Presentación hein vermeulen v26042012

'European regimes for collective investments. The Dutch perspective‘

Dr. Hein Vermeulen

Amsterdam Centre for Tax Law (ACTL) University of Amsterdam

26 April 2012

Bogotá, Colombia Instituto Colombiano de Derecho Tributarion (ICDT)

Agenda

• The Dutch tax regime in general

• Dutch solutions

– Fiscally transparent investment structures

– Special regimes for Collective Investment Vehicles

• The Fiscal Investment Institution

• The Exempt Investment Institution

• Taxable structures

• Comparative law overview

The Dutch tax regime in general

• Three taxes are relevant – Personal income tax

• Taxation of private individuals • All income: business income, labour income, investment income

– Corporate income tax • Taxation of legal entities • All income: business income and investment income

– Dividend withholding tax • Taxation of shareholder to be withheld by legal entity • Serves a prelevy for personal and corporate income tax • In the end, credited against personal and corporate income tax or refunded

• No taxation at source for interest and royalties • Classical system

The classical system

Private individual Personal income tax at level of private individual

Stock Company

Real estate

Private individual

Legal entity

Personal income tax at level of private individual

Corporate income tax at level of corporate entity

No deduction from tax base for dividend distribution

Stock Company

Real estate

Stock or bonds

Stock or bonds

The Dutch tax regime in general

• The general nature of classical system leads to

• One layer of taxation if investment is individual

– Personal income tax

• Two layers of taxation if investment is collective

– Corporate income tax

– Dividend withholding tax is credited or refunded

• How to cope with two layers of taxation?

Agenda


• Dutch solutions







The Dutch approach

• Collective investment is beneficial for – Governments (short money made long) – Citizens (economies of scales, risk spreading, expertise) – The financial system (stability)

• Classical system leads to two layers of tax • Principle of tax neutrality at collective investment

– Put collective investment at par with individual investment – Taxation may not hinder collective investment

• In essence two ways – Eliminate tax at level of the CIV – Eliminate tax at level of the investor

The Dutch approach

Co

CIV

Investor level

CIV level

Investment level

Corporate taxation at level of CIV is eliminated, so

only one layer of tax remains

at the level of the investor

Real estate Stock or bonds

The Dutch approach

• Taxation may not hinder collective investment

• Principle of tax neutrality – Taxation of the individual investors is equal to the taxation

of a collective investment to which they would have been subjected had they invested directly in the investments of the Collective Investment Vehicle

• European Commission – ‘… this mechanism puts the tax treatment of an

investment in a [Collective Investment Vehicle, HV] at par with the taxation of direct investments by individuals in …’

• Thus elimination of tax at level of the CIV

The Dutch approach

• Elimination of tax at level of the CIV





• Aim: fiscal neutrality

Agenda


• Dutch solutions







Fiscally transparent structures

• CIV is not a corporate taxpayer – CIV is neglected, disregarded

• Look-through, conduit, fiscally transparent

– The income and the equity (both assets and liabilities) of the CIV are automatically allocated pro rata – on basis of their interest – to participating investors in the CIV without the need for a distribution declaration (or decision) by the CIV.

• Hence, income and property taxed in hands of investors

– Automatically, fiscal neutrality – Fiscal transparency results in no additional layer of tax at

the level of the CIV • As such, fiscally transparent structures functions well as a CIV


• Three main consequences – taxation of the investors is equal to the taxation to

which they would have been subjected had they invested directly in the investments of the fiscally transparent CIV

– Type of income is not altered • No conversion of a type of income into another type of

income

– Investors are not bothered with each other’s tax status

• e.g. pension funds can align with insurance companies

Fiscally transparent structure

Co

CIV

Investor level

CIV level

Investment level

CIV is disregarded for tax purposes

Real estate

Investors receive dividends, interest income

or rental income directly

Stock or bonds


• Three Dutch vehicles – Common partnership – Limited partnership – Mutual fund (or fund for joint account)

• Common partnership – Contractual arrangement – Investors are partners – Co-ownership – External manager – Transparency through consent partners upon transfer and

admittance new partners – Not suitable for large number of investors – Suitable for active investments


