In February 2020 the Dutch CLO market received news that the existing exemption on VAT for investment firms is no longer applicable to transactions involving CLOs.
Whilst no new law has been passed, the rulings in place for these transactions have been changed (unilaterally) by the Dutch tax authorities, a move that has shaken the sector. Additionally, fees will be backdated to the 1st April 2019, furthering the impact on those caught by the regulation.
Here, Sarah Hamami, Commercial Director, Vistra Capital Markets, Netherlands and John Dunleavy, Managing Director, Vistra Capital Markets, Ireland explore what this means to the market, and how Ireland could be the answer for those faced with the increased tax.
Can you explain the new rules?
Sarah: CLO issuers, lawyers, large banks and professional service providers have been informed by the Dutch Tax Authority that an annual 21% tax will be applied to the management fee of CLO vehicles, and backdated to April 2019.
The Dutch tax authorities have based their decision on the Fiscal case in the Court of Justice of the European Union from 2015, which ruled that the VAT exemption is only applicable as far as there is specific government supervision of the fund, or the management of the fund.
What does this mean for the Dutch CLO market?
Sarah: Whilst market sentiment is that there may be grounds to challenge the position of the Dutch tax authorities, and several law firms and tax advisers are looking into this, in the immediate term there are issues to be faced by existing CLO SPV's and those looking to set up in the Netherlands.
The increase in tax is not only a future issue, but combined with backdated fees to 1 April 2019, firms could see significant additional fees levied on their structures and continue to face these fees going forwards. The repercussions of this on investor equity is obvious, and as such, CLO SPVs, collateral managers, and other service providers and investors must consider their positions.
What options do companies have?
Sarah:CLOs need to identify where VAT risk lies within their structures – with them or their service providers. From here, the cost can be established, and arrangements can be made to pay it. This will have implications for investor returns as the additional costs will have to come out of the transaction cashflows.
And, as already noted, it is highly expected that this ruling will be challenged – with the hope it will be revoked. Companies can join in lobbying – however relying on this potential revocation is risky – litigation is a lengthy process to resolve.
John: Ireland offers a real alternative in that it does not have a similar VAT charge in force, the result being that CLO SPV's will find Ireland to be more competitive. Ireland is the current destination of domicile for many European CLO's given the attractive regime CLO's can operate under. Ireland offers the following;
- Low tax jurisdiction which allows CLO's benefit from the favourable treatment available under 'Section 110' of the Taxes Acts;
- Irish CLO's do not need to be licensed or authorised by the regulator, The Central Bank of Ireland.
- Services, including the appointment of asset managers and the administration services around the governance and running of the SPV can be outsourced;
- Irish domiciled CLO's are not required to show a minimum profit; and
- There are withholding tax exemptions on the payment of interest under both the "Quoted Eurobond Exemption" and the "Qualifying Person" exemption.
Why could Ireland and Vistra be a solution?
John: Vistra Ireland, part of one of the largest Global Corporate Service Providers has been active in the CLO space in Ireland for the best part of 20 years. Vistra Ireland offer a full suite of corporate services to CLO's wanting to set up in Ireland (from incorporation of the SPV, appointment of Directors, registered office, full Co-Sec offering and the preparation of the SPV Financial Statements).
In addition, through our Share Trustee offering, we can support the bankruptcy remote status (usually a requirement) by having our Share Trustee entity hold the share of the issuers on Trust.
What recommendations would you make to a Dutch CLO considering their options?
Sarah: Any company must consider all factors that affect their business and make decisions based on the needs of them and their customers. I would highly recommend talking to an outsourced service provider, to assess viable alternative ways to structure their funds.
John:Talk to us! Vistra has established operations in both Ireland and the Netherlands – our teams are geared up to find solutions and help our existing and future clients continue to operate successfully.
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