NL generally does not levy withholding tax (𝐖𝐇𝐓) on interest and royalty payments and has a broad dividend WHT exemption for dividends. However, 25.8% CWT is levied on interest, royalty and dividend payments to entities that are (i) opaque for Dutch tax purposes, (ii) located in low-taxed / blacklisted jurisdictions (𝐋𝐓𝐉) and (iii) that own a(n) (in)direct interest of >50% in the Dutch payor. Regarding condition (ii), CWT is also levied in abusive situations (e.g., when an entity in a treaty jurisdiction is interposed to mitigate CWT) and in case of certain payments to hybrid entities.

Before 2024, limited partnerships in fund structures (𝐅𝐮𝐧𝐝 𝐋𝐏𝐬) were often considered hybrid entities under the CWT-rules (opaque in NL / transparent in the other country). This meant that payments to Fund LPs would be subject to CWT. An escape applies if, under a look-through approach, Fund LP does not have investors that hold (i) a ‘qualifying interest’ (i.e., >50% interest) and (ii) are resident in an LTJ. It is unlikely that any investor in Fund LP holds an interest of >50% on a standalone basis and is also located in an LTJ.

However, the definition of ‘qualifying interest’ includes a cooperating group (𝐂𝐆) concept, which is not defined in Dutch tax law. There is currently a risk that investors in Fund LP could be a CG and that one LTJ-investor in Fund LP could taint the whole CG for CWT purposes. For example, if an LTJ-investor in Fund LP holds a 10%-interest, 100% of a dividend payment made to Fund LP would be subject to CWT in case of a CG.

As from 2024, Fund LP is already considered transparent for CWT purposes in respect of dividends received, provided Fund LP is not located in an LTJ. This resulted in CWT only being due on the portion of the dividend allocable to LTJ-investors. In our example, only 10% of the dividend would be subject to CWT.

To further improve the Dutch investment climate, a much narrower group concept for CWT purposes is proposed. The new concept, referred to as a ‘qualifying unit’ (𝐐𝐔), only applies if entities act jointly with (one of) the main purpose(s) to avoid one of those entities being subject to CWT. The burden of proof regarding existence of a QU lies with the tax inspector. Fund LPs are generally not set up to avoid CWT and and should therefore not qualify as QU. The uncertainty regarding the CG concept is thus no longer there. For our example, this could mean that the distribution to Fund LP should no longer be subject to CWT at all.

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