The Dutch State Secretary of Finance has issued amended decrees on the Dutch tax treatment of limited partnerships (LPs) and funds for joint account (FGRs). Dutch LPs and FGRs are frequently used as investment funds because of their flexibility and tax efficiency. The key change is that the amended resolutions simplify the requirements that the State Secretary of Finance believes should be met in order to secure a Dutch tax transparent treatment of master-feeder structures involving LPs or FGRs. Where previously the transfer or issue of partnership interests in a feeder or master required the consent of all partners of both the master and feeder, under the new rules only the consent of the partners in the relevant master or feeder is required. This new rule applies from 1 January 2016. To benefit from this simplification, funds should include the simplified consent in the fund documentation or, in the case of existing funds, inform the Dutch tax authorities that they have elected to apply the simplified consent requirement.
In contrast to Dutch NVs and BVs that are subject to Dutch corporate income tax (CIT), LPs and FGRs may, under certain conditions, be treated as tax transparent. As regards its limited partners, an LP 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). An 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 two previous resolutions, the State Secretary of Finance expressed his views on the application of the consent requirement and the redemption alternative to master-feeder structures. The view of the Dutch State Secretary of Finance under the previous resolutions was that all participants in the master are deemed to be also participants in the feeder, and vice versa. In the diagram below, the participants in entity 2 are deemed to participate in entity 1 as well. Under the previous resolutions, the Dutch State Secretary of Finance took the position that in order to preserve the transparency of both entities, the unanimous consent of all partners in all participating and underlying entities was required in the case of a new limited partner’s admission to one of the participating transparent entities. The diagram below indicates that the admission or replacement of any other partner in LP 2 required, in addition to the consent of all of LP 2 other partners, the consent of each of the limited and general partners of LP 1 for LP 2 to retain its closed character. Besides, the admission and replacement of any partner of LP 1 also required the consent of all limited and general partners of LP 2 for LP 1 to retain its closed character. This clearly indicates the very strict approach of the Dutch tax authorities in determining when a LP is tax transparent.
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With a view towards removing undesired restrictions on the structuring of investments funds in the Netherlands, the new resolutions introduce a simplified consent requirement for master-feeder structures. Admission or replacement of a limited partner in a master or feeder only requires the consent of the general and the limited partners in the relevant master or feeder.
In order to maintain the closed-end status of LP 1 in the diagram, only the consent of the limited and general partners of LP 1 is required if a new partner joins LP 1. The general partner of LP 1 may grant the consent on behalf of LP 2. Furthermore, if a new partner joins LP 2, only the consent of the partners of LP 2 is required.
The new resolutions also explicitly allow a FGR that applies the redemption alternative to participate in a LP or FGR that applies the consent requirement, and, vice versa, such LP or FGR to participate in a FGR that applies the redemption alternative.
Besides the simplification of the consent requirement, the new resolutions provide for leniency for limited partnerships which have – in the view of the Dutch State Secretary of Finance – not duly applied the consent requirement to a transfer of LP and FGR interest by means of a legal merger, demerger, or a transfer by way of a liquidation payment. Leniency is granted under the condition that the prior consent was not withheld deliberately, abusively or repeatedly. Subsequently, 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. In our view, it is debatable whether the consent requirement applies to a transfer as part of a legal merger, demerger, or a transfer by way of a liquidation payment.
The simplification of the consent requirement applies from 1 January 2016. This simplification is only applicable if the simplified consent requirement is reflected in the fund documentation, or in respect of existing funds, the fund informs the competent 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.