Dear FS professional,
This is the final newsletter for 2013. The majority of issues discussed in this newsletter relate to increased regulation for financial institutions. CRD IV lays down country by country reporting requirements, prescribes deduction of certain deferred tax assets from CET 1, and includes a 100% bonus cap. However, the Dutch Minister of Finance remains unconvinced of the effectiveness of a 100% bonus cap and has instead introduced a 20% bonus cap. Although the initial impression may be one of an unlevel playing field, in practice it might turn out to be a blessing in disguise, as it will force financial institutions to rethink their approach to incentives for employees, for example by making sure they have ‘skin in the game’. KPMG Meijburg & Co is currently working with several clients to design and implement tailor-made co-investment structures, including obtaining sign off from the regulators and tax authorities.
Last but not least, the Dutch Under Minister of Finance has announced that interest deduction on innovative Tier 1 capital instruments will also be accepted in the future.
We wish you a happy, healthy, and successful 2014!
Partner, Financial Services Tax Group
Table of Contents
- 1. Capital Requirements Directive IV (CRD IV) implements Basel III in the EU
- 2. Country by country reporting
- 3. Supreme Court rules against Finnish investment fund: no refund of withheld dividend withholding tax
- 4. Financial Institutions Remuneration Policy Act
- 5. Investment funds: relief at source facility for closed FGRs added to the Competent Authority Agreement with Canada
- 6. Request for preliminary ruling from CJEU on management of real estate companies
- 7. Services provided to mortgage lenders subject to VAT
- 8. Supreme Court makes it easier to create a VAT group
1. Capital Requirements Directive IV (CRD IV) implements Basel III in the EU
CRD IV was published on June 26, 2013. As of March 2014, the directive is expected to be transposed into Dutch law by being included in the Financial Supervision Act (Wet Financieel Toezicht; “WFT”). The most important difference with current legislation is that credit institutions and certain investment companies will have to deduct deferred tax assets arising from tax losses and tax credits from CET 1 Capital.
The most important difference between Basel II and Basel III is that credit institutions and certain investment companies are now obliged to deduct the net amount of deferred tax assets arising from tax losses and tax credits from CET 1 capital. Deferred tax assets arising from temporary differences are not deducted from CET 1 capital if certain conditions are met. No deduction for such deferred tax assets is required if the amount falls within a certain range. In summary, this exemption applies if i) the amount of the deferred tax assets arising from temporary differences is less than or equal to 10% of the CET 1 capital; and ii) the amount of deferred tax assets together with significant investments in a financial sector entity is less than or equal to 17.65% of the adjusted CET 1 capital. Where deferred tax assets arising from temporary differences are not deducted from CET 1 capital, the risk is weighted with 250%. Under current rules this is 0%. Compared to the full deduction of the deferred tax assets arising from tax losses and tax credits, the deferred tax assets arising from temporary differences result in a higher CET 1 capital of 80% (full deduction versus CET 1 impact of 250 x 8%).
Moreover, the amount of deferred tax assets may be reduced by the amount of the associated deferred tax liabilities, if certain netting conditions are met. These netting conditions differ on certain points from IAS 12. For example, these deferred tax liabilities may not include deferred tax liabilities arising from intangible assets and defined benefit pension fund assets. Furthermore, a pro rata netting between deferred tax assets arising from tax losses and credits versus temporary differences is required. With regard to determining the deduction from CET 1 capital, the institutions should set up a procedure to determine these amounts. Unfortunately, in this respect it is not possible to follow the IAS 12 procedures without any adjustments.
These new rules highlight the importance given to tax under Basel III, in particular, the possibilities now available to convert deferred tax assets arising from losses and tax credits into deferred tax assets arising from temporary differences. KPMG Meijburg & Co can advise you on how to determine and to improve the CET I ratio.
If you have any questions on Basel III, the CRR, or the impact on deferred tax assets and CET 1 capital, please do not hesitate to contact Eveline Gerrits (+31 (0)20 656 2006) or Michèle van der Zande (+31 (0)20 656 1345).
2. Country by country reporting
The Capital Requirements Directive IV (CRD IV) implements Basel III in the EU and includes the directly applicable Capital Requirements Regulation (CRR) and the Directive, of which the latter must be implemented by the local competent authorities. The CRR and CRD IV were published on June 26, 2013. The Directive includes reporting requirements with respect to country by country reporting, which will have a significant impact on the reporting requirements for credit institutions.
Article 89 of the Directive requires credit institutions, among others, as of January 1, 2015, to report on the tax on profit or loss on a consolidated basis with respect to each Member State and third country in which it has an establishment. This reporting requirement will be included in the Dutch Financial Supervision Act, probably by way of a government decree. In the Netherlands, it is expected that the Dutch Central Bank will implement these requirements. Questions arising at this point in time are: i) what is meant by ‘establishments’, ii) what is meant by ‘tax on profit or loss’, iii) which approach to consolidation should be taken? And how is a consistent implementation with other EU Member States guaranteed? With regard to the Netherlands, these questions remain unanswered pending implementation in March 2014.
