Investment funds in the Netherlands

WHY THE NETHERLANDS?

The Netherlands is situated in northwest Europe. It combines a high income per capita with fairly even income distribution and is one of the most open and outward-looking countries in the world.

The Netherlands owes its strong economic performance in large part to its advanced transport infrastructure and its highly developed internet and IT infrastructure, which makes it an excellent gateway to Europe for businesses from abroad.

Globally, the Netherlands is well-known for being one of the premier locations for international business operations. Important factors that contribute to this reputation include, among others:
• an extremely stable political and economic climate;
• excellent financial, operational and technical infrastructure,
• an exceptional number of bilateral tax treaties, low corporate tax rate and availability of favorable tax incentives;
• a positive approach taken by successive governments and the open-minded, dialogue-based attitude of the tax authorities; and
• a highly educated, flexible and multilingual workforce.

The Netherlands has positioned itself as a preferred location for investment funds. The Dutch government recognizes the importance of the financial services industry and has shown openness for initiatives to smooth out unnecessary obstacles.

The Dutch legal, tax and regulatory framework is very advantageous for structuring investment funds and there has been a steady increase in fund sponsors and asset managers setting up their fund structure in the Netherlands.

REGULATORY FRAMEWORK

Regulated funds in the Netherlands are either “UCITS” (Undertakings for Collective Investment in Transferable Securities) or “AIFs” (Alternative Investment Funds).
UCITS are based on a set of European Union directives that aim to allow collective investment schemes to operate freely throughout the EU based on a single authorization (”passport”) from one member state. UCITS must comply with strict investment rules and are geared towards retail investors.
The Alternative Investment Fund Managers Directive (“AIFMD”) is a European Union directive governing the regulation of alternative investment fund managers (“AIFMs”) operating in the EU. The AIFMD regulates EU fund managers that manage alternative investment funds (“AIFs”), whether open-ended (hedge funds) or closed-ended(private equity funds ).

Under AIFMD, as implemented in the Netherlands, different rules apply for:

• AIF managers domiciled in the Netherlands (“Dutch AIF manager”);
• AIF managers domiciled within the EU (but outside the Netherlands); and
• AIF managers domiciled outside the EU

AIF managers domiciled in the Netherlands

License requirement
A Dutch AIF manager wishing to manage an AIF based in the Netherlands, or offering an AIF in the Netherlands, needs to obtain a license from the Authority for the Financial Markets (“Autoriteit Financiële Markten”, or “AFM”). The Dutch AIF manager will then become subject to ongoing regulatory supervision by the AFM.

A Dutch AIF manager, who has obtained a license from the AFM, may also market or manage an AIF in another EU member state. This is referred to as the pass porting regime, whereby it is not necessary to obtain a license in another EU member state. The only requirement is that the AFM is notified of the Dutch AIF manager’s wish to offer an AIF to investors in another EU member state. The pass porting regime may only be used to offer an AIF to professional investors. In case additional requirements (known as the” top-up retail rules”) are met by the licensed AIFM it is allowed to market to non-professional investors in the Netherlands.

When operating under the license regime, special requirements will apply to the organization and procedures of the Dutch AIFM and, amongst others, an AIFMD depositary will have to be appointed. Moreover, all fund agreements must comply with the requirements imposed under the Dutch Financial Supervision Act.

Exemption (“Registration regime” or “Light regime”)
An exemption from the licensing requirement for managing or offering an AIF in the Netherlands exists for managers whose overall assets under management including leverage (in the AIF, but also in other funds managed by it) do not exceed a threshold of:

• EUR 100 million; or
• EUR 500 million, in the case of AIFs that are not leveraged and have no redemption rights exercisable during a period of five years from the date of initial investment in the relevant AIF;

whereas, at the same time:
participations are either offered to less than 150 investors or with a minimum amount of EUR 100,000;.
or:
participations are only offered to professional investors.

Dutch AIF managers that fall within the scope of this exemption are only subject to certain registration and reporting obligations. If the AIF offers to professional investors (making use of the second option above) it must include a banner in a prescribed form in marketing materials (including websites).

With regards to the application in case of a foreign manager, a management company should be incorporated in the Netherlands which will act as the Dutch AIF manager. This management company will need to have a certain degree of substance in the Netherlands.

The registration regime may be attractive for AIF managers, due to its flexibility. In addition, the registration procedure is efficient and therefore relatively cost efficient. On the other hand, an AIF manager making use of the registration regime, will not be able to offer outside the Netherlands unless it follows the prescriptions of the local private placement procedure.

Opt-in
In order to benefit from the possibility of the pass porting regime described above, by which a Dutch AIF manager may offer the AIF’s participations in the rest of the EU,, a manager qualifying as exempt from licensing may still choose to voluntarily opt for a license. In such case, the manager will have to comply with all laws and regulations applicable to an AIFM. A license can also be desirable to attract institutional investors that are prohibited from investing in non-licensed investment funds; or

AIF managers domiciled in the EU
An AIF manager with its seat in the EU (but outside the Netherlands) is required to obtain a license in its home state and subsequently passport to the Netherlands in order to offer participations in the Netherlands or manage an AIF domiciled in the Netherlands.

AIF managers outside the EU
In principal an AIF manager with its seat outside the EU will need to apply for a license before it can manage an AIF based in the Netherlands or offer an AIF in the Netherlands. An exemption from the license requirement is available for:

– AIF managers in certain designated jurisdictions (the United States of America, Jersey and Guernsey); or
– AIF managers established outside the territory of the EU who are able to provide the regulatory authority in the Netherlands with an attestation of the competent authority of the AIF manager in which it confirms that it is able to effectively comply with the cooperation agreement between that competent authority and the AFM (the so called “Third Country Regime”).

