1. This Stibbe Investment Management Alert will inform you about recent EU and Dutch regulatory, corporate and tax developments relevant for the investment fund industry.
2. Further restrictions of remuneration policies for financial enterprises proposed
The draft bill on Remuneration Policies for Financial Enterprises (Wetsvoorstel beloningsbeleid financiële ondernemingen; the: "Bill") has recently been published by the Dutch Minister of Finance. The Bill contains several important new provisions in respect of the remuneration policy, applicable to all staff members of financial enterprises established in the Netherlands and their group companies:
- The introduction of a bonus cap of 20% of the fixed income of all staff members employed by a financial enterprise. Staff mainly working outside the Netherlands may receive a bonus of 100% if they work in an EEA member state, or a bonus of 200% if they work in a non-EEA member state and the shareholders of the financial enterprise have approved such a bonus. The bonus cap does not apply to fund managers, and investment firms that are only engaged in proprietary trading;
- A retention bonus above the 20% bonus cap may only be rewarded if certain requirements are met;
- Under certain circumstances, no severance payments may be granted to staff members of the financial enterprise (e.g. in case of voluntary leave of the staff member);
- The severance payments for managing directors is capped to 100% of one yearly fixed salary; and
- The obligation for financial undertakings to apply a claw-back and malus to all staff in specific situations.
Financial enterprises established in the Netherlands must ensure that the remuneration provisions are also applied at the level of their subsidiaries, including foreign-based subsidiaries. When a financial enterprise that is established in the Netherlands has a holding company that is also established in the Netherlands, the holding company must ensure that all group companies – including foreign-based group companies – have a sound remuneration policy and comply with the provisions of the Bill, unless the main activities of the group do not consist of the offering of financial products, the provision of financial services, the provision of investment services or the performance of investment activities.
The Bill was subject to consultation until 31 December 2013. It is currently envisaged that the Bill – whether amended or not – will enter into force on 1 January 2015. Some proposed remuneration measures in the Bill already apply to financial enterprises pursuant to the Regulation on Sound Remuneration Policies pursuant to the Financial Supervision Act 2011 (Regeling beheerst beloningsbeleid Wft 2011; "RBB") and/or will apply pursuant to the Fourth Capital Requirements Directive ("CRD IV") as of 1 January 2014. The proposed provisions on remuneration pursuant to the Bill will accumulate on the already existing provisions pursuant to the RBB and CRD IV.
3. New competent authority agreement signed between the Netherlands and Canada
The competent authorities of Canada and the Netherlands have reached an new mutual agreement (the "New Competent Authority Agreement") regarding the application of the Dutch-Canadian tax treaty to investors in a fund for mutual account that qualifies as tax transparent for Dutch tax purposes (besloten fonds voor gemene rekening; hereinafter referred to as "closed FGR").1
The New Competent Authority Agreement replaces the competent authority agreement entered into on 1 June 2010 (the "2010 Agreement"; see our Tax Alert of 9 June 2010) and will apply to payments made on or after 1 November 2013. Just as the 2010 Agreement, the New Competent Authority Agreement provides that a closed FGR which is established in the Netherlands:
- is also considered transparent for Canadian tax purposes; and
- may itself (on behalf of its investors) file a refund request to the Canadian Revenue Agency ("CRA") under the relevant tax treaty applicable between those investors and Canada (subject to certain conditions).
A new element is that the New Competent Authority Agreement permits that a closed FGR may also claim reduction or exemption of Canadian withholding tax under the relevant treaty on behalf of its investors (instead of a refund), provided that all direct investors of the closed FGR are qualifying investors.2 This is advantageous for investors as a refund procedure can be time-consuming (resulting in liquidity disadvantages). This makes the closed FGR, a flexible entity for international investment, all the more attractive.
In respect of relief at source, the CRA requires the closed FGR (i.e. fund manager or depository) to provide the payer with a certified statement containing, amongst others, (i) the name, address, and country of residence for tax purposes of each investor, the applicable tax treaty rate, including the number of shares/units beneficially owned by each investor, the investor's foreign tax identification number, and the investor type (e.g. pension plan) and (ii) a statement that the fund manager/ depository has obtained from each investor certifying beneficial ownership, residency and eligibility for tax treaty benefits.
1. An FGR is considered tax transparent when its interests can only be transferred among new or existing participants with the consent of all participants or solely transferred to the funds itself or relatives of the participants in the direct line.
2. As qualifying investor is, inter alia, considered any investor that, at the time of any payment in respect of which relief is requested, is considered resident in a contracting state under the tax treaty applicable between Canada and that contracting state and is eligible to receive any of the benefits provided for in that tax treaty in respect of the payment in its own right.
