On April 10, 2024 on the website of the Dutch tax authorities an interesting position paper of the Knowledge Group tax liability and qualification legal forms has been published. In the position paper the Knowledge Group answered the question which criteria are to be used when qualifying a Limited Liability Partnership (Hereinafter: LLP) that has been established under the laws of England or Wales (Hereinafter: the UK) for Dutch tax purposes. The qualification applies to the levying Dutch Corporate Income tax, Dutch Individual Income Tax, Dutch Dividend Withholding Tax and Dutch Withholding Tax (KG:211:2024:7).

Basically the question to be answered is whether a LLP qualifies as a joint-stock company or as a personal partnership for Dutch tax purposes. If a LLP qualifies as a joint-stock company it will be considered non-transparent for Dutch tax purposes. On the other hand if a LLP qualifies as a personal partnership for Dutch tax purposes the LLP will be considered to be transparent.

The answer of the Dutch tax authorities

An LLP, established under UK law, has the characteristics of both a joint-stock company and a true partnership. Based on the literal answer to the questions of the assessment framework in Section 3.3 of Decree No CPP2009/519M of December, 11 2009 (‘Qualification Decree’), such LLP would qualify as a capital company.

However, based on Section 3.4 of the Qualification Decree, the LLP could still qualify as a personal partnership. This is the case if the personal cooperation between participants is paramount in such a way that, when weighing all the characteristics of the LLP, the balance tips to the qualification personal partnership.

From the assessment of the Dutch tax authorities

From the answer of the Dutch tax authorities it follows that there is no unanimous answer to the question whether a LLP that has been established under UK law qualifies as a joint-stock company or as a personal partnership?

To the extent relevant for the levying of taxes under the Dutch individual income of tax Act, the Dutch corporate income tax Act, the Dutch Dividend Withholding Tax Act and the Withholding Tax Act, foreign legal forms or partnerships have to be qualified according to the Qualification Decree.  According to the Decree, four questions are important for making the analysis: the so-called assessment framework.

Question A

Can the partnership have legal ownership of the assets with which it conducts its business?

This is the case if, under civil law, the partnership can acquire assets and can enter into rights and obligations in the name of the partnership. This also applies if the partnership acquires legal ownership of assets as a result of a registration in the trade register or in a register of a comparable institute, as a result of which the partnership has acquired legal personality.

With respect to a LLP that has been established under UK law the Dutch tax authorities conclude that from the Limited Liability Partnerships Act 2000 it follows that an LLP has legal personality, which implies that it can have legal ownership of the assets with which it carries out its activities.

Question B

Do all participants have limited liability for the debts and other liabilities of the partnership?

In this respect limited liability of a participant means that the liability does not extend beyond the invested capital or the obligation to fully pay-in. In the case of an unlimited liability, the liability is not limited to a fixed amount.

This question concerns the participant's direct, law-based primary external liability to third parties. The Dutch tax authorities conclude that the participants of a LLP are only limited liable debts and other liabilities of the LLP.

Question C

Does the partnership have a capital divided into shares in a civil law sense, or can the capital in a social sense be equated with a capital divided into shares?

If the company’s capital is divided into equal or proportionate parts (participations), entitling to a proportionate share of the profit and liquidations distribution and a proportionate control, the capital will be equated in a civil law sense with a capital divided into shares.

It follows from the assessment to the criteria of the judgment of the Dutch Supreme Court of June 2, 2006, ECLI:NL:PHR:2006:AX2034, that in case of an LLP established under UK law the answer to question C does not affect the determination of the transparency/non-transparency of an LLP. According to the Dutch tax authorities this question as included in the assessment framework is therefore not answered with respect to an LLP.

For so far the general questions that have to be answered under the assessment framework with respect to a LLP that is established under UK law. The following question (Question D) has to be answered based on the facts and circumstances of each individual LLP.

Question D

Apart from inheritance or bequest, can participants join or be replaced without the consent of all participants?

According to the Dutch tax authorities from Section 5 of the Limited Liability Partnerships Act 2000 and Part VI, Paragraph 7 of the Limited Liability Partnerships Regulations 2001 (Default provision for limited liability partnerships) it follows that if the LLP agreement does not provide anything regarding the accession and replacement of participants, accession or replacement is only possible with the consent of all.

Based on the fact of the underlying case, the Dutch tax authorities come to the conclusion that since the LLP agreement does not provide otherwise the legal regulation applies in the underlying case.

Initial assessment of an LLP

In general, an LLP under UK law has the characteristics of both a personal partnership and a joint-stock company. Therefore, on the basis of the initial assessment, it is not yet possible to come to a definit conclusion on whether it qualifies as a joint-stock company or as a personal partnership. Therefore it is necessary to take Section 3.4 of the Qualification Decree into account.

Subsequent qualification

Since the answers to questions A and B are positive and it has not been proven that the business is operated within the LLP at the expense and for the risk of the participants, – with reference to the judgment of the Dutch Supreme Court of June 2, 2006, ECLI:NL:PHR:2006:AX2034 – this LLP would in principle qualify as a joint-stock company.

This may be different if the individual cooperation of the participants has clear priority and the participation is related to and dependent on the work carried out for the cooperation by the participants.

Section 3.4 of the Qualification Decree states: “Personal partnerships are aimed at the personal cooperation of the participants”. An important aspect of this personal cooperation is the contribution of work based on the personal skills and qualities, which is essential for the business that is run at the expense and for the risk of the LLP. For the personal partnership in a Dutch context the concept of affectio societatis is also important. This concept can be defined as: the will of the partners to cooperate on an equal footing, which is to be derived from the content of the partnership agreement.

If this is the case, then in that specific case an LLP established under UK law will therefore have more characteristics of a personal partnership than of a joint-stock company, and for Dutch Individual Income Tax, Dutch Corporate Income Tax, Dutch Dividend Withholding Tax and Withholding Tax purposes the LLP will be qualified as transparent.

The full text of the position paper included the full analysis of the Dutch tax authorities (in the Dutch language) can be found here.

Other Position Papers we have discussed can be found here.

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