The Netherlands and Switzerland sign agreements providing tax certainty for funds and investors

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1 17 June 2016 Global Tax Alert The Netherlands and Switzerland sign agreements providing tax certainty for funds and investors EY Global Tax Alert Library Access both online and pdf versions of all EY Global Tax Alerts. Copy into your web browser: Executive summary On 8 June 2016, the Dutch Government issued a press release stating that two competent authorities agreements (the Agreements) have been signed with Switzerland regarding the application of the Netherlands Switzerland double tax treaty (the Tax Treaty). The first agreement relates to the tax treaty entitlement of the Dutch fiscal investment institution regime, or in Dutch fiscale beleggingsinstelling (FBI), 1 the Swiss Fonds Commun de Placement (FCP) and the Swiss Société d Investissement à Capital Variable (SICAV). The second agreement relates the Dutch closed fund for joint account, or in Dutch fonds voor gemene rekening (FGR) and the Swiss limited partnership for collective capital investment (LP). In light of recent international tax discussions that take place at the level of the Organisation for Economic Co-operation and Development (OECD), more specifically the Base Erosion and Profit Shifting (BEPS) project, about the tax treaty entitlement of so-called collective investment vehicles (CIVs), 2 this clarification provides certainty to funds and investors. Especially as several CIVs, also CIVs located in other countries, experience difficulties in obtaining reclaims of Swiss withholding tax on investments. It seems that the Netherlands and Switzerland are the frontrunners in this discussion by entering into such

2 2 Global Tax Alert an agreement on the treaty entitlement of the FBI, FCP and SICAV. The Agreements furthermore demonstrate the focus and efforts of the Dutch Government to further strengthen the position of the Netherlands as the location within the European Union (EU) for locating asset pooling investment vehicles in the form of tax opaque or tax transparent funds. Detailed discussion FBI/FCP/SICAV Agreement In the Agreement reference is made to issues raised in the OECD Commentary to the OECD Model Tax Convention and the tax treaty entitlement of CIVs. The Dutch and Swiss authorities agree that in principle the tax treaty entitlement of CIVs should be available in the case of investments through CIVs. However, the entitlement to benefits should be limited if these benefits would not have been available through a direct investment. Therefore, it is agreed that if more than 95% of the invested capital of an FBI, FCP or SICAV is contributed by tax treaty residents of the country in which the entity is established, the investment vehicle can claim the benefits of the Tax Treaty with regard to dividend and interest income derived from the other country. The Tax Treaty provides for a reduced withholding tax rate of 15% for shareholdings of less than 10%. An exemption of the dividend withholding tax rate should in principle be applicable for shareholdings of 10% or more. In case less than 95% of the invested capital is contributed by Tax Treaty residents, the Tax Treaty benefits will be applied pro rata for the percentage of relevant Tax Treaty residents. Notwithstanding this, for the portion third country tax residents invest in the investment vehicles, tax treaty benefits of the treaty between that third country and the Netherlands or Switzerland can be claimed. Currently administrative procedures must be developed to apply the rules in practice. It is expected that these will focus on the administrative procedures and controls that will be required by the Dutch and Swiss authorities to be able to make a refund claim on behalf of the third country investors. Finally, the investment vehicle, or its authorized representative should indicate based on data established at the due date of the withholding tax or at least once every year, the percentage of invested capital of the investment vehicle beneficially owned by Tax Treaty residents. FGR/LP Agreement As a result of the Agreement, if an FGR qualifies as tax transparent based on Dutch tax law (also referred to as a closed FGR ), the Swiss authorities will follow this classification for domestic and Tax Treaty purposes. In case a closed FGR is structured as an umbrella fund, it will also be regarded as tax transparent. The same applies with regard to an LP. As a result of the tax transparency, all income and gains derived through a closed FGR or LP must be allocated to the investors in proportion to their participations in the vehicle. It is agreed that if more than 95% of the invested capital of a closed FGR or LP is contributed by tax treaty residents of the country in which the entity is established, the entity, represented by its fund manager or its depository, may claim the benefits of the Tax Treaty or a third country tax treaty to which the Netherlands or Switzerland is a party and that is applicable to those investors on behalf of those investors in the closed FGR or LP. The Agreement furthermore describes certain procedures that should be taken into account. Effective date The Agreements were signed on 14 March For the Agreement that relates to the FBI, the FCP and SICAV, it is effective for all outstanding and future withholding tax reclaims. For the Agreement that relates to the closed FGR and LP, it is effective for withholding tax reclaims as of that date. Impact for the Netherlands The first Agreement provides certainty on the treaty eligibility of the FBI and its investors. Moreover, it not only provides guidelines for FBIs that have outstanding reclaims of Swiss withholding tax on how to effectuate their claim, but also for future claims. It is expected that the Swiss Government will come out with administrative procedures and controls on how an FBI can make a refund claim on behalf of the third country investors. As a result, the Agreement further increases the attractiveness of the Dutch FBI as, for instance, an equity index tracker fund for the EU retail market. Especially, if the FBI is regulated under the European framework for UCITS, 3 it can be easily marketed to retail investors throughout the EU.

3 Global Tax Alert 3 The second Agreement provides an important clearance about the tax transparent treatment of a closed FGR by the Swiss authorities. Currently, the Netherlands has also entered into a similar agreement with Canada, Denmark, Norway, Sweden, the UK and the US. There are furthermore several other countries that recognize the tax transparency of a closed FGR for withholding tax purposes either based on domestic law or via a hybrid entity clause in the relevant double tax treaty. A closed FGR is commonly used as an asset pooling investment vehicle for Dutch and foreign pension funds and other institutional investors. Also considering the fact that the Netherlands is home to the largest institutional investors in the EU, 4 having a highly educated workforce that are almost all fluent in English, and its central location with an outstanding connectivity to the rest of the EU, 5 the Netherlands is regarded one of the most attractive locations for centralizing international asset pooling activities. Endnotes 1. The tax concept of the FBI is that it is subject to Dutch corporate income tax, but at a rate of 0% provided that the FBI distributes all of its current income as a dividend within eight months from fiscal year-end. The balance of realized capital gains and capital losses can be added to a so-called reinvestment reserve which is not subject to this distribution requirement. In addition, the FII is required to meet certain statutory requirements. Furthermore, there is no need to be regulated under the European regulatory framework. 2. CIVs are defined by the OECD as funds that are widely-held, hold a diversified portfolio of securities and are subject to investor-protection legislation in the country in which they are established. This definition generally includes regulated investment funds such as UCITS or Mutual Funds. 3. Undertakings for Collective Investment in Transferable Securities. 4. Based on the 2014 Investment & Pensions Europe data, there are three Dutch pension funds within top 10 EU pension funds by assets, and two Dutch insurance companies within top 10 EU insurance companies by investment portfolio. 5. The Netherlands is ranked as the top-ranked country in terms of overall global connected on DHL s Global Connectedness Index 2014.

4 4 Global Tax Alert For additional information with respect to this Alert, please contact the following: Ernst & Young Belastingadviseurs LLP, Financial Services, Amsterdam Arjan van Oostrom Ton Daniels Silvain Niekel Ernst & Young LLP, Belgium-Netherlands Tax Desk, New York Dirk-Jan Sloof Ernst & Young LLP, EMEIA Financial Services Tax Desk, New York Philip Mac-Lean

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