In the UK, consultation has taken place and it seems that ‘establishments’ should be understood as referring to both subsidiaries and branches. ‘Tax on profit or loss’ is interpreted as tax payments on corporate tax. According to the UK, this is most closely in line with the transparency objectives of the legislation and will give the most meaningful analysis of ‘taxes paid’ as referred to in recital 52 of CRD IV. With regard to the consolidation basis, the UK intends to require institutions to use an accounting consolidation approach that will include any subsidiaries/branches it has. The UK believes this will ensure that groups of which only a small number of institutions fall under CRD IV will not be required to provide disclosure for those institutions within the group that do not fall under CRD IV. Furthermore, the UK considers this approach will ensure consistency across Member States and provide meaningful disclosure in a proportionate manner.
With regard to the term ‘taxes paid’, we consider it essential that corporate tax will be defined. It seems that the UK has interpreted ‘taxes paid’ as referring to national corporate income tax law. However, institutions also pay withholding taxes, which can be a large part of the taxes paid. Withholding taxes paid to the reporting entity are included in the definition of income tax contained in IAS 12. We believe it could be worthwhile to also disclose withholding taxes paid.
The country by country reporting requirements will have a significant impact on the reporting requirements of credit institutions. We believe it is important to have a clear position on these disclosures. KPMG Meijburg & Co can advise you on this position and assist you in implementing these procedures.
If you have any questions on Basel III, CRD IV, or the impact with respect to country by country reporting , please do not hesitate to contact Eveline Gerrits (+31 (0)20 6562006) or Michèle van der Zande (+31 (0)20 6561345).
3. Supreme Court rules against Finnish investment fund: no refund of withheld dividend withholding tax
The Supreme Court has ruled that a Finnish investment fund is not entitled to a refund of withheld Dutch dividend withholding tax. This is the conclusion reached in the judgment rendered on November 15, 2013, in proceedings initiated by a Finnish investment fund
Relevant facts and the dispute
The taxpayer is a Finnish resident open-end investment fund without legal personality that is comparable to a Dutch common fund (fonds voor gemene rekening). The fund was not subject to a profit tax in Finland. In 2008, it held shares for investment in companies resident in the Netherlands. In that year, the fund received dividends of EUR 235,492.30 on those shares, on which 15% dividend withholding tax was withheld. It was not possible to credit this dividend withholding tax in Finland. The taxpayer filed a request with the Dutch tax authorities for a full refund of the withheld dividend withholding tax, presenting various arguments to support its position. The tax inspector rejected the request, which resulted in legal proceedings being initiated before the District Court Breda, the Court of Appeals Den Bosch, and the Supreme Court.
The Supreme Court judgment
The Supreme Court has ruled that the Finnish investment fund is not objectively comparable to a Dutch resident company that is entitled to a refund. According to the Supreme Court, one fact in particular negates that comparability: the fact that the fund would have been subject to Dutch corporate income tax had it been resident in the Netherlands. The fact that the fund was exempt from profit tax in Finland is irrelevant: the Netherlands is not obliged to adopt the tax relief granted by the other Member State. Furthermore, the fact that the Finnish investment fund did not distribute its 2008 profit to its shareholders within eight months, was reason for the Supreme Court to conclude that the fund is also not comparable to an FBI that is eligible to apply the remittance reduction. The Supreme Court therefore ruled that the fund was not discriminated against and therefore the Finnish investment fund was not entitled to a refund of Dutch dividend withholding tax.
Although this is clearly a negative ruling for non-resident investment funds trying to obtain full refunds of Dutch dividend tax via EU claims, there are various reasons why, in certain situations, it may still be advisable for non-resident investment funds to file protective claims in the Netherlands:
- the Finnish investment fund did not distribute its profit over the relevant year. It is uncertain how the Dutch Supreme Court will rule on a case where the profit of the non-resident investment fund has been (partly) distributed;
- a Court of Appeals ruling on a similar case (a Luxembourg SICAV that did distribute part of its profit over the respective years) is expected in 2014. The Court of Appeals may refer the case to the Court of Justice of the European Union (“CJEU”).
- The CJEU is also expected to rule shortly on a potentially important case involving a US investment fund that is claiming a full refund of dividend withholding tax in Poland (“Emerging Markets-case”).
If you have any questions about this Supreme Court ruling, please do not hesitate to contact Niels van der Wal (+31 (0)20 656 1232).
