01-03-2010
New decree on qualification of foreign entities

On 21 December 2009, the Dutch Ministry of Finance published a new decree on the qualification of foreign entities. This decree is important for tax planning structures which use hybrid entities. A similar decree was published in 2004, the new decree contains more details and method of determining the qualification of the foreign entity is slightly revised. The changes are not major but should be taken into account for existing and future structures. An elaborate (indicative) list has been published with the qualification of over 120 foreign entities.

The new decree
Under Dutch tax laws a foreign entity can be considered as a tax transparent or non tax transparent entity (opaque). This distinction is relevant for the tax treatment of the Dutch resident taxpayer participating in such foreign entity, the foreign entity itself if it has Dutch source income as well as its non-Dutch resident partners/investors receiving Dutch source income. For the classification as tax transparent or opaque the 2009 decree makes a distinction between corporations and partnerships. Corporations are (always) classified as opaque while partnerships are in principle treated as tax transparent, unless their shares are freely transferable. Please note that the foreign qualification of the entity is not taken into account in the Dutch analysis.

The qualification is determined based on four questions:

1) Whether the entity is the (legal) owner of the assets.
2) Whether the members of the entity carry only liability for debts of the entity up to the amount of the capital contributed by them.
3) Whether the capital of the entity is divided into shares under civil law or has similar features.
4) Whether the shares of the entity are freely transferable.

An entity is classified as a corporation (tax opaque) in two situations:

1) where at least three of the four relevant questions are answered in the affirmative; or
2) where (i) the liability of the members for debts is limited to the capital contributed by them, (ii) the entity owns the trade or business that is carried on and (iii) the trade or business is not carried for the risk and account of another person.

If an entity is not classified as a corporation, it is classified as a partnership. A partnership is in principle treated as tax transparent, but can be classified as opaque in two situations:

1) where the partnership has features similar to that of a Dutch limited partnership (commanditaire vennootschap) and its shares are freely transferable; or
2) where, the partnership is not comparable with a Dutch limited partnership, but has a capital divided into shares and those shares are freely transferable.

These qualification rules do not apply to foreign entities that are comparable to an association, foundation, mutual fund, trust, special fund or cooperative entity. Separate guidance is available for these entities.

The new decree does no longer contain a default list of the qualification of foreign entities. A list with over 120 foreign entities has however been published on the website of the Dutch tax authorities. This list has an indicative nature only and will be updated on a regular basis. The qualification of specific foreign entities has in general not changed in the new list. An exception is that an US LLP will now in general be qualified as a transparent entity instead of opaque under the previous decree. Please note that a draft list was distributed by a another Dutch law firm which differs from the final list. A taxpayer can request a binding ruling from the Dutch tax authorities on the qualification of a foreign entity.

The new qualification rules apply as of 11 December 2009. A grand fathering period of two years applies where the taxpayer can decide to apply the previous rules to a foreign entity if the qualification under the new rules results in a different outcome.

Our analysis

The new decree provides more detail on the method of determining the qualification of foreign entities but this unfortunately results in a more complex analysis. Current and new structures should be reviewed in order to determine whether the new rules will have impact. Planning structures which use mismatches between the qualification by the Dutch tax authorities and the foreign tax authorities are frequently used and remain an interesting planning tool.

Decision model
VMW Taxand has prepared a flowchart (decision model) which provides more insight to the analysis. The flowcharts can be found here.

An English version of the list of the qualification of foreign entities (including the local treatment of the entity) is available upon request.

Your Taxand contact for further queries is:
Marc Sanders
T. +31 20 757 09 05
E. marc.sanders@vmwtaxand.nl