On September 19, 2023, two legislative proposals were published that affect the Dutch tax qualification of certain legal entities. These are the "Act on adjustment of funds for joint account and exempt investment institutions" and the "Act on adjustment of tax qualification of legal entities". Both proposals aim to bring the current tax qualification rules for Dutch investment funds, which are often structured as funds for joint account (in Dutch: fonds voor gemene rekening) ("FGR") or limited partnerships (in Dutch: commanditaire vennootschap) ("CV"), more in line with their original purpose and international standards. On December 19, 2023 both proposals were approved by the Dutch Senate and will enter into force on January 1, 2025.
The measures should lead to fewer tax qualification differences of legal entities in international situations. Qualification differences are undesirable because they may result in certain income being taxed twice, or not taxed at all. Several measures have been proposed to reduce such qualification differences. Below, we will consider the impact of the changes on (i) the FGR and (ii) the CV.
Fund for joint account (FGR)
Based on current Dutch tax law, an FGR is either open or closed. An open FGR is subject to Dutch corporate income tax. A closed FGR, on the other hand, is not subject to Dutch corporate income tax. The (results from) investments of a closed FGR are taxed directly with the participants of the FGR. The FGR is considered an open FGR if participations in the FGR are freely transferable. This is not the case if the prior unanimous consent of all participants is required ('consent requirement'), or if transfer is only possible to the FGR itself ('redemption requirement') or relatives by blood or marriage in the direct line of the participant. Schematically, the Dutch tax qualification of an FGR under current Dutch tax law is as follows:
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In practice, the consent requirement frequently leads to ambiguity. In an international context, this requirement is often not understood, as other countries are often not familiar with such a criterion. This leads to qualification differences between tax systems and is considered undesirable in practice.
As of January 1, 2025, the definition of the FGR will change. As a starting point, an FGR will not be subject to Dutch corporate income tax and therefore considered as 'closed' (i.e. transparent). An FGR will only be regarded as open, and thus subject to Dutch corporate income tax, if the participations are freely transferable on a regulated market or comparable trading platform. The current consent requirement as a distinguishing criterion will be abolished. However, the transferability of the participations in an FGR remains relevant. Participations will be considered non-transferable if they can only be sold to the FGR (i.e. redemption requirement). Schematically, the tax qualification of the FGR as of January 1, 2025 will be as follows:
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An FGR that qualifies as an investment institution (in Dutch: beleggingsinstelling) and UCITS (in Dutch: instelling voor collectieve belegging in effecten) within the meaning of the Financial Supervision Act (in Dutch: Wet Financieel Toezicht) ("Wft") will, by applying the redemption requirement, similar as under current law, retain control over whether it is considered as an open or closed FGR. For the qualification of the FGR as closed FGR it is important that the participations cannot be transferred to a third party. It is allowed for the FGR to purchase the participations first and then distribute them to a third party. In this way, albeit indirectly, the participations in a closed FGR can still be transferred to a third party.
As a result of the changes effective as of January 1, 2025, many FGR's will no longer be subject to Dutch corporate income tax. For Dutch tax purposes, by fiction, a transfer is assumed of all assets of the FGR to its participants at fair market value. In principle, this leads to taxation of the hidden and fiscal reserves and goodwill. To avoid immediate taxation, facilities can be applied under certain conditions. Participants who are subject to Dutch corporate income tax may apply a rollover facility. In such case, the tax book values of the assets and liabilities of the FGR are passed on to the participants. This will preserve the tax claim. However, if not all FGR participants are subject to Dutch corporate income tax, the rollover facility cannot be used directly. In that case, for individual taxpayers, the transitional law provides for a share-for-share merger facility (with a temporary exemption from real estate transfer tax), allowing the participation to be brought into a company without Dutch tax consequences. Subsequently, the rollover facility could still be used. The Dutch real estate transfer tax exemption, as an additional (temporary) measure to the share-for-share merger facility, is subject to two conditions. First, the interest obtained as part of the share-for-share merger in exchange for the interest in the capital of the FGR must be similar. Second, the interest obtained should in principle be held for at least three years after the share-for-share merger.
Participants that are exempt from Dutch corporate income tax or participant that are not subject to Dutch corporate income tax (e.g., foundations without a business) cannot apply for the facilities offered. In such cases, it should be considered whether a change in the structure can be realized before this law enters into force in order to prevent or limit (undesirable) tax consequences. Should this not be possible, the transitional law provides for a deferred payment facility for up to ten years.
Limited partnership (CV)
Similar to the FGR, based on current Dutch tax law, the consent requirement is relevant for the Dutch tax classification of the CV. This consent requirement means that entry or replacement of a limited partner can only take place after all partners (managing and limited partners) have given their consent. Only in that case the CV is considered as a closed CV (i.e. tax transparent). The (results from) investments in the closed CV are subject to Dutch personal income tax or Dutch corporate income tax directly at the level of the participant of the CV. If this consent requirement is not met, the CV is considered as an open CV meaning the CV is subject to Dutch corporate income tax.
As of January 1, 2025, a CV will in principle always be treated as transparent for Dutch tax purposes and will not (no longer) be subject to Dutch corporate income tax. Instead, as of January 1, 2025, the participants in the CV will be subject to Dutch personal income tax or Dutch corporate income tax on their share in the result of the CV. This rule will also apply to foreign legal forms similar to the CV.
Similar to the FGR, the CV is by fiction assumed to have transferred all its assets to its participants at fair market value as a result of the change in its Dutch tax qualification. In principle, this results in taxation of the hidden and fiscal reserves and goodwill. Again, certain reliefs (including a temporary and conditional exemption from Dutch real estate transfer tax for situations where real estate is transferred) or a deferred payment facility can be invoked under conditions to avoid immediate taxation.
Conclusion
For all open CVs and open FGRs, a timely evaluation of the Dutch tax consequences will be required when they become transparent, so that any restructuring can be carried out under the transitional law during 2024.
Furthermore, as a result of these legislative amendments, an FGR that is currently classified as a closed FGR under the consent requirement may be classified as an open FGR as of January 1, 2025, provided the FGR qualifies as an investment fund or UCITS within the meaning of Article 1:1 Wft. Also for these situations, if qualification as an open FGR is not desirable, restructuring or adjustment of the fund conditions will be necessary ultimately before 2025.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
