Since 2005, a bill containing new rules on partnerships has been before the upper chamber of the Dutch Parliament. These rules are to be enacted as Title 13 of Book 7 of the Netherlands Civil Code and are intended to replace the current rules on partnerships. In addition, an implementation bill containing transitional rules for existing partnerships, new provisions relating to tax and amendments to some of the provisions of the first bill was subsequently submitted to the lower chamber of Parliament. The upper chamber therefore decided to postpone further proceedings pertaining to the bill already before it, so that the two bills could be dealt with together. On 15 December 2009 the lower chamber of the Dutch Parliament passed the implementation bill. This means that the upper chamber will now consider both of these bills, the last step in the process that will result in the introduction of the new title in Book 7 of the Civil Code. If the upper chamber handles both bills speedily, it is possible that Title 7.13 will enter into force on 1 July 2010.
The current categories of partnerships are (i) private partnerships (maatschappen), which are subdivided into those acting under a common name (openbare maatschappen) and those not acting under a common name (stille maatschappen); (ii) general partnerships (vennootschappen onder firma) and (iii) limited partnerships (commanditaire vennootschappen). Under the new rules, these categories will disappear, and the following new categories will be created:
- partnerships not acting under a common name (stille vennootschappen);
- partnerships acting under a common name, with or without legal personality (openbare vennootschappen met of zonder rechtspersoonlijkheid);
- limited partnerships, with or without legal personality (commanditaire vennootschappen met of zonder rechtspersoonlijkheid).
Re-classification of existing partnerships
Under current law, the categorisation of partnerships is based on whether they practise a profession (private partnership) or conduct a business (general partnership or limited partnership). This distinction will be eliminated. Instead, Title 7.13 of the Civil Code will make a distinction between partnerships acting under a common name and partnerships not acting under a common name.
Under the new rules, there will be three constitutive requirements for a partnership acting under a common name:
- the partnership's aim must be to practise a profession or conduct a business, or to perform acts of a professional or commercial nature;
- the partnership must act as such in a manner that is clearly cognizable to third parties;
- the partnership must do so under a name used by it for this purpose.
All partnerships that do not meet these three criteria will constitute partnerships not acting under a common name. If a partnership acting under a common name has at least one general partner and at least one limited partner, it will constitute a limited partnership.
Upon the entry into force of the new rules, existing partnerships will be re-classified under the new categories as follows:
- An existing general partnership (vennootschap onder firma) will be classified as a partnership acting under a common name;
- An existing limited partnership (commanditaire vennootschap) will be classified as a limited partnership as defined under the new rules, being a special form of partnership acting under a common name;
- An existing private partnership acting under a common name (openbare maatschap) which, after the entry into force of the new rules, practises a profession or conducts a business, or performs acts of a professional or commercial nature, will be classified as a partnership acting under a common name;
- An existing private partnership acting under a common name (openbare maatschap) which, after the entry into force of the new rules, does not practise a profession, conduct a business or perform acts of a professional or commercial nature will be classified as a partnership not acting under a common name;
- An existing private partnership not acting under a common name (stille maatschap) will be classified as a partnership not acting under a common name.
Title 7.13 of the Civil Code will introduce the option for partnerships acting under a common name to elect to acquire legal personality. This can be done at the time the partnership is created. In such a case, the partnership agreement must state that the partnership possesses legal personality and a notarial deed setting out the name, seat and objects of the partnership, as stated in the partnership agreement, must be executed. It will also be possible for a partnership acting under a common name to acquire legal personality at a later stage. In such a case, it will be necessary not only to execute a notarial deed containing the name, seat and objects of the partnership as stated in the partnership agreement, but also to immediately transfer all assets owned jointly by the partners in respect of the partnership to the new entity. A partnership with legal personality will be able to terminate its legal personality, thus becoming an "ordinary" partnership acting under a common name. It will also be possible to convert a partnership with legal personality into a private limited liability company (besloten vennootschap met beperkte aansprakelijkheid, "BV") or vice versa.
There are a number of practical and legal advantages to the possession of legal personality. A partnership with legal personality will be entitled to own assets in its own right. By contrast, in a partnership without legal personality, the assets are owned by the partners jointly. Assets can be transferred by or to a partnership with legal personality in the same way as with other legal entities (e.g. companies). As a general rule, this will be easier than the transfer of assets by or to the partners in a partnership without legal personality.
