The crucial element of using a Dutch CV as tax planning instrument is that it can be considered as a transparent vehicle for Dutch tax purposes and as a corporate entity from a foreign tax perspective. If properly drafted, a closed CV will not be subject to Dutch corporate income tax on its profits. To qualify for this tax transparency, the CV must place restrictions on the transfer of the interest of the limited partner, on admitting new limited partners and on altering the relative share of interest between limited partners. Each of these transactions need the prior consent of all partners. In the jurisdiction of the limited partner a closed CV may often be considered non-transparent and therewith treated as a corporation.
Typically, the CV is structured in such a manner that the Dutch managing partner will only be entitled to a relatively small annual fee, resulting in a negligible Dutch tax liability for his part. From the
perspective of the country of residence of the limited partner, the CV may be considered a corporation, as a consequence of which no reporting of the limited partner’s income is required as long as he does not receive any distributions of funds. Significant tax deferral can therefore be achieved, allowing the gross profits of the CV to be reinvested for as long as desired. Furthermore, distributed profits could be eligible for a participation exemption at the level of the corporate limited partner. Because of its tax transparency in the Netherlands, no Dutch withholding tax is levied on distributions by a CV.
Formation and management of a Dutch partnership
A Dutch partnership is formed by an agreement between two or more partners, each of which may be an individual or a corporation, either for a limited or an unlimited period of time. The partners are not required to be Dutch citizens, a corporation or residents of the Netherlands.
In principle, there are no formal requirements (such as a notarial deed or government approval) with respect to the formation of a Dutch partnership. As far as the terms and conditions of the partnership agreement are concerned, generally, the concept of ‘freedom of contract’ applies. It should be noted that the absence of a written partnership agreement does not necessarily imply that a Dutch partnership does not exist. If partners wish to prove that their relationship qualifies as a Dutch partnership, however, a written agreement is beneficial.
A CV is managed by its managing partner(s). A managing partner is responsible for the day-to-day affairs of the CV. In addition, the managing partner is authorized to represent and validly bind the CV to third parties. If there are more managing partners, each managing partner has the power and authority individually to represent and bind the C.V., unless the partnership agreement provides otherwise.
The limited partner(s) in a CV may not represent (directly or by proxy) the CV or act or appear to act on behalf of the CV. Also, their names may not appear in the partnership’s name. If the limited partner represents the CV or otherwise acts on behalf of the CV or his name appears in the partnership’s name, such limited partner becomes jointly and severally liable for all debts and obligations of the CV as if he were a managing partner.
Capital, assets and annual accounts of a Dutch partnership
Unlike the rules applicable to a BV or an NV, Dutch law does not prescribe any statutory minimum capital for a partnership and no provisions under Dutch law require that a certain minimum amount of capital be retained in the partnership. The interests in the capital of a partnership may not be referred to as shares. Since a Dutch partnership is not a legal entity, it is not capable of having the legal
ownership of the partnership’s assets. Contribution of an asset to the partnership by the partners at the time of formation or otherwise is considered to have a contractual basis (verbintenisrechtelijke grondslag). The combined contributions of the partners form, in principle, a community of property (goederenrechtelijke gemeenschap) between the partners.
Contribution of assets may be effected by contribution to the community of property of :
(a) full (i.e., legal and beneficial) title to the assets (volledige eigendom);
(b) the beneficial title to the assets (economische eigendom); and
(c) the right of use with respect to the assets (gebruiksgenot).
To avoid any uncertainty as to the form and legal consequences of contribution, the partnership agreement should provide for detailed provisions with respect to initial and future contributions of assets by the partners. Dutch legal doctrine holds the general that movable assets (roerende zaken) which are acquired by the general partners of a v.o.f. in their capacity as such or by the managing partner, acting on behalf of the CV, during the lifetime of the CV become automatically part of the partnership’s estate, i.e. the community of property that exists between all partners. With respect to such movable assets, the (managing) partner is assumed to act as agent (middelijke vertegenwoordiger) on behalf of the partnership and thus, movable assets acquired by him will belong to the partnership’s estate unless otherwise provided in the partnership agreement and effected in a particular transaction.
Immovable assets (onroerende zaken) which are acquired by the managing partner during the lifetime of the partnership will not automatically form part of the community of property pursuant to the concept of agency. Such immovable assets will only form part of the community of property if the (managing) partner transfers the immovable assets to the limited partnership in joint ownership and in compliance with applicable transfer formalities. Dutch law contains no special requirements as to the contents of the annual accounts of a Dutch partnership, unless all managing partners are corporations incorporated under foreign law, in which case the partnership is subject to Dutch financial reporting requirements.
Revisions of Dutch partnership law
A bill to introduce a new book 7:13 to the Dutch Civil Code has been approved by the lower house of the Dutch parliament and is now under consideration in the upper house. The expectation is that the bill will be enacted early in the foreseeable future. The bill introduces the term ‘public partnership’ (openbare vennootschap or ‘OV’), of which the limited partnership or CV is a particular form. The major difference from current partnership law is that the partners may opt, at the time of formation or during the existence of the partnership, to have the partnership either constitute a separate legal entity or not, i.e. the partners may create a partnership or adopt a resolution to amend an existing partnership agreement such that the partnership either will, or would not or would no longer, constitute
a separate legal entity. A public partnership with separate legal personality will be referred to in Dutch as an openbare vennootschap met rechtspersoonlijkheid or ‘OVR’, and if such partnership is constituted in the form of a limited partnership with separate legal personality, it will be referred to as a commanditaire vennootschap met rechtspersoonlijkheid or ‘CVR’. There is a formal requirement that the partnership agreement of an OVR including a CVR, or the amendment thereto whereby the partnership is changed into an OVR including a CVR, is entered into by means of a notarial deed.
A result of a partnership being a separate legal entity is that it would be the legal owner of its assets and not the community of property constituted by the partners. Another new feature is that it will become possible to convert the OVR into a BV or vice versa.