4. FATCA - intergovernmental agreement signed between the Netherlands and the US
On 18 December 2013, the Netherlands and the United States signed an intergovernmental agreement ("IGA") to provide for the implementation of the Foreign Account Tax Compliance Act ("FATCA")3. This will be implemented through domestic reporting and reciprocal automatic exchange of information pursuant to the Dutch-US tax treaty. According to a press release from the Dutch Ministry of Finance, an important advantage of the IGA is that financial institutions resident in the Netherlands no longer need to enter into separate agreements with the Internal Revenue Service ("IRS"). Instead, the Dutch tax authorities will exchange the information to the IRS. The IGA reduces the administrative burden for financial institutions, resident in the Netherlands and guarantees legal protection for their clients. Banks, custodians, investment funds and investment and asset managers are, amongst others, considered as financial institutions for purposes of the IGA.
The US has indicated that it intends to treat qualifying Netherlands financial institutions, as complying with FATCA and not subject to the 30% withholding.
The IGA and any implementing legislation will be presented for approval to Dutch Parliament in 2014 and is aimed to enter into force by 30 September 2015. Any progress on the implementation of the IGA will be reported in upcoming Alerts.
3. In short, FATCA introduces a reporting regime for Foreign Financial Institutions ("FFIs"), such as foreign private equity funds and investment funds, in order to identify US account and equity holders. Compliance with this reporting regime is enforced with a 30% withholding tax on all payments made to FFIs arising from a US source (e.g. dividend, interest and sale proceeds), unless the FFI qualifies for one of the limited exemptions or becomes a participating FFI complies under a separate agreement with the Internal Revenue Service (which contains specified due diligence, reporting and FATCA withholding requirements). The implementation of FATCA is scheduled for 1 July 2014.
5. EU Cross-border conversions
In December 2012, Stibbe announced that we advised on innovative inbound cross-border company conversions that have been executed by way of a Dutch notarial deed. Through these conversions, the companies that were previously governed by the laws of another EU jurisdiction, were turned into Dutch companies, without discontinuing them.
Over the last twelve months, Stibbe has advised on a number of cross-border conversions, both inbound (conversion into a Dutch company) and outbound (conversion of a Dutch company to another jurisdiction). The combination of inbound and outbound cross-border conversions paves the way for any company governed by the laws of an EU-member state to convert itself into a company governed by the laws of another EU-member state. Furthermore, from a siège réel country such as Luxembourg, a company could easily be converted into a company governed by the laws of any other country in the world as vice versa. Therefore, the entire world can be a destination within two steps.
Private equity and/or publicly traded funds often use special purpose vehicles in several jurisdictions in order to structure their investments tax efficiently. The possibility of cross-border conversions and/or migrations makes it possible for funds within and outside the EU to restructure their SPVs to make their investments much more tax efficient. It enables them to change jurisdictions without having to liquidate, without creating a dual residency and without the necessity to re-execute all important contracts.
Should you have any questions regarding cross-border conversions into or out of the Netherlands, please feel free to contact one of the members of Stibbe's Investment Management group mentioned below.
6. Update EU financial transaction tax
According to the recently signed German coalition agreement the coalition parties (CDU and SPD) will push for an EU financial transaction with a broad tax base and a low tax rate. Where possible, the tax will cover stocks, bonds, currencies and derivative transactions. Although it is – according to the agreement – intended to first assess the impact of the FTT on pension funds as well as the real economy (to prevent undesirable consequences and to prohibit undesirable forms of financial transactions), it is evident that Germany will remain a leading force behind a possible EU FTT (a very ambitious date of 1 January 2016 is mentioned). Algirdas Semeta, the EU Commissioner for tax affairs, said on 17 January 2014 that he thought a deal on the FTT with the eleven participating Member States was possible in the first half year of this year. His greatest concern is, however, that the need for a compromise between the eleven countries might lead to loopholes which may result in a shift of financial transactions to countries that do not participate in FTT.
Another recent development with respect to the FTT is that in an unofficial leaked opinion of 12 December 2013 EU Commission lawyers appear to have claimed that the residence principle of the FTT – which gives the FTT extraterritorial effect – is lawful. Although this document is only intended to stimulate discussion regarding the FTT, it is striking that its content completely contradicts the opinion of the Legal Service of the Council of the EU of 6 September 2013 stating that the residence principle is unlawful. The EU Commission lawyers now claim that the proposed FTT Directive is in conformity both with customary international law and EU primary law, and does not lead to any inadmissible extraterritorial effects of the FTT. The result of the contradiction between the two legal assessments may be that the eleven participating Member States may choose to ignore the legal opinion from the Council Legal Service.
Columns written by members of Stibbe's Investment Management group in Fondsnieuws (only available in Dutch):
"Advies: niet adviseren" by Rogier Raas on 3 February 2014;
"Bonusplafond" by Paul Quist on 24 December 2013;
"Olifant in de kamer" by Sjoerd Buijn on 4 November 2013;
"Empire State" by Jeroen Smits on 30 September 2013; and
"Kleine scheurtjes" by Rogier Raas on 2 September 2013.