• Limited partnership – Contractual arrangement

– Investors are limited partners

– Manager is general partner

– Co-ownership

– Transparency through consent partners upon transfer and admittance new partners

– Not suitable for large number of investors

– Suitable for active investments


• Mutual fund (or fund for joint account) – Contractual arrangement – Investors are participants – Manager is external – Transparency through

• Consent partners upon transfer and admittance new partners

• Redemption clause

– Suitable for large number of investors • Retail and institutional

– Suitable for passive investments


• Contractual arrangement – No legal personality

• Need for a custodian (‘safekeeper’) – To hold legal title of investments on behalf and

account for the investors

– ‘bankruptcy remote vehicle’

• Need for an external manager – To manage the investments of the CIV

• Unless LP, where GP is manager

No legal personality

Co

CIV

Investor level

CIV level

Investment level

Real estate

Manager

Economic ownership

Legal ownership

(legal title)

Stock or bonds

Custodian


• Conclusions fiscally transparent structures – Are not corporate taxpayers – Disregarded – No conversion of income – Absence of dividend withholding tax – No requirement on investment level – Absence of legal personality

• Thus legal flexibility

– May be an administrative hassle – No tax treaty benefits, but Dutch Mutual Fund may act as an

agent • Cf. § 6.28 Commentary to OECD MTC • Cf. § 2.2.1 and 2.4 Dutch Memorandum on Tax Treaty Policy 2011

Agenda


• Dutch solutions – Fiscally transparent investment structures






Fiscal Investment Institution

• Fiscal Investment Institution = FBI

• Part of Dutch law since 1970 – Successor of 1940’s CIV regime

• Money needed after WWII

– Oldest CIV regime in Europe

• Fiscal Investment Institution in short – Corporate taxpayer

– Corporate tax rate of 0%

– Requirements


• Requirements, many! • Legal form (public limited liability company,

private limited liability company, MF) – Less legal flexibility

• Strict shareholder requirements – Either listed on a stock exchange or not

• Distribution requirement – Fiscal Investment Institution must distribute its profits

promptly after year end • More or less immediate taxation in the hands of the

investors


• Gearing requirement

– Forbids excessive debt at level of CIV

• 60% tax book value real estate

• 20% other investments

• Activity requirement

– Forbids to engage in a trade or a business

• CIV regime only supports investment activities – Based on principle to treat individual investment equally with

collective investment


• Main consequences

– taxation of the investors is ‘equal’ to the taxation to which they would have been subjected had they invested directly in the investments of the Fiscal Investment Institution

– Type of income is altered

• Conversion of all income into dividend income and capital gains/losses on shares in Fiscal Investment Institution


Co

CIV

Investor level

CIV level

Investment level

Fiscal Investment Institution = corporate taxpayer

Corporate tax rate = 0%

All income is converted into profit of the Fiscal

Investment Institution

Real estate

Investors receive dividend income and

capital gains/losses on their interest in the


Stock or bonds

Dividend withholding tax


• Conversion of income

– Dividend income and capital gains/losses on stocks at investment level is profit at CIV level

– Interest income and capital gains/losses on bonds at investment level is profit at CIV level

– Rental income and capital gains/losses on real estate at investment level is profit at CIV level

• This converted income may receive different tax treatment than the ‘original’ income

Fiscal Investment Institution can have legal personality

Co

CIV

Investor level

CIV level

Investment level

Real estate

Legal ownership (legal title)

and economic ownership at the level

of the CIV, if organized as a company

NV (public limited liability company) or

BV (private limited liability company)

Stock or bonds


• Upon dividend distribution Fiscal Investment Institution must withhold Dutch dividend withholding tax

– Credit against personal income tax or corporate income tax

– Refund for Dutch exempt entities (e.g. pension funds)

• No tax leakage


• Conclusions Fiscal Investment Institution – Corporate taxpayer

– Dividend withholding tax

• Regime for Fiscal Investment Institution provides for tax neutrality – Between individual investment

