The Netherlands

Author: | Published: 23 May 2005
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Dutch special purpose vehicles are commonly used in both cross-border financing transactions as well as in Dutch domestic financing transactions.

As regards cross-border transactions, (synthetic and cash) securitizations, repackagings, collateralized debt obligations (CDOs) and collateralized loan obligations (CLOs) and leasing transactions, MTN and other note issuance programmes are among the most popular transactions involving a Dutch special purpose vehicle.

Notable examples of structured finance transactions involving a Dutch SPV include the two Eurotunnel securitizations (Fixed-Link Finance 1 BV and 2 BV), which, according to Euroweek, "are among the most complex structured financings in Europe," and the Jazz CDO I transaction, which was awarded Collateralized Debt Obligation of the Year in 2002 by Structured Finance International.

Why a Dutch SPV?

There are a number of reasons why The Netherlands is an attractive jurisdiction in which to set up the SPV in structured financing transactions. The first of these is the favourable Dutch tax regime (see below).

Investor considerations also often drive the SPV location. The Netherlands is a member state of the EU, which makes a Dutch SPV attractive to European investors. Based on domestic regulations in their home country, many European investors are precluded from or restricted in investing in debt instruments issued by vehicles established outside the EU (such as the Cayman Islands and Jersey). The Netherlands is also a member of the OECD. The jurisdiction of residence of the SPV has become an increasingly important issue that may seriously affect the sale of securities to regulated EU investors.

Also, from a reputational perspective certain investors are less comfortable with investing in a tax haven SPV than in an SPV incorporated in the EU.

Structure

A Dutch SPV typically takes the form of a BV (besloten vennootschap met beperkte aansprakelijkheid), which is a private limited liability company. A BV can be incorporated within a matter of days. The minimum share capital of a BV is €18,000 ($22,000). This is substantially less than for Irish and Luxembourg SPVs. A number of Dutch corporate service providers are willing to contribute this share capital out of their own pocket, provided they are appointed to provide local management and administration services to the SPV. Since March 1 2004 all Dutch corporate services providers are required to be licensed by the Dutch Central Bank and are fully subject to integrity and customer due diligence requirements, giving international investors a further layer of comfort.

To make the SPV an orphan company its shares are typically held by a Dutch foundation (stichting). A foundation can be set up within a day and has the power and capacity to hold the issued and paid-up share capital of the SPV. A foundation does not have any members or shareholders.

Tax

Withholding tax
Depending on the nature of the underlying assets and jurisdiction of residence of the underlying obligors, payments under underlying assets may be subject to withholding tax. The transfer of underlying assets to an SPV may have an effect on the withholding tax position of these payments. Depending on the nature of the underlying assets and jurisdiction of residence of the obligors of these assets, payments under the underlying assets could become subject to (increased) withholding tax if transferred to an SPV in a tax haven jurisdiction. The transfer of the assets to a Dutch SPV may avoid such negative effect or indeed may have a positive effect on the withholding tax position of payments under the underlying assets. Under Dutch double tax treaties withholding taxes are usually substantially reduced or eliminated. The Netherlands has concluded comprehensive double tax treaties with about 80 countries and the availability of this treaty network is usually a factor in determining the location of the SPV (for example where the SPV's assets include Italian or Spanish asset backed securities).

As The Netherlands does generally not levy withholding tax on interest payments, payments of interest by a Dutch SPV to investors can be made gross. Interest paid on profit sharing debt, however, may be subject to Dutch withholding tax if the legal maturity of the debt exceeds 10 years. In our experience it is usually possible to structure a transaction so that all interest payments made by a Dutch SPV (even in respect of subordinated notes in a CDO transaction that are entitled to residual interest on an available funds basis only) can be made without withholding. Advance confirmation from the Dutch tax authorities as to the absence of withholding is available.

Tax position of SPVs
Income received by the SPV is included in its corporate tax basis. However, the SPV will have a corresponding tax deduction for its expenses (such as interest on the notes issued, fees, hedging costs and so on), which results in a zero taxable profit for the SPV.

Typically, a structured finance transaction will be structured so that the SPV earns a minimal taxable profit (equal to the fee of the corporate services provider to the SPV). This does not increase the transaction cost, but does give the SPV substance, which is attractive from a cross-border tax perspective where double tax treaties offer protection.

