EU Fund Managers: Structuring To Attract Dutch Investors To Luxembourg

EU fund managers often rely on a Luxembourg access point (Lux Fund) within their fund structure to cater to the preferences of investors across Europe. Dutch investors prefer that the Lux Fund is organised in a manner that avoids Dutch tax inefficiencies.

Dutch pension funds: Importance of tax transparency

For Dutch pension funds, in certain cases, it may be required that the Lux Fund qualifies as transparent for Dutch tax purposes to be entitled to an exemption from, or reduction of, withholding tax on income derived by the Lux Fund. That entitlement follows from tax treaties entered into by the Netherlands and the source jurisdictions. As Dutch pension funds are exempt from Dutch taxation, foreign taxes cannot be credited against their own tax base. Any foreign withholding tax would thus reduce their return on investment on a euro-for-euro basis.

Dutch taxable corporate investors: application of the Dutch participation exemption

On the other hand, for Dutch taxable corporate investors (among others family offices), it is typically most tax efficient to access the Lux Fund via a vehicle that is considered non-transparent for Dutch tax purposes (Blocker) as that may facilitate the application of the Dutch participation exemption (PPX). The Blocker could for example be a feeder fund in the form of a Luxembourg partnership limited by shares (SCA), which secures tax neutrality under the Luxembourg RAIF regime.

However, if the Dutch taxable corporate investors were to invest directly in the Blocker, they would need to hold at least 5% in the Blocker as one of the conditions for the PPX. That threshold is usually challenging to meet, given the typically smaller ticket size of each investor. This threshold does not apply in the case of an investment in a Dutch cooperative (Coop), which makes the Coop an ideal pooling vehicle to access the Blocker. However, in order to secure that the Coop can apply the PPX to its investment in the Blocker, it must comply with the 5% minimum threshold. That threshold is often achievable now that the Dutch investors are pooled in the Coop.

In addition to that minimum ownership threshold, applicable at Coop level, it is generally also required that the majority of the (consolidated) assets of the Blocker consists of ‘good’ assets. Participations of at least 5% in other companies should be disregarded for this test and replaced by (a proportionate interest in) the underlying assets (all the way down the chain). On the other hand, participations of less than 5% in other companies are typically considered ‘bad’ assets, so should preferably be avoided as much as possible. A majority of good assets is typically manageable for direct private equity and secondary strategies, but more challenging in a fund-of-fund context. Not being able to offer PPX to Dutch investors impacts the competitiveness of the fund offering.

Importance of the Dutch tax classification rules

Considering the foregoing, the Dutch tax classification of the Lux Fund and the Blocker are very relevant for Dutch investors. Those rules have undergone changes and will be subject to further changes. These new rules should therefore be carefully navigated since a change in the Dutch tax classification of a Lux Fund (from non-transparent or transparent or vice versa) can have detrimental tax consequences for Dutch investors.

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