On 8 June 2012 the Dutch government published a mutual agreement between the competent authorities of the US and the Netherlands (the "MA"). The MA clarifies the application of the Dutch-US income tax treaty ("Treaty") with respect to US source dividends and interest paid to a Dutch closed fund for joint account (besloten fonds voor gemene rekening; "closed FGR"). The MA was signed and entered into force on 21 May 2012.
The main benefits of the MA are certainty that the participants of a closed FGR are entitled to Treaty for income (dividends and interest) from their US investments, without a heavy administrative burden as the closed FGR may claim Treaty benefits on behalf of its participants.
An FGR is a Dutch investment fund vehicle which is formed by a contractual arrangement. Depending on the way it is set up, and more in particular the requirements for the admission and substitution of participations, it may be either qualified as a tax transparent (closed FGR) or as a taxable (open FGR) entity for Dutch tax purposes. An FGR is considered tax transparent when its participations can only be transferred among new or existing participants with the consent of all participants or solely transferred to the fund itself or to relatives of the participants in the direct line . Consequently, a closed FGR itself is not subject to Dutch corporate income tax and its income is directly attributed to its participants (see our Tax Alert of 12 February 2007) in which the conditions for tax transparency are discussed in more detail.
The closed FGR is well suited for international investment. It is often used as an investment vehicle by Dutch and non-Dutch pension funds and other investors to pool their capital to invest collectively in a variety of assets. The main reason is to improve their return and to spread their risk. Such asset pooling can result in substantial savings for the investors.
The MA provides that
- the closed FGR is also considered tax transparent for US tax purposes (to the extent that the US source dividends or interest income derived through the FGR is subject to tax as the income of a resident of the Netherlands. This is essentially already provided by article 24, paragraph 4, of the Treaty); and
- the closed FGR may claim Treaty benefits on behalf of its participants by filing a form in according with all applicable US procedures.
This means that a Dutch resident participant in a closed FGR would be entitled to the same Treaty benefits it would have been entitled to in the case of a direct investment. It, however, still benefits from the interposition of the FGR: not only does the participant benefit from a business perspective, but it also receives the administrative benefits of having the FGR secure Treaty benefits on behalf of the participants.
The MA provides with respect to a closed FGR whose participants are exclusively Dutch resident tax-exempt entities which, pursuant to a mutual agreement of 6 August 2007 with respect to the qualification of certain Dutch entities for benefits under article 35 of the Treaty (Exempt Pension Trusts), can claim Treaty benefits (in short, qualifying pension funds or strike funds), that it may continue to follow the procedures in that agreement. Based on those procedures, qualifying Dutch resident tax-exempt entities can either claim exemption from US income tax withholding on dividends and interest income or, alternatively, may seek a refund of taxes withheld on such income.
The MA between the US and the Netherlands is important for the financial sector in the Netherlands as it grants tax certainty to pension funds and other investors investing in the US through a closed FGR established in the Netherlands. This makes the closed FGR all the more attractive for new and existing investors and may strengthen the Dutch international position in the field of asset pooling.
Currently, the Netherlands has also entered into a similar agreement with Canada (Tax Alert of 10 June 2010), Denmark, the UK and Norway. The recently signed new tax treaty between Germany and the Netherlands also provides that the managers of closed funds for joint account, as well tax transparent investment arrangements and cooperations, may claim tax treaty entitlement on behalf of their participants (Tax Alert of 19 April 2012).
As this agreement explicitly refers to a closed FGR, it may not be applicable to other investment vehicles which are also considered transparent for Dutch tax purposes, such as the closed limited partnership (besloten commanditaire vennootschap).