– And collective investment

– Suitable for large number of (retail, institutional) investors

– Well appreciated internationally • Cf. § 6.12 Commentary to OECD MTC

• Cf. § 2.2.1 Dutch Memorandum on Tax Treaty Policy 2011

Agenda


• Dutch solutions – Fiscally transparent investment structures






Exempt Investment Institution

• Fiscal Investment Institution = VBI

• Relatively new: August 2007

• Designed to compete with other European fund regimes

– Luxembourg and Ireland

– Copycat of the Luxembourg SICAV

– Background need for CIV regime without distribution requirement


• Not subject to Dutch corporate income tax

– Hence its name Exempt Investment Institution

• Its investors are not subject to Dutch dividend withholding tax

• This is too good to be true, so there must be a catch?


• Requirements, not so many! – No distribution requirement, no gearing requirement,

no dividend withholding tax

• Transferrable Securities requirement – Stock, securities, bonds, options, swaps, derivatives

• Risk spreading requirement • Investment Institution

– Dutch Financial Markets Supervision Act

• Variable capital requirement – Investors may ask for refund of their capital invested


• Main consequences

– Exempt from corporate income tax

– Taxation of the investors is ‘equal’ to the taxation to which they would have been subjected had they invested directly in the investments of the Exempt Investment Institution

– Type of income is altered

• Conversion of all income into dividend income and capital gains/losses on shares in Exempt Investment Institution

• Note the difference with transparent vehicles


Co

CIV

Investor level

CIV level

Investment level

Exempt Investment Institution ≠ corporate taxpayer

Exempt from corporate tax rate

All income is still converted into (commercial) profit

of the Fiscal Investment Institution

Real estate ≠ transferable security




Stock or bonds

Exempt Investment Institution may only invest in

Transferable Securities,

(stock, bonds, futures, options et cetera) but not

in Dutch real estate X


• Conversion of income

– Dividend income and capital gains/losses on stocks at investment level is profit at CIV level

– Interest income and capital gains/losses on bonds at investment level is profit at CIV level

• This converted income may receive different tax treatment than the ‘original’ income


• Is Exempt Investment Institution too good to be true?

• The catch is twofold

– Exempt Investment Institution cannot credit any (e.g. dividend) withholding tax suffered on its investments

– Exempt Investment Institution is not recognized as person under Double Tax Treaties

• Cf. § 6.12 Commentary to OECD MTC

• Cf. § 2.2.1 Dutch Memorandum on Tax Treaty Policy 2011


• Conclusions Exempt Investment Institution – Not a Corporate taxpayer

• No credit availability for underlying source taxation • Not recognized as a person under Tax Treaties

– No Dividend withholding tax – Suitable for large number of investors

• Either listed or non-listed

– Not suitable for investments that attract WHT

• Regime for Exempt Investment Institution provides for tax neutrality – Between individual investment – And collective investment

Agenda


• Dutch solutions







Taxable structures

• Use of CIV regime is not mandatory – If requirements are met, CIV regime does not apply

automatically

• Why not use of the general tax system? • Disadvantages CIV regimes

– Activity requirements – Gearing restrictions – Asset allocation restrictions – Unavailability of tax facilities – Administrative hassle – Uncertainty treaty application

Taxable structures

• Solution is taxable structure • Coop-structure

– Coop is corporate entity with legal personality – Corporate taxpayer – In principle, not a taxable subject for Dutch dividend

withholding tax • Its distributions do not trigger Dutch dividend withholding tax

– Use of Dutch participation exemption to circumvent economic double taxation

– Income and capital gains from domestic or foreign shareholdings are not taxed in the Netherlands

– In the end no Dutch tax leakage at Fund (Coop-BV-combination) level

Institutional investor

Institutional investor

Taxable structure

Institutional investors

Sub

No Dutch dividend withholding tax

Use of participation exemption

Corporate tax entity

Sub Sub

BV

Coop

Corporate tax entity

Use of participation exemption NL

ROW

ROW

Agenda


• Dutch solutions







Comparative law overview

• European systems

• Generally, three types of CIV regimes

– Transparent structures

– Funds

• UCITS

– REITS

Comparative law overview

• Transparent structures: no CIT nor WHT

• All look like Dutch Mutual Fund – Lux FCP (fonds commun de placement)

