The 2025 Dutch tax classification of the Brazilian FIP

Overview of Dutch rules for non-Dutch entity classification

2024 Classification Rules

Until the end of 2024, non-Dutch entities are classified based on their similarity to Dutch entities using the 'similarity approach' (rechtsvormvergelijkingsmethode).¹ This method involves comparing the characteristics of the non-Dutch entity, as outlined in its articles of association or partnership agreement and non-Dutch company law, with those of Dutch legal entities. If a Dutch equivalent exists, the non-Dutch entity is classified as either transparent or non-transparent for Dutch tax purposes based on this equivalence. However, this approach does not always suffice as there are many non-Dutch entities without clear Dutch equivalents. Additionally, the 2024 Classification Decree does not provide rules for entities similar to Dutch associations, foundations, funds for joint account, trusts, and other special-purpose funds (doelvermogens).

New Classification Rules (Starting 2025)

To address the limitations of the 2024 classification rules, new classification methods will be introduced starting in 2025. The existing Dutch tax classification system for non-Dutch entities will be replaced by a new Classification Decree (the Decree), which will provide a comprehensive framework for determining the equivalence of non-Dutch entities to Dutch entities.² While the similarity approach will remain the primary method, two additional methods will be implemented for cases where no clear Dutch equivalent can be identified:

• The Fixed Approach: Non-Dutch entities with no clear Dutch equivalent that are tax resident in the Netherlands will always be classified as non-transparent for Dutch tax purposes, making them subject to Dutch corporate income tax (CIT).
• The Symmetrical Approach: For non-Dutch entities with no clear Dutch equivalent that are tax resident outside the Netherlands, the Netherlands will follow the tax classification of the country of  residency.

Both of these methods will only be applicable if the non-Dutch entity is not equivalent to any Dutch entity. 

New Classification Decree 

The Decree, published on 9 November 2024, outlines the key characteristics of all Dutch entities, including partnerships. It specifies that a non-Dutch entity sufficiently equivalent in nature and structure to a certain type of Dutch legal entity will be treated in accordance with the Dutch legal equivalent. For instance, if a non-Dutch entity closely resembles a Dutch private limited company (besloten vennootschap; BV) in terms of nature and structure, it will be classified as non-transparent, similar to the BV. However, if a non-Dutch entity resembles more than one type of Dutch entity or none at all, it will be classified using the fixed or symmetrical approach.

The Decree includes classifications for several non-Dutch entities commonly used in international investment structures. For instance, the Brazilian Limitada is considered equivalent to a Dutch BV and therefore remains non-transparent for Dutch tax purposes. However, many entities, such as the Brazilian FIP, have not yet been classified, creating uncertainty. 

Qualification of the Brazilian FIP

Following the discussion of the new classification rules, it is interesting to assess the expected qualification of the Brazilian FIP. This detailed examination will provide insights into how these changes could impact international investment structures which include FIPs and the tax obligations of non-Dutch FIPs operating within the Netherlands. We note that each FIP is unique and may therefore be classified differently as well.

According to the 2025 classification rules, the qualification of the FIP hinges on whether its characteristics, as outlined in its articles of association or partnership agreement and Brazilian law, resembles those of Dutch legal entities. Should a Dutch equivalent exist, the FIP is then classified as either transparent or non-transparent for Dutch tax purposes based on this equivalence.

As the FIP lacks separate legal personality, resembling a “mede-eigendom” or pool of assets owned by its quotaholders, it generally necessitates representation by its manager. Consequently, the FIP's classification aligns mostly with Dutch legal entities such as the CV and FGR.

Comparison to the Dutch CV

Together with the new Dutch tax classification rules, the Netherlands will also have new definitions of Dutch CVs and the Dutch FGRs as of 1 January 2025.

The Netherlands will abolish the distinction between open (non-transparent) and closed (transparent) CVs. The unanimous consent requirement will no longer be relevant in determining the tax qualification of a CV. This change means that all CVs, along with comparable foreign limited partnerships such as the Luxembourg SCSp and Cayman LP, will in principle be treated as transparent for Dutch tax purposes, even if their participations are tradeable. The only exception is when the partnership qualifies as a non-transparent FGR, as the FGR similarity takes precedence over the CV similarity.

It is worth noting that for comparability with the CV, one requirement is that a limited partner’s liability is confined to their contributed capital and they do not bear losses beyond this amount unless specific rules are violated.³ However, in the case of FIPs, equity losses incurred by the FIP’s quotaholders are not limited to the subscribed capital, meaning that they may be called to make extraordinary capital contributions to the FIP in cases where the assets available are not sufficient to fulfil liabilities arising from target companies. The quotaholders may have unlimited  liability  for debt and other liabilities of the FIP in the event of a negative net worth. This is not included in the by-laws, but follows from Brazilian law. Thus, the focus primarily lies on comparing the FIP with the FGR due to this divergence from the CV on this point.⁴

Comparison to the Dutch FGR

In conjunction with the changes to the tax qualification rules for the CV, the Netherlands will introduce the Act on the Amendment of the LPs for Joint Account and Exempt Investment Institution (Wet aanpassing fonds voor gemene rekening en vrijgestelde beleggingsinstelling; the Act). This Act is set to take effect on 1 January 2025.

The purpose of this amendment is to better align the practical use of the FGR with its original fiscal intent. One significant change is that, similar to the amendments affecting the CV, the unanimous consent requirement will no longer serve as a criterion for determining the tax classification of the FGR. However, unlike the CV, a distinction between a tax transparent and non-transparent FGR will continue to exist in 2025 and beyond. The classification of an FGR will be based on whether it qualifies as a "Fund for Joint Account" under the Dutch Financial Supervision Act (Wet op het financieel toezicht; WFT). 

