Background

The potential reclassification of a Fund LP into a non-transparent FGR and the relevant criteria under which such a reclassification may occur are still heavily debated. We are still trying to get more clarity from the Dutch government on these criteria, in cooperation with various industry bodies.

Based on last week’s publications, the Dutch government seems of the view that a broad range of Fund LPs may be reclassified into non-transparent FGRs. Whilst they remain silent on certain of the criteria, they offer a transitional period of one year to amend the fund documentation in order to maintain the tax transparency of potentially affected Fund LPs (the redemption option as further described below).

We believe that their current position is not in line with the historical background of the non-transparent FGR, introduced as being functionally comparable to (widely held) investment institutions in the form of public limited companies (naamloze vennootschappen; NVs), thus far from how most closed-end private funds, including Fund LPs, tend to operate.

Albeit that we hoped that further clarifications would still be issued and hence the reason for waiting with an external communication thereon, based on the latest communications from the Dutch government on October 25 it is now expected that the Dutch government will not issue further guidance which makes that we do want to share our views and takeaways on the situation.

Further reference is also made to our Budget Day tax flash. In the below, we will focus on the uncertainty/attention points surrounding Fund LPs potentially becoming non-transparent FGRs.

Uncertainty around criteria non-transparent FGRs

As it stands now, Fund LPs that are not considered to be engaged in business activities for Dutch tax purposes may be considered an FGR as per 2025.

The Dutch tax classification rules applicable to FGRs will be amended as of 1 January 2025. In short, an FGR will be transparent for Dutch tax purposes, except if it is:

  • an ‘investment fund’ (e.g., an AIF) or ‘fund for collective investment in tradeable securities’ (i.e., a UCITS) within the meaning of the Dutch Financial Supervision Act (Wet op het financieel toezicht; Wft);
  • established for collective investments (i.e. generally has at least two investors);
  • with a strategy that is classified as ‘normal’ portfolio management (i.e., generally not ‘value-add’); and
  • the participations in the fund are embodied by ‘tradeable participation certificates’, whereby participation certificates are not considered tradeable if they are only transferable to the fund by way of redemption (Redemption Fund).

Fund LPs may only be classified as a non-transparent FGR if they meet all the cumulative criteria. Generally, Fund LPs meet criteria (i) and (ii). Most of the current uncertainty is related to criteria (iii) and (iv). Both criteria are dependent on the specific features of the Fund LP, in particular its fund documentation and investment strategy, and are subject to interpretation. Therefore, it is very important to review the position and reclassification risk of each Fund LP as soon as possible.

In case of doubt whether a Fund LP may be classified as non-transparent FGR as per 2025, it should be considered to amend the fund documentation in such a way that criteria (iv) is not satisfied, and to qualify as Redemption Fund.

Transitional rules / option to amend fund documentation

The Dutch government recently indicated that potentially affected Fund LPs have the opportunity to amend their limited partnership agreement (LPA) to ensure that such Fund LP meets the criteria of a Redemption Fund. Negotiating a secondary trade should still be possible, provided that the transaction is ultimately implemented through a repurchase and re-issuance of the interest by the Fund LP. Hence, investors should effectively still be able to sell their participation to a third-party in a secondary transaction. 

The Dutch government also indicated that they are aware that not all potentially affected Fund LPs can meet the conditions to be considered a Redemption Fund in time, as such change to the LPA may require the approval of (part of the) investors. For that reason, an additional transitional law will be proposed by the Dutch government in the coming weeks, to allow Fund LPs that are currently transparent to restructure into a Redemption Fund still within 2025 (without adverse consequences that would otherwise apply as from 1 January 2025). One of the conditions is that the Fund LP already in 2024 demonstrates the intention to meet the conditions of a Redemption Fund in the course of 2025.

Takeaway

Although we don’t fully agree with the current position of the Dutch government, which we hope they will still clarify and revisit, Fund LPs should already be checked and action may need to be taken.

Should you have any questions with respect to the above, please contact your trusted adviser.