Corporate finance

Author: | Published: 8 Apr 2002
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This scheme identifies various typical ways of structuring jointly funded equity investment vehicles under Netherlands' law and certain key legal, tax and regulatory aspects

  Company NV or BV Limited Partnership CV Pool Foundation 
Target investor category – tax driven If the NV or BV has zero-tax rate status (FBI or fiscale beleggingsinstelling): (i) individuals resident in The Netherlands and (ii) entities that are exempt from Dutch corporate income tax whether or not resident in The Netherlands.

Without FBI status: individuals and entities that may take advantage of a double-tax treaty.


Where the NV or BV does not have FBI status, Dutch corporate income tax may be levied on income and gains of the vehicle.
 

Entities whether or not resident in The Netherlands; not suitable for a large number of investors owing to its closed character described below. Entities and individuals, whether or not resident in The Netherlands; not suitable for a large number of investors owing to its closed character described below.
Structure summary The NV or BV holds the assets; the investment manager can be a managing director of the entity; the manager and the investors hold shares in the entity. One or more of the partners of the CV hold(s) the assets; the investment manager is a general partner, the investors are limited partners. The foundation holds the assets, and the investment manager is appointed to control them; the investors are participants and have contractual rights vis-à-vis the foundation.

The shares in the NV or BV can, for these purposes, be ordinary, priority or preferred shares.

The investors hold either (i) directly (ordinary) shares in the NV or BV or (ii) depository receipts in an intermediate vehicle which in turn holds shares in the NV or BV. The intermediate vehicle has a purely administrative purpose.


Often the assets are legally held by the manager, or a special purpose vehicle general partner, but the economic ownership of the assets is contributed to the CV – ie to the common ownership of all partners. Other arrangements are possible.


The foundation holds the assets only legally (in custody), the beneficial ownership rests with the participants.

The structure as a whole has characteristics of a unit trust. The relationship between the foundation and the investors is generally characterised as mandate (lastgeving). The investors would not have any proprietary interests in the assets.
 

Liability towards third parties

This sets out the liabilities most commonly intended by the parties from a structuring point of view – limited where possible.

The NV or BV contracts in its own name and for its own account; the shareholders are liable only for the contribution on their shares. The general partners are jointly and severally liable for all debts and liabilities of the CV, the limited partners are liable only for their commitment. The foundation contracts in its own name; the participants are liable only for their commitment.



The payment on the shares is generally the par value thereof, but may also include additional share premium (agio).

This requires, apart from proper structuring of the CV, also that limited partners do not de facto control or represent the CV, and are not active in its business.


The foundation transacts and holds its assets for the account of the participants. Where the relationship would be qualified as mandate, Dutch agency rules might render the participants, as (partially) disclosed principals, liable vis-à-vis third parties.
 

Dutch corporate income tax (35%) – on income and gains flowing from investments to the vehicle – vehicle tax position Yes – unless the participation exemption applies; the rate is reduced to zero if the NV or BV qualifies as an FBI. No – provided the CV is closed. No – provided (i) the foundation is passive; and (ii) the pool is closed.

The participation exemption is applicable if the NV or BV holds at least (i) 5% of the paid-in capital (gestort kapitaal) of a Dutch resident company or (ii) 25% of a non-Dutch resident EU company provided certain further requirements are met. The participation exemption is also applicable if the NV or BV holds at least 5% of the paid-in capital of a non-Dutch company, provided (i) the shares in the relevant company are not held as a passive investment and (ii) the company is subject to profit tax in its jurisdiction.


The CV is closed for corporate income tax purposes provided the prior consent of all partners is required for (i) the transfer of partnership interest to a new partner (ii) the admission of a new partner (iii) the transfer of partnership interest among existing partners and (iv) the contribution of capital to the CV if such contribution results in a change of the relative ownership of partnership interests.


The foundation is passive for corporate income tax purposes if its activities consist solely of holding the pool assets. All custody, administrative and other activities in relation to the assets would have to be performed by the manager or third parties.

The pool is closed for corporate income tax purposes provided the prior consent of all participants is required for (i) the transfer of participations to a new participant (ii) the issue of participations to a new participant and (iii) the transfer of participations among existing participants.
 

Dutch tax treatment of non-Dutch investors – on income and gains flowing from the vehicle to the investors Individual substantial interest holders pay a 25% charge. For corporate substantial interest holders the rate is 34.5% unless the shareholding forms part of the assets of an enterprise, in which case there is no tax. Corporate investors are subject to a rate of 34.5%, if the CV interest should be allocated to a Dutch permanent establishment. Individual investors pay a progressive rate of up to 52%. For corporate investors the rate is 34.5%, if the participation should be allocated to a Dutch permanent establishment.

A substantial interest is generally a shareholding of 5% or more. Under certain circumstances a smaller shareholding may also qualify as a substantial interest.


There is debate as to whether foreign investors have a permanent establishment in The Netherlands as a consequence of participating in the CV. The risk may be mitigated by proper structuring.


A corporate income tax charge may be triggered for foreign resident participants. Such liability may exist where a non-Dutch interest in the pool is part of its business activities. A ruling may be obtained that this is not the case, but at a price.
 

Dutch capital tax (0.55%) – on investments by the investors in the vehicle Yes – over the higher of the nominal value of the shares or the value of the contribution thereon, unless an exemption applies. No – provided the CV is closed. No – provided the pool is closed.

The CV is closed for capital tax purposes provided the prior consent of all partners is required for (i) the transfer of partnership interest to a new partner and (ii) the admission of a new partner.


The pool is closed for capital tax purposes provided the prior consent of all participants is required for (i) the transfer of participations to a new participant and (ii) the issue of participations to a new participant.
 

