Karel’s Legal Blog

By Karel Frielink, Attorney at Law

INTRODUCTION

The Netherlands Antilles form part of the Kingdom of the Netherlands. The other members of the Kingdom are Aruba and the Netherlands. The Netherlands Antilles in turn consist of five islands: Bonaire and Curacao (together with Aruba constituting the so-called ABC Islands, or Leeward Antilles, located in the South western Caribbean, near Venezuela; Curacao is the largest island of the Netherlands Antilles) and Saba, St. Eustatius and St. Maarten (together constituting the three S’s, or Windward Islands, located in the North eastern Caribbean, near Puerto Rico). St. Maarten consists of a Dutch and a French part, the latter of which does not form part of the Netherlands Antilles.

Apart from certain affairs that are considered to be ‘Kingdom’ affairs (e.g. defence and foreign affairs), the Netherlands Antilles have full autonomy. The Netherlands Antilles is a so-called associate member of the European Community. The purpose of such association is to promote the economic and social development of the Netherlands Antilles and to establish close economic relations between them and the European Community as a whole. With respect to the judicial system, Curacao has a court of first instance and a court of appeal and in addition Curacao falls under the jurisdiction of the Supreme Court in The Hague in the Netherlands, which is also the Supreme Court for the Netherlands itself.

The system of government of the Netherlands Antilles is a parliamentary democracy based on the Dutch model. Free elections are held every four years. Education and social security systems are also based on those of the Netherlands. Standard of living is rather high compared to the area. Dutch is the official language. English and Spanish are widely spoken, in addition to the local language Papiamento. The Netherlands Antilles guilder is pegged to the United States dollar at 1.78:1.

International financial services form an important pillar of the economy of the Netherlands Antilles. Other important sources of income include tourism, oil refining and shipping. The financial sector is supported by a number of international banks offering a wide scale of services. All of the larger international audit firms are represented in the Netherlands Antilles.

Curacao has an active representative interest group called the Curacao International Financial Services Association (’CIFA‘). CIFA consist of all market participants, including funds, administrators, corporate service providers, lawyers, tax advisers, auditors, notaries, banks and other financial institutions. Furthermore, in relation to the fund industry, Curacao has its own interest group, called the Funds Platform.

Netherlands Antilles laws are quite modern. In 2001 a new Civil Code came into effect, apart from Book 2 (Corporate Law), which came into force as of March 1, 2004. Various regulations on the supervision of the financial sector have been adopted and implemented in the nineties and early years of this century. Recently, the National Ordinance on the Supervision of Investment Institutions and Administrators 2002 (Landsverordening toezicht beleggingsinstellingen en administrateurs, the ‘NOSIIA’) and the National Ordinance on the Supervision of Trust Service Providers 2003 (Landsverordening toezicht trustwezen, the ‘NOST’) entered into force. Virtually all such laws and regulations are to a large extent based on their Dutch equivalent.

ADVANTAGES

The Netherlands Antilles provides a favourable tax, legal and regulatory climate for (hedge) funds. Advantages, in short:

1. tax neutral environment;
2. speed of formation;
3. flexible corporate structure;
4. very sophisticated and well organized supervisory authority;
5. no mandatory (Netherlands Antilles) governing law in relation to transaction documentation;
6. stable environment and more predictable rulings caused by civil law system;
7. sophisticated regulatory regime;
8. OECD and FATF compliant;
9. transparent disclosure;
10. associate member of the EU;
11. favourable geographic location;
12. no regulatory restrictions on investment policies or strategies;
13. no regulatory restrictions on commercial terms (including performance and other fee arrangements;
14. license exemption possibilities and plain vanilla registration;
15. no restrictions on the choice of service providers;
16. high quality service providers; and
17. decades of experience ahead!

TAX NEUTRAL ENVIRONMENT

It is possible in the Netherlands Antilles to discuss in advance with the tax authorities what at arms’ length remuneration will be acceptable. A tax-exempt vehicle is available for hedge funds. Furthermore, the Netherlands Antilles are concluding tax treaties with several other countries, such as Venezuela.

Withholding tax

The Netherlands Antilles do not levy withholding tax on dividends or on royalties. A withholding tax on interest on savings accounts of individuals resident in the EU has been introduced (but not yet entered into force) in line with the EU savings directive as has been implemented by for example Luxembourg, BVI and Guernsey and Jersey. The implication of the EU Savings Directive in Europe and a lot of other countries are burdensome for funds and administrators qualifying as UCITS. As opposed to e.g. the Cayman Islands, funds established in Curacao do not qualify as UCITS and therefore there is no need to withhold on redemption or pass client information to tax authorities in third countries.

