Leo Neve looks at a popular hybrid investment vehicle, which is not only beneficial for pension funds, but also for private investors who are tax protected by Netherland’s double taxation agreements (DTAs).
In this year’s overview on developments in the Netherlands, I will look at a popular hybrid investment vehicle, which is not only beneficial for pension funds, but also for private investors who are tax protected by Netherland’s double taxation agreements (DTAs). This specific investment vehicle is also popular because it does not require the disclosure of ultimate beneficial owners under the 4th amended EU Directive on Anti Money Laundering, 2015/849/EU.
The Dutch Law Fund for Mutual Account
A Fund for Mutual Account (FMA) or Fonds voor gemene rekening (FGR) is a Dutch investment vehicle which is formed through a contractual arrangement. Depending on the way it is set up, and in particular the requirements for the admission and substitution of participations, it may be either qualified as a tax transparent (closed FGR) or as a taxable (open FGR) entity for Dutch tax purposes. An FGR is considered tax transparent when its participations can only be transferred among new or existing participants with the consent of all participants, or solely transferred to the fund itself or to relatives of the participants in the direct line. Consequently, a closed FGR itself is not subject to Dutch corporate income tax and its income is directly attributed to its participants.
A FGR is not a legal entity, irrespective of whether it is deemed to be an entity for corporate income tax purposes. The FGR is created by agreement (terms and conditions for the administration) between a Manager and one or more investors (Participants), which obliges the Manager to invest and manage for the mutual account of the Participants monies and/or other assets contributed to the mutual account by the Participants. The Manager holds the assets for the risk and account of the Participants. Provided no specific regulatory rules require otherwise, any person, legal or natural, may act as the Depository. The person acting as the Depository is often a foundation, which acts in the capacity of Administrator (Administratiekantoor) of assets.
Readers who use Dutch entities in their structures may be familiar with Dutch foundations acting as Administratiekantoor for administering shares and converting shares into certificates of shares, so that equity interests can be separated from voting interests.
The Advantages of FGR
The closed FGR is well suited for international investment. It is often used as an investment vehicle by Dutch and non-Dutch pension funds and other investors to pool their capital to invest collectively in a variety of assets. The main reason is to improve their return and to spread their risk. Such asset pooling can result in substantial savings for the investors. A FGR is well known in the professional investment environment, but less known is private spheres. A FGR is a tax-driven investment vehicle. Often a direct investment of a person in assets located outside their tax jurisdiction entitles them to benefit from a double tax agreement. Without intermediate vehicles, the person can benefit from the reduced withholding taxes under DTAs. With an intermediate vehicle in the investment structure the return on investment will often be converted into a (deferred) dividend and subsequent distribution by the vehicle will incur additional secondary withholding taxes. A FGR provides a pooled investment through a fund with a manager, but will still be a direct investment for tax purposes for the person.
Organisational Documents and Registration
The FGR is established by the execution of a private or notarial deed setting out the Terms and Conditions of the Administration. The initial parties are the Manager and the Participant – at least one must attend. In the case of investments in shares, a Depository/Custodian will also be involved, as legally, management and depository should be separated. Important in the Terms and Conditions are the provisions on admittance of new participants, on transfer of participants, on the contribution obligations of the participants, on the allocation of the results, on the substitution of Manager and/or Depository and on dissolution/liquidation of the fund.
There is no requirement in the law to register a FGR with the Chamber of Commerce. Only the Manager will be registered in his or her own name if he or she is a legal entity. That is the current situation. In the discussion draft of the bill to implement the amendments to article 30 and 31 of the 4th Directive on AML (2015/849/EU) the government suggested that a registration obligation of a FGR may be possible, but the government has not made a proposal for that.
There are no restrictions with respect to governance, financial relationships and fees. Parties have the freedom to contract whatever they wish to agree to. It is not clear whether the Manager of the FGR is subject to the supervision of the Central Bank under the law of supervision of professional service providers (Wet toezicht trustkantoren).
FGR’s Tax Position
FGR has a hybrid tax position. It can organize itself as a closed fund (closed entry) or as an open fund (open entry). Only an ‘open’ FGR is an ‘entity’ subject to corporate income tax. A ‘closed’ FGR is not to be confused with a ‘closed end’ fund. The element ‘closed’ only relates to the entry and transfer of the participants. A FGR is ‘closed’ if entry and transfer of participation require the approval of all other participants or the participation can be transferred to the FGR itself by way of redemption. A closed FGR is thus not a corporate entity, and by consequence is transparent for the income tax purposes of the participants. The participants derive the income of the funds directly, at the moment it is realised by the FGR. In an ‘open’ situation, the FGR is subject to corporate income tax and the participants are only taxed if and when the FGR makes a distribution.
Under the double taxation agreements, the Netherlands takes the position that the investors in a ‘closed’ FGR are themselves and individually entitled to the treaty benefits. The competent authority has, therefore, concluded many Mutual Agreements (MAs) with the authorities of other contracting parties. With the US, Norway, the UK, Denmark, Sweden, Canada, Germany and (recently) Indonesia, the government has concluded Competent Authority Agreements by which the competent authorities agree that the closed FGR will be treated as fiscally transparent. The Manager may claim the treaty benefits on behalf of the participants in proportion to their participation in the FGR.
An ‘open’ FGR can claim the benefits of the treaty as an entity, unless the FGR is itself fully exempt from Dutch income tax, e.g. as a tax exempt investment vehicle (VBI). In the alternative of a fiscal investment vehicle (FBI), taxed at 0 per cent, the FGR will be able to apply the treaty benefits; however, such a FBI has strict shareholders’ requirements, which are difficult to meet for non-resident participants.
In general, a large FGR will fall within the definition of an ‘investment institution’ in the meaning of the Dutch Act on Financial Supervision (wet financieel toezicht). Such FGR is subject to the normal rules of supervision. In case no participations are offered to the public, no license and prospectus will be needed. Most FGRs escape supervision in the case where participations are offered to less than 100 participants.
Registration of the Ultimate Beneficial Owner
Under Article 30 of the 4th AML Directive of the EU (2015/849), it will become obligatory for the Member States to implement an obligation for corporate and legal entities to register their beneficial owners. The owner register must hold adequate, accurate and current information on beneficial owners. Article 30 also provides for a central registry of ultimate beneficial ownership (UBO) in the corporate and legal entities. The central register is not public, but accessible to banks, financial intelligence units (FIU) and supervisory authorities. It is the intention of the Dutch government to place this register with the Chamber of Commerce, with an equivalent obligation that is based on the law on the Trade Register (Handelsregisterwet).
This obligation creates transparency of ownership of entities. It is an understatement to say that not everybody likes it. Organising ownership of a reportable entity through a FGR (open or closed) prevents the disclosure of ownership of reportable entities. With a FGR as owner of the shares the UBO of the underlying corporate entity does not have to be disclosed.
The arrangement known as Fonds voor gemene rekening (FGR) is a flexible tool for the transnational structuring of direct and indirect investment. In its ‘closed’ version, the FGR will be transparent for income tax purposes, and based on many Competent Authority Agreements it will entitle the participants in the closed fund to a direct refund of excess withholding tax. In the ‘open’ version of the fund, the arrangement is treated as a corporate vehicle for corporate income tax purposes. A special benefit in these days of transparency is that a FGR, whether open or closed, is not deemed to be a reportable entity for AML purposes, so that the owners of the underlying assets will not be disclosed.
Leo Neve LL.M Owner & Managing Partner