Pooling in Holland gathers pace
The recent disclosure that the oil company Shell is considering pooling the assets of some of its international pension funds within a Dutch asset pooling vehicle suggests that the government's efforts to keep Dutch assets in Holland are having some success.
Pension pooling allows companies from various countries to pool their pension plan assets into a single vehicle, enabling them to achieve cost and efficiency.
Until now the favoured locations for pension pooling vehicles have been Ireland and Luxembourg, which have developed, respectively, the Common Contractual Fund (CCF) and the Fond Commun de Placement (FCP).
However, the Dutch government has been determined to reverse the actual and potential flow of Dutch assets to these jurisdictions. One of the signs of this determination was a decree from the finance ministry's in March which set out its commitment to promote the Netherlands as a preferred location for cross-border pension asset pooling.
In particular, the decree endorsed a tax-transparent asset pooling vehicle for Holland, the Fund for Joint Account (FJA). This vehicle is intended to be a direct competitor to the CCF and FCP.
Ton Daniels, a partner at the Amsterdam office of Ernst & Young Tax Advisers and professor of international tax law at Utrecht University, says the FJA shares all the characteristics of an CCF and an FCP. "The FJA can best be described as a pool of securities that is held by a custodian as the legal owner and trustee for the beneficiaries," he says.
"Pooling vehicles are look-through vehicles; that is, they are considered to be tax-transparent by foreign tax authorities. That is particularly when pooling equities. Pension funds should be in the same situation when able to recover withholding taxes on dividends as they would be investing directly," he says.
The Dutch finance ministry's initiative imprimatur on the FJA followed a period of intense lobbying by the leaders of Holland's investment industry, among them the Dutch Fund and Asset Management Association (DUFAS) which represents the investment management industry in the Netherlands.
The director of DUFAS, Hans Janssen Daalen, says that the lobbying was necessary if Holland was to retain investment business. "Facing competition from centres like Luxembourg and Ireland, we have seen a lot of Dutch funds migrating to these jurisdictions. That is the reason why we been lobbying so hard for a change of attitude at the Ministry of Finance."
Janssen Daalen sees the ministry's endorsement of the new FJA as a sign that the message has got through. "We're very pleased that they are now following our signals and are starting to improve the whole financial climate of Holland."
Part of this improvement is the government's ‘Working on Profits' Bill, now going through parliament, which is intended to make the Netherlands a more attractive base for overseas business.
The former under minister of finance, Joop Wijn, said the aim was to put the Netherlands back in the international big league in respect of taxation. "This is important because, otherwise, businesses would leave the Netherlands or not come to our country at all."
The bill provides for a reduction of dividend withholding tax from 25% to 15% from the beginning of 2007. The rate of corporate tax will also be cut from 29.6% to 25.5%.
An FJA will not be subject to any other taxes in the Netherlands, such as subscription tax or withholding taxes on income distributions. But what has given the FJA real impetus is the abolition of Holland's antiquated capital tax at the beginning of the year.
"Capital tax has always been an issue. We've always said we should get rid of capital tax, at least for investment funds," says Daniels. "Taxing investment funds which are constantly buying and selling securities was not a proper application of the tax."
However, as a member of EU, Holland has had to be wary of anything that looked like state-sponsored help for the investment industry. "There always been the risk that if the Dutch government abolished capital tax only for the investment funds they could trigger some kind of state aid issue," Daniels says.
Over the years, the government has done what it can to reduce the impact, and has progressively reduced the rate of tax from 1% to 0.75% to 0.55%. However, the prospect of a new EU directive on capital tax, which will result in a loss of revenue for member countries because of new exemptions, has persuaded the Dutch government to abolish capital tax altogether.
The main effect of the abolition of capital tax is to enable a tax-transparent vehicle that has so far been used only domestically to be rolled out internationally. Holland has used a tax-transparent vehicle, the Fond voor Gemene Rekening (FGR), for many years, but mainly for domestic purposes, says Daniels.
