The Netherlands changes legal entity tax qualification policy  

New qualification methods for foreign legal entities and limited partnerships as of 2024/2025 

Accurate tax qualification of foreign legal entities is essential for proper application of tax bases, adherence to international tax regulations, and avoidance of double taxation. Due to the Netherlands’ deviation from the international standard in its legal entity tax qualification policy, adjusting this policy became a top priority to prevent qualification differences. This priority was realized on January 1, 2024, with the enactment of the Law on Qualification of Legal Forms (Wet fiscaal kwalificatiebeleid rechtsvormen). This legislation ensures that the Dutch qualification policy will undergo changes effective from 2025. Notably, these changes will impact the qualification of open limited partnerships (cv) and the methods utilized for classifying foreign legal entities. Consequently, the new law holds particular significance for the tax strategies of globally operating groups and specifically for investors serving as limited partners.

Why have a qualification policy? 

Qualification disparities between tax systems can emerge when one country regards an entity as a transparent taxpayer, while another country views it as an non-transparent taxpayer. These disparities can exploit different tax treatments among different tax systems, resulting in hybrid mismatches. Therefore, to align Dutch qualification policy more closely with international standards, the Dutch Parliament passed the Law on Fiscal Qualification of Legal Forms (Wet fiscaal kwalificatiebeleid rechtsvormen) last year, which will come into effect on January 1, 2024 (with full implementation by 2025). 

The amendments to this law aim to: 

1. Codify the Dutch qualification policy for foreign legal entities based on the legal form comparison method, supplemented by two additional methods (the fixed method and the symmetrical method). 

2. Remove the requirement for consent and the open limited partnership (cv), thereby: 

• Ending the independent tax liability of the open limited partnership. 

• Ceasing the fiction that the limited partner’s interest in the open limited partnership is classified as a share. 

• Terminating the standalone tax liability of partnerships that, based on Dutch case law, are comparable to a company whose capital is wholly or partially divided into shares. 

These adjustments impact Dutch income tax (inkomstenbelasting), corporate income tax (vennootschapsbelasting), dividend tax (dividendbelasting), withholding tax (bronbelasting), inheritance tax (erfbelasting), gift tax (schenkbelasting), and transfer tax (overdrachtsbelasting).   

Tax implications of qualification policy adjustments 

The aforementioned modifications also entail direct tax implications. With the elimination of the open limited partnership (cv), all partners, including limited partners, will be directly subject to taxation for their portion of the cv’s results, both for income and corporate income tax purposes. Limited partners are considered to have disposed of their share in the limited partnership and their claims against it at fair market value, triggering taxation of the latent reserves. Moreover, under specific circumstances, there may be a mandatory final settlement of the open limited partnership for corporate income tax purposes, encompassing all latent reserves, tax provisions, and goodwill (a so-called exit tax). In need of guidance on these changes? Complete our contact form. 

Transitional provisions 

The Law on Fiscal Qualification of Legal Forms incorporates transitional provisions that come into effect as early as 2024 to address the immediate tax settlement described earlier. Given that these transitional provisions are effective from 2024 onwards, taxpayers have a one-year window to prepare for the changes in the law and the resulting tax implications. Individuals involved in a limited partnership (CV) or a foreign partnership, as well as CVs and foreign partnerships operating in the Netherlands and subject to taxation, may potentially encounter tax consequences under this law affecting various taxes. To mitigate these direct tax consequences, various transitional arrangements to be implemented in 2024 could be utilized. Curious about the impact on your organization and the necessary steps for 2024? Reach out to our tax specialists.