Netherlands: Consultation on new framework for determining characterization for tax purposes of foreign legal forms

A consultation on a draft decree under the new framework for assessing whether foreign legal forms qualify as transparent or non‑transparent for tax purposes was launched on 5 February 2024.

The new framework was introduced as part of “The Legal Forms Tax Qualification Policy Act”—adopted at the end of 2023 as part of the 2024 Tax Plan package (read TaxNewsFlash)—and would be effective as of 1 January 2025.

The consultation closes on 18 March 2024.

The Legal Forms Tax Qualification Policy Act aims to bring the Netherlands more in line internationally and prevent differences in characterization of various foreign legal forms. The Act provides for the following steps in order to determine the qualification:

• If a foreign legal form is comparable with a Dutch legal form, the qualification for tax purposes of the comparable Dutch legal form is followed.
• If there is no comparable Dutch legal form, the qualification depends on the place of establishment:
  • If the legal form is established in the Netherlands, it is regarded as non-transparent and therefore independently taxable (fixed method).
  • If the legal form is not established in the Netherlands, the qualification in the country of establishment is used (symmetrical method).

In addition, the Act contains an important change for limited partnerships. Although under current law, these entities can still qualify as transparent or non-transparent, as of 1 January 2025 they will, in principle, qualify as transparent.

The draft decree relates to whether a foreign legal form is considered comparable with a Dutch legal form.

• The starting point for assessing whether a legal form is comparable is the “hallmarks” of the various Dutch legal forms included in the draft decree (e.g., whether or not there is capital divided into shares, the liability members/partners have toward third parties, and the management of the legal form).
• The draft decree also includes a list of legal forms, in which different foreign legal forms have been assessed and qualified as comparable or not comparable with a Dutch legal form.

In theoretical terms, the assessment under the draft decree differs significantly from current qualification policy under which four criteria are generally used to establish whether an entity is a company with share capital (if three of the four criteria are met) or a partnership. The new policy is based on a more substantive assessment/comparison, which also takes into account what the foreign legislator had intended with the legal form, and what place that legal form occupies in foreign law. Nevertheless, this new policy may, in certain cases, lead to a qualification of the legal form that is comparable to the qualification under the current rules.

Read a February 2024 report prepared by the KPMG member firm in the Netherlands