Tax Alert – Update Letter published on issues and solutions regarding the new definition of the FGR

We would also like to refer you to our contribution to the recently published Chambers Tax Controversy 2025, in which we provided an overview of Tax Controversy law and practice applicable in the Netherlands. 

Background

Effective 1 January 2025, new Dutch tax classification rules apply to foreign entities, Dutch limited partnerships (commanditaire vennootschap, or CV), and funds for joint account (fonds voor gemene rekening, or FGR). Under the new tax classification rules for FGRs, an investment fund  will be considered an FGR only if (i) it is an investment fund or fund for collective investment in transferable securities regulated by the Dutch Financial Supervision Act, (ii) the participations in the FGR are tradeable and (iii) the fund engages in (passive) investment. A FGR is non-transparent for Dutch tax purposes. The new tax classification rules for FGRs also have impact on foreign equivalents of the FGR, as the classification of an FGR prevails over any other classification. This underlines the importance of the conditions that must be met to qualify as a non-transparent FGR. 

For a more detailed explanation of the new tax classification rules, we refer to our earlier Tax Alerts of 20 November 2024 (regarding the publishment of the Decree on tax classification of foreign entities),13 January 2025 (regarding the update on Dutch entity classification and anti-base-erosion rules) and 25 April 2025 (regarding the Q&A document published on the new Dutch tax classification rules for (foreign) entities). 

The Letter

Unfortunately, there are still several uncertainties in the market in respect of the amended FGR definition. In the beginning of 2025, the State Secretary conducted an internet consultation receiving 12 public responses, followed by a roundtable meeting on April 23, 2025 involving various stakeholders. On 12 June 2025, the Dutch State Secretary of Finance sent a letter to the Dutch Parliament, regarding the outcome of the consultation. The letter first zooms in on the objectives of the amendments to the definition of the FGR, which are (i) preventing unintended use of the FGR (primarily by wealthy individuals and families), and (ii) addressing qualification differences by eliminating the internationally uncommon consent requirement. 

The letter then focuses on how the State Secretary followed up on the abovementioned motion and the steps which have recently been taken. Following the internet consultation, three main issues were identified:

Qualification of a foreign partnership as FGR

The elimination of the consent requirement has created a situation where foreign partnerships, particularly limited partnerships, can qualify as FGR, leading to the same qualification problems the consent requirement elimination was meant to solve. According to the State Secretary foreign partnerships cannot simply be excluded from the FGR definition, as – in case of, for instance, foreign investment funds with Dutch real estate – the individual investors would need to file separate returns for their proportional shares of Dutch real estate, which is deemed to be a highly complex enforcement challenge for the Dutch tax authorities.

The State Secretary is exploring a solution that would (i) keep partnerships transparent where this does not create enforcement problems; and (ii) allow partnerships to remain or become subject to corporate tax (possibly optional) where enforcement problems would occur. The State Secretary aims to publish a concept legislative proposal for internet consultation in autumn 2025.

As the qualification of foreign partnerships and the uncertainty thereof may in practice indeed be a bottleneck, the acknowledgement and intentions to further investigate of the State Secretary are very welcome. However, it remains of course uncertain what the exact outcome of the investigation will be and how the distinction will be made between situations where the mentioned enforcement problems may arise and situations without any such enforcements problems. Depending on the solution, of course, this may also give rise to interpretation issues. Furthermore, it is unclear whether the solution is limited to foreign partnerships that are similar to a Dutch CV or will be applicable to every foreign legal form that is transparent under the normal classification rules.

References to Dutch Financial Supervision Act Concepts

According to the State Secretary the new FGR definition refers to concepts from the Dutch Financial Supervision Act, primarily to prevent abuse by wealthy individuals and families. The Dutch Financial Supervision Act refers to EU directives requiring investment institutions and funds to raise capital from multiple investors or the public, excluding private family constructions. However, in practice this creates complexity as it requires knowledge of financial supervision law and its implementation across EU member states. It furthers lacks application to third countries.

The State Secretary considers changing the reference from specific terms "investment fund" and "fund for collective investment in securities" to the broader concepts of AIF and UCITS to mitigate discussions on whether or not a foreign partnership would be a qualifying fund from a foreign regulatory perspective. This would require an amendment to the current law which may be included in the abovementioned announced concept legislative proposal. He further indicates that further research will be done how to simplify the test for foreign partnerships, e.g. by aligning with registrations at foreign regulators (also in third countries).

The Investment Criterion

A fundamental requirement since the FGR inception is that the fund must engage in "investment" rather than "business operations". This distinction appears throughout Dutch tax law and is determined case-by-case based on facts and circumstances.

The identified issue is mainly that the nature of activities can change during a fund's lifetime. Some suggested aligning with the broader investment definition in the Dutch Financial Supervision Act, which includes private equity and venture capital as investment activities, while Dutch tax law typically treats these as business operations. The State Secretary does not see a solution for this issue as (i) a broader investment definition would conflict with the character of the FGR, (ii) it would mean that more foreign partnerships would qualify as FGR (conflicting with issue 1) and (iii) it would create another reference to the Dutch Financial Supervision Act (conflicting with issue 2). The State Secretary will therefore take no further actions in respect of this issue, but states that it remains possible for taxpayers to obtain certainty in advance from the Dutch tax authorities in this respect.

It remains remarkable that the State Secretary implies that only passive investment activities qualify for the investment criterion since there is no case law on this. It could be derived from parliamentary history that other investments may also be allowed to an FGR.

Conclusion

The internet consultation in respect of the FGR identified significant technical challenges in the Dutch tax treatment of investment funds, particularly regarding the intersection of domestic tax law with international structures and EU financial supervision regulations. While solutions are being explored for two of the three main issues, the complexity of the legal framework and the need to balance various stakeholder interests make this a challenging area requiring careful legislative drafting.

Subject to the further research conducted on solutions for Issues 1 and 2, the State Secretary aims to publish a potential legislative proposal for internet consultation in autumn 2025. Any legislative changes would likely take effect 1 January 2027 at the earliest.