www.islamicnancenews.com
SECTOR REPORT
Opportunities for Cross-Border Islamic Finance in the
Netherlands
By Niels Muller
International nancing hub
The world of international tax planning is rapidly changing due to the
large scale attack on tax havens, supported by the Organization for
Economic Cooperation and Development, the Group of 20 developed
and developing nations and several world leaders. Although little is
still known about the exact legislative changes to be implemented
around the world, it seems inevitable that this changing approach
to tax havens will also have an impact on structuring cross-border
Islamic nance transactions. It is therefore likely that investors
will not only require tax efcient but also sustainable and stable
investment structures.
The Netherlands has traditionally played a leading role as a home
for international nancing and holding activities, due to three key
advantages:
• It has an extensive global tax treaty network.
• The comprehensive participation exemption avoids double
taxation in relation to qualifying shareholdings.
• The possibility to obtain certainty in advance from the Dutch
Revenue Service is favored by many foreign investors. In
addition to tax efciencies, the Dutch legal and regulatory
framework also caters well to the needs of foreign investors.
An often overlooked advantage is the Dutch bilateral investment treaty
(BIT) network. Under a BIT, investors are, among other things, protected
against expropriation by the state in which the ultimate investment is
made. Not only is the Dutch BIT network a frontrunner in the number of
BITs concluded (over 100), some of its BITs also have specic benets
compared to those entered into by other countries.
For example, only the Dutch BIT with China provides that in case of a
conict, arbitration will take place in international courts rather than in
Chinese courts. Only the BIT with Germany contains a similar provision.
In addition, most BITs entered into by the Netherlands have so-called
indirect applicability, which means that the use of an intermediate
Dutch holding company is sufcient to access the relevant BIT.
The Netherlands is rather well known as a suitable hub for structuring
cross-border Islamic nance transactions. Until now, mainly Shariah
compliant private equity and real estate structures have been set up
by foreign investors and nancial institutions. The local market is still
in a development stage although the Dutch tax and legal framework is
very suitable for hosting Islamic nance.
There is however a growing interest in Islamic nance within the Dutch
nancial and academic communities, evidenced by, among others, a
report by the Dutch Central Bank and the nancial regulator on Islamic
nance, the Holland Financial Center initiative to promote Islamic
nance, and the large turnout, about 120 participants, at a recent
Islamic nance seminar at our Amsterdam ofces.
Dutch tax system does not require any major changes to facilitate
Islamic nance transactions. The Netherlands is therefore put at a
disadvantage from a marketing perspective as it cannot use changes
in tax legislation to promote its Islamic nance industry.
Flexible prot calculation method
A specic advantage of the Dutch tax system for Islamic nance
structures is the prot calculation method. Unlike in the UK, for example,
there is no different tax treatment for different types of income. This
means that, for example, trading losses can be offset against capital
gains and vice versa. Since in Islamic nance transactions, income is
often assigned a different qualication than in conventional nance
structures, this has proven to be a signicant advantage over prot
calculation methods that treat different types of income separately.
The risk of a mismatch causing tax leakage is therefore minimal under
the Dutch tax system.
Advance tax rulings available
The widely accepted substance-over-form approach in tax matters, in
combination with the generic nature of the rules for prot determination,
leaves room for the Dutch Revenue Service to agree in advance on an
interpretation of the contractual relations. Such agreement achieves
clarity for investors.
No withholding taxes
The Netherlands does not levy a withholding tax on interest and royalty
payments. If an Islamic nancing qualies as the provision of debt for
tax purposes, then no tax will be withheld in the Netherlands on any
payment under such debt. The Netherlands does levy dividend withholding tax at a rate of 15%. However if, for example a Dutch cooperative (as discussed in more detail below) is used for investments in
active business enterprises, no dividend withholding tax should apply.
Tax treaties
In total, over 80 tax treaties have to date been concluded by the
Netherlands. Treaty countries specically relevant to Islamic nance
are Malaysia and Kuwait. Treaties with Qatar, Bahrain, the UAE and
Saudi Arabia are expected to enter into force in the near future. For the
application of the tax treaties concluded by the Netherlands, payments
under qualifying debt instruments (such as certain Sukuk issues)
will fall under the “interest” article, in which case no withholding tax
will be due. Interesting in this respect is that in the tax treaty with
Bahrain, Article 11 uses the term “income from debt claims” instead
of “interest”.
Islamic nance and Dutch taxation
Deductibility of nancing costs
An important question for corporate tax purposes is whether nancing
costs relating to an Islamic nance transaction are deductible. In the
Netherlands, the mark-up paid under a Murabahah nancing, or the
nancing component in an ijarah nancing, will generally be deductible,
assuming that it is an arm’s-length transaction with a third party (for
example the nancing bank).
The existing Dutch tax system is generally suitable for Islamic nancing
transactions. Unlike the UK and France, where some amendments
to the tax legislation were made (and more are still required), the
For a Sukuk issue which qualies as a debt for Dutch tax purposes, the
period distribution amount (prot for the Sukuk holders) should, as a
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SECTOR REPORT
rule, also be deductible under current law and regulations. This can be
conrmed in a tax ruling by the Revenue Service.
legal, regulatory and tax framework that suit the changing investor
requirements.
