The Netherlands has unique rules when it comes to the classification of foreign entities and limited partnerships (“LPs”) for tax purposes. LPs are only considered transparent for Dutch tax purposes in case the admission and substitution of limited partners is subject to the prior unanimous consent of all (i.e., both limited and general) partners. This requires specific provisions in the LP agreement, which need to be adhered to in practice. In the absence of such provisions, which is normally the default, (Dutch and non-Dutch) LPs are considered opaque for Dutch tax purposes.
Legislation is currently pending to revise the Dutch tax classification rules for (Dutch and non-Dutch) LPs and other non-Dutch entities. The new legislation, which is expected to enter into force on January 1, 2025, in essence entails the following:
- LPs formed under Dutch law (i.e., Dutch CVs), including existing ones, will always be classified as transparent for Dutch tax purposes.
- Entities formed under foreign law will be classified in accordance with their most similar Dutch equivalent under Dutch corporate law.
This means that foreign LPs - in line with the classification of Dutch LPs - will be considered tax transparent as from January 1, 2025.
The pending legislation is generally good news for LPs as it will reduce classification mismatches in an international context. This could be helpful for (i) non-Dutch investment funds that wish to accommodate a tax transparent structure for their Dutch investors and (ii) the use of Dutch LPs in joint venture structures, as they would become more attractive due to their Dutch tax transparent classification.
In case no clear Dutch equivalent can be identified, the following two supplementary rules will apply for the classification of a foreign entity:
- the classification for foreign tax purposes will generally be followed; or
- if the foreign entity is resident in the Netherlands, it will always be classified as opaque for Dutch tax purposes and will thus become a Dutch taxpayer.
There is currently no clear guidance on what the equivalent of a US LLC is under Dutch corporate law. An LLC is generally considered not (sufficiently) equivalent to a Dutch LP. Under the new rules, if an LLC is considered equivalent to a Dutch limited liability company (i.e. a BV), it would be treated as opaque for Dutch tax purposes. If the LLC is not considered equivalent to a Dutch BV, the US tax classification would be followed (unless the LLC is based in the Netherlands). The latter means that a US check-the-box election has a direct impact on the classification for Dutch tax purposes in such situation.
Want to know more about this topic? Reach out to one of our colleagues mentioned below.