Dutch dividend tax (25%) – on distributions of profits by the vehicle to the investors Yes – over dividend distributions unless (i) an exemption or (ii) a reduction under a double-tax treaty applies. No – provided the CV is closed. No – provided the pool is closed.

The CV is closed for dividend tax purposes provided the prior consent of all partners is required for (i) the transfer of partnership interest to a new partner (ii) the admission of a new partner (iii) the transfer of partnership interest among existing partners and (iv) the contribution of capital to the CV if this results in a change of the relative ownership of partnership interests.
 


The pool is closed for dividend tax purposes provided the prior consent of all participants is required for (i) the transfer of participations to a new participant (ii) the issue of participations to a new participant and (iii) the transfer of participations among existing participants.

Dutch VAT (19%) – on investment management fees charged by the manager Yes – unless the collective investment exemption applies. Yes – unless the collective investment exemption applies. No – by virtue of the collective investment exemption.

The collective investment exemption applies to the management of assets brought together for collective investment purposes by investment funds or investment companies governed by the 1990 Act on the supervision of investment institutions.
 


In case of a CV investing funds contributed directly by its (limited) partners the exemption from VAT should be available.


In case of a pool investing contributions received directly from its participants the exemption from VAT is available.

Non-Dutch withholding tax – on distributions (eg dividend, interest or fees) to the vehicle May be reduced under an applicable Dutch double-tax treaty; any remainder is creditable against Dutch tax. May be reduced under an applicable double-tax treaty between the source state and the state of residence of the partner, provided the CV is recognised as transparent by the source state. May be reduced under an applicable double-tax treaty between the source state and the state of residence of the participant, provided the pool is recognised as transparent by the source state.

Otherwise no treaty relief is available.


Otherwise no treaty relief is available.
 

Dutch regulatory treatment – investment fund An NV, BV, CV or pool operating as an investment fund (bringing together in or from The Netherlands from outside a restricted circle, monies or other assets for the purpose of collective investment in order to enable the participants to share in the revenues thereof) must in principle obtain an investment fund licence from the Dutch Central Bank.

Whether a circle of (prospective) investors and the offeror (the NV, BV, CV or foundation) constitute a restricted group depends on a number of criteria, one being whether or not there is a pre-existing relationship, other than a financial relationship, between the offeror and offeree(s). Such a relationship can be assumed to exist between family members, group companies, employer and employees and an association and its members. The fact that some or all of the investors to whom shares in the NV, BV, interests in the CV or participations are offered already co-investing in an existing fund would not constitute a qualifying relationship. Within the context of a commercial set-up for a fund, a restricted group is very unlikely to exist.


Certain generic exemptions from the requirement to obtain a licence are available. A generic exemption applies where shares in the NV, BV, interests in the CV or participations in the pool are offered to professional investors only.


Professional investors in this context are individuals or legal entities, trading or investing in securities or other investment objects in the conduct of a business or profession. The term includes institutional investors, banks, securities intermediaries and certain governmental organisations, but not necessarily high net-worth individuals.

It should be noted that the marketing entity will qualify as a securities intermediary, and requires an intermediaries' licence from the Financial Markets Authority of The Netherlands. The licence requirement does not apply insofar as the marketing entity markets investments or units in its own capital. If the manager is appointed managing director of the NV, BV, managing partner of the CV or the managing director of the foundation/investment manager of the pool and undertakes the marketing activities as such, this criterion is satisfied.
 

Dutch regulatory treatment – venture capital company Notwithstanding the above, an NV, BV, CV or pool does not fall within the scope of the investment fund legislation if it is conducting a business as opposed to more passive collective investing. If it is structured as a venture capital fund and its activities consist of (directly or indirectly) participating in a number of portfolio companies, it could be argued that business activities are being carried out within the NV, BV, CV or foundation. Consequently, no licence from the Dutch Central Bank would be required.

As both venture capital companies and investment funds typically invest in securities it is sometimes difficult to distinguish between the two, but there are certain official criteria to establish whether an entity qualifies as a venture capital company or as an investment fund. Entities complying with the following criteria are generally held to be venture capital companies: (i) the shares in portfolio companies in which the entity (directly or indirectly) invests are difficult or impossible to place with or sell to the general public and (ii) a venture capital agreement is entered into between the entity and each portfolio company, in which it is laid down that: divestment only occurs in consultation with the relevant portfolio company; and the entity exercises influence on management of the portfolio company and is actively involved with the portfolio company's business. In addition, the term during which a participation will be held may be an indicator when determining whether the entity qualifies as a venture capital company. The longer the term, the greater the likelihood that the entity qualifies as a venture capital company.


The shares, interests or participations in the venture capital structure may only be offered in or from The Netherlands outside a restricted group if a qualifying prospectus is available (unless an exemption applies). Exemptions from the prospectus requirement, should it arise, include exemptions for offerings to professional investors only and for offerings made exclusively to investors resident outside The Netherlands.


It should be noted that the marketing entity will qualify as a securities intermediary, and requires an intermediaries' licence from the Financial Markets Authority of The Netherlands. The licence requirement does not apply insofar as the venture capital company is the marketing entity. If the manager is appointed managing director of the NV, BV, managing partner of the CV or the managing director of the foundation/ investment manager of the pool and undertakes the marketing activities as such, this criterion is satisfied.

Diagram NV/BV Structure

Diagram CV Structure

Diagram Foundation Structure


Clifford Chance
Droogbak 1A
1013 GE Amsterdam
Netherlands
Tel: +31 20 711 9000
Fax: +31 20 711 9999

Clifford Chance
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London EC1A 4JJ
United Kingdom
Tel: +44 20 7600 1000
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