Title 7.13 expressly provides that the acquisition or termination of legal personality will not affect the validity or scope of any security given by the partnership to a bank.
Under the current rules, each of the partners in a private partnership (maatschap) is liable for an equal part of the partnership's obligations, to the extent that those obligations are divisible and the agreement with the relevant third party does not provide otherwise.
The partners in a general partnership (vennootschap onder firma) are, under the current rules, jointly and severally liable for all of the partnership's obligations. The same is true for the general partners in a limited partnership. A limited partner is in principle not liable for the partnership's obligations unless he/it violates the prohibition laid down in Article 20(2) of the Netherlands Commercial Code against participating in the partnership's management. In that event, the limited partner is jointly and severally liable for the partnership's existing and future obligations (Art. 21 Commercial Code).
Under the new rules, each of the partners in a partnership acting under a common name (with or without legal personality) will be jointly and severally liable for all of the partnership's obligations. For partnerships currently organised as private partnerships acting under a common name (openbare maatschappen) – which will be re-classified as partnerships acting under a common name – the new rules will therefore increase the liability of the partners, at least with respect to claims that are divisible.
The general partners in limited partnerships (with or without legal personality) formed under the new rules will, like general partners in limited partnerships formed under the current rules, be jointly and severally liable for the partnership's obligations. For the limited partners, the point of departure will remain that they cannot be held liable for the partnership's obligations, except to the extent of their contribution to the partnership's capital. The new rules do, however, contain a change with respect to the prohibition against participating in the partnership's management: this prohibition will be violated if a limited partner (whether or not pursuant to a power of attorney) acts in the name of the partnership or – and this is new – through his/its conduct exercises a decisive influence on the actions of the general partners. If a limited partner violates this prohibition, he/it will be jointly and severally liable for the obligations of the partnership that arise on or after the date of the violation unless his/its conduct does not justify this liability, or at least not in full. The limited partner's liability will not extend to obligations of the partnership that arose prior to his/its management participation (including the "decisive influence" scenario). This represents a change from the current rules, under which a limited partner who has violated the management prohibition is jointly and severally liable for all of the partnership's existing and future obligations. Another change is the introduction of the possibility for the partner's liability to be mitigated.
Under Title 7.13, each of the partners in a partnership not acting under a common name will be liable for an equal part of the partnership's obligations, to the extent that those obligations are divisible and the agreement with the relevant third party does not provide otherwise. This rule is the same as the present rule for private partnerships not acting under a common name (stille maatschappen).
The rules on the liability of partners who join or leave a partnership will also change. In the future, new partners will only be liable for obligations of the partnership that arise on or after the date they join the partnership, while under the current rules new partners are also liable for the obligations that exist when they join.
In addition, the current rules do not restrict the duration of the liability of former partners. In contrast, under the new rules the liability of partners will be limited to a period of five years after the date on which their departure has been registered in the trade register, except liability for claims that only become due and payable after the partner's departure. With respect to such claims, the five-year period will only start to run once they have become due and payable. Accordingly, it is possible that liability for a claim that becomes due and payable two years after a partner has left the partnership will terminate seven years after the registration of his/its departure.
Division of profits and losses
At present the general rule is that, unless the partners have agreed otherwise, profits and losses must be divided between the partners in proportion to the size of their respective contributions to the partnership's capital. Under Title 7.13 of the Civil Code, the general rule will be that profits and losses must be divided equally between the partners, unless the partnership agreement provides otherwise.
In practice, many existing partnership agreements contain specific provisions on the division of profits and losses. Where this is the case, the relevant provisions will continue to apply following the entry into force of Title 7.13. If no such provisions have been laid down in the partnership agreement, the partnership in question will be subject to the new general rule (i.e. equal division between the partners).
Dissolution and continuation
Under Title 7.13 of the Civil Code the basic rule is that, in principle, the departure of a partner will not lead to the complete dissolution of the partnership, but only to a partial dissolution vis-à-vis the exiting partner. However, the partnership will be completely dissolved if fewer than two partners will remain following the departure of the exiting partner, unless the latter is succeeded in the partnership by another party.