Value added tax (VAT)/real estate transfer tax (RETT)
VAT and RETT, if the nancing relates to Dutch real estate, often
play an important role in Islamic nance transactions due to the fact
that each transaction needs to have one or more underlying assets.
Depending on the nature and location of such assets, the application
of VAT or RETT should be considered. It falls outside the scope of this
general summary to discuss this further. However, note that for most
Islamic nancing products it is possible to consult with the Revenue
Service in order to avoid undesirable VAT or RETT consequences. For
example, it should be possible to structure most ijarah-based real
estate nancings without VAT leakage or double RETT.
Dutch tax exempt partnerships
Dutch limited partnerships (commanditaire vennootschap), as well
as general partnerships (openbare vennootschap) can be structured
as tax transparent funds. Also, a general partnership structure from
which a Sukuk is issued can be accommodated under Dutch law (and
in our experience, the Dutch Revenue is willing to conrm the tax
treatment in a ruling). The Dutch partnership is therefore an attractive
vehicle to bear in mind when, for example, structuring a Musharakah
or Mudarabah transaction.
Dutch stichting acting as trustee or agent
An example of how the Dutch legal framework can play a facilitating
role in cross-border Islamic nance transactions is the use of a Dutch
foundation known as a trustee or agent (wakeel). The stichting is
already recognized as an efcient vehicle to act as trustee or agent in
conventional structured (asset) nance transactions. The main benet
of using a stichting as a trust vehicle is its separate legal personality
without having outside shareholders, thereby bundling control rights
and limiting the liability of investors.
Moreover, a stichting can be set up in such a way that the investors can
have more “grip” on its activities than is possible with a common law
trust. This can simply be done by limiting its objectives and authority to
act vis-a-vis third parties and nomination/resignation rights in respect
of its directors.
Another advantage of using a stichting is that it is easy to set up and
the compliance costs are generally marginal. Finally, as opposed to
certain offshore vehicles (as often used in more traditional structures),
a Dutch vehicle can have the benet of an European Union (EU)
passport facilitating an onshore listing of the Sukuk within the EU (at,
for example, Euronext Amsterdam). If a stichting does not carry on an
enterprise, it is not subject to corporate tax in the Netherlands, unless it
enters into competition with (taxable) entrepreneurs. Payments made
by a stichting are not subject to withholding taxes in the Netherlands.
Practical example: Saxony-Anhalt Sukuk
In the 2004 Saxony-Anhalt Sukuk issue, for example, a stichting was
chosen to issue certicates to investors relating to the income derived
from certain ofce buildings located in the German Bundesland
Saxony-Anhalt. Effectively, a lease and lease-back transaction was set
up in respect of real estate in Germany.
In this transaction the Dutch stichting entered into a long lease as an
issuer of the Sukuk. The long lease was then paid off in advance using
the proceeds of the Sukuk issue. Saxony-Anhalt then leased the real
estate back from the stichting under a ve-year lease contract. The
Sukuk holders’ prot entitlement was included in the rental payments
made to the stichting.
Opportunities
Following the trend that investors require a stable and transparent
investment climate, Islamic funds are increasingly structured as
onshore (regulated) funds instead of offshore (unregulated) funds.
The Netherlands provides several investment vehicles with a exible
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Exempt investment fund regime
A fund for joint account (fonds voor gemene rekening) or a public
limited company (NV) obtaining a tax exempt status (vrijgestelde
beleggingsinstelling or VBI) may also serve as a suitable investment
vehicle for Islamic investors. By obtaining the VBI status, the fund will
not only be exempt from any taxation in the Netherlands, it will also be
released from any tax compliance obligations. Also, no requirements
as to the administration or management of the VBI are applicable. For
example, a semi-open ended fund managed from Bahrain or Malaysia
investing in (listed) Sukuk should be able to obtain the VBI status.
Cooperative as efcient private equity investment vehicle
The Dutch cooperative (coöperatie) has been increasingly popular
for structuring cross-border private equity investments. The main
attractions are the exible corporate governance rules, the absence
of any capital protection rules (avoiding trapped cash issues) and the
fact that prot distribution to members are not subject to dividend
withholding tax.
The combination, with the comprehensive participation exemption
under which all benets from qualifying participations are exempt
from corporate tax, has made the cooperative a vehicle of choice. In
addition, the roots of the cooperative, as a vehicle to share the prots
of a joint enterprise amongst its members, matches well with the basic
Islamic principles of risk sharing and entrepreneurship.
Concluding remarks
This article provides a summary of some of the benets the
Netherlands has on offer when structuring cross-border Shariah
compliant investments. The Netherlands should be on any the short list
when structuring cross-border Islamic nance transactions, especially
in these changing times when investors are not only looking for tax
efciency but also for transparency and cost-efciency.
Niels Muller
Senior Associate (Tax),
Co-head Islamic nance team
Loyens & Loeff
P O Box 71170, 1008 BD Amsterdam
Fred. Roeskestraat 100, 1076 ED Amsterdam
The Netherlands
Tel: +31 20 578 57 85
Fax: +31 20 578 58 00
www.loyensloeff.com
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