Under the current rules, CVs and FLPs are only considered transparent for NL tax purposes if the admission and substitution of limited partners is subject to prior unanimous consent of all partners. Without such unanimous consent, LPs are considered opaque from a NL tax perspective. This often results in classification mismatches because other countries generally classify LPs without such strict transferability requirements as tax transparent.

New NL tax classification rules will become effective on Jan 1, 2025. Under the new rules, FLPs that are equivalent to CVs will become transparent for NL tax purposes by default. An exception applies in cases where an FLP is comparable to an NL fund for joint account (not further discussed in this Snippet).

Under the new rules, a CV/FLP that is opaque under the current rules but becomes transparent under the new rules will be deemed to have transferred its assets at fair market value to its partners immediately prior to Jan. 1, 2025 (Deemed Transfer). This could result in NL corporate income tax (CIT) on any capital gain. A rollover facility can be applied to mitigate this CIT but not all situations are covered by these transitional rules.

The Deemed Transfer, which occurs if the NL tax classification of the CV/FLP changes from opaque to transparent, can be relevant in the following 3 situations:

  • An FLP holds an interest in an NL corporate entity (NLCo). It should be assessed whether FLP will be subject to CIT as non-resident taxpayer upon the Deemed Transfer of its interest in NLCo to its partners.
  • The tax position of a CV. Capital gains realized by a CV upon the Deemed Transfer of its assets should be exempt from CIT if it only holds shareholdings qualifying for the participation exemption (the Exemption). However, it could give rise to CIT if CV holds other assets with built-in gains.
  • NLCo holds an interest in an FLP. Any capital gains realized by NLCo upon the Deemed Transfer of its interest in FLP are exempt from CIT if the income from FLP qualifies for the Exemption. After the transfer, NLCo holds the assets previously held by FLP for NL tax purposes. It should be checked whether income from these assets qualifies for the Exemption or gives rise to CIT at the level of NLCo.

CVs with a US shareholder that are treated as opaque under both the current NL rules and the US tax rules will generally become transparent for NL tax purposes as from 2025 under the new rules. However, such CVs will continue to be treated as taxable entities for NL tax purposes as reverse hybrids under the ATAD 2 anti-hybrid rules.

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