4. Financial Institutions Remuneration Policy Act
On November 26, 2013, the Finance Minister, Mr. Dijsselbloem, introduced a bill which includes a bonus cap for employees in the Dutch financial sector. Under the bill, any bonuses paid as of 2015 will be limited to a maximum of 20% of the fixed remuneration. In line with the intended effect (discouraging risk), market movements towards co-investment structures can be expected.
The Explanatory Memorandum accompanying the bill states that, on the basis of current legislation, a financial institution’s remuneration policy must not encourage it to take more risks than are justified and it must also not lead to perverse incentives in dealings with clients. Apparently Mr. Dijsselbloem does not consider these measures adequate and therefore the Bill on the Financial Institutions Remuneration Policy Act includes a number of additional rules with which he hopes to achieve his objective.
Who will be affected by the bill?
The bill is aimed at “financial institutions whose registered office is in the Netherlands”. A number of rules in the bill also apply to “individuals working under the supervision of a financial institution”.
Subsidiaries with a registered office in the Netherlands will also be covered by the bill. If the parent company of a group has its registered office in the Netherlands, then the bill will also affect all the companies within the group, regardless of where they are resident. Finally, Dutch resident branches of financial institutions will, in principle, also be covered by the bill.
Maximum variable remuneration of 20%
One of the measures in the bill sets a cap for variable remuneration i.e. bonuses.
Under the bill, any bonuses paid as of 2015 will be limited to a maximum of 20% of the fixed remuneration. Such a restriction will have consequences for everyone employed in the Dutch financial sector, even those working abroad.
The bill defines fixed remuneration as follows: “that part of the total remuneration consisting of unconditional financial or non-financial benefits included in the remuneration policy of the financial institution or in the agreement on the performance of activities for the financial institution.” Variable remuneration is defined as follows: “that part of the total remuneration that is not fixed remuneration”.
In principle, the 20% maximum applies to the entire financial sector. However, an exception has been made for:
- individuals employed in the Netherlands with employment contracts that fully or partly deviate from the conditions in the Collective Labor Agreement;
- individuals who mostly work abroad.
An exception has also been proposed for a group that primarily operates abroad, but whose parent company (usually the holding company) has its registered office in the Netherlands. It will also be possible to award a higher bonus, but only in isolated cases and subject to strict conditions.
Finally, it has been proposed to limit severance pay to 100%, and to prohibit golden handshakes being paid to members of a company’s executive board or in cases of company failure.
According to the bill, the Act will take effect on January 1, 2015.
With regard to the bonus cap, transitional rules will apply to individuals already employed by the company on the date the Act takes effect. This means that bonuses exceeding 20% of the fixed remuneration can be awarded in 2015 if they relate to appraisals for 2014 and provided they are in accordance with existing agreements concluded with the particular individual. As of January 1, 2016, financial institutions will not be able to award bonuses that exceed 20% of the fixed remuneration.
Consultation on the bill
The bill was issued for consultation on the www.internetconsultatie.nl website on November 26, 2013.
The government has used the consultation procedure to inform taxpayers about the proposed changes and provides everyone with the opportunity to respond. The consultation procedure will end on December 31, 2013.
5. Investment funds: relief at source facility for closed FGRs added to the Competent Authority Agreement with Canada
Recently, a relief at source facility was added to the agreement between the competent authorities of the Netherlands and Canada regarding the tax treatment of closed FGRs (besloten fondsen voor gemene rekening). This means that a liquidity disadvantage can be avoided as managers/depositories of closed FGRs no longer have to file reclaim requests to obtain a withholding tax reduction or exemption.
In 2010, the competent authorities of the Netherlands and Canada concluded an agreement regarding the tax treatment of closed FGRs (besloten fondsen voor gemene rekening). In October 2013 a relief at source facility was added to this agreement.
An FGR is a contractual asset pooling vehicle under Dutch law without legal personality. It is often used as an asset pooling vehicle for investors (e.g. pension funds). The closed FGR invests the assets on behalf of the investors in the fund. Each participation in an FGR represents an equal interest in the net assets of the FGR and a proportionate share of the income generated by the FGR.
Pursuant to Dutch law and policy, an FGR is classified as transparent if it is closed, meaning that units in the fund may only be disposed of by participants subject to the approval of other participants, or to the fund itself only to be reissued in the future. For Dutch tax purposes, the income of a closed FGR is directly attributed to the participants in proportion to their total interest in the FGR. The source and income are recognized and taxed in the hands of the FGR participants as if they had received that income directly without the intervention of the FGR.
The agreement with Canada
The agreement between the Netherlands and Canada means that if the Netherlands classifies an FGR as tax transparent by virtue of it being organized as a closed FGR, Canada will follow this classification as tax transparent for tax treaty purposes. However, in the 2010 agreement only a reclaim procedure was included. After evaluating the practical procedures and implications of the 2010 agreement, Canada has agreed to add a relief at source procedure to the agreement.
