The Dutch Government is introducing changes for mutual funds and Exempt Investment Institutions (EII) taking effect from 1 January 2025, with a transitional period for 2024. The draft bill, proposed by the Dutch Ministry of Finance on 19 September 2023 (Budget Day 2023), introduces significant changes for such investment vehicles. For instance, from 2025, a fiscal investment institution (FII) may no longer directly invest in property, and the EII regime will no longer be available for the investment of private (family) capital.

On 1 January 2024, a conditional exemption from real estate transfer tax was implemented for acquisitions related to a restructuring directly associated with the prohibition of direct investments in real estate for FIIs. The disallowance would take effect as of the following year.

The main purpose of the amendment is to prevent tax voidance and abuse by certain types of investment funds and partnerships, as well as to mitigate qualification mismatches between domestic and foreign investment institutions of this type.

This article will explain the implications of these changes for pension and investment funds in the Netherlands and how this shift will impact foreign institutional investors operating in the Netherlands.

New Rules for Dutch Fiscal Investment Institutions

For Dutch Fiscal Investment Institutions (in Dutch ‘fiscale beleggingsinstellingen’ or FBIs) that directly invest in Dutch real estate, the change of law means that they will lose their tax-exempt status and become subject to the regular corporate income tax rate of 25.8% for profits exceeding EUR 200,000 or 19% for revenues below this threshold.

This will increase their tax burden and reduce their returns for their investors. However, FBIs that indirectly invest in regularly taxed real estate entities will still be able to apply the 0% tax rate, as long as they meet the other requirements for FBIs, such as the shareholder and distribution requirements.

Key Considerations for Mutual Funds (FGR)

Mutual funds (FGR) will only be considered non-transparent funds if they qualify as funds under the Dutch Financial Supervision Act, which implements the EU Alternative Investment Fund Managers Directive (AIFMD). The purpose is to bring the transparency rules for the Dutch Mutual Funds more in line with international standards to mitigate hybrid mismatches. This means that FGRs not subject to the AIFMD, such as retail funds (a category of investment funds that are primarily funded by individual investors) or funds that fall under the de minimis exemption (i.e. small-scale funds), will be treated as transparent funds for tax purposes.

Changes for Dutch partnerships

For Dutch partnerships (commanditaire vennootschappen or CVs), the change of law means that they will be regarded as tax transparent irrespective of the transferability of their partnership interests. This will affect the tax treatment of partnerships that were previously considered non-transparent entities, such as open CVs or foreign partnerships that are comparable to open CVs. These partnerships will no longer benefit from certain tax advantages, such as the participation exemption or the interest and royalty withholding tax exemption. Instead, they will be taxed at the level of their partners, who may be subject to different tax rates and rules depending on their residence and status.

Transitional Rules

The temporary real estate transfer tax exemption allows transfer tax-neutral restructurings from Dutch Real Estate Investment Trusts (REITs) into tax transparent Mutual Funds exclusively during 2024. This real estate transfer tax exemption is intended to apply only to acquisitions of beneficial ownership (legal ownership is therefore excluded). Further restrictions are introduced on the entity disposing and the entity acquiring the economic ownership of real estate in connection with the reorganization.

Changes for Foreign Entities

The changes in the law may pose challenges for foreign investment institutions seeking qualification as objectively comparable to Dutch funds. Particularly impacted are those institutions directly investing in Dutch real estate or structured as non-transparent FGRs or partnerships. Such funds will lose access to the advantageous tax treatment afforded to Dutch FBIs, including the favorable 0% corporate income tax rate and the dividend withholding tax exemption.

The complexity is further heightened by the tax qualification methods applied to foreign entities. The legal form comparison method determines whether foreign entities are transparent or non-transparent based on an analogy with comparable Dutch legal forms. The new amendment aims to codify this method in various tax laws, along with the introduction of the fixed and symmetrical methods only applying to foreign entities with a legal form that is not comparable to a Dutch legal form.

Fixed Method

It designates an entity as a domestic taxpayer if it is incorporated under foreign law and established in the Netherlands.

Symmetrical Method

It deems an entity that is incorporated or set up under foreign law and established abroad as non-transparent if it is independently taxable in its home jurisdiction.

Dividend Stripping Measures

The 2024 Tax Plan includes fresh provisions aimed at preventing dividend stripping. These changes are important for individuals looking to offset withholding tax, request a refund, or obtain an exemption from dividend withholding tax. To qualify for these types of benefits, a taxpayer must be the rightful recipient of the dividend.

The initial step concerns the requirement of providing evidence. A taxpayer who requests a credit for withholding tax or a refund of withholding tax exceeding EUR 1,000 annually must demonstrate that they are the rightful owner. However, for corporate taxpayers seeking an exemption from dividend withholding tax (mainly applicable to intragroup dividends), there is no threshold of EUR 1,000 per year. As a result, the responsibility of presenting evidence always rests with the taxpayer claiming such an exemption. In terms of defining 'beneficial owner', the explanatory notes rely on guidance from the OECD Commentary and rulings by the Court of Justice of the EU.

Additionally, there are proposed adjustments to an existing regulation that currently states a taxpayer cannot be considered the beneficial owner if they were engaged in specific dividend-stripping transactions outlined by law. The proposal suggests taking into consideration transactions conducted by related entities and individuals to determine whether these qualify as dividend stripping. This measure is designed to prevent related parties from conducting transactions to bypass the rules on dividend stripping.

Finally, it has been recommended to establish a particular date in the law for shares traded on a stock exchange to determine dividend eligibility. The Ministry of Finance has proposed that this date should also be adopted for tax purposes and incorporated into Dutch tax legislation.

Future Challenges for Foreign Institutional Investors

In conclusion, the changes introduce additional challenges for foreign institutional investors seeking qualification as objectively comparable to Dutch funds. The loss of specific tax advantages for certain types of funds, coupled with the introduction of nuanced tax qualification methods, could make fulfilling the criteria for objective comparability with Dutch FBIs for foreign entities even less of a straightforward process. The increased complexity and potential loss of favorable tax treatments could pose difficulties and uncertainties for foreign investment institutions in navigating the evolving Dutch tax landscape.