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October 17, 2023

Netherlands Proposal to align legal entity and partnership classification rules with international tax standards, including earlier look-through rule

  • The Netherlands has proposed new legal entity and partnership classification rules that would take effect, generally, on 1 January 2025 and, in certain cases, on 1 January 2024.
  • The aim of the new rules is to better align with international standards.
  • Enactment of a final proposal is likely in December 2023.

On 13 October 2023, the Dutch Government published a favorable amendment to its 19 September 2023 proposal to align the legal entity and partnership classification rules with international tax standards. The amendment is aimed at implementing a one-year-earlier look-through approach for the conditional withholding tax on dividends, set to take effect on 1 January 2024. The proposal is currently subject to review and discussions by Parliament and may be subject to change. Enactment of the final proposal is expected in December 2023. If enacted, the rules will enter into effect as of 1 January 2025, with a certain look-through rule taking effect as of 1 January 2024.

Current entity classification rules

As a first step under the current ("old") rules, a foreign entity must be compared to the Dutch legal entity that it most closely resembles based on its legal characteristics (i.e., comparability assessment). If a comparable legal form/entity exists for Dutch tax purposes, the foreign entity is treated similarly.

If a non-Dutch legal form/entity is a "partnership" that is comparable to a Dutch limited partnership (in Dutch, commanditaire vennootschap or CV), it 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 of the limited partners is not restricted, the CV is considered opaque (non-transparent) for Dutch tax purposes (referred to as an "open CV").

If the transferability of the limited partnership's (relative) interest is restricted/only possible upon prior written consent of all other limited partners and the general partner, the CV is considered transparent (referred to as a "closed CV").

The same applies to non-Dutch equivalents of the CV and, as a result, comparable foreign limited partnerships often result in a hybrid entity mismatch.

Proposed entity classification rules

Treatment of Dutch CVs

Under the proposed rules, Dutch CVs will by default be transparent for Dutch tax purposes as of 1 January 2025 (technically due to the abolishment of the prior consent requirement (see above)), unless the Dutch CV would qualify as a reverse hybrid.

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 ((deemed) exit charge). This deemed transfer occurs in the moment before 1 January 2025 (i.e., on 31 December 2024). Grandfathering rules are proposed for participants/partners in the Dutch CV who, as a result of the deemed transfer, would by themselves become subject to Dutch CIT (e.g., by virtue of Dutch permanent establishment) to alleviate the direct payment of cash tax, such as conditional roll-over relief and tax payments in installments. Dutch open CVs that will qualify as reverse hybrid entities after the new classification rules are excluded for the deemed transfer (i.e., no deemed exit charge) and will continue to be Dutch CIT payers.

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 (to be confirmed) foreign limited partnerships should become transparent entities from a Dutch tax perspective by default as well — again, unless the reverse hybrid rules apply.

Two additional entity classification methods for (non-comparable) foreign entities

If no comparable Dutch legal equivalent can be found with Dutch legal entities/partnerships, foreign entities are to be classified under an alternative approach: (i) symmetrical method or (ii) fixed method.

If the foreign entity or partnership does not have a place of effective management in the Netherlands, the classification applied by the jurisdiction in which the entity is incorporated will be followed for Dutch tax purposes (symmetrical method).

If the place of effective management of the foreign entity or partnership 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 (fixed method).


Significantly, the Dutch "prior consent requirement" (in Dutch: toestemmingsvereiste), which was an important condition required for Dutch (and comparable foreign) partnerships to be considered as transparent from a Dutch tax perspective, has been abolished. As a result, non-transparent Dutch (incorporated or tax resident) partnerships basically cease to exist, likely resulting in fewer hybrid mismatches in entity classifications. Only in specific situations (e.g., under the fixed method) could the Netherlands consider foreign transparent legal entities/partnerships as non-transparent in case of Dutch income.

The proposed amendments are relevant for, among other things, application of the Anti-Tax-Avoidance-Directive II (known as ATAD2) or the (conditional) withholding tax rules that could apply on certain payments to hybrid entities. The withholding tax rules apply to dividends as well for 2024 (2024 conditional withholding tax on dividends is already enacted legislation; see details in EY Global Tax Alert, The Dutch Government publishes a list annually of the blacklisted jurisdictions that it considers non-cooperative and/or low-taxed, dated 31 March 2021). In particular, taxpayers with foreign partnerships in the ownership structure should consider the impact of the (conditional) withholding tax on dividend payments.

Look-through rule regarding conditional withholding tax on dividends per 1 January 2024

In the 13 October amendment, the Dutch Government proposes a look-through rule for the conditional withholding tax on dividends, effective as of 1 January 2024. Under an earlier-enacted law, a Dutch taxpayer will in principle become a withholding agent for the conditional dividend withholding tax on dividend payments to entities including certain partnerships residing in non-cooperative (blacklisted) jurisdictions as well as, among other things, to hybrid foreign partnerships not established or not residing in non-cooperative (backlisted) jurisdictions.

Because these partnerships will become transparent by default as of 1 January 2025, there would be a "gap" year between the introduction of the conditional dividend withholding tax (as of 1 January 2024) and the alignment of the classification rules (as of 1 January 2025). This gap year is (partly) considered undesirable. In essence, the favorable look-through rule implies that the new classification rules will be deemed to apply as of 1 January 2024 for the conditional withholding tax on dividends on payments to hybrid entities not established or residing in non-cooperative jurisdictions. It is important to note that these look-through rules do not extend to the conditional withholding tax on interest or royalty payments or to the regular dividend withholding tax.


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 Tax Services Limited (Hong Kong), Netherlands Tax Desk, Hong Kong

Ernst & Young (China) Advisory Limited (China Mainland), Netherlands/EMEA Tax Desk, Shanghai

EY Corporate Advisors Pte Ltd (Singapore), Netherlands/EMEA Tax Desk, Singapore

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

Ernst & Young Tax Co (Japan), Netherlands/EMEA Tax Desk, Tokyo

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor


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