Closed-end Real Estate Funds in the Netherlands

Closed-end real estate funds in the Netherlands

Introduction

Notwithstanding the critical voices in the market, investors are looking for a way to invest in real estate. In this respect, we have seen an increase in interest for closed-end funds the last couple of months. Both fund initiators and investors are examining the possibility to invest in real estate through a closed-end fund. The Netherlands count numerous domestic and foreign closed-end real estate funds that have the legal form of a limited partnership. Especially fund initiators in Germany, France and Ireland offer real estate funds in the form of a limited partnership that invest in the Netherlands. Below we will explain concisely what makes a limited partnership so interesting from a legal and tax point of view.

What is a limited partnership under Dutch law?

In short, a limited partnership under Dutch law is an agreement between one or more general partners (beherende vennoten) and the investors, the limited partners (stille vennoten). The partnership is aimed at a lasting co-operation for which purpose the partners undertake towards one another to make contributions, in order that all of them shall share in the resulting profits. The limited partners are not liable towards third parties for obligations of the partnership duly entered into by the general partner, provided that the limited partner does not conduct acts of management and does not become active in the affairs of the limited partnership and provided that the name of the limited partner, or a significant part thereof, is not used in the name of the partnership.

Who owns the property?

As opposed to some other countries, a limited partnership under Dutch law does not have separate legal personality. The absence of legal personality leads to a number of uncertainties in daily practice. For example, it is not always clear who owns the assets used for the partnership. Legal doctrine and practice have come up with many practical solutions. For example:

1.   the full ownership (i.e. the legal and beneficial ownership) of the real property is held by all partners in co-ownership;

2.   the legal ownership of a real property is held by the general partner and the beneficial ownership is held on behalf of the fund c.q. all limited partners. In this case the real property will be legally owned by the general partner, who is also the one registered as owner in the public registers for real property. The general partner is authorised to dispose of the real property or to encumber it with mortgage rights. Amongst the partners there will exist arrangements regarding the beneficial (economical) rights, the limited partners will have claims towards the general partner(s);

3.   none of the partners are legal owner of the real property; the legal ownership is held by a custodian (bewaarder) and the partners have arrangements regarding the beneficial (economical) rights.

The scenarios under 2 and 3 are commonly used by closed end real estate funds in the Netherlands. A pending bill of law will change this, as we will discus below.

So why choose a limited partnership?

A limited partnership is treated as transparent for Dutch (corporate) income tax purposes if the issuance and transfer of a partnership interest requires the approval of all partners. The classification as transparent entity means that the partnership is not subject to corporate income tax or dividend withholding tax but that the income is allocated to each partner in proportion to its partnership interest. As a result the taxable income generated with the investment will not be taxed at the level of the fund itself but at the level of the investors in the fund. The rules on transparency for Dutch tax purposes do not just apply to Dutch limited partnerships, but also to foreign partnerships that are comparable to Dutch limited partnerships. Therefore, a limited partnership may constitute a tax efficient vehicle for different kinds of investors, both Dutch and non-Dutch, who want to invest in Dutch real estate.

What does the approval requirement mean in practice?

According to the Dutch Ministry of Finance the aforementioned approval is required from both the general and the limited partners. The requirement that approval is necessary should emerge not just from the partnership agreement itself but it should also be supported by the factual situation.

The fact that each time a partnership interest is transferred all partners must give their prior approval, can be very unpractical especially in case of a large number of investors. In a decree of January 11, 2007 the Dutch Ministry of Finance has therefore announced that if the existing partners in a fund have been asked their approval for the issuance or the transfer of a partnership interest in writing and none of the partners have refused this approval within four weeks, the approval may be deemed to have been granted unanimously. The four week period starts on the day on which all partners have been requested in writing to grant their approval.

When a new fund is set up, investors will generally not all sign up for participation at the same moment. It would be burdensome to ask the existing participants to grant their approval every time a new investor joins. Therefore, in the same decree the Dutch Ministry of Finance has provided for a facility for new funds according to which the fund may benefit from a special 6 month period during which period investors may basically join the limited partnership without the prior consent of all other partners being required (the free admission period).

Where will the investor be subject to tax?

If an investor invests in a limited partnership (either a Dutch limited partnership or a comparable foreign entity) that can be classified as transparent for tax purposes and this limited partnership has invested in Dutch real property, the investor will become subject to taxation in the Netherlands. Depending on the country of residence of the investor, this investor may also be taxed in his own country. However, the Netherlands has an extensive tax treaty network. Most tax treaties will allocate the right to the taxation of income from real estate investments to the country where this real property is located. This way a taxpayer is not taxed twice for the same income.

Changes to Dutch partnership law with impact on closed-end real estate funds

A pending bill of law will provide a simple cure for the uncertainties regarding the ownership of real properties by foreseeing in the option that separate legal personality be attached to a partnership. A Dutch limited partnership then can opt for legal personality, which means that the limited partnership itself can obtain ownership of the assets. An act of disposition performed by an authorized general partner is to be considered an act of disposition of the partnership/legal entity itself.

According to the parliamentary documents all assets contributed to the partnership will be owned by the partnership. The partners will have a "share" in the partnership, and therefore indirectly they will have a "share" in the partnership's assets.

The election for legal personality will not change the current Dutch (corporate) income tax and Dutch dividend withholding tax treatment of the limited partnership and its partners.

Summary

Even in challenging times investors are looking for a way to invest in real property. A limited partnership is an agreement and may be used to structure investments. If transparent, the limited partnership is not subject to corporate income tax or dividend withholding tax. A pending bill of law will enable Dutch limited partnerships to opt for legal personality. Election for legal personality will not change the current Dutch income and corporate tax treatment of the limited partnership and its partners. Therefore, the limited partnership may offer an effective alternative for structuring real estate investments in the Netherlands.