A bill recently introduced by the Dutch Ministry of Finance is drawing the interest of foreign investors. Two novel proposals, in particular, show that the Netherlands is serious in its bid to topple Luxembourg from its prominent position as a pan-European investment jurisdiction. The rules have been recently approved by parliament and are expected to enter into force later this year.
Tax exempt funds
A new investment vehicle will be introduced. Completely exempt from Dutch corporate income tax, this new type of fund may be either a Dutch entity or a non-Dutch entity with a branch in the Netherlands. There will be no withholding tax on any distribution from the fund to its investors.
The new fund will be able to invest only in financial instruments. A fund resident in the Netherlands will not enjoy treaty protection. Collective investment fund regulations will apply. Authorization by the relevant regulator or a statutory exemption will be required. There will be no shareholder requirements.
The new investment vehicle will be an attractive alternative to the Luxembourg Sicar or Sicav and is ideally suited for multi-jurisdiction indirect real estate investment funds.
Dutch real estate funds
To date, the rules for tax-exempt real estate funds have often proved too cumbersome for non-Dutch investors investing in real estate projects in the Netherlands. The existing requirements will be eased, and open the possibility to non-Dutch corporate shareholders to acquire stakes of more than 25% in a listed and/or licensed tax-exempt real estate investment fund.
A distinction is made between two types of funds: funds that are either quoted on the stock exchange or operate under a licence under the investment fund regulations, and funds that are not quoted or do not require a licence under the investment regulations. For each of the two categories, the new shareholder requirements can be summarised as follows.
- A private individual may not directly or indirectly hold 25% or more of the shares in the fund.
- A corporate taxpayer may not directly or indirectly hold 45% or more of the shares in the fund.
- A private individual may not hold interests of 5% or more in the shares of the fund.
- 75% of the shares must be held by private individuals or tax-exempt institutions.
All other existing requirements for tax-exempt funds will largely remain unchanged, among them the obligation to distribute dividends within eight months after the end of the year. Distributions will be subject to Dutch dividend withholding tax, although the statutory rate has been reduced from 25% to 15%. Further reductions could be available under the Parent-Subsidiary Directive and under the tax treaties concluded by the Netherlands. Under certain conditions the distribution of the fund's reinvestment reserves might also be made free of withholding.
Under the new rules, the scope of permitted activities for tax-exempt real estate investment funds will also be eased. Until now, it was not possible for a tax-exempt real estate fund to be involved in the development of real estate property. Under the new rules, this is no longer forbidden, provided the real estate development projects are developed in a separate subsidiary that will be subject to corporate income tax at the full statutory rate of 25.5%.
Under the new rules, the fund will no longer be required to be based in the Netherlands. For example, if the fund were structured as a German AG with a branch in the Netherlands, its Dutch real estate income would be tax exempt under the Dutch rules. Distributions by the German AG to its ultimate beneficiaries would be regulated not by Dutch dividend withholding tax rules, but by German rules.
Robert W Tieskens