Corporate tax

The Netherlands Antilles corporate taxation will depend on the kind of vehicle used for (hedge) fund. Please note that the below only applies if the (hedge) fund is a resident of the Netherlands Antilles for Netherlands Antilles corporate income tax and (if applicable) tax treaty purposes. Consequently, certain substance requirements should be fulfilled in the Netherlands Antilles.

Tax exempt status

Under certain conditions it is possible to obtain a tax-exempt status for a BV. As a consequence of this status, a BV will not be subject to Netherlands Antilles corporate income tax. To obtain such status a number of criteria will have to be met. On request, we can provide you with more in depth information.

On September 9, 2004 the tax authorities announced an anti-misuse rule. The exempt status will be revoked if the company?s profit exists for more than 5% of its profits out of dividends from companies that themselves are not subject to a profit tax at a rate of at least 15%. Please note that we have a more in-depth memorandum on the (tax-exempt) BV available at your request.

Vat and other taxes

Since interest is not considered a taxable remuneration for Netherlands Antilles turnover tax purposes, there is no Netherlands Antilles turnover tax payable in respect of the payment of interest. Also payments in consideration for the issue by the (hedge) fund of shares, or the transfer of Notes or, principal or premium (if any) under debt securities are not subject to the Turnover tax.

Turnover tax will in general be incurred on fees payable to investment advisers / managers, lawyers and accountants. VAT will also be due on any fee paid to the Netherlands Antilles trust company. However, in case certain conditions are being met, (hedge) funds will be exempt for turnover tax purposes. Also, in that case no turnover tax will be due on any fee paid to investment advisers/managers, lawyers, accountants or the Netherlands Antilles trust company. We can provide you with more in depth information on request.

CORPORATE: speed of formation and flexible structure

From a legal point of view, establishing a fund in Curacao has become very attractive since under new corporate law a private limited liability company (besloten vennootschap) can be established very quickly and very flexible. Virtually everything is possible with this new legal entity. There is no minimum issued share capital requirement. Incorporation can be done within a day and without the need for any prior governmental approvals. It is possible to split voting rights and dividend rights. There is no statutory requirement to have shares with a par value. The set up and maintenance costs of a private limited liability company are low. There is no annual government fee, only a one time fee at incorporation (US$ 175, incorporated in the notary’s fee) and an annual chamber of commerce fee. The articles of association can be in the Dutch, English, Spanish or Papiamentu language. Even another language is possible as long as the public notary understands it.

There is no requirement from a corporate law point of view for a fund to have any employees and it may have a single managing director (which can even be a corporate entity) who may be domiciled in the Netherlands Antilles or elsewhere, provided that the fund performs its business outside the Netherlands Antilles. There are no specific statutory formalities to comply with in order to have meetings of the board of managing directors (or board of supervisory directors). For instance, there are no statutory regulations in connection with the location of board meetings.

Both open- and closed-end funds are possible. There are many exclusion, exemption and dispensation possibilities from a license requirement under the regulatory regime. Master/feeder structures, multiclass, umbrella funds and hybrid debt/equity structures are all possible.

REGULATORY BODY

The Netherlands Antilles have one regulator: the Central Bank of the Netherlands Antilles (Bank van de Nederlandse Antillen, the ‘Central Bank’). The Central Bank is a separate legal entity (rechtspersoon) having its seat at Curacao.

The Central Bank is also an independent administrative body (zelfstandig bestuursorgaan) and is therefore not subject to the political responsibility of the Minister of Finance.

The tasks of the Bank include, inter alia, circulating coins and bank notes (circulatiebank), enhancing stability of the value of Netherlands Antilles currency, acting as central currency bank (deviezenbank), regulating cross-border payment transactions and acting as supervisory body in the Netherlands Antilles (prudential supervision).

The supervisory authority is delegated to the Central Bank in article 11 of the Central Bank Statute 1985 (Centrale Bank-Statuut). Each time when a relevant new supervisory regulation comes into force, article 11 is amended so as to allocate the new supervisory task to the Central Bank. The supervisory regulation itself sets out the specific tasks and authorities of the Central Bank in relation to the area of supervision.

The Central Bank’s supervisory role varies, inter alia, from (i) monitoring compliance with supervisory laws and issuing licenses and exemptions as prescribed therein, to (ii) formulating rules, directives and guidelines based on discretions granted to the Central Bank in the relevant supervisory laws (and monitoring compliance with such rules, directives and guidelines).

