Q&A document published on the new Dutch tax classification rules for (foreign) entities

Background

Effective 1 January 2025, new Dutch tax classification rules apply to foreign entities, Dutch limited partnerships (commanditaire vennootschap, or CV), and funds for joint account (fonds voor gemene rekening, or FGR). In this context, the Dutch government also issued a decree on the comparison of foreign entities (Besluit vergelijking buitenlandse rechtsvormen; the “Decree”) which provides guidance to certain aspects of the new tax classification rules. A list (rechtsvormenlijst) with legal presumptions regarding the comparability of certain foreign entities is annexed to the Decree (the “List”). We refer to our earlier Tax Alert of 20 November 2024 (regarding the publishment of the Decree on tax classification of foreign entities) and 13 January 2025 (regarding the update on Dutch entity classification and anti-base-erosion rules) for a more detailed explanation of the new tax classification rules. 

As the new tax classification rules are being implemented, several practical questions arose. The Dutch Tax Authorities (“DTA”) have now addressed a number of these questions, with the aim to provide further guidance on the proper implementation and interpretation of the new legislation. The answers provided in the Q&A are for informational purposes only.

The Q&A document in a nutshell

The Q&A is divided into three categories: the first category covers the transitional provisions, the second category concerns the qualification methodology and the final category pertains to the new rules for the FGR. Lastly, the Q&A document includes in the annex a form that can be used as a supporting tool for the Dutch tax classification of foreign legal entities that have not been classified yet. 

In this Tax Alert, we will highlight a few answers per category as set out above.

Category A: Transitional law 

As a result of the new tax classification rules, it is possible that an entity now classifies differently compared to its classification under the previous rules (i.e. changes from a tax transparent entity into a non-transparent entity or vice versa). To mitigate the impact of such change, transitional rules were implemented. The first category of the Q&A concerns the interpretation of these transitional provisions, which could be invoked by taxpayers prior to the new tax classification rules entering into force. These transitional provisions allowed for certain specific tax-friendly restructuring alternatives, aimed at mitigating the consequences of a different classification.  

The DTA has, among other things, provided clarification on the applicability of the transitional provisions in certain specific cases. For example, the DTA confirmed in this first part of the Q&A that the so-called ‘deemed disposal provision’ (vervreemdingsfictie) does not apply to Dutch partners of a foreign entity comparable to a Dutch limited partnership (CV) which classifies as an FGR and is therefore treated as non-transparent for Dutch tax purposes (the classification as an FGR prevails over the classification as an entity comparable to a Dutch CV). The deemed disposal provision only applies if the foreign entity is no longer considered a taxpayer as a result of the new tax classification rules. 

Category B: Qualification methodology 

The second part of the Q&A focuses on the qualification methodology under the new tax classification rules. 

Most of the answers provided in this part offer more general guidance on the qualification methodologies. For example, the DTA clarified that when applying the symmetrical approach – which applies to foreign entities based outside the Netherlands and entails following the local tax classification for Dutch tax purposes – to a entity which is based in a federal state, the relevant assessment must be carried out on the basis of the relevant federal legislation, rather than on the basis of state-level legislation. Additionally, the DTA confirmed that in case the DTA classifies new foreign entities (i.e. foreign entities not yet included in the List), these new classifications will be published throughout the year and will be considered a supplement to the List as of that moment. The List will be updated in its entirety on an annual basis. 

Category C: FGR 

The final, most extensive, part of the Q&A pertains to the FGR. Under the new tax classification rules for FGRs, an investment fund  will be only be considered an FGR only if (i) it is an investment fund or UCITS (Undertaking for Collective Investment in Transferable Securities) regulated by the Dutch Financial Supervision Act and (ii) the participations in the FGR are tradeable. A FGR is non-transparant for Dutch tax purposes. 

The new tax classification rules for FGRs also have impact on foreign equivalents of the FGR, as the classification of an FGR prevails over any other classification. This underlines the importance of the conditions that must be met to qualify as a non-transparent FGR, which in turn explains the number of questions in the Q&A regarding these conditions. We note for completeness sake that a number of questions remain unanswered, however the following has been clarified.

The DTA reiterated in the Q&A that participations are not considered tradable if they can only be transferred to the fund itself by way of redemption (inkoopfonds). In the same context, the DTA further clarified that, in order for a fund to qualify as a (transparent) redemption fund, the interest held by the general partner – who is proportionally the economic owner of the fund’s assets and therefore considered a participant – must also be exclusively transferable to the fund itself. Furthermore, the DTA confirmed that the presence or absence of legal personality is not relevant when determining whether an investment fund or UCITS qualifies as an FGR and that a fund cannot qualify as an FGR if it has, in substance, only one participant. 

According to the legal definition of an FGR, the activities of the fund should be limited to ‘investing’ (beleggen) and may not extend beyond ‘normal’ asset management (i.e. the activities of the fund are not considered an active business for Dutch tax purposes). In the Q&A, the DTA confirmed that the definition of ‘investing’ has not changed under the new tax classification rules.

Annex: Support form 

Lastly, the Q&A contains an annex with a form that can be used as a support tool for the tax classification of foreign legal entities. The tool is intended to supplement the List. Completing the form should help clarifying whether a foreign legal entity is comparable to a Dutch legal entity, and if so, which type of entity. 

Concluding remarks 

Although the Q&A provides helpful clarifications, some practical questions remain outstanding. It is indicated that the Q&A will be supplemented in the future when additional practical and/or more general questions have been addressed. Answers to more legal questions and official policies regarding the new tax classification rules will in principle be published through knowledge group positions (kennisgroepstandpunten) and policy decrees (beleidsbesluiten), as the Q&A also confirms.