- in United States
- with readers working within the Business & Consumer Services and Utilities industries
- within Antitrust/Competition Law, Transport and Consumer Protection topic(s)
US fund managers (USFM) often rely on a Luxembourg access point (Lux Fund) within their fund structure to cater to the preferences of EU investors and to streamline distribution in the EU using a marketing passport. Dutch investors prefer that the Lux Fund is organised in a manner that avoids Dutch tax inefficiencies.
Key insights
- Dutch pension funds require the Luxembourg fund to be Dutch‑tax transparent to benefit from zero U.S. withholding tax under the U.S.–Netherlands treaty, which directly improves their net return.
- Dutch corporate investors often need a non‑transparent Blocker structure, with a Dutch cooperative (Coop) sometimes used to meet participation exemption thresholds efficiently.
- Recent Dutch tax‑classification rule changes create real risks: a shift in the Lux Fund's classification (transparent vs. non‑transparent) can trigger adverse tax consequences, making careful structuring essential for US fund managers raising Dutch capital.
Dutch pension funds are a key source of capital for USFM raising capital in the EU. To accommodate Dutch pension funds, the Lux Fund must qualify as transparent for Dutch tax purposes since the pension funds may then be entitled to an exemption or reduction of withholding tax on income derived by the Lux Fund. That entitlement follows from the tax treaties entered into between the Netherlands and the investment jurisdictions.
This is specifically relevant for US investment strategies as the US - Netherlands tax treaty provides Dutch pension funds with a full exemption from US withholding tax on interest and dividends if the Lux Fund is transparent from a Dutch tax perspective. As Dutch pension funds are exempt from Dutch taxation, foreign taxes cannot be credited against their own tax base. Any foreign withholding tax would thus reduce their return on investment on a dollar-for-dollar basis.
For Dutch taxable corporate investors, it is typically most tax efficient to access the Lux Fund via a vehicle that is considered non-transparent for Dutch tax purposes (Blocker). As an addition to their fund structures, USFM often choose Luxembourg as the jurisdiction of the Blocker. Dutch corporate investors are not taxed on income derived from the Blocker pursuant to the Dutch participation exemption (PPX) provided certain requirements are met, including a minimum shareholding in the Blocker of 5%. This 5% threshold cannot always be met by Dutch corporate investors, including personal holding companies of Dutch individuals. To overcome that concern, their investment in the Blocker might be pooled via a Dutch cooperative (Coop). The 5% threshold of the PPX does not apply for an interest in the Coop. However, in order for the Coop to benefit from the PPX, the Coop's interest in the Blocker as well as the ultimate investments owned by the Blocker should represent an interest of at least 5%.
The above structures rely heavily on the Dutch tax classification of the Lux Fund and the Blocker. Those rules underwent significant changes last year (see our website post for details). The new rules, which are subject to further changes, should be carefully navigated since a change in the Dutch tax classification of a Lux Fund (from transparent to non-transparent or vice versa) could have detrimental tax consequences for Dutch investors.
When USFM venture into the Dutch market for capital raising, it is key to be aware of the above considerations, especially when smaller investor tickets are solicited.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
