On 24 December 2015 the Dutch Ministry of Finance published a revised decree on the tax-transparency rules for the Dutch limited liability partnership (commenditaire vennootschap; CV).1 The decree includes guidance on when a CV, or its foreign-law equivalents, are treated as transparent from a Dutch tax perspective. The new decree includes two new, more relaxed, positions on the so-called Consent Requirement (defined below). Because of these changes, new CV structures can benefit from less strict regulation but also existing CV structures may require further consideration.
Dutch CVs are commonly used in for instance shipping projects and international joint ventures. Reason is that these entities can be established in such a way that they are considered to be regular tax payers (so-called open partnerships) but also as tax-transparent entities (so-called closed partnerships) from a Dutch tax perspective. The latter can be beneficial if for instance income of a joint venture should be directly reported by the partners/investors.
The treatment of a CV as tax-transparent or not can have material consequences. Dutch law, however, only contains a definition of the term “open partnership”. Article 2, third paragraph, subsection c, of the Dutch General Tax Act (Algemene Wet Rijksbelastingen) states that a partnership is considered “open” (i.e. it is generally treated as a regular independent tax payer) if limited partners can be added or replaced without the prior consent of all existing partners (i.e. all general partners and all limited partners).
By contrast, a partnership should therefore be considered “closed” (i.e. it is transparent for Dutch tax purposes and its income and assets are pro rate attributable to its partners) if all partners individually need to consent to any changes in the sharing amongst partners and the addition or replacement of partners. This rule is known as the “Consent Requirement”. For the avoidance of doubt, it is not sufficient that these rules are laid down in the constitutional documents but these should also follow from the actual actions of the partners.
Because there was no definition of a “closed” partnership in Dutch law and tax payers requested more guidance on the tax transparency of a CV and its foreign-law equivalents, the Dutch Ministry of Finance published a first version of its decree on the transparency rules for CVs in 1986. This decree has in the meantime been updated and now receives another facelift.
The new decree includes two material changes compared to its predecessors:
- A new paragraph 2.2 is added, dealing with situations where by mistake no prior consent was requested for the addition or replacement of a partner in a tax-transparent CV. The Ministry of Finance approves that such omission will not result in the CV being deemed non-transparent if specific conditions are met. These conditions include, amongst others, that the omission are only incidental, it is immediately reported to the tax authorities and consent is as soon as possible retrospectively obtained from all partners.
- Paragraph 5 is amended, which deals with so-called tiered CV structures (i.e. one tax-transparent CV partially owning by another tax-transparent CV). Previously, a change in the lower tier CV would require the prior consent of all partners of both CVs. The reasoning was that partners in the upper tier CV were also deemed to participate in the lower tier CV. This consent requirement led to complex arrangements in the constitutional documents of these tiered CV structures. Now the Ministry of Finance approves that prior consent only needs to be obtained of the direct partners of a tax-transparent CV.
In addition to the above changes, the wording of the decree has been adjusted slightly to clarify certain positions although the Ministry of Finance mentions that these adjustments are in no way meant to be changes in its existing transparency policies.
Because of these changes to the decree, new CV structures can benefit from less strict regulation. This means for instance that in tiered CV structures the Consent Requirement can be less complex. But also existing CV structures may require further consideration with regard to their Consent Requirement clauses. The decree states that existing tiered CV structures can use this new and more relaxed Consent Requirement without actually amending their constitutional documents. This does require though that such CVs file a written request hereto with the Dutch tax authorities.