A leading law firm in The Netherlands is mulling an appeal against the Dutch authorities’ decision to charge VAT on the management fees of collateralized loan obligations.
Baker McKenzie, which represented the vast majority of Dutch CLO clients last year, is in talks with the officials to better understand the rationale behind the revision, and to see whether there are alternative solutions.
CLO issuers, lawyers, large banks and professional service providers have received letters from the government informing them that an existing exemption on VAT for investment firms is no longer applicable to transactions involving CLOs and collateralized debt obligations. That means that an annual 21% tax will be applied to the management fee of CLO vehicles, and backdated to April 2019.
If the law firm decides to contest the decision it would be the latest in a series of appeals against regulatory rulings with negative consequences for the CLO industry.
“We think there is a case to be made to challenge the position of the Dutch authorities,” said Folkert Idsinga, tax partner at the Baker McKenzie’s Amsterdam office.
“Any challenge to this decision will be based on what our clients want, but we are in conversations with the tax authorities now to see if anything can be done to change things,” said Philippe Steffens, securitization partner at the law firm, also based in Amsterdam.
Ruling Precedent
The tax authorities have based their decision on the Fiscale Eenheid X 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, said Idsinga.
But the Baker McKenzie partners argue that because CLOs have MiFID licenses, they should qualify as being under official oversight, in the same way as funds with UCITs or AIFM licenses.
In addition, the lawyers say in a February 25 client alert seen by Bloomberg News that Dutch SPVs or their managers should be given an appropriate grace period, as “the retroactive effect of the Letter as well as the absence of a grace period breaches the principle of legal certainty and the principle of legitimate expectation.”
High Stakes
There’s a lot a stake if the authorities stick by their decision.
On a deal level, the fact that the tax is back-dated to April last year will slap existing transactions issued via a Dutch SPV with a one-off charge -- estimated at around 400,000 euros -- that will be taken from the equity notes. The same amount will then be charged to each vehicle on an annual basis until it matures.
Such a hefty charge is likely to drive CLO managers to other jurisdictions, including Luxembourg and Ireland, for their future CLOs. That would be a major blow for the Dutch CLO industry, including the law firms and the corporate service providers that support that market.
Still, while other European tax authorities currently maintain a more favorable position when it comes to taxing CLOs, there is a risk that authorities from these other jurisdictions follow suit, Idsinga said.
If the Netherlands goes ahead with this decision, it won’t be just CLO equity investors who will suffer, he added.
“This reversal will also be bad news for the Dutch tax authorities in terms of the substantial loss of VAT they collect from trustees, rating agencies and also law firms on these Dutch CLO SPVs, as well as corporate tax payable by Dutch CLO SPVs,” said Idsinga.
