Relaxed conditions for multi-tier Dutch and foreign limited partnership and investment fund structures

The Dutch State Secretary of Finance has recently issued amended Decrees on the Dutch direct tax treatment of Dutch limited partnerships (or similar organized foreign law partnerships) and socalled funds for joint account (FGRs). Dutch and foreign limited partnerships as well as FGRs are frequently used in cross border holding and investment structures because of their flexibility and tax efficiency.

Other than Dutch NVs and BVs that are subject to Dutch corporate income tax (CIT), limited partnerships and FGRs may, under certain conditions, be treated as tax transparent. As regards its limited partners, a limited partnership is only treated as transparent from a Dutch CIT and Dutch dividend withholding tax perspective if the admission and replacement of limited partners is subject to the prior approval of all other partners, both general and limited (the consent requirement). A FGR is treated as transparent if (i) the consent requirement is satisfied or (ii) if participations may only be redeemed to and re-issued by the FGR itself (the redemption alternative).

In order to remove undesired restrictions on the structuring of investments funds in the Netherlands and to establish an equal playing field with other jurisdictions, the new rules simplify the requirements that the State Secretary of Finance believes should be met in order to ensure a Dutch tax transparent treatment of multi-tier structures involving such limited partnerships or FGRs.

Where previously the transfer or issue of partnership interests in another limited partnership required the consent of all partners of both limited partnerships, under the new rules only the consent of the partners in the relevant limited partnership is required (‘simple consent requirement’). The new rule is applicable as from 1 January 2016. To benefit from this simplification, limited partnerships should include the simplified consent in its documentation or, in the case of existing limited partnerships, notify the Dutch tax authorities that they have elected to apply the simplified consent requirement.

Next to the simplification of the consent requirement, the new rules provide for a specific derogation for limited partnerships which have – in the view of the State Secretary of Finance – not duly applied the consent requirement in connection with a transfer of limited partnership and FGR interest by means of a legal merger, demerger, or a transfer by way of a liquidation payment. Derogation is granted under the condition that the prior consent was not withheld deliberately, abusively or repeatedly. In addition, the limited partnership should immediately report to the relevant tax inspector and inform the limited partners about the applicability of the requirement to obtain consent. It is noted that the view of the State Secretary of Finance that the consent requirement applies to a transfer as part of a legal merger, demerger, or a transfer by way of a liquidation payment is not undisputed.

The simple consent requirement applies from 1 January 2016. This simplification is only applicable if it is accurately reflected in the fund documentation, or in respect of existing funds, the fund informs the Dutch tax authorities that it has elected to apply the simplified consent requirement. However, upon the first amendment of the constitutional documents, the provisions regarding the requirement to obtain consent should be amended as well.

The new rules also explicitly allow a FGR that applies the redemption alternative to participate in a limited partnership or FGR that applies the consent requirement, and, vice versa, such limited partnership or FGR to participate in a FGR that applies the redemption alternative.