Netherlands : issues arising under the decrees on the tax treatment of foreign (hybrid) entities

The tax consequences of the choice of entity in international tax structuring can vary significantly, in particular where an entity is considered to have corporate characteristics in one jurisdiction and is thus taxed as a company, but is considered to have flow-through characteristics in another jurisdiction and is therefore taxed at the level of the participants. The Netherlands Ministry of Finance issued two decrees at the end of 2004 which address the classification of foreign entities: (a) the "entity classification decree", which deals with the classification of entities in the context of the amended EC Parent-Subsidiary Directive and updates the Ministry's policy on classifying entities as transparent or non-transparent, and (b) the "participation exemption decree", which seeks to clarify the Dutch approach to the classification of foreign entities for purposes of the Dutch participation exemption. This article first overviews the predecessor to the 2004 decrees, i.e. the 1997 "SNC decree", which contained the rules for classifying entities as transparent or non-transparent, and then examines the 2004 decrees generally and in the context of the SNC decree. The article also considers the issues arising as a result of applying the new decrees and certain EC law aspects of the decrees.