Background
The draft ‘Tax Qualification Policy for Legal Forms’ law aims to prevent hybrid mismatches in international contexts, particularly for open limited partnerships (open CVs) and open common funds (open FGRs). This proposal aims to limit tax avoidance by preventing the unintended use of these structures. The government wants to no longer treat open CVs and open FGRs as corporations. This could lead to unexpected income or corporate tax in the form of a final settlement for these legal forms.
The Proposal
The proposal for open limited partnerships (open CVs) and open common funds (open FGRs) was presented on Budget Day 2023. Originally, it was intended that the proposal would enter into force on January 1, 2024. However, to give taxpayers more time to restructure, the entry into force has been postponed. This means that the transitional rules, including the carry-over facilities, will apply in the year 2024. The changes to the legislation, such as the new definition of the common fund and the abolition of the open limited partnership, will now enter into force on January 1, 2025.
Impact on open CVs
One of the most significant impacts of the proposal is that the tax liability for open CVs will be eliminated. This means that open CVs will become ‘fiscally transparent’ and that taxation will occur at the partners instead of at the open CV itself. This could mean that open CVs will be subject to income tax (for individuals as partnerships) and/or corporate tax (for legal entity as partnerships). This could have profound consequences for tax planning and asset structuring.
Repercussions for open FGRs (Family Funds)
For open FGRs, also known as family funds, the definition of this legal structure will be altered. This will result in open FGRs being less likely to be classified as taxable for corporate tax. Open FGRs are also anticipated to become fiscally transparent, which implies that taxation will occur at the participants of the fund. These adjustments have particularly significant ramifications for family funds that use the open FGR structure.
Note to the proposal
On November 17, 2023, the official response to the proposal was issued. The committee handling the response inquired about the government's stance on the proposal. The official response to the proposal ‘Tax Qualification Policy for Legal Forms’ affirms that anonymizing assets is not a valid reason to keep the open limited partnership (open CV). The abolishment of the tax obligation of the open CV only applies to Dutch tax regulations. This is independent of the UBO regulations in the Netherlands for CVs, as the internationally unusual authorization requirement is being eliminated. This aids in preventing tax qualification discrepancies.
Regarding the potential unremitted losses due to the loss carry-forward rule, the state secretary confirms that there will be a carry-over provision in the transitional rules. The transitional law, including provisions for rollover facilities and deferred payment arrangements, applies in the year 2024. Amendments to the regulations, such as the revised definition of the mutual fund and the abolition of the open limited partnership, will take effect from January 1, 2025.
Additionally, an administrative regulation (AMvB) will be developed for the legal form comparison method, which will incorporate further guidelines and a list of acceptable foreign legal forms. This AMvB will be subjected to public comment in the first quarter of 2024.
Finally, the cabinet has included a transitional measure in the proposal to prevent dividend withholding tax. Since dividend withholding tax has been in place for interest and royalties since January 1, 2021, the cabinet sees no reason to expand the transitional rules for this purpose.
Recommended Action
It is critical to anticipate the proposal in a timely manner and to examine potential measures to avoid negative tax consequences. Although the specific steps are not yet known, it is advisable to map out in advance how these modifications will affect your particular circumstance.
Conclusion
The proposed legislation for open CVs and open FGRs could have significant tax consequences for the participants of these legal structures. It is critical to stay informed about these developments and to consider potential measures to prevent negative tax consequences.
We would be happy to assist you in assessing the potential consequences and discovering appropriate solutions for open CVs and open FGRs.
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