netherlands, creating an increased administrative burden for these taxpayers. Another obvious flaw in the consultation proposals is the absence of transitional rules and roll-over facilities for foreign entities, triggering a possible exit taxation at the current Dutch corporate income tax rate of 25% for foreign entities that are no longer qualified as opaque after the entry into force of the new legislation.
It is noted that Germany has also proposed to change the qualification method for German partnerships by introducing a system whereby it is possible to opt for independent taxpayer status. Given that Germany is the Netherland’s biggest trading partner, this may cause additional complexities should the Netherlands implement the symmetrical method.
Considering the large number of responses, the Deputy Minister of Finance has already dealt with the first objection above, as the bill will most likely not enter into force on January 1, 2022. A new intended effective date has not yet been communicated. Given that the Deputy Minister of Finance has indicated that a final bill will not be submitted to the Lower House of Parliament until the winter of 2021, it cannot be ruled out that this will be only after January 1, 2023.
Moreover, on July 1, 2021, the Deputy Minister of Finance indicated that the new definition for the mutual fund will be dealt with separately, in connection with an evaluation of the possible amendments to the regimes for the fiscal investment institution (Fiscale Beleggingsinstelling) (FBI) and the Exempt Investment Institution (Vrijgestelde Beleggingsinstelling (VBI)). The outcome of this evaluation is expected in the first quarter of 2022.
Given the issues raised in the responses, we expect some substantive changes to the proposal. We therefore look forward to the amended bill.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Mark Theunissen is Senior Tax Manager and Martine Moor is Tax Partner at Meijburg & Co., a member of the KPMG network, Amsterdam.