Sign up for tax alert emails    GTNU homepage    Tax newsroom    Email document    Print document    Download document

March 31, 2021

The Netherlands starts consultation to better align legal entity and partnership classification rules with international tax standards

Executive summary

On 29 March 2021, the Dutch Government released for public consultation a draft proposal to revise the Dutch classification rules for entities incorporated under foreign law and partnerships formed under Dutch as well as foreign law.

The proposed new entity classification rules are intended to be better aligned with international tax standards. It is expected that this will result in less potential hybrid situations due to mismatches in entity classifications between the Netherlands and foreign jurisdictions. If adopted, the proposed rules would be an improvement for Dutch taxpayers and the Dutch tax practice as it would reduce the number of cases in which a hybrid entity or partnership under the current entity classification rules leads to the potential application of the Anti-Tax Avoidance Directive (ATAD2) rules or withholding tax rules.

The consultation closes for comments by the public on 26 April 2021. Subsequently, the Dutch Government will issue a legislative proposal that will be subject to review and the regular parliamentary proceedings.

If enacted, the proposed changes will take effect as of 1 January 2022.

Detailed discussion

Current entity classification rules

Under the current rules, a foreign entity is compared to the Dutch legal entity which it most closely resembles based on its legal characteristics. For Dutch tax purposes, the foreign entity is treated similarly to that comparable Dutch legal form (legal form comparison analysis).

In addition, the Dutch limited partnership (CV) may qualify as either transparent or non-transparent for Dutch tax purposes depending on the free transferability of the partnership interests (also referred to as the “prior consent requirement”). If the transferability is not restricted, the CV is considered opaque (non-transparent) for Dutch tax purposes (such a CV is called an ”open CV”).1 As a result, comparable foreign limited partnerships are often treated as non-transparent from a Dutch perspective, potentially resulting in a hybrid entity mismatch.

Proposed entity classification rules

Treatment of Dutch CVs

It is proposed that the prior consent-requirement for CVs will be abolished. As a result, CVs will always be transparent for Dutch tax purposes as of 1 January 2022.

For existing non-transparent CVs (open CVs), the transition to a tax-transparent entity will occur through a deemed liquidation resulting in the transfer of all of its assets and liabilities to its limited partners against fair market value. Grandfathering rules are proposed to alleviate the direct payment of cash tax, such as conditional roll-over relief and tax payments in installments.

Classification of foreign entities

Under the proposed entity classification rules, the legal form comparison analysis will remain applicable. As CVs will be transparent entities for Dutch tax purposes, comparable foreign limited partnerships that are currently non-transparent should become transparent entities from a Dutch tax perspective as well.

Two additional entity classification methods for foreign entities

If no comparable Dutch legal equivalent can be found, foreign entities are to be classified based on the tax treatment of the jurisdiction under the laws of which that entity has been established.

If the entity is tax resident in a jurisdiction other than its country of incorporation, the tax treatment as transparent or non-transparent in the country of tax residency is not relevant (as only the treatment in the country of incorporation is relevant). However, if the tax residency is in the Netherlands, it is proposed that the entity or partnership will be treated as non-transparent and thus will be considered a taxpayer in the Netherlands.

Impact, next steps and timing

It is expected that the proposal will result in fewer hybrid mismatches, which may avoid the application of the (complex) Dutch anti-hybrid mismatch rules and - in specific cases - the conditional withholding tax on interest and royalties.

The proposal may also have other indirect implications such as the applicability of the participation exemption regime and the exemption for nonresident capital gains or dividends.

Taxpayers should carefully review their structures, monitor the consultation process, and consider the potential consequences of the proposal.

The proposal is open for consultation until 26 April 2021 and, if enacted, will apply as of 1 January 2022.


For additional information with respect to this Alert, please contact the following:

Ernst & Young Belastingadviseurs LLP, International Tax and Transaction Services, Amsterdam

Ernst & Young Belastingadviseurs LLP, International Tax and Transaction Services, Rotterdam

Ernst & Young LLP (United States), Netherlands Tax Desk, New York

Ernst & Young LLP (United States), Netherlands Tax Desk, Chicago

Ernst & Young LLP (United States), Netherlands Tax Desk, San Jose/San Francisco

Ernst & Young LLP (Shanghai), Netherlands / EMEA Tax Desk, Shanghai

Ernst & Young Tax Services Limited, Netherlands Tax Desk, Hong Kong

Ernst & Young LLP (United Kingdom), Netherlands Tax Desk, London



  1. A similar situation could arise for other partnerships such as the Dutch fund for joint account (FGR). The FGR has not been further addressed in the Tax Alert.

The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting or tax advice or opinion provided by Ernst & Young LLP to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader's specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The reader should contact his or her Ernst & Young LLP or other tax professional prior to taking any action based upon this information. Ernst & Young LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.


Copyright © 2024, Ernst & Young LLP.


All rights reserved. No part of this document may be reproduced, retransmitted or otherwise redistributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP.


Any U.S. tax advice contained herein was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.


"EY" refers to the global organisation, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.


Privacy  |  Cookies  |  BCR  |  Legal  |  Global Code of Conduct Opt out of all email from EY Global Limited.


Cookie Settings

This site uses cookies to provide you with a personalized browsing experience and allows us to understand more about you. More information on the cookies we use can be found here. By clicking 'Yes, I accept' you agree and consent to our use of cookies. More information on what these cookies are and how we use them, including how you can manage them, is outlined in our Privacy Notice. Please note that your decision to decline the use of cookies is limited to this site only, and not in relation to other EY sites or Please refer to the privacy notice/policy on these sites for more information.

Yes, I accept         Find out more