On 21 February, the draft bill of the Legislative Proposal for the modernisation of partnerships (‘draft legislative proposal’) was submitted for consultation. The draft legislative proposal intends to provide a modern, clear and straight forward scheme that, on the one hand facilitates the entrepreneur and, on the other, offers suitable protection to creditors and certainty to business. In this contribution, we describe the civil and tax aspects.
The current legislation relating to partnerships originates from the 19th century and, according to the legislator, no longer meets the requirement of practice. There have been previous attempts to modernise the legislation. However, all those did not have sufficient political support. Now the draft bill has once again become very topical. This is also reflected in the number of reactions to the draft bill.
Contrary to the current legislation, the legislative proposal only has two legal forms:
- the partnership [vennootschap]; and
- the limited partnership [commanditaire vennootschap (‘CV’)].
In the draft legislative proposal, a partnership is defined as ‘the cooperation agreement to practice a profession or operate a business with contribution by each of the parties, partners, with the intention to obtain benefits and to share this with each other’. In turn, a limited partnership is defined as ‘a partnership in which, apart from a partner, a limited partner participates who is not bound for obligations towards third parties’. In practice, the terms closed and open limited partnership are often used. More details on this can be found in the tax paragraph of this blog.
An important aspect of the draft legislative proposal is the fact that it grants legal personality to the partnership and the limited partnership from the moment of their incorporation. The advantage of acquiring legal personality is that the partnership becomes an independent bearer of rights and obligations and can therefore be compared to a private limited company (‘BV’). This means that the assets contributed by the partners belong to the partnership and no longer to for example the partners jointly of a partnership. The result is that the transfer of, for example, registered property to the partnership and the accession and resignation of partners becomes easier.
Liability / obligation to contribute
Under the draft legislative proposal the partners are, alongside the partnership, jointly and severally liable for the commitments of the partnership towards third parties, however only to the extent that the other party makes it plausible that the partnership will not fulfil the the relevant obligation. An important exception to this is when a particular obligation has been entrusted to one specific partner. In that case, the relevant partner will be fully liable towards third parties alongside to the partnership for an attributable shortcoming.
A joining partner is only bound by commitments of the partnership that have arisen after the partner has joined. For a resigning partner, it applies that this partner remains liable for five years for the commitments of the partnership that were in existence at the time of the resignation.
For a limited partnership, it applies that a limited partner will in principle not make further contributions to the losses of the limited partnership than up to the amount of the agreed contribution. Also see the section regarding representation below.
Registration and notarial deed
Registration of the partnership in the commercial register is – except for the limited partnership – not compulsory. A partnership that has not been registered cannot acquire registered property and cannot be a heir. This partnership therefore has limited legal rights.
Under the legislative proposal, no notarial deed is required for entering into a partnership or a limited partnership. Contrary to the current situation, legal personality can be acquired without intervention of a civil-law notary.
The draft legislative proposal determines that a right of pledge or right of usufruct can be established on a right to a contribution, a payment on resignation and, insofar as transferable, the legal relationship of the partner. The intention is to increase the opportunities to attract finance and to reduce the differences with a private limited company (BV).
Similar to the current legislation, in the draft legislative proposal each partner is authorised to represent the partnership. This is different for the limited partnership, where this authority only accrues to the general partners. A limited partner may only represent the limited partnership if this partner has explicitly received a power of attorney to this end. If the actions by the limited partner on the basis of this power of attorney has been a significant cause of the liquidation of the limited partnership, the limited partner is jointly and severally liable towards the liquidation assets for the amount of the debts that cannot be paid through liquidation of the assets.
The partnership and limited partnership are often used for business and investments activities. In practice, the limited partnership is regularly used for real estate investment structures, asset management structures and privacy protection structures. From a tax point of view, the granting of legal personality to the limited partnership may offer more flexibility in the setting up of such structures.
The draft legislative proposal does currently not yet include the corresponding Implementation Act. The Implementation Act will include the adjustments for the tax legislation. Please note, the Dutch Association of Tax Advisers (Nederlandse Orde van Belastingadviseurs hereafter: NOB) has in the meantime given its reaction to the draft legislative proposal.
The tax consequences are detailed below.
Income tax, corporate income tax and dividend tax
The most relevant tax aspect is the granting of legal personality to partnerships.
Tax experts have already argued in literature that, as a general rule, partnerships must again be considered as tax-transparent for corporate income tax purposes. This means that the assets and the results of partnerships are allocated to the underlying partners.
The NOB stated in this respect that – just as under the current tax legislation – the option must remain for a limited partnership to continue to qualify as non-transparent for Dutch corporate income tax purposes. A non-transparent partnership (such as the ‘open limited partnership’) is independently liable for corporate income tax.
An ‘open limited partnership’ means that, apart from in the event of inheritance or legacy, the joining or replacement of limited partners can take place without the prior written consent of all partners. This is the so-called consent requirement.
If there is a unanimous consent requirement of all partners, the limited partnership qualifies as transparent. In practice, this is also referred to as the ‘closed limited partnership’.
The NOB explicitly asks for the reconsideration of the unanimous consent requirement for the joining and replacement of partners. Following on from that, the NOB also calls for a reconsideration of the policy for the criteria of tax transparency in respect of foreign partnerships. We therefore have to wait and see whether the government will reconsider the unanimous consent requirement.
Please note that the granting of legal personality to Dutch partnerships and Dutch limited partnerships could lead to a foreign fiscal requalification (transparent or non-transparent) in case of a foreign partner in a Dutch (limited) partnership.
Real estate transfer tax
If a partnership has legal personality, its real estate will be owned by the partnership itself. It is expected that the limited partnership with legal personality will fall under the regime of Section 4 of the Taxes on Real Estate Transactions Act 1970 [Wet op belastingen van rechtsverkeer 1970], which means that on acquisition and/or expansion of a qualifying interest in a partnership with legal personality, real estate transfer tax may be payable by a partner of the (limited) partnership.
Finally, the NOB suggested for the inclusion of exemptions in the real estate transfer tax in the following situations:
- Acquisition of legal personality through registration in the commercial registry and the accompanying transfer of the legal ownership to the partnership;
- Contribution of an immovable property to partnership with legal personality; and
- Termination of the legal personality of a partnership and the accompanying transfer of the legal ownership to the partners.
In this blog, we discussed the civil and tax implications of the draft legislative proposal
for modernising partnerships in broad outlines. We will keep you updated
on the developments of the draft legislative proposal.