Listed or regulated investment institutions must meet the following shareholders requirements for qualification as FBI: (i) no legal entity which is subject to tax on profits holds, alone or together with related entities, 45% or more of the total outstanding shares of the institution; and (ii) no individual holds an interest of 25% or more in the institution. Other (non-regulated) investment institutions must meet the following stricter requirements: (i) at least 75% of the total outstanding shares must be held by individuals or entities which are not subject to tax on profits or are exempt or other FBIs; and (ii) no individual holds a substantial interest, which typically is a 5% or more equity interest.
In practice, questions were raised on how to apply these requirements to structures where the legal ownership of the shares in an investment institution is held by an entity on behalf of a group of individuals, e.g., shares held by an insurer on behalf of its policy holders pursuant to unit-linked products. In this respect, reference was made to the parliamentary history where it was stated that, subject to strict requirements, the legal owner could be disregarded for purposes of the shareholders requirements if it held no or a very small economic interest in the shares itself. In response to these questions, the Dutch State Secretary of Finance confirmed his view in the amended resolution. His view is that the legal owner of the shares in the FBI will not be disregarded unless that owner has no beneficial interest in the shares whatsoever. In addition, the shareholders requirements must also be satisfied in respect of entities or persons holding part but not all of the economic interest in the shares in the investment institution. No guidance is provided on the grandfathering of current FBI structures.
It is of the essence that FBIs analyse the implications of these views and consider restructuring opportunities. Non-satisfaction of the shareholder requirements could result in a loss of the FBI status and the taxation of the investment profits at the ordinary Dutch corporate income tax rates. One of the alternative structuring opportunities is that the FBI or the manager of the FBI establishes one or more tax transparent investment vehicles such as a Dutch fund for joint account (FGR). If and to the extent that investments by interested parties – for example, insurers investing on behalf of the holders of their unit-linked products – would cause issues with the shareholder requirements, these investments will not be held through the FBI but directly through the tax transparent investment vehicle. This preserves to the extent possible the benefits of holding investments through an FBI – mainly the 0% Dutch corporate income tax rate and treaty application – while complying with the shareholder requirements as interpreted by the State Secretary of Finance.
The distribution requirement entails that an FBI must distribute its adjusted profits on a pro rata basis within eight months following the end of the relevant financial year. The Dutch State Secretary of Finance already allows certain deviations from the pro rata requirement including for the creation of one or more sub funds within the same entity and the creation of different share classes. See our Legal alert dated 10 March 2014. The amended resolution further increases flexibility. While the previous resolution only allowed creation of different share classes for specific purposes – certain differences in management fees, marketing costs or currency – the amended resolution does not limit the creation of share classes to specific purposes. The creation of share classes is subject to the following conditions:
- the investment institution keeps track of the contributions to the reinvestment and the rounding-off reserves on a per share class basis;
- the exemption from Dutch dividend withholding tax for distributions from the reinvestment reserve will be applied in accordance with item (i) above;
- the shareholder requirements will be applied on an overall basis, i.e. on a fund basis and in case of a sub fund, also on a per sub fund basis, rather than a per share class basis; and
- the use of different classes of shares is not predominantly aimed at avoiding Dutch dividend withholding tax.
Dividend withholding tax
Dutch dividend withholding tax is due on distributions by an FBI subject to relief based on Dutch domestic law or tax treaties. However, Dutch dividend withholding tax due by the FBI may be reduced by Dutch and foreign withholding tax levied on dividends or interest payments received by the FBI subject to certain limitations. The new resolution allows investment institutions with multiple sub funds or share classes to determine the reduction on a per sub fund or per share class basis rather than on an overall basis. This is subject to the investment institution accepting in writing the application of the reduction on a per sub fund or per share class basis.