A relief at source can only be claimed if all investors in the FGR are qualified investors. There are three categories of direct qualified investors:
The relief at source procedure requires the fund manager/depository to provide the Canadian Revenue Agency with investor details and a statement that the fund manager/depository has obtained proof that all the investors are eligible for tax treaty benefits.
Please note that the reclaim procedure will remain available for obtaining tax treaty benefits.
Agreements with other countries
Similar agreements have previously been concluded with the competent authorities in Denmark, Norway, Spain, the United Kingdom and the United States. In addition, the Netherlands has recently concluded tax treaties with Germany and Ethiopia which explicitly recognize the closed FGR as tax transparent (these tax treaties are not yet in force). These agreements are relevant to the funds sector as they ensure that both treaty parties will grant tax treaty benefits (e.g. reduction of withholding taxes) at the same level, i.e. in the hands of the participants in the fund.
The full text of the new competent authority agreement with Canada - including all (formal) requirements managers/depositories of FGRs need to comply with to obtain a relief at source or to claim a refund - can be accessed through this link.
6. Request for preliminary ruling from CJEU on management of real estate companies
On November 1, 2013 the Supreme Court requested a preliminary ruling from the Court of Justice of the European Union on the VAT treatment of the management of real estate companies. The upcoming ruling will provide more clarity on how ‘investment funds’ and ‘management’ should be interpreted for the application of the VAT exemption for the management of special investment funds.
On November 1, 2013 the Supreme Court requested a preliminary ruling from the Court of Justice of the European Union (CJEU) on the following two questions concerning the VAT treatment of the management of real estate companies.
- Can a company that was set up by more than one investor for the sole purpose of investing the raised capital in real estate be regarded as a special investment fund for the purposes of the (VAT) exemption for the management of special investment funds?
- If so, should ‘management’ also be interpreted to include the company’s property management that it outsources to a third party?
The upcoming ruling is relevant for the real estate fund practice, but possibly also for investment funds in general, primarily as it ought to clarify how ‘investment funds’ and ‘management’ should be interpreted for the application of the VAT exemption for the management of special investment funds. This is particularly relevant in light of developments arising from the Alternative Investment Fund Managers Directive (AIFMD).
Please find our VAT Alert on this topic via this link.
7. Services provided to mortgage lenders subject to VAT
On October 11, 2013 the Supreme Court ruled that payment and collection services provided to mortgage lenders are subject to VAT. This third party ‘credit management’, consisting of loan funding, calculating and collecting the monthly interest, repayments and insurance premiums as well as administrative activities is not VAT exempt, as it is not performed by ‘the person granting the credit’.
According to the Supreme Court, the IT services also provided to mortgage lenders – consisting of making an IT system available in order for the mortgage lenders to assess mortgage applications and submit quotes – are subject to VAT.
The Dutch Banking Decree – a decree from the Dutch Ministry of Finance containing guidance on the VAT treatment of banking activities – did not offer any solace. In contrast to the 2011 judgment rendered by the Amsterdam Court of Appeals in this case, the Supreme Court ruled that the payment and collection services do not involve the VAT exempt ‘normal debt collection’, referred to in the Decree.
The consequences of this ruling are not limited to the outsourced management of mortgages, but are also relevant for the (partly) outsourced management of securitized and other loans, debt collection services, payment services and suchlike. Although this judgment does not mean that all outsourcing of payment and collection services is subject to VAT, it highlights the importance of taking VAT into consideration when deciding whether to outsource activities. Outsourcing may involve a wide variety of VAT taxable and VAT exempt services. It is therefore advisable to review any existing or planned agreements in the light of this Supreme Court ruling.
8. Supreme Court makes it easier to create a VAT group
On October 11, 2013, the Supreme Court eased the VAT grouping rules, by ruling that the required economic link may also be present in cases where a mutually non-negligible economic link exists among the companiesOn October 11, 2013, the Supreme Court eased the VAT grouping rules by extending the scope of the economic link.
The Netherlands has implemented the VAT grouping regime for VAT taxable persons that have a significant financial, organizational and economic link. In the past, the Supreme Court ruled that the condition of the economic link could be met if: 1) the turnover from intra-group services or goods supplied amounts to more than 50%; or 2) there is a joint customer base. The Supreme Court has now ruled that the economic link may also be present where goods are supplied to a VAT group which has several customers in common. In the case at hand, the mutual economic link among the companies was non-negligible, and therefore, the economic link is present.
As VAT grouping enables group companies to avoid VAT on intra-group transactions and potentially increase the right to recover input VAT, this ruling is particularly important for VAT taxable persons with a limited right to recover input VAT.
Please find our VAT Alert on this topic via this link.