The Netherlands: Alternative Investment Funds

In the Netherlands, alternative investment funds within the meaning of article 4(1)(a) of Directive 2011/61/EU (the AIFMD and such alternative investment funds AIFs) are generally structured in the form of a limited partnership (commanditaire vennootschap, CV), a co-operative (coöperatie, Co-op), a contractual fund for joint account (fonds voor gemene rekening, FGR), a private limited liability company (besloten vennootschap met beperkte aansprakelijkheid, BV) or a public limited company (naamloze vennootschap, NV), or a combination thereof.

In addition, there are two separate tax fund regimes, being the Dutch REIT (fiscale beleggingsinstelling, FBI) and the exempted investment fund (vrijgestelde beleggingsinstelling, VBI). These regimes provide for an attractive tax treatment subject to certain requirements having been met.

A CV is a limited partnership for the purpose of a durable co-operation between one or more managing (or general) partners (beherend vennoten), each with unlimited liability, and one or more limited partners (commanditaire or stille vennoten) who are not personally liable towards third parties for the obligations of the CV in excess of the amount they have contributed or have agreed to contribute to the CV, unless the names of the limited partners (or characteristic elements of their names) are used in the name of the CV or the limited partners engage in any act of management or control (daden van beheer) or are involved in any activities of the CV (even by virtue of a power of attorney). However, a limited partner may be held liable for obligations of the CV if:

• such limited partner has committed a tort (onrechtmatige daad);
• such limited partner qualifies as a policy maker (beleidsbepaler) or a co-policy maker (medebeleidsbepaler) of the general partner and there is evidently improper management of the general partner;
• such limited partner voluntarily assumes liability for the obligations of the CV; or
• in certain exceptional circumstances only, a limited partner is identified with a general partner.

Co-op

If the articles of association do not provide otherwise, members and former members of a Co-op are liable for deficits upon liquidation or bankruptcy. However, Dutch law allows for the liability of members to be limited or excluded in the articles of association. The letters W.A. (wettelijke aansprakelijkheid – unlimited liability), B.A. (beperkte aansprakelijkheid – limited liability), or U.A. (uitsluiting van aansprakelijkheid – exclusion of liability), respectively, must be added to the name of the Co-op in order to indicate the level of liability attached to the members. A member of a co-operative U.A. is not personally liable for any deficit of the Co-op. However, a member may be held liable for the obligations of the Co-op in the following circumstances:

• the member has committed a tort (onrechtmatige daad);
• the member qualifies as a policy maker (beleidsbepaler) or a co-policy maker (medebeleidsbepaler) of the co-operative and there is evident improper management of the Co-op; or
• the member voluntarily assumes liability for the obligations of the Co-op.

BV/NV

A BV or NV is a legal entity with capital divided into one or more transferrable shares, that has legal personality (rechtspersoonlijkheid). A shareholder of a BV or NV is, in principle, not personally liable for acts performed in the name of the company and does not have to contribute to the losses of the company in excess of the amount to be paid up on their shares. However, the liability of a shareholder for the obligations of a BV or NV may arise if:

• the shareholder commits a tort (onrechtmatige daad);
• the shareholder qualifies as a policy maker (beleidsbepaler) or a co-policy maker (medebeleidsbepaler) of the company and there is evident improper management of the company;
• the shareholder voluntarily assumes liability for the obligations of the company;
• in exceptional circumstances, where “hiding” behind separate legal identities constitutes an abuse of law, the shareholder may be identified (vereenzelvigd) with the company; or
• a shareholder receives a distribution in excess of the company’s freely distributable reserves while being aware – or when they reasonably should have been aware – that the distribution in question was not permitted.

FGR

The liability of a participant of an FGR to make contributions is generally limited to the amount that each participant has paid or has agreed to pay. However, although the FGR is not a legal entity (rechtspersoon) or a partnership (personenvennootschap), but a contractual arrangement sui generis, the possibility of a FGR being requalified as a partnership (maatschap/vennootschap onder firma) or a limited partnership (commanditaire vennootschap) among the manager, the title holder and the investors (i.e., the participants) or among the participants cannot be ruled out if, as a factual matter, it meets the constitutive requirements of such a partnership. Upon such a requalification, the investors may become liable for equal amounts (gelijke delen) (if the FGR is requalified as a maatschap) or jointly and severally liable (hoofdelijk aansprakelijk) (if the FGR is requalified as a vennootschap onder firma or commanditatire vennootschap, or VOF) for the liabilities of such partnership.