VAT and other taxes
In an asset-backed transaction there is often a third party appointed as servicer or collateral manager in respect of the portfolio acquired and held by the SPV. If structured properly, it is virtually always possible to ensure that servicing/collateral management fees payable by the SPV are not subject to Dutch VAT. Particularly in CDO transactions it is important to avoid VAT in respect of collateral management fees not only in the issuer jurisdiction but also in the jurisdiction where the collateral manager is located. Practice has proven that a Dutch SPV is ideally placed to avoid VAT in respect of collateral management fees in both jurisdictions.

The Netherlands does not levy any relevant stamp duty or other documentary taxes.

Double tax treaties
As mentioned above, The Netherlands is party to about 80 comprehensive double tax treaties. A Dutch structured finance SPV is entitled to the benefits of this Dutch double tax treaty network.

The applicability of a double tax treaty ensures that the income in respect of the underlying assets acquired by the SPV can be paid to it without any (or at reduced) withholding.

Tax treaties also reduce the risk of a collateral manager/servicer being deemed to be a permanent establishment of the SPV and limit the risk of the SPV being regarded as tax resident in the jurisdiction of the collateral manager/servicer. This benefit is of particular importance in managed CDO transactions.

Banking laws

A Dutch SPV is not required to obtain a banking licence nor any consent or authorization from the Dutch banking regulatory authority for the issue of the SPV notes, provided they are exclusively offered and sold to Professional Market Parties (PMPs) anywhere in the world. The SPV notes can be in registered form or in bearer form without jeopardizing any tax or regulatory benefits. This is material in the context of 144A issues because a conversion of bearer notes into US depositary receipts is unnecessary for a Dutch SPV. Also, if the notes are in registered form there is no need to have the register maintained in The Netherlands.

The wide range of PMP categories (including banks, insurance companies, securities firms, collective investment institutions and pension funds established and supervised or licensed in a EU member state, the USA, Japan, Australia, Canada, Switzerland or other countries, governmental institutions, large corporations and companies with a credit rating) allow a Dutch SPV to tap national and international debt capital markets. A Dutch SPV cannot be used to make a public offer of notes anywhere and locating the SPV in another EU member state where this restriction does not apply would still not allow its notes to be offered into The Netherlands to anyone other than PMPs.

If its notes have a minimum denomination of €500,000 (or the equivalent in any other currency) and are held at the time of issue through a reputable clearing system (such as Euroclear, Clearstream of DTC) (safe harbour notes), all that a Dutch SPV need do is verify the PMP status of the initial purchasers or investors known to it (typically the managers or dealers) on the basis of information obtained from certain permitted sources. The initial purchasers are free to sell safe harbour notes to anyone.

If the notes (or certain classes of notes) have a denomination below €500,000, the transaction documentation and the notes should include selling restrictions and certain provisions to ensure that they are only offered and sold to PMPs. Therefore, it is wrong to say that an SPV based in The Netherlands can only issue notes with denominations of €500,000 or more. Denominations can be as low as needed (even as low as €1,000) provided some simple steps are followed in the issue documentation. Many structured finance deals and CDOs have been closed after the new rules on SPVs took effect in July 2002 with low denominations (or at least one class of such notes) without any difficulty.

Regardless of whether the notes are safe harbour notes or not, the SPV will not be subject to reporting requirements to the Dutch banking regulator (except for any changes to its management and some minor foreign exchange reporting for statistical purposes).

A Dutch SPV's regular debt funding under loan facilities (for example, during the warehouse phase or under liquidity facilities), is subject to the general requirement that lenders should qualify as PMPs and be verified as such by the Dutch SPV.

Underlying assets

Dutch banking regulations do not restrict the SPV from purchasing any asset anywhere in the world and such assets do not have to be held or located in The Netherlands upon acquisition. It can purchase (participations in) existing loans, grant new loans, acquire debt or equity securities (including asset-backed or CDO securities). The only restriction in this regard is that an SPV (whether Dutch or foreign), generally, cannot acquire (participations in) loans to Dutch corporate borrowers before it qualifies as a PMP. The easiest category of PMP available to an SPV is the rated entity PMP, where the SPV has issued rated instruments or has itself obtained a rating. There is no minimum level of rating and not all notes it issues need to be rated.

