Replace on Dutch guidelines on the classification of Dutch and international authorized entities

On 3 June 2022, the Dutch State Secretary of Finance presented the Fiscal Policy and Implementation Agenda for the coming years. In the agenda, he sets out the ambitions in the area of taxation and their implementation by the Tax Authorities.

An important ambition is modernization of the tax system. For example, the tax system will be adapted to the international developments in preventing tax avoidance (e.g. ATAD3 and Pillar 1 and 2) and is also aimed at achieving the climate ambitions. Another ambition is to abolish various less effective tax schemes. Generally, in my view, the letter shows ambition and vision but, above all, seems well-considered and nuanced, which is a breath of fresh air in the current fiscal climate. In this blog, I will focus only on an update of the proposed amendments to the Dutch rules on the classification of Dutch and foreign legal entities.

As discussed in more detail in my blog of 2 July 2021 (see link), a consultation document including the draft bill “Adaptation of the Classification of Legal Forms” has been published, amending the methods for classifying foreign legal entities, among other things. On 1 July 2021, the Dutch State Secretary of Finance issued a letter in which he indicated that the proposed amendments to the Dutch mutual fund (fonds voor gemene rekening) would no longer form part of the legislative proposal on the Dutch classification rules. Apart from the postponement, no further updates were published regarding the further progress of the draft bill.

Until now, that is. The Fiscal Policy and Implementation Agenda includes a paragraph on the draft Bill that very briefly discusses the content of the draft bill and the expected timing. First, the State Secretary emphasizes again that the draft bill does not specifically address tax avoidance. Since 1 January 2020, the Netherlands has implemented the ATAD2 hybrid mismatch measures that should tackle tax avoidance through the use of hybrid mismatches between different jurisdictions. One of the objectives of this bill is to prevent differences in classification between jurisdictions, i.e. aimed at eliminating the cause of hybrid mismatches, rather than the symptoms.

The update in the agenda is brief and in line with the information previously published. Under current Dutch tax law, a commanditaire vennootschap or CV (limited partnership) is considered transparent (a closed CV) forDutch tax purposes and the partners are taxed on the income derived from their interest in the CV, if the unanimous consent of all the partners is required for the admission or substitution of a limited partner. With the draft bill, the government plans to abolish the limited partnership’s consent requirement. As a result, an open CV itself will no longer be subject to corporate income tax when the bill is enacted. On the basis of current Dutch policy, in principle, a foreign legal entity is treated the same way for Dutch tax purposes as the Dutch legal entity that is comparable to it. This means that, on the basis of the draft bill, also foreign limited partnerships that do not meet the current consent requirement will no longer be considered non-transparent for Dutch tax purposes. The intention of this is to prevent differences between the Dutch and foreign classification of legal forms and the resulting mismatches.

In contrast to the 2021 consultation document – but in line with the letter of 1 July 2022 – the adjustment of the tax treatment of the Dutch mutual fund is no longer mentioned in the update.

The plan is to introduce the bill in the spring of 2023 with 1 January 2024 as the proposed effective date.