Updated Fund Decree – latest on Dutch tax classification as FGR for Dutch and non-Dutch limited partnerships

To qualify as an FGR, the investment fund must be an ‘investment fund’ (i.e., an AIF) or ‘fund for collective investment in tradeable securities’ (i.e., a UCITS) within the meaning of the Wft. The updated Fund Decree clarifies this requirement is presumed to be satisfied if the fund manager registers the fund as such with the Dutch Financial Markets Authority (Autoriteit Financiële Markt, AFM), either with an AFM license or under an exemption. An EU-based fund could demonstrate its qualification as an investment fund or a collective investment in securities by providing a license or registration comparable to that of the AFM. Unfortunately, the updated Fund Decree still does not provide any further guidance in this regard on funds based outside the EU.

When a fund raises capital exclusively within an existing group of family members, it falls outside the definition of collective investment and therefore outside the scope of the Wft. The Dutch tax authorities follow the AFM’s interpretation in this regard. A family fund can therefore not qualify as an FGR.

The investment fund must have a strategy that is classified as ‘normal’ portfolio management (i.e., generally not entrepreneurial / ‘value-add’). The new Decree clarifies how this applies to funds investing in tax-transparent limited partnerships (LPs) and loans.

For investments in tax-transparent LPs, the assets and liabilities are attributed to the participants for Dutch tax purposes. However, simply participating in an LP that carries on a business enterprise does not automatically result in that the fund itself is deemed to carry on a business enterprise. The fund can therefore still meet the investment criteria and qualify as an FGR.

For funds investing in loans, a case-by-case analysis on the basis of the relevant facts and circumstances is in principle required to determine whether the lending activities qualify as ‘normal’ portfolio management. However, lending activities should now in any case qualify as ‘normal’ portfolio management if the following strict criteria are met:

• No more than 10% of the fund’s assets may be lent to a single borrower (including group companies).
• No more than 15% of the fund’s assets may be invested in loans rated B+ or lower (unless the fund’s AFM risk rating is 4 or lower).
• These limits are tested at the time of granting the loan.
• The fund must make only limited use of external financing. In this context, leverage is capped at 20% of the fund’s assets (in line with the financing restrictions for Dutch fiscal investment institutions (fiscale beleggingsinstelling, FBI).
• Management fees must not exceed 1% of fund assets per year (excluding interest costs and certain SDG-related costs).
• No profit-based or performance-related compensation for the manager or related parties.
• The fund’s investment policy, risk framework, and specific risks must be clearly described in the prospectus.

The above criteria serve as a safe harbour. However, based on our experience, most private debt funds generally do not meet these conditions. As a result, an assessment based the relevant facts and circumstances remains required. Advance certainty can be requested from the Dutch tax authorities.

The participations in the investment fund must be embodied by ‘tradeable participation certificates’, whereby participation certificates are not considered tradeable if they are only transferable to the investment fund by way of redemption (in which case it would be a Redemption Fund). The updated Fund Decree emphasizes that the fund terms must explicitly state that the participant has a (conditional) redemption right or that participation rights can only be transferred back to the fund itself.

For determining whether a fund qualifies as a Redemption Fund, certain transfers are disregarded. These include transfers of participation rights by universal succession, transfers by particular title under inheritance law, and transfers resulting from the creation or division of a marital community, including upon its dissolution.

In a stacked structure where one fund invests in another, each fund is assessed independently to determine whether it qualifies as a Redemption Fund. The classification of the other fund has no impact on this assessment.

A Redemption Fund may still be classified as a reverse hybrid entity if at least 50% of ownership rights are held by related entities in jurisdictions that classify the entity as non-transparent.

Unfortunately, the Fund Decree does not provide any further guidance as to when an investment fund is deemed to have issued 'participation certificates'.