Current entity classification rules

To date, the Netherlands applies very specific entity classification rules for determining whether a limited partnership (either Dutch or foreign) is considered transparent or non-transparent for Dutch tax purposes. Under the Dutch rules, the decisive criterion is whether accession or substitution of a limited partner requires unanimous consent of all (general and limited) partners. Only if such unanimous consent is required (and in practice obtained), a limited partnership is classified as tax transparent for Dutch tax purposes. In practice, this generally means that foreign limited partnerships are quite often treated as non-transparent from a Dutch tax perspective, resulting in ‘hybrid’ entities: limited partnerships are considered transparent in most of the world but non-transparent from a Dutch tax perspective.

Similarly (deviating) classification rules also apply in respect of other Dutch and non-Dutch entities.

Anti-hybrid mismatch rules

In line with the European ATAD2 directive, the Netherlands has introduced various anti-hybrid mismatch rules in its domestic tax legislation (see inter alia our flash of 5 March 2021). These rules neutralised the tax effects of hybrid mismatches. However, the origin of such ‘hybrid entity’ mismatches – the unique Dutch classification rules – was in principle not affected by the introduction of anti-hybrid mismatch rules (unless it considered reverse hybrid entities). With the newly proposed classification rules, the cause of many hybrid entity mismatches should be solved.

The legislative proposal

The proposal, which would apply for Dutch personal income tax, corporate income tax, dividend withholding tax and the conditional withholding tax, entails the following:

Dutch entities

In the Netherlands, a limited partnership (commanditaire vennootschap or CV) and a fund for joint account (fonds voor gemene rekening or FGR) can be transparent or non-transparent.

The non-transparent CV ceases to exist under the proposed rules, making all CVs transparent.

The aforementioned change means that non-transparent CVs are deemed to realise their assets (i.e. a tax triggering moment) when becoming transparent. In practice, this can result in tax becoming due without cash being generated. Therefore, several facilities are being proposed: (i) a rollover facility, (ii) a share-for-share merger facility, or (iii) a deferred payment obligation (spread out over ten years).

There are currently three types of FGRs, in short being: (i) an FGR in which participations are only transferable to other participants with unanimous consent (transparent), (ii) an FGR in which the participations can only be repurchased by the FGR (transparent) and (iii) other FGRs with transferable participations (non-transparent). Under the proposed rules and contrary to the CV, an FGR can remain either non-transparent or transparent.

Under the proposed rule, an FGR is transparent, unless the FGR has the obligation the repurchase participations regularly and/or if the participations in the FGR are publicly traded. Special rules are introduced to avoid that family owned FGR’s can remain non-transparent.

Foreign entities

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 position thereof.

Under the current proposal, the similarity approach remains in force as primary classification rule. However, due to the revised rules for the CV (Dutch limited partnership), which would become per se transparent (without consent requirement), many hybrid mismatches will disappear as the Netherlands (in line with most other jurisdictions) will regard a foreign partnership as transparent for tax purposes.

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 the Netherlands will follow the classification of the foreign entity’s home state.
  • Finally, foreign entities with no clear Dutch equivalent, which are based in the Netherlands, will always be considered as non-transparent entities, thus becoming Dutch domestic taxpayers.

Concluding remarks

For newly set up structures, these rules will significantly reduce the risk of a hybrid entity mismatch. However, for existing structures, one should carefully check the consequences as the transition may lead to unforeseen tax consequences.


Should you have any questions or comments, or wish to participate in the consultation process and need our assistance, please contact your trusted advisor at Loyens & Loeff.