The Central Bank is a very sophisticated regulator based on and partly trained by it’s Dutch equivalent. Overall, the legal and institutional framework for financial sector supervision meets high standards. It is comprehensive, effective, and to great extent in line with international standards. The Central Bank’s staff is highly capable, well-trained and dedicated, and is able to attract appropriate personnel and material resources to perform its functions. The Central Bank supervises and monitor’s the financial sector and issues guidelines, which are downloadable on its website, as are the main rules and regulations.

CIVIL LAW AND GOVERNING LAW

Transaction documentation does not have to be governed by Netherlands Antilles law and can be governed by any law. Moreover, (transaction) documents, including articles of association, can be drafted and filed in almost every language. Furthermore, there are no regulatory restrictions on commercial terms (including performance and other fee arrangements). Some people consider the civil law system of Curacao as a weakness because its differences with common law to which certain investors are used. However, civil law produces a more stable environment and more predictable rulings. Often misunderstood, Curacao’s Civil Legal system can offer advantages over other established (Common Law) legislative frameworks as it provides a greater degree of stability and predictability through established legislation and a fixed ruling environment, as opposed to evolving jurisprudence. Curacao forms an integral part of a larger whole, The Kingdom of the Netherlands and the European Union, nurturing a greater degree of comfort to investors as opposed to independent territories.

INVESTOR CONSIDERATIONS

Investor considerations also often drive the fund location. The Netherlands Antilles are a so called associate member of the EU, which makes a Netherlands Antilles fund attractive to European investors. The Netherlands Antilles are also a member of the OECD. The jurisdiction of residence of a fund has become an increasingly important issue that may seriously affect the sale of securities to regulated EU investors. Also, from a reputational perspective certain investors are less comfortable with investing in a tax haven fund than in a fund incorporated in the EU or an associate member state of the EU.

A new regulatory regime (new NOSIIA, NOST and new anti-money laundering rules) provides for comfort to investors and Curacao is not listed on any blacklist (OECD, FATF).

The regulatory regime focuses on full and transparent disclosure, both in the offering documentation as to the regulatory authority. This enables prospective investors to make a thorough decision whether or not to invest. Furthermore, because of the control of the regulatory authority, the chance to end up in Enron like scandals remains very low and on a very acceptable level.

Another important factor for fund managers and investment managers is how convenient is it to travel to the location if you must get there, e.g. if meetings are needed. Curacao has an international airport and twice a day American Airlines fly from Miami to Curacao. Also good connections with New York are available. Another advantage of Curacao is that Curacao is in the same time zone as NY.

From a fund administration point of view we live in an ever increasing virtual world where location is subordinated to continuity. Systems and technology determine this to a great degree. Telecommunications are essential: high speed, high quality and modern communication to deal with the data flow between the fund, the manager, the administrator and the prime broker. Curacao?s telecommunications infrastructure is perfect, proven by the fact that Curacao is developing with its e-zones (low-tax) as an e-commerce domicile of choice. And since the geographic location of Curacao is outside the hurricane belt, it is not to be expected that such infrastructure will be ruined by nature.

REGULATORY REGIME

Investment institutions

The primary objective of the NOSIIA is to introduce a regime of supervision for investment institutions and administrators in the interest of an adequate operation of the financial markets and the position of the investors in those markets. Since a large number of investment institutions, whether or not themselves established in the Netherlands Antilles, have administrators in the Netherlands Antilles, administrators are subject to supervision as well.

The NOSIIA has adopted the principle ‘include first, exempt later’. This means that, inter alia, the statutory definition of ‘Investment Institutions’ (beleggingsinstellingen) is somewhat wide. For the purpose of the NOSIIA, an Investment Institution, which is issuing and re-acquiring participating interests at the request of the public, is regarded as ‘open-end’. If the institution does not on an on-going basis issue or re-acquire participating interests, then it is regarded as a ‘closed-end’ Investment Institution. Hybrid forms are possible as well. If an Investment Institution has been structured as a closed-end Investment Institution, but in practice acts as an open-end one, it will be regarded as the latter for the purposes of the NOSIIA.

Exceptions, exemptions, dispensations and exclusions

The following persons and entities have been expressly excluded, whether in the Explanatory Memorandum to the NOSIIA or by the Central Bank, from the definition of Investment Institutions: (i) holding companies, (ii) securities brokers and (iii) venture capital companies.

