The Netherlands

Author: | Published: 3 Oct 1999
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There is an increasing demand for pooled investment structures for pension funds and other institutional investors, not just in the Netherlands but also in the rest of Europe. This is partly the result of the considerable growth in pension fund assets and the proportional increase in the investment in international securities, particularly equities. Furthermore, pension funds are under constant pressure to improve their performance and pooling investments has the potential benefit of lower fees and costs. In structuring investment pools, maximizing the operational flexibility, minimizing legal and regulatory constraints and optimizing tax effectiveness are of paramount importance.

In recent years the use of a Dutch Stichting as the pooling vehicle has proven to be an extremely effective tool in setting up pooling structures for Dutch pension funds and other institutional investors. Originally used by groups of pension funds for specific intra-group needs, the Stichting pooling structure has been further developed and improved. The structure is now also suitable for asset management houses in providing economy of scale benefits to institutional clients as well as for multinational enterprises in coordinating the management of their pension funds in different jurisdictions (and for instance for their own treasury departments). In principle, the Stichting pooling structure works for institutional investors irrespective of their nationality or jurisdiction of residence and irrespective of the nature or nationality of the securities to be invested in.

The Stichting structure is completely tax transparent in the Netherlands as well as under many tax treaties based on the OECD-model tax treaty with respect to withholding taxes on dividends and interest income. In other words, the after tax position of investors is equal to that of direct investment in the underlying assets. Geared towards professional investors, the Stichting is exempted from the supervision of investment funds in the Netherlands by the regulator. Thus, flexibility is maintained in structuring the custody, management and administration of the assets and in the methods of financial reporting.

The Stichting, a legal entity under Dutch law, can be pictured as the centre in a hub consisting of the investors, the underlying assets, the asset manager, the custodian bank and the administrator. Each investor enters into an agreement with the Stichting whereby the Stichting will hold and manage the underlying assets for the account of the joint investors. In turn, the Stichting enters into management, custody and administration agreements, whereby it delegates its responsibilities to professional service providers. The Stichting itself has a passive role and will, for instance, not employ any personnel.

Their contribution to the Stichting (in cash or in kind) will entitle the investors to a pro rata share of the assets of the Stichting in accordance with a participation register. The Stichting pooling structure can be set up in a manner that would provide the equivalent of an umbrella fund. Thus investors would be able to retain maximum flexibility in choosing their individual asset mix.

Finally, in our view the Stichting pooling structure compares favourably to the limited number of other pooling structures specifically for institutional investors. Compared for instance to the new UK Pension Fund Pooling Vehicle (PFPV), the Stichting structure would seem to provide more flexibility regarding the eligible categories of investors and potentially provides a better VAT efficiency.

Below the Dutch legal, regulatory and tax aspects of the Stichting pooling structure are briefly described.

LEGAL ASPECTS

The pool itself is basically a mutual investment fund. The mutual fund does not have legal personality. Participants can join the fund at formation or, subject to a consent procedure, at a later date. Through the agreement with the Stichting (the formal manager, custodian and administrator of the pool) the participants have a set of contractual (in personam) rights against the Stichting for the cash countervalue of their participation in the pool. For instance, any securities account with a custodian bank will be in the name of the Stichting. The Stichting is set up in such a manner that it is bankruptcy remote. As the manager, custodian and administrator of the pool, the Stichting contracts on behalf of the participants but in its own name.

The Stichting has legal personality under Dutch law. A Stichting does not have shareholders or members. It has a board of directors, typically consisting of representatives of the sponsor of the pooling structure. The board of directors will manage and represent the Stichting. Where desired the Stichting could also have a supervisory board, for instance made up of representatives of the participants.

Regulatory aspects

In principle, the pool qualifies as an investment institution within the terms of the Investment Institutions Supervision Act (Wet toezicht beleggingsinstellingen, Wtb). However, provided the participants qualify as professional investors within the terms of the Wtb, the pool is exempt from supervision by the regulator, the Dutch Central Bank (De Nederlandsche Bank).

The sponsor marketing the investment in the pool would generally qualify as a securities intermediary under the Securities Markets Supervision Act 1995 (Wet toezicht effectenverkeer, Wte). When securities intermediaries offer their services in or from the Netherlands they must obtain a licence from the Dutch Securities Board. However, a number of exemptions could apply, eg under the sponsor's single passport under the EU Investment Services Directive, as an entity registered with the Dutch Central Bank as a credit institution benefiting from a single passport under the Second Banking Coordination Directive, or as an introducing broker under the Wte. The Wte also requires a licence for portfolio management services for the sponsor where it would perform the asset management and administration of the pool (for and on behalf of the Stichting). Again an exemption may be available under the EU Investment Services Directive.

TAX ASPECTS

The activities of the Stichting are limited to a passive role as the formal custodian, manager and administrator of the pool. Provided the Stichting is carefully structured in this respect, it is possible to effectively keep the Stichting outside the scope of Dutch corporate taxation. As to the Dutch corporate tax position of the pool itself, Dutch tax law contains specific rules. These rules govern the question of whether a mutual fund without legal personality is subject to Dutch corporate taxation or not. In the latter case the fund is tax transparent and the income of the fund will be allocated (pro rata) to its participants. Whether the participants are subject to corporate tax in the Netherlands will depend on their own status. For instance, Dutch pension funds are exempt from tax. Normally foreign resident pension funds or other corporate investors will not be subject to tax provided they do not have a branch office in the Netherlands to which the investment is attributable. The pool will be set up as a transparent entity. Under the above-mentioned rules, roughly speaking, this means participations are non-transferable.

In the Netherlands a capital tax is levied on the contribution of equity to Dutch resident entities that have a capital divided in shares. In the absence thereof, the Stichting is outside the scope of capital tax. Again, for the pool specific rules apply, whereby the pool will not be subject to tax with respect to the issue of participations to investors provided certain conditions are met. The most important conditions are those relating to the admission of new participants. A consent procedure can be structured that would meet these conditions, while maintaining operational flexibility for the sponsor in acquiring new investors.

The Dutch VAT position of the Stichting pooling structure will heavily depend on the status and location of the sponsor in its capacity as service provider to the Stichting. In principle the pool would qualify for an exemption in the Dutch VAT act with respect to asset management services provided to collective investment schemes.

The Netherlands levy a withholding tax at the statutory rate of 25% on dividends, other profit distributions and payments on profit sharing debentures. Where the pool invests in Dutch shares, for dividend withholding tax purposes such payments would be attributed directly to the participants. The pool and the Stichting are considered transparent for this purpose. Dutch resident entities which are exempt from Dutch corporate tax will normally be entitled to a full refund of any Dutch dividend withholding tax levied.

To the extent that the pool would invest in non-Dutch securities, any income on those securities may be subject to withholding tax in the source country. In the Stichting pooling structure the participants would be in at least an equal position with respect to such withholding taxes as when investing directly, provided that the source country recognizes the transparency of the pools. In practice this is generally the case. Under the principles embedded in the OECD model tax treaties with respect to the beneficial ownership of dividends, interest payments and the like, the participants would be considered to be the beneficial owners rather than the Stichting.


Contact Details:

Clifford Chance

Apollolaan 171

1077 AS Amsterdam

Netherlands

Tel: +31 20 5777 111

Fax: +31 20 5777 222