Private equity funds are generally structured in the form of a CV, BV or Co-op. Hedge funds and debt funds are often structured as an FGR. Real Estate Funds are commonly structured as an FGR, BV or NV.

Yes, managers of open-ended funds are subject to stricter rules given the liquidity risks that such funds pose. Managers of AIFs (AIFMs) that are subject to the Small Managers Regime (see under 2.1 below) and that manage open-ended funds are subject to lower assets under management thresholds in order to be able to use an exemption from the AIFMD license requirement (see under 2.1 below) and licensed AIFMs managing open-ended funds are subject to additional rules regarding liquidity and risk management.

This will depend on the fund terms. However, an AIFM cannot exclude the right of a limited partner in a CV to request a judge to rescind the limited partnership agreement in respect of itself for serious cause (gewichtige redenen) nor can an AIFM prohibit an investor in a Co-op to withdraw from a cooperative on the basis of an arrangement that exceeds what is permitted pursuant to the articles of association of the Co-op and applicable law.

All general tools are available to AIFMs of liquid AIFs to manage illiquidity risks, including the maintenance of cash reserves, redemption gates, matching of sale and purchase requests and redemption of interests following the sale of underlying assets. A licensed AIFM managing AIFs that are open-ended or leveraged should implement a liquidity management policy.

In the Netherlands, a CV (and its foreign law equivalents) can be organised as a tax-transparent entity (a “closed” CV) or as a tax-opaque entity (an “open” CV). AIFs in the Netherlands are often structured as a tax-transparent (closed) CV. The closed character requires that any admission or substitution of a limited partner, as well as any change in relative interests among the existing limited partners, is subject to prior unanimous consent of all partners, both the general and limited partners. These restrictions also apply to transfers to affiliates. In practice, however, these restrictions, do not result in any issues. In addition, the fund documentation generally provides that such consent shall be deemed to have been given if an investor has not declined its approval within four weeks of the date on which the request for approval was sent.

Similar to the CV, also with regards to the FGR, two different types exist: so-called “closed” FGRs and “open” FGRs. A closed FGR is a transparent entity for Dutch tax purposes. An FGR is considered a closed FGR if either the participations in the FGR are not transferable other than to the FGR itself by way of redemption, or if the participations are transferable only with the consent of all other participants.

Finally, Co-ops that are used as principal fund vehicles may be eligible for an exemption of Dutch dividend withholding tax. AIFMs that seek confirmation from the Dutch tax authority that the Co-op fund vehicle is eligible for such exemption of Dutch dividend withholding tax are required to state in the articles of association of the Co-op that a transfer of a membership interest in the Co-op is subject to the approval of all investors.

AIFs that do not qualify as an FBI or VBI (see under 1.1. above) are not subject to mandatory product requirements (such as diversification requirements). However, the license authorisation of a licensed AIFM may restrict the manager in its ability to manage certain types of funds. For instance, an AIFM that holds a licence for managing AIFs investing in financial instruments is not allowed to manage an AIF that invests in real estate without first applying for an extension of the scope of its licence.

Dutch tax residents (entities and individuals) are subject to income tax in the Netherlands with respect to their worldwide net income, whilst non-Dutch residents (entities and individuals) are subject only to income tax in the Netherlands with respect to certain Dutch sources (including a permanent establishment or real estate located in the Netherlands).

Subject to certain conditions, pension funds may be entitled to a full exemption from Dutch corporate income tax and a full refund of Dutch dividend withholding tax. Other tax exempt (governmental) bodies (EU and non-EU) might also be entitled to a full refund of Dutch dividend withholding tax with respect to qualifying portfolio investments in Dutch (fund) entities.

The legal structure of an AIF strongly depends on the nature of its investments (see under 1.3 above). Most AIFs are structured in a way that pursues tax neutrality, i.e. taxes are to be levied at investment level and at investor level, but not at the level of the fund. Further, various structures provide for the possibility to make distributions free from withholding tax.

Generally, pursuant to the AIFMD, the AIFM itself is responsible for performing the portfolio and risk management tasks on behalf of an AIF. In addition, as set forth under 1.2 above, the involvement of investors in management tasks may trigger liability risks. Consequently, investors typically have limited rights with respect to the management and operation of the Fund (such as the right to remove an AIFM, approve annual accounts and in some cases certain reserved matters,). Some of the investors typically also have a representative on the fund’s advisory committee through which they can exercise certain approval and/or consultation rights.