Partial exemptions can be requested from the Central Bank for an Investment Institution that can demonstrate that it (i) cannot be reasonably expected to satisfy all license requirements; and (ii) is a foreign Investment Institution subject to adequate home-country supervision.

Apart from the above partial exemptions, various general exemptions are available. If such a general exemption applies, no further stipulations under or pursuant to the NOSIIA apply to the Investment Institution in question. However, it should be noted that the NOSIIA treats administrators separately (see below) and hence, that an administrator to an exempted Investment Institution may be regulated. For example, general exemption is available to Investment Institutions (i) for which money or other pecuniary means are raised and obtained in a ‘restricted circle’, or (ii) for which participating interests are solicited or obtained from ‘professional parties’ only, i.e. natural persons who, or legal entities which, in pursuit of their occupation or business deal or invest in investment objects.

Furthermore, Investment Institutions that offer their participating interests only or also to natural persons and/or legal entities considered by the Central Bank to have comparable skills and competency as the professional parties to form their own balanced opinion about the offer being made, may in individual cases be exempted. In determining whether an institution qualifies for this exemption, the Central Bank particularly considers the target group to whom the institution’s participating interests are offered. This exemption, which is strictly spoken individual dispensation, is available only if the minimum initial subscription amount is at least US$ 50,000 (or its equivalent in another currency).

Administrators

It is not allowed to exercise the business of Administrator (administrateur) in or from the Netherlands Antilles without prior licensing from the Central Bank. The NOSIIA defines an ‘Administrator’ as a legal entity that has the purpose of providing Administrative Services.

The NOSIIA in turn contains an exceptionally wide definition of ‘Administrative Services’, i.e. the providing of services to Investment Institutions, whether or not against payment. The NOSIIA list three examples of Administrative Services (in short offering of management, administration and/or domicile services), but states that the list is not exclusive.

Whether a regulated Administrator has its registered office in or outside the Netherlands Antilles, it must apply for a license. To be granted a license the Administrator will have to satisfy certain requirements, divided into two categories. The first category concerns the competence and integrity (of which probity testing is a constituent) that the Administrator is expected to have. The second category concerns management and business operation. The NOSIIA requires that the Administrator is a separate legal entity (rechtspersoon).

SERVICE PROVIDERS

The quality of service providers is high and Curacao has decades of experience in the offshore industry. Curacao has been an important player in the field since the 1960’s when such well known fund groups as George Soros’ Quantum Funds and Julian Robertson’s Tiger Funds began funds in the jurisdiction. Attorneys, trust companies, company managers etc. have a strong tradition in providing (offshore) financial services. Most professionals working in this area are educated in Europe and the US. For example Spigthoff Attorneys & Tax Advisers’ employees are all educated in Europe and some have additional US education and a lot of employees formerly worked at the magic circle law firms. All of the larger international audit firms are represented in the Netherlands Antilles and almost all large financial institutions from the Netherlands are located in Curacao.

Curacao also has a history of providing high quality fund administration services to several very large and prestigious offshore fund groups. Some of the largest fund administrators in the world have a sizable presence in Curacao. Since the beginning of 2004 all Netherlands Antilles corporate services providers are required to be licensed by the Central Bank and are fully subject to integrity and customer due diligence requirements, which provides international investors with further comfort.

CONCLUSION

Curacao plays a dominant role in the funds administrator industry. For some reason, it appears that the advantages of establishing funds in the Netherlands Antilles is relatively unknown in the offshore fund industry. The Netherlands Antilles provide for a favourable legal and tax regime for the establishment of (hedge) funds. A private limited liability company can be established very quickly, with low cost and flexible regarding the corporate structure. Furthermore, a tax exempt status is possible and there are many exclusions, exemptions and dispensations available from a license requirement. There are no specific dangers for the development of Curacao as a domicile for (hedge) funds. Given its past experience and the renewed focus of the jurisdiction recognizing the importance of being a leading financial services centre, including for the (hedge) fund industry, there are more opportunities than dangers for the future!

Curacao, January 2006

This contribution is designed to provide a summary of certain aspects of fund legislation in the Netherlands Antilles. It is not intended to be comprehensive or to provide specific legal advice. For more information, contact Karel Frielink, Xandra Kleine, Martijn Welten or Frank Promes (e-mail: firstname.lastname@spigthoff.com; Phone +599 9 461 8700). Alternatively, speak to your usual Spigthoff contact.

Spigthoff Attorneys & Tax Advisers