In this article we discuss the very interesting position paper KG:024:2023:12. In the position paper the Knowledge Group dividend withholding tax and withholding tax of the Dutch tax authorities answers the question whether an open limited partnership (open commanditaire vennootschap/open cv) can make a tax exempt repayment of capital if it has a net profit available.
Facts of the underlying case
An open limited partnership intends to repay capital to its limited partners. The question arises whether this return of capital will be taxed or tax exemnpt?
(ITP: In the case of an open limited partnership (open CV), partners can join the partnership without the consent of all the other existing partners being needed. Whereas in the case of a closed limited partnership (besloten CV) partners can only join the partnership with the consent of all other partners)
Question
Can an open limited partnership make a tax exempt repayment of capital by applying Article 3, Paragraph 1 under d of the Dutch Dividend Withholding Tax (hereinafter: DDWT) Act if there is a net profit available in the open limited partnership?
Answer
No, an open limited partnership cannot make a tax exempt repayment of capital if it has a net profit available.
From the considerations of the Dutch tax authorities
Pursuant to Article 3, Paragraph 1 under d of the DDWT Act, a partial repayment of what has been paid up on shares is part of the proceeds if and insofar as a net profit is available (main rule). This is different if, prior to making the repayment, the general meeting of shareholders has decided to that the return will be made and if pursuant to an amendment to the articles of association the nominal value of the relevant shares issued has been reduced by an equal amount (exception). If the requirements of this exception are met, then the repayment is not part of the proceeds.
For the purposes of Article 3, Paragraph 1 under d of the DDWT Act, the Dutch Supreme Court adheres strictly to the formal conditions of a capital reduction by means of an amendment to the articles of association. It follows from ECLI:NL:HR:2014:2976 that based on Article 3, Paragraph 1 under d of the DDWT Act a repayment of capital can only take place tax exempt if it is based on a capital reduction by means of an amendment of the articles of association (HR 14 January 1959 , no. 13775, BNB 1959/81).
An open limited partnership does not have a general shareholders meeting, does not have a (nominal) share capital and does not have articles of association. Therefore an open limited partnership cannot meet the conditions for an tax exempt return of capital as laid down in Article 3, Paragraph 1 under d of the DDWT Act. This has been explicitly confirmed in parliamentary history. Therefore an open limited partnership cannot repay capital tax exempt if and insofar as a net profit is available.
The full Dutch text of the position paper (in the Dutch language) with considerations can be found here.
Other position papers on Dutch dividend withholding tax and other Dutch withholding taxes that we already discussed earlier can be found here.
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