The SPV's assets may further be managed by a servicer or manager located either in or outside of The Netherlands (subject to the licensing requirement mentioned below).

Because the SPV normally issues rated notes only at closing, loans to Dutch borrowers should be kept on another party's balance sheet during the warehouse phase (for CDOs) and the Dutch SPV can also not be the economic owner prior to closing (that is, the SPV should not bear the risk on any price fluctuation prior the closing date). The same restriction applies: (a) to any foreign SPV and (b) to investments in notes issued by another Dutch SPV, unless these are safe harbour notes.

Securities laws

A Dutch SPV is not required to obtain a licence nor any consent or approval from the Dutch securities regulatory authorities for the distribution of offering documentation nor for the offering and sale of the notes anywhere in the world if the notes have a minimum denomination of €50,000 or (for lower denominations) if they are offered to professional investors (that is, PMPs that also trade or invest in securities in the conduct of a business or profession). In either case, a Dutch SPV will also be exempt from all prospectus and continuous reporting requirements under Dutch securities laws.

In structuring a transaction, care should be taken that any party that provides regulated securities services to the Dutch SPV is authorized to conduct business in The Netherlands, either by having a local Dutch licence or - for EU entities - by having their domestic licence for the relevant services passported under the Investment Services Directive or under the Banking Directive, as applicable, or by relying on exemptive relief. This typically applies to a collateral manager, any securities lending agents, all hedge and swap counterparties, synthetic security counterparties and credit default swap counterparties. For transactions that have a financial guarantee provider and the guarantee is drafted as an insurance product, such entity should also be licensed or - if it is an EU insurer - have permission to carry out its activities in The Netherlands. Normally, the time frame of a transaction is enough to arrange for passporting for EU entities if these have not done so for The Netherlands. Exemptive relief is available in certain circumstances for unlicensed securities service providers, based for example in non-EU jurisdictions, to provide services to the Dutch SPV without violating Dutch securities laws.

Dutch SPVs do not need to prepare and publish audited financial statements or any interim financial statements as a matter of Dutch law. By limiting the offering of their notes to PMPs or (for non-safe harbour notes with denominations below €50,000) to professional investors qualifying as PMPs they are exempt from such financial reporting duties. This represents a significant cost saving compared to other jurisdictions where such reporting duties are imposed on local SPVs.

The regulatory requirements outlined above are likely to be liberalized in the near future as the banking regulatory authority has announced that it will amend its PMP rules before the summer of 2004 to take into account market experience over the past two years. One of the proposed amendments may well be a reduction of the safe harbour threshold to €100,000. Further amendments may be discussed during the consultation process of the next three to four months. Once this is achieved the pre-eminent position of The Netherlands as an SPV location will be further enhanced.

About the authors

Frank Graaf

Clifford Chance

Frank Graaf has been a partner since 1990 and is head of the Securities and Derivatives Group within the Amsterdam Finance Department. He specializes in securities and financial markets related work, with an emphasis on international capital markets offerings, CDO/CLO/CBO and repackaging transactions, derivatives, repo's and securities lending. He is a co-founder and board member of The Netherlands Association for Securities Law (Vereniging voor Effectenrecht), a board member of The Netherlands Commercial Law Association (Vereeniging Handelsrecht) and a co-founder of and lecturer for the annual postgraduate course on securities law of the Grotius Academy. He has authored a book entitled Euromarket Finance: Issues of Euromarket securities and Eurocurrency syndicated loans (1991) as well as numerous articles for legal journals and contributions on Netherlands law to various books. He serves on the editorial boards of World Securities Law Report and the Banking Law Series (Bankjuridische Reeks) of the Dutch banking and Securities Institute (NIBE).

Philippe Steffens

Clifford Chance

Philippe Steffens is a senior associate with Clifford Chance. Philippe joined Clifford Chance's Amsterdam office in 1996 and spent almost three years in the London office's Securitization and Tax Groups. He has advised extensively on debt capital markets and structured finance transactions with a particular emphasis on securitization and collateralized debt obligations transactions, involving a wide variety of different asset classes.

Philippe received his Law degree from Leiden University in The Netherlands and holds an LLM in Taxation from New York University, School of Law.

Philippe is a Dutch advocaat admitted to the Amsterdam Bar and solicitor in England and Wales.