• Subscription tax is levied

• Also French FCP and Belgian FCP

– Irish CCF (common contractual fund)

– UK unit trust

– German Sondervermögen

• Different techniques to create transparency

• No legal personality, externally managed

UCITS

• UCITS for retail market – Undertakings for Collective Investment in Transferable

Securities

• European law Directives since 1985 – To harmonize European market from a regulatory

point of view – In ‘parts’: now UCITS IV Directive

• License in Resident State • European passport for marketing in all other

Member States after notification • Investor protection

UCITS

• Open-end Collective Investment Vehicle – Investor is entitled to request redemption of his

interest in the Collective Investment Vehicle

• Requirements at fund level – Prospectus requirement

– Subject to supervision of Market Authority

• Requirements at investment level – Transferable Securities only

• Stock, securities, bonds, options, swaps, derivatives

– Risk spreading, limits on seize of investment

Luxembourg SICAV

• SICAV = Société d’investissement à capital variable – i.e. investment company with variable capital

• No corporate taxpayer – Annual ‘taxe d’abonnement’

• Payable on a quarterly basis and assessed on its net asset value at the end of each quarter

• No shareholder requirements

• Limited requirements on investment level

Luxembourg SICAV

• No withholding tax on dividends • No distribution requirement • Treaty eligible under several Tax Treaties

– Specifically negotiated by Lux Authorities • Cf. § 6.12 Commentary to OECD MTC • Cf. § 2.2.1 Dutch Memorandum on Tax Treaty Policy 2011

• Recognised by foreign Market Authorities – Hong Kong, et cetera

• Combination of regulatory law and tax law is essential – Arbitrage in respect of residency of CIV

Luxembourg SICAV

Co

CIV

Investor level

CIV level

Investment level

SICAV = exempt from corporate tax rate


of the SICAV



SICAV

Stock or bonds

SICAV has no requirements for investments

Irish UCITS

• Undertakings for Collective Investment in Transferable Securities

• Various legal forms

– Trust, partnership or company

• No corporate taxpayer

– Only exit tax for Irish investors

• No distribution requirement

Irish UCITS

• Dividend withholding tax

• Treaty eligible under several Tax Treaties

– Dependent on legal form

• Recognised by foreign Market Authorities

• Requirements on investment level equal to UCITS Directive

Irish UCITS

Co

CIV

Investor level

CIV level

Investment level

Irish UCITS = exempt from corporate tax rate


of the Irish UCITS



Irish UCITS

Stock or bonds

Irish UCITS may only invest in

Transferable Securities as listed in UCITS

Directive

Dutch UCITS

• Use of – Dutch Fiscal Investment Institution

– Dutch Exempt Investment Institution

• Distribution requirement depends on choice of CIV

• Tax treaty status depends on choice of CIV

• Key is recognition by foreign Fin’l Market Authorities – Especially outside Europe

• Visits to other country by Dutch Financial Market Authority

• Combination of regulatory law and tax law is essential

REITS

• Special fund regimes for investments in real estate

• Dutch REIT since 1970

• UK REIT since 2007

• German REIT since 2007

• French REIT (SIIC) since 2003

• Italian REIT (SIIQ) since 2007

• Spanish REIT (SOCIMI) since 2009

REITS

• Real estate is a special asset class

• Different solutions chosen

– Housing only, rental income only, only listed companies eligible, etc.

• Principle of source state taxation

– i.e. Source State has unlimited taxing right

• This functions well in domestic context

• Problems arise in international context

REITS in an international context

Residence State

Source State

Which CS has taxing right? Co

'European regimes for collective investments. The Dutch perspective‘

Dr. Hein Vermeulen

Amsterdam Centre for Tax Law (ACTL) University of Amsterdam

26 April 2012

Bogotá, Colombia Instituto Colombiano de Derecho Tributarion (ICDT)

Presentación hein vermeulen v26042012

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