Under Dutch law, the regulatory regime and supervision with respect to investment funds is the concern of the manager of an investment fund, rather than the investment fund itself (unless the latter is managed internally). In principle, AIFMs that are active in the Netherlands fall within the scope of the AIFMD and the Dutch implementation thereof in the Dutch Act on Financial Supervision (Wet op het financieel toezicht, or AFS) and the rules and regulations promulgated thereunder.

It is, in principle, prohibited in the Netherlands for an AIFM to manage an AIF or to market interest in an AIF without having obtained a licence from the Netherlands Authority for the Financial Markets (Stichting Autoriteit Financiële Markten, AFM). This is only different if an exemption to the licence requirement is available, such as using a passport by a licensed EU AIFM or making use of the Small Managers Regime (as further set out below) or another exemption or exception applies.

There is an exception from the above-mentioned licence obligation for Dutch AIFMs who can make use of the so-called “small managers registration regime” (Small Managers Regime) of section 2:66a of the AFS. In order to be able to make use of this exemption, each of the following conditions must be met by the AIFM:

• the AIFM manages directly – or through an undertaking with which it is linked through common management, common control or a qualified holding – portfolios of AIFs whose assets under management (AuM) in total do not exceed (AuM Thresholds):

1. EUR100 million; or
2. EUR500 million if all the AIFs managed by the AIFM are unleveraged and there are no redemption or repayment rights exercisable with respect to interests in the AIFs for a period of five years following the date of the acquisition of the interests in the respective AIFs; and

• interests in each AIF managed by the AIFM may only be marketed (Placement Restrictions):

1. to professional investors within the meaning of section 1:1 of the AFS;
2. to fewer than 150 persons; or
3. for a countervalue of at least EUR100,000 per investor, with the amount of EUR100,000 to be provided at once.

The AFM clarified that the following conditions should be met, in order to make use of the Placement Restriction set forth under paragraph (c) above:

• the amount of the first capital commitment per investor is at least EUR100,000 (exclusive of costs);
• the first amount called under the commitment per investor should be at least EUR100,000; and
• the amount of committed capital may never fall below EUR100,000.

It is only possible to use one Placement Restriction.

A Dutch AIFM that meets the AuM Thresholds and the Placement Restrictions as set out above and wants to make use of the Small Managers Regime needs to register itself and the AIF it manages/intends to market with the AFM, by submitting a registration form (including, inter alia, an overview of the AuM and a description of the investment strategy). The AFM charges EUR4,400 for a registration. After review and acceptance of the registration form by the AFM, the AIFM and the AIFs managed by it will be included in the public register of the AFM kept on its website. If the AIFM meets the conditions of the Small Managers Regime, it can start marketing after the registration is submitted to the AFM; there is no waiting period. If the AIFM wishes to raise a new AIF after registering itself, it should register the AIF two weeks prior to the commencement of the marketing on the AIF. If the AIFM exceeds the AuM Thresholds or does not comply with the Placement Restrictions, the AIFM must apply for a licence from the AFM within 30 calendar days.

Exemptions to the general licence requirement are also available in the following instances:

• when using a passport by a licensed EEA AIFM; and
• when marketing units in an AIF in the Netherlands under the Dutch implementation of the national private placement regime of article 42 AIFMD.

Reference is made to our answer under 2.1 above.

Dutch law entities that are non-transparent from a Dutch tax perspective, like the Co-op, BV, NV, open FGR and open CV are deemed to be a Dutch tax resident by virtue of their Dutch domicile. Nevertheless, in an international tax environment also the effective place of management of the entity may be of relevance. The Dutch concept of the place of effective management is very similar to the international (OECD driven) standards, predominantly focussed on the place where the management exercises its executive tasks. Further, subject to certain strict conditions, Dutch tax law stipulates that AIFs are deemed to be effectively managed in their country of establishment.

Licensed AIFMs must appoint a depositary for the AIFs they manage. In principle, in the Netherlands such depositary is subject to a licence requirement (a depositary generally holds a licence as a trust office, investment firm or credit institution), unless a specific exemption to the licence requirement is available. If the AIF does not have legal personality, the legal ownership of the assets under management must be held by a separate legal entity whose sole object according to the articles of association is holding the legal ownership of the assets of investment funds.

We refer to 2.3 above. Generally speaking, no specific requirements for Dutch resident trustees or directors apply to AIFs.

