There are a number of reasons to know whether a partnership qualifies as a taxable or a tax transparent entity for Dutch tax purposes. With regard to partnerships in the Netherlands and partnerships with activities in the Netherlands, this determines whether these entities are subject to Corporate Income Tax and whether their partners are subject to Dividend Withholding Tax. With regard to foreign limited partnerships, a difference has to be made between the partners and the partnerships and between there is a match between the partnership for Dutch tax purposes and for purposes of the law of the country where the partnership is situated, as this could result in no taxation or double taxation for either the partners or the partnership.
The Dutch Corporate Income Tax Act defines a so-called "open" limited partnership as a taxable entity (2'1 CIT). However, a "closed" limited partnership is not defined as an entity subject to Dutch Corporate Income Tax. A definition of a taxable limited partnership is found in the General Tax Act (AWR 3'3c)
The Dutch Dividend Withholding Tax Act determines that profit distributions by a taxable limited partnership are subject to dividend withholding tax (1'1 DWT). Distributions by tax transparent limited partnerships are not subject to Dutch Dividend Withholding tax. The definition of a taxable limited partnership is, as is the case with the Corporate Income Tax Act, the definition given by the General Tax Act.
Since income tax treaties are generally only applicable to "residents" as defined in those treaties and since "residents" are generally defined as any person who is liable to tax, problems arise with regard to transparent entities especially, if another country qualifies an entity different from the Netherlands.
Example 1:
A British partnership holds shares in a Dutch company which distributes profits to that partnership. While the British partnership qualifies as a taxable entity for Dutch tax purposes, it is transparent for British tax purposes. From the point of view of the Dutch tax authorities, the partnership is subject to (among others) Dutch Dividend Withholding Tax and is not entitled to any shelter from the UK/Dutch tax treaty, since it is not "resident" for treaty purposes. The partners of the British partnership may all be companies or individuals resident in the UK for treaty purposes, however, from the point of view of the Dutch tax authorities they are not entitled to any treaty shelter either, since the partnership and not they is the recipient of the dividends.
Example 2:
In the reverse situation, double taxation could potentially occur as well. E.g. if a Dutch company participates in a British partnership which is tax transparent for British purposes, but taxable for Dutch tax purposes, the following could apply: From the UK point of view, the Dutch company may have a permanent establishment in the UK and be subject to UK income tax. However, from a Dutch point of view, the Dutch company has a subsidiary and not a permanent establishment in the UK. It will therefore not allow relief for income from a foreign permanent establishment. This situation is further complicated by the fact that the Dutch company may also not get relief under the participation exemption for income from the British limited partnership, since the participation exemption only applies to foreign participations subject to an income tax.
As stated hereabove, a definition of taxable limited partnerships is given under the General Tax Act. However, there are more types of partnerships under Dutch law and taxable mutual investment funds. In order to be sure that an entity is not taxable, one would need to ensure that is does not fall under any of the other definitions of taxable entities either.
The General Tax Act defines a taxable limited partnership as "the limited partnership in which the admittance or replacement of a limited partner can take place without the permission of all partners, general as well as limited partners; this does not apply to the admittance or replacement of limited partners by inheritance or bequest". Leaving aside the exceptions for inheritance or bequest, this definition sets a number of conditions, the first being that an entity must be a limited partnership for Dutch civil law purposes and second that a limited partnership is always taxable unless any shift in interests between limited partners must be agreed to beforehand by all partners (limited partners, general partners and other partners). It is safest to have such agreements in writing per each individual transfer or replacement. It is not possible to work with any proxies given in advance, e.g. to the general partners. More details on what is and what is not allowed can be found in our detailed memorandum.
Something similar to limited partnerships, exclusively for investment purposes, are mutual investment funds.