Changes in Dutch Tax Classification for entities 2025

Introduction

Starting 1 January 2025, new qualification rules will apply for determining the Dutch tax status of foreign legal forms.  Under these new rules, Dutch limited partnerships (CVs) and foreign limited partnerships (LPs) will generally be classified as transparent for Dutch tax purposes, unless they also qualify as a fund for joint account (FGR) in which case the FGR qualification rules take precedence over the general classification rules (priority rule).

Under the new rules, FGRs can both be tax-transparent and non-transparent depending on the exact characteristics. The new 2025 FGR qualification rules could result in existing foreign LPs transitioning from opaque  for Dutch tax purposes to a tax transparent status, which could result in Dutch tax becoming due. On the other hand, LPs currently treated as tax-transparent and that can be designated as 'investment funds' may transition to a non-transparent FGR status from 1 January 2025. This transition depends on whether the LP possesses the main characteristics of an FGR.  It is expected that many investment CVs and investment LPs could be reclassified as non-transparent FGRs based on the new rules. Although some criteria remain uncertain, there is a one-year transition period to make the necessary changes to the fund documentation to maintain the current tax-transparent status.

Required Action Before 1 January 2025

To maintain tax transparency, action must be taken before 1 January 2025.  Under the new rules, LPs that do not conduct a business enterprise but perform investment activities for Dutch tax purposes can be considered an FGR from 2025.  The Dutch tax classification rules for FGRs also change as of 1 January 2025.  An FGR is tax-transparent unless it meets all the following criteria:

• It is an 'investment fund' (e.g., an AIF) or a 'fund for collective investment in transferable securities' (UCITS) under the Dutch Financial Supervision Act (Wft).
• It is established for collective investments (with at least two investors).  For example, a German Sondervermögen with only one investor will not qualify as an FGR and will automatically be classified as opaque for Dutch tax purposes.
• It follows a strategy classified as 'normal' portfolio management.
• The participations are embodied by 'transferable participation units,' which are not considered transferable if they are only (quasi) transferable to the fund through redemption. It is uncertain what constitutes 'transferable participation units'. It seems that even a registration in an investors register may qualify as such.

Redemption Fund: Non-Transferable Participation Units

If the transfer of participations can only take place to the fund itself (the so-called redemption fund), the participations are considered non-transferable for purpose of the qualification rules. The fund is then not considered an FGR and therefore qualifies as tax transparent. In order to enjoy this treatment, the fund's terms must indicate that a (conditional) redemption right of the participation holder applies.  Even if the fund holds the participations in its portfolio after (re)purchase to reissue the units, they remain non-transferable, and the fund is not considered an FGR.  This also applies if the participation holder resells their participation unit to the fund, while the fund immediately reissues that unit to a third party designated by the participation holder.

Redemption Fund and Secondary Trading

It occurs that a fund, in addition to the redemption obligation in the fund's terms, includes provisions under which, under certain conditions, the sale of participation units to a third party is possible.  This is also known as secondary trading and often relates to the circumstance that the fund (or the manager) does not have sufficient liquid assets to redeem the participation units, for example, because the fund's assets are invested in (illiquid) real estate.  If the fund (or the manager) is a party to the agreement between the old and the new participation holder and the financial settlement of the transfer of the participation units actually takes place through the fund (or the manager), it remains a redemption fund.  This is still the case if, in addition to the financial settlement through the fund (or the manager), a premium or discount settlement takes place between the buyer and the seller.

Conditions for Secondary Trading

In all cases of secondary trading where the financial settlement of the transfer of the participation units does not actually take place through the fund (or the manager), the fund can only be considered a redemption fund if both of the following conditions are met:

• The fund's terms or the prospectus state that the transfer by a participation holder to a third party is deemed to take place through the fund (or the manager), and
• The fund (or the manager) charges a fee to the selling participation holder for the presumed redemption of the participation unit(s) or to the buyer for the presumed issuance of the participation unit(s).

Transitional Provisions

The Dutch government has confirmed that investment CVs and investment LPs, and funds in general, currently transparent for Dutch tax purposes will have the opportunity to amend their limited partnership agreements (LPA) in 2025 to meet the criteria of a Redemption Fund.  To qualify for this transitional provision, such CVs, LPs and other funds must be able to demonstrate that the intention to amend their fund terms (including the LP agreement) to meet the conditions of a Redemption Fund already existed in 2024.

Required Action

We recommend that CVs and LPs (and funds in general) affected by these changes inform their investors about the upcoming changes and also that the intention exists to amend the LP agreement (or fund terms) on the relevant points before 1 January 2025 to take advantage of this transitional period effectively.  The LP agreement or fund's terms must then be amended by the end of 2025 to ensure that the fund qualifies as a Redemption Fund, thereby maintaining tax transparency.

If no action is taken, as of 1 January 2025, there may be independent tax liability for foreign funds regarding the (real estate) assets they hold, and investors in that fund may be deemed to have sold their share in the (real estate) assets at fair market value to the fund as of 1 January 2025 (a tax settlement moment).  Additionally, dividends paid by entities established in the Netherlands may be subject to a different tax.  In some cases, this could attract a withholding tax rate of 25.8%.  If you would like further advice on the impact of the new rules and the necessary actions, please contact your regular advisor or CMS Netherlands.

Contact

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