This Stibbe Investment Management Alert will inform you about recent EU and Dutch regulatory, corporate and tax developments relevant for the investment fund industry.
1. AIFMD – Private Placement Regime in the Netherlands
On 22 July 2013 the Alternative Investment Fund Managers Directive (2011/61/EC) (the "AIFMD") has entered into force in the Netherlands. The AIFMD provides a new legal framework for both alternative investment funds ("AIF") and their fund managers. The implementation of the AIFMD has significantly modified the private placement regime that is available in the Netherlands to investment funds and their fund managers. The requirements for fund managers of AIFs to make use of the private placement regime in the Netherlands are as follows.
A private placement regime is available in the Netherlands to non-EU funds managed by non-EU fund managers. A fund manager is only eligible to make use of this regime if:
- the fund is marketed solely to qualified investors (within the meaning of MiFID);
- the fund manager and the fund are located in countries which have entered into cooperation agreements with the Dutch Authority for the Financial Markets; and
- these countries are not listed by the Financial Action Task Force as non-cooperative jurisdictions.
A fund manager relying on the private placement regime will have to make available an AIFM Prospectus and an annual financial report to investors and will have to report to the Dutch Central Bank on the use of leverage by the fund it offers. Furthermore, the fund manager will have to comply with certain provisions on asset-stripping and notification of substantial holding.
The AIFMD registration regime for small funds and their managers exists besides the private placement regime for non-EU entities. A fund manager wanting to make use of the registration regime must have assets under management of less than EUR 100M, or EUR 500M if it manages only funds closed for at least 5 years not using leverage. Furthermore, this fund manager can only use the registration regime if its offers the interests in a fund:
- to professional investors only;
- to less than 150 persons; or
- if the interests in the fund have a minimum value or denomination of at least EUR 100,000.
2. Tax residency of EU alternative investment funds
If an AIF is not located in the same EU Member State as the fund manager that manages the AIF, the question may arise whether the AIF is resident for tax purposes in (i) the EU Member State where the AIF is located or (ii) the EU Member State in which the fund manager is located. An EU Member State may take the position that an AIF is tax resident where it is managed; in other words in the EU Member State in which the fund manager is resident. As per 22 July 2013, Dutch tax law therefore stipulates that an EU AIF as meant in article 4, paragraph 1, under k, of the AIFMD is considered to be a resident in its EU Member State of origin for Dutch tax purposes if:
- the entity is incorporated or established under the laws of that Member State; and
- the statutory purpose and actual activity of the entity solely consists in making passive investments (i.e. investments that fall within the scope of the Fiscal Investment Institution (fiscale beleggingsinstelling) regime).
This means that an EU AIF that is established in another EU Member State, but is managed by a Dutch resident fund manager, is in principle not considered resident of the Netherlands for Dutch tax purposes. Consequently, such EU AIF generally would not become subject to Dutch corporate income tax, nor has to withhold Dutch dividend withholding tax. Conversely, if an EU AIF has the Netherlands as its EU Member State of origin and is incorporated or established under Dutch law it would be considered Dutch tax resident, even if it is managed by a non-Dutch fund manager. In situations of dual residency the tie-breaker under the tax treaty between the Netherlands and the relevant EU Member State would have to be applied to determine the residency of an EU AIF.
Dutch tax law contains a comparable – yet less stringent - carve-out regarding the residency of UCITS. For Dutch tax purposes, UCITS are considered a resident in the EU Member State or country whose competent authority has authorised the institution within the meaning of article 5 of the UCITS IV Directive (2009/65/EC).
3. Ban on inducements for investment firms as of 1 January 2014
The Dutch Minister of Finance has announced regulation that prohibits investment firms in the Netherlands to receive inducements from, or provide inducements to, third parties. As of 1 January 2014, the only form of allowed inducements for investment firms is when the clients directly pay the investment firm for the provision of its various investment services, such as asset management, investment advice, and execution-only investment services. At the beginning of 2013, six Netherlands-based investments firms (ABN AMRO, BinckBank, ING Bank, Van Lanschot, Rabobank and SNS Bank) already introduced a voluntary ban as of 1 January 2014 on the receipt of distribution fees from fund providers for the investment funds these investment firms offer to their clients.