More specifically, an FGR (and its foreign equivalents) will only be considered non-transparent for Dutch tax purposes if the following four conditions are met:

• The fund qualifies as either an "investment fund" or a "fund for collective investment in transferable securities" (UCITS) within the meaning of the WFT;⁵
• The fund is established for collective investments (i.e. has multiple investors);
• The fund has an investment strategy that is classified as ‘normal’ portfolio management (i.e., exclusively with the aim to generate a return that can be expected from ordinary asset management activities, and generally does not add value thereto);
• The participations in the fund are considered tradeable. Tradability will be determined based on whether the participations can be freely transferred without needing the consent of all other participants. However, if transfers are restricted to sales back to the FGR itself, then the participations are not considered tradeable, and the FGR may still qualify as tax transparent (a so-called Redemption Fund).

To qualify as a non-transparent FGR, the FIP must (among others) meet the requirement of engaging in (passive) investment activities, which must consist of a 'normal' portfolio investment strategy that does not add value.⁶ It follows from established case law (e.g., BNB 1981/299) that there will be a ‘normal’ portfolio investment strategy if the investments are exclusively managed with the aim to generate a return that can be expected from ordinary asset management activities (normaal vermogensbeheer). This means that only FGRs engaging in conventional asset management, aimed at generating returns from ordinary investment activities, qualify. Brazilian FIPs, by contrast, frequently adopt active, value-adding strategies, such as direct involvement in the management and operations of their portfolio companies. This fundamental divergence would disqualify the FIP from meeting the passive investment requirement for a non-transparent FGR.

However, it is important to note that the qualification ultimately depends on the specific activities and investment strategies of each individual FIP. Since FIPs can vary significantly in their operational approach and degree of active involvement, the Dutch tax classification will need to be assessed on a case-by-case basis, taking into account the unique characteristics and activities of each FIP.

The FGR equivalency takes preference over the CV comparison

If the FIP fulfils the conditions of an FGR, then this comparison takes preference over the potential comparison to the Dutch CV. This means the FIP will be qualified as equivalent to the FGR and thus be non-transparent for Dutch tax purposes.

If the FIP does not meet the conditions of the FGR, but could be considered comparable to the CV, then the FIP would qualify as transparent for Dutch tax purposes.

Last resort: the symmetrical approach

Considering the above, if a specific FIP fails to meet the criteria of the FGR and cannot be considered comparable to the CV, the fixed or symmetrical approach should be applied.⁷ The symmetrical approach entails adhering to the tax classification of the country where the FIP is tax resident, for example Brazil. Therefore, if the FIP qualifies as tax transparent under Brazilian (tax) law, it would similarly qualify as transparent for Dutch tax purposes. 

For Dutch tax purposes, a foreign entity is deemed non-transparent if the country in which the entity is considered a tax resident also treats it as a separate taxpayer. This requires the entity to be recognized as a resident for tax purposes and to have its income, assets, liabilities, and costs attributed to itself rather than its participants under the rules of that jurisdiction. It is important to note that the original tax treatment of the entity by the jurisdiction where it was established is not decisive. Moreover, it is not relevant whether the entity is actually subject to taxation in its country of residence.⁹ Therefore, the critical consideration is whether, under the tax rules of its country of residence, the FIP is treated as separately taxable by having its assets, liabilities, income, and costs attributed to itself.

In Brazil, investment funds, including FIPs, do not possess legal personality and are generally not subject to taxation on income, revenues, or capital gains generated at the portfolio level. Instead, the potential tax burden arises at the quotaholders level upon distributions carried out by the FIP (e.g., quotas amortization, redemption or capital gains). The tax treatment is determined by the profile and tax domicile of the quotaholders, with the respective tax burden on the relevant gains distributed taking into account factors such as the quotaholders’ profile (e.g., individual, entities) and their tax domicile (e.g., jurisdiction).

While Brazilian tax law does not explicitly recognize the concept of tax transparency, the taxation framework assigns tax obligations to the quotaholders, making the FIP a pass-through entity for practical purposes. As a result, the FIP is generally not treated as independently taxable entity, as its assets, liabilities, income, and costs are not attributed to itself. Consequently, under the symmetrical approach, the FIP would likely classify as transparent for Dutch tax purposes.

Practical guidance

It is important to emphasize that each FIP is unique, and its classification will depend on its specific characteristics and activities. As a starting point, the FIP should be assessed against its closest Dutch equivalent, such as the CV or FGR, based on its structure and operational features. As it stands now, only FIPs that are considered to be engaged in (passive) investment activities for Dutch tax purposes may be considered a non-transparent FGR as from 2025.

If it is not desirable for a FIP to qualify as non-transparent under Dutch tax law due to its potential comparability to an FGR, adjusting the FIP's governing agreement may provide a solution. Specifically, aligning the FIP with the criteria of a Redemption Fund could preserve its tax transparency for Dutch tax purposes. This requires incorporating a redemption mechanism where quotas are transferable only to the FIP itself, effectively prohibiting direct secondary transactions between quotaholders. However, the inclusion of a 'secondary transaction’ clause can facilitate sales by enabling redemption and reissuance of quotas through the FIP. This approach would allow the FIP to maintain tax transparency for Dutch purposes if desired, while ensuring quotaholders could still effectively sell their quotas to third parties in a structured secondary transaction.

In cases where no clear Dutch equivalent exists, the classification applied by the FIP’s country of residence – assuming it is outside the Netherlands – can serve as a reference point for Dutch tax purposes.

Should you require any assistance with the qualification of your investment structure, feel free to contact a member of the Norton Rose Fulbright tax team.