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Dutch Limited Liability Partnership (CV) Advantages
Legal Aspects A CV is a contract between one or more general partners and one or more limited partners.
While a CV agreement can be concluded verbally, in practice a CV is typically set up by means of written agreement (contract), which is preferably executed as a notarial deed by a Dutch civil-law notary. A CV can be set up easily and within a few days. Dutch law does not include requirements as to the contents of the CV-agreement, pursuant to the principle of contractual freedom. Also, there are no requirements with regard to the identity of the partners. Hence, residents as well as non-residents can be partners in a CV, while the partners can be private individuals as well as corporate bodies.
The management of the CV must be performed by the general partner(s). The general partner(s) can be held liable for the debts of the CV. While the general partner is entrusted with the management of the CV, the limited partner is typically the party that provides the funding of the CV. The limited partner may under no circumstances be involved with the management of the CV; violation hereof means that the limited partner also will become liable for any debts and obligations of the CV. It should also be noted that the partners are free to determine their respective interests in the profits of the CV. While no partner may be completely deprived of the profits of the CV, a profit allocation of e.g. 0.001% for the general partner and 99.999% for the limited partner is allowed.
In international structures, it is common that the CV only has one general partner. This general partner is typically a designated corporate entity, often a Dutch foundation, provided and managed by a Dutch fiduciary service provider. This is basically for two reasons:
1 – The CV is not a corporate entity; it cannot hold legal title to assets. Therefore, legal title to the CV-assets is held by the general partner for the risk and account of the CV.
2 – The Dutch Foundation is not an entity designated to conduct a business and, as general partner, will not conduct any other business. Hence liability risks are ruled out as much as possible.
For Dutch tax purposes, a CV can be either “closed” (i.e. tax transparent) or “open” (i.e. tax non-transparent). Pursuant to Dutch tax legislation, a CV will be considered “closed” if the admission and substitution of limited partners is subject to the unanimous consent of all other partners. Hence, the partners are free to decide whether or not the CV should be tax transparent or not, by including adequate provisions in the CV agreement. Any CV which is not “closed”, is considered “open”. For completeness sake, we note that the Dutch tax treatment of an open CV is very similar to the tax treatment of a Dutch company, i.e. it is liable to Dutch corporate income tax.
Profit distributions by a “closed” CV to its partners are not subject to Dutch withholding taxes. Furthermore, the contribution of assets to a CV does not trigger any (capital) taxes.
Tax Planning Opportunities
The “closed” CV is a highly popular international tax planning tool. This popularity is due the tax transparency of the CV and its highly flexible character. Because the CV is tax transparent, any profits of the CV will for Dutch tax purposes be allocated to the partners in the CV according to their pro rata interest in the CV. When the partners are not tax residents of the Netherlands however, the partners will not be subject to Dutch taxation in respect of their share in the profits of the CV, as long as the partners do not derive Dutch source income through the CV. Dutch source income notably includes an enterprise carried out in the Netherlands, substantial shareholdings in Dutch resident companies and real estate based in the Netherlands. Below we will outline two very common international tax planning structures in which a CV is used.
CV as a Portfolio Investment Holding Company
In this set-up, the “closed” CV is merely used to hold portfolio investments. The limited partner typically has a 99.999% interest in the CV and the general partner has a 0.001% interest in the CV. Both the limited and the general partner are domiciled outside the Netherlands. While the CV is tax transparent for Dutch tax purposes, the CV is considered tax non-transparent from the perspective of the country of residence of the limited partner. Hence, the limited partner is mostly not required to report any income, as long as he does not receive any profit distributions from the CV. As such, a significant tax deferral can be achieved, allowing the profits of the CV to be reinvested for as long as desired. Furthermore, distributed profits could qualify as tax-exempt income under the participation exemption regime at the level of the corporate limited partner.
CV as a Trading Entity
In this set-up, the CV engages in the international trading of goods. The CV (Agent) is instructed by a company (Principal) in a low taxed country, to perform certain specified trading activities for the risk and account of the Principal. The Principal can be a partner in the CV, although this is not required. Any profit realized by the CV from the trading transactions, is not taxed in the Netherlands because of the tax-transparent character of the CV. We have extensive experience with trading structures and can advise on all aspects for the setting up of a proper functioning trading structure. Furthermore, it should be noted that a similar set-up with a “trading” CV is in principle also possible for the international routing of services.