"Succession" in the partnership occurs where the accession of one partner is tied to the departure of another. It can occur in cases where two or more partners will remain but also where only one partner will remain. In that event, the successor himself/itself will, in effect, also be regarded as a remaining partner. In general, a successor becomes subject to the relevant rights and obligations under the partnership agreement after he/it has accepted the succession. A party joining the partnership by succession and a party acceding to the partnership are subject to the same rule: they are only liable for obligations of the partnership that arise after the succession or accession.
Title 7.13 contains a set of rules for cases in which a partnership is completely dissolved and must, in principle, be liquidated. The liquidation of a partnership is quite a complex process. However, it will be possible to avoid liquidation if a party (whether a former partner or a third party) that has been designated for this purpose in writing agrees to take over the partnership's enterprise (i.e. its business or professional practice). Where the enterprise is continued by such a party without liquidation of the partnership, the assets jointly owned by the partners or, in the case of a partnership with legal personality, owned by the partnership itself must be transferred to that party. In that event, all claims against the partnership can also be recovered from that party's assets. Creditors of the partnership seeking to recover from the assets formerly owned by the partners jointly or by the partnership itself have priority over creditors seeking to recover from those assets for other debts of the party that has taken over the enterprise.
The introduction of the option of vesting partnerships with legal personality will not change the current system of tax transparency for Dutch corporate and personal income tax purposes. It might, however, influence the classification of a Dutch partnership as transparent or non-transparent in certain foreign jurisdictions in which possession of legal personality affects whether a partnership is treated as transparent or non-transparent. The fact that the same partnership may be classified differently in different jurisdictions may result in double taxation or double non-taxation (i.e. no taxation anywhere). In practice, tax transparency – i.e. that it is the individual partners who are subject to taxation and not the partnership itself – is often one of the main reasons for opting to do business as a partnership.
By contrast, a decision to opt for legal personality will have consequences for Dutch transfer tax purposes. Under the new rules, legal personality will become a distinguishing criterion: partnerships with legal personality will be treated as non-transparent, while partnerships without legal personality will be treated as transparent for transfer tax purposes. This may have adverse effects for real estate funds investing in Dutch real estate. For funds without legal personality, transfer tax at the rate of 6% will in principle be due upon any acquisition of Dutch real estate, either directly or indirectly, by a participant through an interest in such a fund (whether Dutch or foreign). Under the current rules, it is possible to set up a real estate fund in such a way that transfer tax only becomes due in the event that (i) an acquisition results in the holding by a participant of an interest in the fund of at least 33.33 %; and (ii) at least 70% of the fund's assets consist of Dutch real estate. Under the new rules, this treatment will only apply to funds with legal personality. Therefore, from a transfer tax perspective, it will generally be more advantageous for a real estate investment fund organised in the form of a partnership to opt to acquire legal personality.
It should be noted that not all real estate funds will be able to opt to acquire legal personality. Real estate funds are often set up in the form of Dutch mutual investment funds (fondsen voor gemene rekening), which will generally not constitute partnerships under the new rules and will therefore not be able to opt to acquire legal personality. The only such fund that may constitute a partnership (and thus be able to opt to acquire legal personality) is a "closed" mutual investment fund (i.e. one that is not subject to Dutch corporate income tax and dividend tax), where there is a contractual relationship between all participants in the fund. Foreign real estate funds investing in Dutch real estate will generally not be able to opt to acquire legal personality under their national laws.
To reduce the inequality in the tax treatment of different forms of funds investing in Dutch real estate, the new rules provide for a special threshold for Dutch and foreign investment funds without legal personality. For participants in such funds, transfer tax will only be due if an interest of 33.33% or more is acquired (taking into account successive acquisitions within a period of two years by the participant or by related parties, as well as participations already held). This threshold was originally set at 5%, but was then increased to 33.33% because it became clear that a 5% threshold would lead to substantial problems for the real estate sector. In principle, the special threshold will only apply to investment funds in which participations can be transferred without the consent of all other participants, meaning that the threshold will apply to "open" mutual investment funds (i.e. funds that are subject to Dutch corporate income tax and dividend tax) and to "closed" funds that are set up in such a way that participations in the fund can only be transferred to and issued/reissued by the fund.