Benelux's PE legislation: Clearing up or losing ground?

July brought about two regulatory updates in the Benelux private equity world: Luxembourg announced the modernisation of its company law, while the Netherlands put forward proposals for amendments to existing regulation regarding tax deductions on debt and shareholder loans.

While the Luxembourg company law reform will be implemented in September, the proposed changes in the Netherlands are still to be debated in parliament in October as part of the government's new tax plan.

One of the major aims of Luxembourg's company law reform is to make the Grand Duchy an even more attractive place for international investors and for private equity firms looking for a fund domicile.

Among the new measures, those which pertain most directly to private equity are those related to limited liability companies (the SARL structure). These company types will, for example, benefit from the following new rules: an increase in the maximum number of shareholders from 40 to 100; a reduction in the minimum share capital to €12,000; the ability to issue interim dividends, beneficiary and redeemable shares, sweat equity and bonds to the public; permission to increase capital within the limit of authorised share capital; and allowances for delegating daily management to a board member.

These measures have the overall effect of making SARLs much more flexible and easier to use for joint ventures and private equity investors.

The new rules clearly open new ways for fund structuring. They are more in line with Anglo-Saxon practices and free the market from the stranglehold of civil law and traditional corporate law principle" – Nicolas Marchand, DLA Piper

"The project has been under review for about nine years," says Nicolas Marchand, senior associate at DLA Piper. "The reference text for company law dated back to as far as 1915, and had received few modifications since.

"This allowed for great flexibility as practices were not always codified, but, at the same time, it was a weakness, as at times we were lacking the legal basis to support certain procedures – that's what was partly at the root of the current changes."

Marchand describes the benefits resulting from these updates in two ways: first, it is about giving the country the right tools to stay up to date with current practices, with a clearer and more secure legal basis; and second, changes are designed to meet the needs of locally incorporated funds, promoting modernised and flexible practices.

"The new rules clearly open new ways for fund structuring," Marchand says. "They are more in line with Anglo-Saxon practices and free the market from the stranglehold of civil law and traditional corporate law principles."

The verdict thus seems to be clear: the Luxembourg company law reform is clearly a beneficial one for the private equity industry and sees the country live up to its reputation as a private equity stronghold.

Limiting Dutch shareholder loans
In the Netherlands, the proposed changes are "more like minor tweaks than actual reforms", explains Felix Zwart, who is in charge of public policy and regulatory affairs at NVP, a Dutch private equity and venture capital lobbying organisation.

Aside from the ongoing discussion around the loopholes left by the much-debated 2011 tax change, which limited tax deductions on debt interest for takeovers leveraged beyond the 60% mark, a new point has now been raised by Dutch lawmakers.

According to the current rules, an investor holding a stake of less than 33% in a company can deduct interest on shareholder loans in the Netherlands. The government is, however, willing to redefine the notion of "cooperating group", offering to treat all co-investors as a single entity, rather than as individual LPs. As a result, the 33% threshold would be reached much faster and interest deductions for investors would, again, be more limited.

"This is a proposal that we are very much against," says Zwart, "as it assumes we primarily structure our companies in such a way as to avoid tax. It is a total misconception about how private equity works. Our structures have very valid economic reasons and are made to accommodate investors from certain jurisdictions – this is our rationale, and not the other way around."

Though these proposals might give the impression that Dutch lawmakers still want to tighten the screws of private equity regulation, conditions seem to have improved overall: "The government has publicly said it welcomes private equity investors and their contribution to the economy," Zwart says. "The proposed changes should only be seen as technical adjustments – not as major threats."

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