In both cases, the AIF manager will need to follow a notification procedure with the AFM. In case an AIF manager makes use of the Third Country Regime it can only offer to “qualified investors”.

INVESTMENT FUND VEHICLES

Different legal structures are available in the Netherlands and investment funds can be established either as a corporate entity (with) legal personality or as a non- corporate entity.

Dutch entities (corporate or non-corporate) that are most frequently used as an investment fund are:

– fund for joint account (fonds voor gemene rekening) (“FGR”);
– cooperative (“coöperatie”) (“Coop””);
– dutch limited (liability)partnership (commanditaire vennootschap) (“CV”) with or without legal personality

A private limited liability company (besloten vennootschap met beperkte aansprakelijkheid (“BV”) is less suitable to be used for open-ended fund structures given the obligatory restrictions on the transfer of its shares. However, the BV is frequently used in private equity structures.

FGR
The FGR is a contractual vehicle created by way of an agreement (often referred to as “Terms and Conditions”) between the manager (“Manager”), the investors (“Participants”) and the legal owner. The latter is usually a Dutch foundation solely incorporated for holding legal title to the FGR’s assets and thus to keep all assets segregated from those of the Manager.

The Terms and Conditions oblige the Manager to invest and manage the assets for the joint account of the Participants. Usually, the Terms and Conditions are supplemented by an information memorandum outlining the fund’s investment strategy and restrictions, subscription and redemption terms, the costs associated with running the fund, its service providers and other matters that are of key importance to investors.

As a pooled investment vehicle, the FGR offers a great amount of flexibility. The FGR is widely used for both institutional and retail funds. The FGR can be set up as a open-ended or a closed-ended fund and can be structured as an umbrella fund. Investors in an FGR will purchase participations.

The main reasons why an FGR is attractive are:
1. its set-up is usually very quickly and cost-efficient since a Dutch civil-law notary will not have to be involved.
2. since the FGR is not dealt with in Dutch corporate law there are no ongoing corporate obligations; An FGR can be structured as either a tax transparent or a non-tax transparent entity for Dutch tax purposes

Coop
The Dutch Cooperative or Coop can be incorporated as a legal entity with or without limited liability for its participants. A Coop issues membership rights and an account is created for each member/ investor respectively. Profit rights and voting rights can be attributed to the members in different ways, and this can change along the way, without going to the notary.

The law on cooperatives as a legal entity in the Netherlands is very short. There are only few functional limitations and corporate obligations

CV
A CV is generally used for investments in real estate and privately held companies. ,A CV is a contract between one or more general partners and one or more limited partners. While a CV agreement can be concluded verbally, in practice a CV is typically set up by means of written agreement (contract), which is preferably executed as a notarial deed by a Dutch civil-law notary. In international structures, it is common that the CV only has one general partner. This general partner is typically a corporate entity, usually a Dutch foundation.

INVESTMENTS

Under Dutch corporate and regulatory laws (except where it implemented UCITS), there are basically no pre-set prohibitions or limitations on the use of leverage, nor on the types of financial instruments or geographical markets that a fund may invest in, although the AFM will require certain safeguards for investors. In particular, the AFM will require that the fund’s investments will match its liquidity profile.

TAXATION

If your fund is structured as a tax transparent entity, it is not subject to corporate income and dividend withholding tax in the Netherlands.
In the Netherlands is also possible to structure your fund) as a non-tax transparent vehicle, or to arrange for the structure to qualify either as an Exempt Investment Institution (“VBI”) or as a Fiscal Investment Institution (“FBI”).

VBIs’ are fully exempt from Dutch corporate income and dividend withholding tax. However, due to its tax exempt status, the VBI lacks treaty protection.

In practice, many investment funds may qualify for the VBI status. For private equity funds this is less evident: their activities generally have an ‘enterprise’ rather than an ‘investment’ character and also the open-ended test will be difficult to meet.

FBI’s are subject to the Dutch corporate income tax, but at a rate of zero percent. An FBI benefits from tax treaty protection and the scope of activities that it may perform is broader. To qualify as an FBI, more requirements have to be met, the main one being that all of the fund’s net current income should be distributed within 8 months after the fiscal year-end.

KEY SERVICE PROVIDERS

The following service providers will typically be contracted for Dutch funds. Some of them are to be appointed compulsorily in case the fund is regulated (the manager is licensed under AIFMD or UCITS). :

Administrator
The administrator will typically calculate and determine the net asset value of the fund, process subscriptions and redemptions of the fund, act as the registrar and transfer agent, keep various records of the fund and undertake anti-money laundering procedures on behalf of the fund (manager).

Auditor
All regulated funds based in the Netherlands must appoint an auditor and will need to file audited financial statements with the AFM.
All of the main accounting firms have offices in the Netherlands. The bulk of the preparatory work will invariably be done by the audit firm in cooperation with the administrator

Bank
A fund will need to open a bank account, which will serve to collect subscription amounts from investors, to pay for fees and expenses and to disburse redemption proceeds to investors redeeming from the fund.

Prime broker
Depending on the financial instruments and the geographical markets in which the fund invests, it will open one or more broker accounts in which it will hold its non-cash assets. Specialist brokers may also be engaged.

AIFM Depositary
Under AIFMD and UCITS, each fund is obliged to have a depositary. A depositary will ensure that the assets are held in segregated accounts in the name of the fund, will monitor the cash flows of the fund and will ensure that the fund manager adheres to the fund’s investment restrictions as set out in the offering documents.
For a fund that falls within the scope of the aforementioned ‘registration regime’, the appointment of a depositary is not required.

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