The Netherlands currently applies the ‘similarity approach’ to classify foreign entities. In short, this approach means that one looks at the most similar Dutch equivalent of the foreign entity (‘corporate resemblance’) to determine the Dutch tax classification thereof.  Under the new Dutch classification rules which will enter into force per 1 January 2025 (with transitional rules during 2024), the similarity approach will remain in force as primary classification rule and will be codified in Dutch tax law.

For certain situations where the similarity approach does not provide a solution, there will be two new rules:

  • For entities with no clear Dutch equivalent, the ‘symmetry approach’ will apply. This means that for foreign tax resident entities, in principle, the tax treatment in the home jurisdiction will be adopted;  
  • For foreign entities with no clear Dutch equivalent and which are based in the Netherlands, the ‘fixed approach’ will apply. This means that such entity will always be classified as non-transparent entity for Dutch tax purposes, thus becoming a Dutch domestic taxpayer.

Further reference is made to our Budget Day tax flash.

Draft Decree

The draft Decree includes the key characteristics of all Dutch entities (incl, partnerships), albeit that it defers to the law for the key characteristics of the Dutch non-transparent mutual fund (fonds voor gemene rekening; FGR) and the transparent fund (transparant fonds). In general, a foreign entity that is sufficiently comparable in nature and structure to a Dutch entity will be treated in accordance with such Dutch law equivalent. Key characteristics that should be taken into account are for example: (i) the relationship among the entity and its participants, (ii) the liability regime, (iii) the presence of legal personality, (iv) the form of management / governance structure, and (v) conditions imposed on the establishment of the entity (e.g., with regard to the objective of the entity).

However, if a foreign entity is sufficiently comparable to (i.e. has key characteristics of) more than one type of Dutch entity or is not equivalent with any type of Dutch entity, a classification based on the similarity approach will not be possible. In that case, the foreign entity will be regarded as a non-equivalent entity and such foreign entity will be classified based on the symmetry approach or fixed approach.

The draft Decree further stipulates that in case a foreign entity contains characteristics of both a Dutch entity (e.g., a partnership) and a Dutch FGR, such foreign entity will be considered comparable with the Dutch FGR (i.e., a classification as FGR will prevail). It is further clarified in the draft Decree that foreign funds which have legal personality will not be comparable to a Dutch FGR.

Examples of foreign entities that have already been classified include some commonly used foreign entities such as inter alia the Delaware LLC which is considered comparable to a Dutch limited liability company (besloten vennootschap; BV) and therefore remains non-transparent for Dutch tax purposes based on the similarity approach. An example of a foreign entity that is considered a non-equivalent entity is the Luxembourg SCA which will remain non-transparent based on the symmetry approach due to its non-transparent qualification for Luxembourg tax purposes. In this regard, it can explicitly be derived from the Decree (incl. the list of already classified foreign entities) that foreign partnerships with a capital divided into shares have no Dutch equivalent entity and should therefore be classified based on the symmetry approach or fixed approach.

It is helpful that the list already includes the classification of various foreign entities that are often used in international investment structures (including Luxembourg, German, UK and US limited partnerships). That said, there is still a significant number of foreign entities that have not yet been classified (e.g., the French SLP and FPCI) which creates uncertainty for the market as to how such foreign entities should be classified for Dutch tax purposes as per 2025.

Finally, it is strongly recommended to review existing structures at short notice to see whether the new classification rules may result in adverse tax consequences as per 2025 to ensure that structures can still be timely restructured, if needed.

Loyens & Loeff will (indirectly) provide input on the draft Decree via the relevant industry bodies.