Euronext Dublin reported on 21 February that the Dutch tax authorities had sent letters to a number of market participants in the securitization industry concerning the application of Dutch VAT to collateral management fees charged to Dutch SPV companies acting as issuers of securities in CLO and other securitization transactions.
It is understood that the Dutch tax authorities had issued tax rulings dating back to the mid-2000s confirming that the provision of collateral management services to Dutch CLOs benefited from a Dutch VAT exemption for the “management of special investment funds defined by the member states.” Those rulings were widely relied upon in Dutch CLO transactions, enabling the participants in the transactions to be comfortable that no Dutch VAT would be imposed on these companies (under the reverse charge mechanism) relating to the management services received.
This tax treatment was fairly stable until the ruling of the Court of Justice of the European Union in December 2015 in the case of Fiscale Eenheid X (C-595/13). In that case, the Court of Justice ruled that the VAT exemption for investment management services could be applied to (i) funds constituting undertakings for collective investment in transferable securities (UCITS Funds) and (ii) funds that, without being UCITS funds, displayed features which were sufficiently comparable for them to be in competition with such undertakings, and particularly where such funds were subject to “specific State supervision” under national law. There was some uncertainly regarding what funds were subject to “specific State supervision.” The Dutch tax authorities have taken a number of cases on that question before the Dutch regional courts, and a final judgment of the Dutch Supreme Court on that question is expected later this year.
However, it now appears that the Dutch tax authorities have acted sooner, issuing the letters mentioned above which revoke – with retroactive effect to 1 April 2019 – the Dutch VAT rulings previously provided by the authorities.
The consequence of these developments is that Dutch CLO issuers are required to self-assess Dutch VAT (at a rate of 21%) on fees charged for investment management services supplied from outside the Netherlands since 1 April 2019. Interest and penalties might also be chargeable. As a technical matter, the Dutch tax authorities are therefore taking the position that Dutch CLO issuers are not “subject to specific State supervision” to the extent that the Dutch CLO issuers (or their managers) are not subject to UCITS or AIFMD supervision for collateral management services.
Accordingly, arrangers, managers, and both senior and subordinated investors in Dutch CLO warehouses and CLO term deal transactions will need to consider how the actions of the Dutch tax authorities affect those deals. We anticipate that, in the first instance, market participants will be focusing closely on the existing transaction documentation for Dutch CLO transactions. Definitions in the transaction documents for “note tax event,” for the “substitution” of the Dutch issuer and for “modification” of the CLO transaction documents, will be scrutinized with a view to evaluating where the risk of any Dutch VAT liability of the CLO issuer lies among the deal participants.
The restructuring of these Dutch SPVs is likely to follow. There are various options in this regard, ranging from re-setting the deals (where the deals are out of a “non-call” period), to issuer substitution or modification, to a migration of the Dutch issuer itself to a different jurisdiction. Resetting a Dutch CLO deal once out of a non-call period – with new securities being issued by an Irish CLO issuer – seems the simplest of these options, although other possible options might well be explored for deals which are not yet outside their non-call period.
Other restructuring options might also exist, including arrangements between the senior investors, subordinated investors and the manager, particularly where commercial flexibility exists among the deal participants.
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