"The FJA is not a newly invented vehicle. In its present format it has been in our corporate tax act since 1969 and it has been used in many cases for institutional investment. Some of these funds are listed on the Amsterdam stock exchange but many are unlisted funds that have been tailor-made for specific institutional investors, particularly because of the transparency they offer. But the vehicle hasn't been used that much in an international context, mainly because of the tax issue.
"But that issue was resolved on 1 January this year. The abolition of capital tax has made the FJA an interesting vehicle for pension fund. We now see many more areas where the fund can be used, such as asset pooling for multinational pension funds.
"And this is typically an area where international companies could use this vehicle in the same fashion as it was already being used in the domestic context."
The European pensions directive has also provided pan-European opportunities for pooling vehicles, FJA, says Janssen Daalen; "The European directive will change the whole pensions business in Europe from one which used to be domestically organised, into one where cross border pension funds are possible.
"When an employee is able to move pension across borders the employing organisation and the attitudes of the pension fund are likely to become more international. In these circumstances it is easy to see that pension funds will organise themselves more internationally. We have already seen Luxembourg and Ireland lobbying for this new business."
Whether Holland can win some of this business from Luxembourg will depend not on the superiority of the FJA as a tax transparent vehicle, but on the long experience has using this kind of financial instruments for institutional investors, says Janssen Daalen.
"The Dutch invented the Fond Commun de Placement, which is now used by Luxembourg, back in the 17th century. So in a sense we are facing competition from our own vehicle.
"The rules that would apply to the Irish CCF or the Luxembourg FCP are very much the same as those that apply to the FJA because they are essentially the same vehicles. Only the jurisdiction differs. On the tax transparency side there's no difference at all."
Tax transparent vehicles such as the CCF and FCP have been notoriously slow to set up, chiefly because of the time spent checking with other jurisdictions whether they will regard such vehicles as transparent. Will an FJA prove any quicker to set up?
Janssen Daalen says that the well developed network of bilateral tax treaties will help: "Holland has one of the best developed tax treaties infrastructures in the world, with treaties with all the main mature investment markets If we were to meet with problems, our tax treaty network would enable us to resolve them speedily."
Dutch investment and pensions manangment expertise will tilt the balance in favour of Holland, Janssen Daalen believes. "We can offer the same features as the Luxembourgers and the Irish can, of course. But next to that we are able to offer greater financial expertise, not only on the asset manangment side but also on the side of pensions management."
One area of expertise Janssen Daalen singles out as a Dutch area of expertise is liability driven investment (LDI).
"When it comes to valuing the assets and liabilities of pension funds, we are one of the most experienced nations in the world," he says.
"The LDI side of managing pension funds is very highly developed here in Holland. And that is not an expertise, I would suspect , you would find in countries like Luxembourg.
"That's what we can offer, next to the tax infrastructure and the vehicles to pool assets of pension funds."
Perhaps most important has been the supportive stance of government and the supervisory authorities, says Daniels. "The decree of March explicitly refers to the potentially lengthy process of obtaining clarification about whether an FJA would be accepted as tax transparent in other investment countries or countries where a pension fund is resident.
"The finance ministry has said that it would clarify the tax transparency of an FJA to a foreign tax authority, should that authority want to know more about the flow-through nature of the FJA."
The Dutch treasury has confirmed that the finance ministry will, at the request of a fund manager, negotiate with treaty countries on the tax transparency of a fund. Janssen Daalen sees this official support for the FJA as highly significant.
"What is new here is not so much the legal or the tax vehicles. What's new here is the proactive role the government is willing to play, facing the competition of the European internal market," he says. What is also new, he says, is that the Dutch are learning to promote themselves and their skills in a way that they have not done before.
In particular, the DNB, the Dutch central bank and pensions supervisor, has transformed itself from a reticent regulator to an articulate champion of Dutch financial prowess.
"What we have never done before is promote or export the financial skills of Holland to other countries. We have tended to stay low key. That attitude is changing fast," says Janssen Daalen.