An AIFM authorised in another EEA Member State in accordance with article 6 sub 1 of the AIFMD may manage a Dutch AIF in the Netherlands on a cross-border basis with a passport, provided that the procedure of article 33 AIFMD is followed, which, in summary, entails certain documentation and information being provided to the home Member State regulator of the AIFM.

A non-EEA AIFM may manage a Dutch AIF on a cross-border basis if such AIFM complies with certain reporting, disclosure and transparency requirements relating to the annual report, disclosures to investors (both initially and on an ongoing basis), reporting obligations to regulatory authorities and, where relevant, transparency and asset stripping requirements relating to investments in portfolio companies, and if appropriate co-operation arrangements are in place between the supervisory authority of the non-EEA country where the AIFM is established and the AFM. In addition, a notification should be filed with the AFM, including an attestation of the home country supervisor of the non-EEA AIFM. Furthermore, the non-EEA country where the AIFM is established should not be listed as a non-co-operative country for the purposes of the Financial Action Task Force (FATF). In this event, units in the relevant AIFs may only be offered to qualified investors (gekwalificeerde belegger) within the meaning of the AFS.

The AFM may impose sanctions such as fines, incremental penalties and the publication thereof in case of a violation of the AIFMD as implemented in the Netherlands.

When it comes to management fees the Dutch market is generally in line with the international market. The typical management fee levels for private equity funds range from 1.75% to 2.25% of the aggregate capital commitments during the investment period and on invested capital thereafter. For fund-of-funds the management fees are typically lower and for other strategies (e.g. real estate, mortgage receivables, etc.) the typical level of fees is dependent on the strategy (for instance core or opportunistic).

Yes, most fund agreements provide for a performance fee or carried interest model. For liquid strategies a high-water mark or otherwise benchmark performance fee model is more common. Illiquid strategies such as private equity strategies generally provide for a carried interest model with a hurdle, commonly ranging from 5% to 8% (where we see most private equity funds provide for an 8% hurdle).

Due to tax considerations the management team of the AIFM typically invests on a pari passu basis with the other investors. First closing management fee discounts are frequently applied for initial investors.

Some funds indeed offer discounts on fees payable if an investor’s commitment exceeds a certain threshold.

First loss programs are not widely applied in the Netherlands.

An AIF that applies to the Seed Capital scheme offered by the Ministry of Economic Affairs and Climate Policy must be structured as a NV, BV, CV or VOF and should be established by at least 3 investors. There are various tenders within the Seed Capital scheme under which a loan can be obtained, with each having their own specific requirements in relation to, for instance, the term of the investment period and the amount of management costs.

Prior to the COVID-19 pandemic occurring, the trend was that the terms and conditions of management and incentive fees were increasingly “manager friendly”. This was for instance evidenced by the growing number of ratchet carried distribution cascades in private equity funds allowing AIFMs to increase their entitlement to distributions of carried interest if certain predefined criteria (i.e. certain IRRs and/or MOMs) are realized for investors. It is currently unclear what effect the COVID-19 pandemic will have on fundraisings and hence fund terms and conditions. Whether or not fund terms and conditions will become less “manager friendly” due to changes in the fundraising environment remains to be seen. So far, the trend towards more manager friendly terms does not seem to be affected.

A Dutch licensed AIFM is in principle only authorised to offer the interests in the AIF it manages to professional investors within the meaning of the AFS and non-professional investors who invest more than EUR100,000. However, if the AIFM complies with the “retail top-up regime”, the AIFM may also offer interests to non-professional investors in the Netherlands who invest less than EUR100,000.

An AIFM authorised in another EEA Member State in accordance with article 6 sub 1 of the AIFMD may offer the interests in a non-Dutch AIF in the Netherlands to professional investors on a cross-border basis with a passport, provided that the procedure of article 32 AIFMD is followed. In addition, such AIFMs may market interests to non-professional investors who invest more than EUR100,000, or to non-professional investors in the Netherlands who invest less than EUR100,000 whilst complying with the “retail top-up regime”, provided that a notification has been made to the AFM in addition to the article 32 AIFMD procedure.

A non-EEA AIFM may offer interests in a EEA or non-EEA AIF to professional investors in the Netherlands if such AIFM complies with certain reporting, disclosure and transparency requirements relating to the annual report, disclosures to investors (both initially and on an ongoing basis), reporting obligations to regulatory authorities and, where relevant, transparency and asset stripping requirements relating to investments in portfolio companies, and if appropriate co-operation arrangements are in place between the AFM and the supervisory authority of the non-EEA country in which the AIFM is established. In addition, a notification should be filed with the AFM, including an attestation of the home country supervisor of the non-EEA AIFM. Furthermore, the non-EEA country where the AIFM is established should not be listed as a non-co-operative country for the purposes of the FATF.