4. EU financial transaction tax
In January 2013, the Council of Ministers authorised eleven EU Member States to proceed with an EU financial transaction tax ("FTT") on securities and derivative transactions. A full proposal was then published by the European Commission on 14 February 2013 in line with its original FTT proposal of September 2011. This would mean an FTT levy of 0.1% on the trading in shares and bonds, and 0.01% on derivative agreements such as options and futures. Although the Netherlands did not join the participating Member States, Dutch residents could fall within the scope of the proposed FTT. In its current form the proposal would also apply to transactions entered into by a financial institution resident in the FTT zone, even where the securities or derivatives have no connection to the FTT zone (the "residence principle"). The residence principle has extra-territorial effect: a financial institution resident outside the FTT zone is deemed resident in the FTT zone when transacting with an FTT zone party. A Dutch or US bank, for example, selling Dutch or US securities to a French bank would be deemed resident in France and subject to the FTT in France.
However, on 6 September 2013, the Legal Service of the Council of the EU has issued an unusually clear opinion stating that this "residence principle" is unlawful because it:
- exceeds Member States’ jurisdiction for taxation under the norms of customary public international law as they are understood by the EU;
- is not compatible with the EU Treaty as it infringes on the taxing competencies of the non-participating Member States; and
- is discriminatory and likely to lead to distortion of competition to the detriment of non-participating Member States.
Although this opinion is not binding, it is a further significant hurdle for the EU FTT to clear. When added to increasing concern about the practical impact of FTT (many of the eleven participating Member States have been public about their reservations), it is going to be difficult to progress the proposal in its current form. This opinion will likely accelerate the process of watering down the current proposal, including its reach beyond the Eurozone (the (deemed) residence principle will most likely be dropped), the range of transactions it covers and the rate that is applied.
5. Dutch budget 2014 – changes to tax regimes investment funds
On 17 September 2013, Dutch budget day, the Dutch government published its tax measures that generally are intended to become effective as per 1 January 2014 (the "2014 Tax Proposals"). The 2014 Tax Proposals contain two measures that concern the tax regimes for investment funds:
- The introduction of a separate definition of "investment institution" for the Exempt Investment Institution (vrijgestelde beleggingsinstelling or "EII") regime to clarify that the implementation of the AIFMD as per 22 July 2013 does not lead to a change in the application of the EII regime. Following the implementation of the AIFMD, the EII regime referred to AIFs and Undertakings for Collective Investment in Transferable Securities ("UCITS") within the meaning of the Dutch Financial Supervision Act (Wet op het financieel toezicht). However, funds that solely invest in private assets of participants without raising external capital (such as family funds) are no longer considered an AIF or UCITS. In order to avoid that such (family) funds no longer fall within the scope of the EII regime, a separate definition of "investment institution" has been introduced in the EII regime; and
- As per 1 January 2014, real estate funds to which the Fiscal Investment Institution (fiscale beleggingsinstelling or "FII") regime applies, may also perform ancillary activities that directly relate to the real estate held by such investment institution or a related entity (e.g. certain facility services for lessees such as cleaning or catering services) without jeopardizing their FII status, provided the following conditions are met:
- the ancillary services are provided by a subsidiary of the FII that is subject to corporate income tax under the normal rules;
- the (tax) value of the shares in the taxable subsidiary may not exceed 15% of the equity (for tax purposes) of the entity;
- the turnover from the ancillary activities may not exceed 25% of the turnover from the investments in the real estate for which these activities are performed; and
- the taxable subsidiary should be entirely financed with equity.
This takes away the competitive disadvantage that Dutch FIIs currently face compared to foreign real estate funds when investing in real estate located outside of the Netherlands, because the foreign REIT regime applicable to such real estate funds often allows for the performance of (taxable) ancillary services. In addition, this may make it easier for foreign real estate funds to qualify for the FII regime for their Dutch (branch) operations.