Investment funds play an important role in the Dutch economy. The Netherlands avails of investment firms that are focusing on a broad scale of investments both in and outside the Netherlands. This may be clarified by the Dutch economic and political stable climate, knowledge economy and attractive legal and tax system for fund structuring.
Generally speaking, Dutch private equity or venture capital funds are managed by firms that have a strong connection with the Netherlands. These funds may facilitate a tax-neutral investment for a variety of investors, including institutional investors, high-net worth individuals and family offices, both domestic as foreign. Its diverse investment opportunities and well-established market makes the Netherlands an attractive country to invest in.
Dutch private equity and venture capital fund structures
Main Dutch legal forms used for fund structuring
A fund structure should be determined on a case-by-case basis, whereby various factors as the type of investment and expected investor-base should be taken into account. The limited partnership (commanditaire vennootschap; CV) and the cooperative (coöperatie; Coop), a special form of association, are the most commonly used Dutch legal forms for private equity and venture capital funds. In addition to the fund entity, one or more domestic or foreign feeder entities may be established to accommodate certain specific structuring needs of investors.
The CV used as a fund entity
Dutch private equity and venture capital funds are often structured as a CV. A CV may have one or more limited and general partners. A CV does not have legal personality but provides limited liability to its limited partners. The general partner(s) have unlimited liability. Investors become limited partners of the CV and may not be vested with management authority to maintain their limited liability.
For Dutch direct tax purposes a CV may be structured as transparent or opaque. As a fund entity, a CV is typically structured as transparent. Consequently, all assets and liabilities of the CV and the management activities that are provided by the CV’s management entity towards the CV are allocated to its limited partners. Taking into account the substantial level of involvement of private equity and venture capital funds towards their portfolio companies, these activities are considered to constitute ‘business activities’ for Dutch tax purposes.
A direct investment in such fund CV is unsuitable for Dutch resident or non-Dutch resident individuals as income from the CV would qualify as business income that is taxed at the highest Dutch income tax rates.
The business activities of the CV constitute a Dutch permanent establishment for foreign investors to which the participations held by the CV are allocable. Income of this permanent establishment is in principle subject to corporate income tax. However, income from qualifying subsidiaries is fully exempt from corporate income tax if the participation exemption applies. If the portfolio companies of the fund are held by the CV directly, each investor should individually meet the requirements for application of the participation exemption. This means that generally an interest of at least 5% in each portfolio company is required on a see-though basis. As the non-applicability of the participation exemption would lead to a severe tax leakage, the fund should be structured in a way that the investors can apply the participation exemption. This may be achieved by pooling the interests of investors in a foreign feeder entity that is considered non-transparent from a Dutch tax perspective and transparent in its country of residence. In such case only the feeder entity must meet the threshold requirement to apply the participation exemption on the fund’s portfolio investments, and not each investor on an individual basis. An easier, pure domestic and cheaper way to achieve application of the participation exemption is by pooling the investments of the CV in a Coop. A benefit of using a Coop as a master holding company is that no percentage interest threshold applies on a membership interest in a Coop in order to apply the participation exemption. Consequently, by pooling the investments in a Coop, the (permanent establishments of the) investors may generally apply the participation exemption irrespective of the size of their investment in the fund.
Distributions by the Coop on so-called ‘qualifying membership rights’ (interests of at least 5%) are in principle subject to 15% dividend tax, but an exemption applies to distributions on interests to which the participation exemption applies. Therefore, generally no dividend tax will be due in this structure. Usually, a ruling from the Dutch tax authorities is obtained to confirm this position.
The Coop used as a fund entity
A Coop is increasingly used as a fund entity itself. In such case, investors become direct members of the Coop. The Coop has legal personality and may be set up with excluded liability for its members. The Coop, as a non-tax transparent entity, is normally subject to corporate income tax. However, the Coop’s investments will usually qualify for purposes of the participation exemption as a result of which income derived from these investments is effectively exempt. Distributions by a Coop used as fund entity in a typical private equity or venture capital structure should not be subject to dividend tax. A ruling from the Dutch tax authorities is often obtained to confirm this position.
Unlike the CV structure, a Coop fund is also suitable for private individuals. However, certain foreign corporate investors with an income tax avoidance motive are generally not allowed to participate under ruling policy. In practice, this hardly ever leads to problems.
Dutch consent requirements; uncommon but rarely an issue
To achieve transparency from a Dutch tax perspective, strict admission and transfer restrictions apply. With respect to funds that are set up as a CV, this entails that any admission of a limited partner to the CV or transfer of a limited partnership interest requires the prior consent of all partners. The definition of ‘transfer’ in this context is very broad. This seems to be a very burdensome rule, but consent does not have to be given actively and cannot be withheld unreasonably. If consent is requested but a partner does not respond, consent is deemed to be given once four weeks after the date of the request have lapsed. Although less strict, a somewhat similar rule applies to Coops based whereon a transfer of a membership interest is subject to the prior consent of all other members of the Coop. This rule follows from case law and ruling practice and relates to the Coops specific status for dividend tax purposes.
Practice learns that although these rule appears to be very strict and uncommon from an international point of view, they are rarely an issue.