With respect to interests offered to non-professional investors in the Netherlands a key information document prepared in accordance with the requirements of the PRIIPS Regulation needs to be provided to such non-professional investors.

The concept of pre-marketing is recognized under Dutch law. To determine whether an AIFM is engaged in pre-marketing or not, it is important to know what constitutes “marketing” within the meaning of Dutch law and which sales promotional measures are permitted in the pre-marketing stage in the Netherlands. In this respect it is relevant to note that the directive with regards to cross-border distribution of collective investment undertakings (Directive (EU) 2019/1160) contains a definition of pre-marketing and that this directive will be implemented into Dutch law in the near future. Until implementation, the analysis as to whether or not an action constitutes pre-marketing in principle will still be based on the current definition in Dutch law on when interests in a fund are marketed in the Netherlands. Offering (i.e. marketing) is defined in the AFS, as:

• making a direct or indirect, sufficient defined proposal to, as counterparty, enter into an agreement regarding units in an AIF; or
• directly or indirectly requesting or obtaining funds or other goods for the purposes of participation in an AIF.

With respect to licensed AIFMs, as the authorisation pursuant to the AIFMD is, in principle, limited to professional investors, managers who intend to offer interest in the AIF they manage to non-professional investors (retail) in the Netherlands should comply with the so-called retail top-up. The licence for these authorised AIFMs should specifically include the retail top-up. The authorised AIFM with a retail top-up will have to meet all requirements that apply for authorised AIFMs under the fully licensed regime. In addition, the retail top-up regime, inter alia, requires the manager to comply with certain additional compliance, information and reporting requirements. However, the manager is not required to comply with the requirements under the retail top-up regime if interests are offered to non-professional investors for a countervalue of more than EUR100,000 per investor.

AIFMs benefiting from the Small Managers Regime may offer their interest to retail investors in the Netherlands, provided that they do not offer their interest to more than 150 persons or if such retail investors agree to participate for a countervalue of at least EUR100,000 payable at once.

Finally an AIFM authorised in another EEA Member State that has obtained an EuVECA-label as set forth in Regulation (EU) 345/2013 (EuVECA Regulation) can market their interest to retail investors in the Netherlands, provided these investors subscribe for at least EUR100,000 in accordance with article 6(1)(a) of the EuVECA Regulation.

Reference is made to 4.3 and 2.1 above.

Not that we are aware of.

Whether or not there are restrictions on the use of intermediaries for the fundraising process depends on the agreements entered into with such intermediaries and the tasks performed by the intermediaries. For instance, depending on the relationship, the Dutch rules on outsourcing of tasks to be performed by the AIFM itself pursuant to Annex I of the AIFMD may be applicable. If such intermediary performs certain regulated activities in its role as intermediary, for instance as a placement agent or broke, the intermediary itself may be required to have for instance a license pursuant to MiFID II (2014/65/EU). Whether or not these rules apply should be assessed on a case-by-case basis.

No, in principle AIFMs are allowed to enter into side letters with investors. Side letters are also common practice in the Dutch investment management business.

Dutch fund agreements generally provide for a most favoured nation’s clause with respect to the disclosures of side letters to investors. Often investors are allowed to receive the side letters entered into with other investors and elect the provisions thereof (which entitlement to elect may be restricted, for instance to provisions negotiated by other investors that have a capital commitment equal to or lower than the capital commitment of the electing investor). Licensed AIFMs are required to disclose preferential treatment of investors to the other investors under article 23(1)(j) AIFMD.

Reference is made to 5.1 above.

In our experience, the most common side letter terms are as follows: rights relating to disclosure of information and confidentiality, rights to appoint members of the advisory committee, acknowledgement of co-investment appetite of investors, particular reporting requirements that investors need for internal reporting purposes and regulatory and tax requirements of certain investors.

Trend wise, in recent years we have seen an increasing number of investors emphasizing the need for AIFMs to focus on environmental, social and corporate governance (ESG) issues. Also in general the number of side letter requests from investors has substantially increased. In order to efficiently handle such requests, many of the AIFMs we assist have made an effort in aligning and standardising their side letter procedures. This allows them to address the investors’ concerns whilst limiting operational compliance costs.