The new Dutch entity classification legislation
The current Dutch tax classification rules deviate from most other jurisdictions, which can lead to classification mismatches caused by the Dutch perspective. For example, LPs are only considered transparent for Dutch tax purposes in the case the admission and substitution of limited partners is subject to the prior unanimous consent of all (i.e., both limited and general) partners (the consent requirement). In the absence of the consent requirement, both Dutch and non-Dutch LPs are classified as opaque for Dutch tax purposes.
The new legislation sets out a framework that brings entity classification for Dutch tax purposes more in line with international practice. The legislation provides that:
- All Dutch partnerships will be transparent for Dutch tax purposes. This includes existing tax opaque Dutch partnerships (e.g., CVs), which will cease to be a Dutch corporate taxpayers immediately preceding January 1, 2025, by the transition into transparent entities. For these partnerships transition law applies – including a roll-over facility further discussed below.
- Entities formed under foreign law will be classified in accordance with the classification of their equivalent legal form governed by Dutch law (the similarity approach). If no clear Dutch equivalent can be identified, the classification for foreign tax purposes would generally be followed. Foreign entities with no clear Dutch equivalent that are based in the Netherlands will always be classified as opaque for Dutch tax purposes and will thus become Dutch domestic taxpayers.
Consultation on draft Decree on Dutch tax classification rules for foreign entities
The Dutch Ministry of Finance has launched a public consultation (which closes on March 18, 2024) on the draft Decree on the Dutch tax classification rules for foreign entities (the Foreign Entities Decree). The Foreign Entities Decree contains an assessment framework for comparing foreign entities with Dutch legal forms. For more background on the Foreign Entities Decree, reference is made to our more elaborate news article on the topic.
For U.S. group structures, it is particularly relevant that the Foreign Entities Decree contains an annex with a list of foreign entities that have already been classified for Dutch tax purposes. Included on this list are (i) the Delaware LLC and Ohio LLC and (ii) the Delaware LP.
- Delaware / Ohio LLC
The Delaware LLC and Ohio LLC are considered equivalent to the (tax opaque) Dutch limited liability company (besloten vennootschap, BV). This means that the Delaware LLC and Ohio LLC will continue to be classified as opaque from a Dutch tax perspective after 2024. This is a welcome clarification, as the LLC does not have a matching legal form under Dutch corporate law, which can create difficulties when applying the similarity approach explained above. An attention point for the LLC remains that the U.S. tax classification can differ from the Dutch tax classification. Nevertheless, the classification as opaque from a Dutch tax perspective should be helpful as it results in a status quo.
For LLCs organized under the laws of another U.S. state the similarity approach should be applied, pursuant to which the LLCs will be classified in accordance with their equivalent legal form under Dutch law. In the case of sufficient similarity with the Delaware LLC or Ohio LLC, the classification as opaque for Dutch tax purposes is expected. - Delaware LP
The Delaware LP is considered equivalent to a Dutch limited partnership. As all Dutch partnerships will be transparent from 2025, the Delaware LP will always be classified as transparent for Dutch tax purposes from 2025 whereas currently the LP is oftentimes classified as a tax opaque entity due to the applicable consent requirement.
For LPs formed under the laws of another U.S. state the similarity approach should be applied, pursuant to which the LP will be classified in accordance with their equivalent legal form under Dutch law, which is expected to be the Dutch limited partnership.
Roll-over facility under new Dutch entity classification legislation
The transition of Dutch partnerships (from tax opaque to tax transparent) implies that, immediately preceding January 1, 2025, the Dutch partnerships cease to be corporate taxpayers for Dutch tax purposes. The transition is for Dutch tax purposes treated as a (deemed) transfer by the partnerships of their assets to the general and limited partners. A roll-over facility is provided in the legislation that allows for any (deemed) tax claim to be assumed by the limited partners (subject to conditions). In some cases, the roll-over applies automatically but in most situations a request to the Dutch tax authorities should be made.
The adopted legislation does not include a geographical limitation for limited partners to apply the roll-over facility, meaning that the roll-over facility can also be applicable to U.S. limited partners that are subject to corporate tax. This can provide relief in U.S. group structures with existing tax opaque Dutch partnerships. A (timely) request to apply the roll-over facility must be made (ultimately when the Dutch corporate income tax return for the year 2024 is filed on behalf of the relevant partnership).