In 2014 the Bahamas introduced the Bahamian investment condominium Fund (ICON) as an alternative for non-resident high net worth individuals (HNWIs) and more specifically for Brazilian HNWIs. The Curaçao fund for mutual account (Fonds voor gemenerekening), however, has many positive features as an alternative to the Bahamian ICON.
The ICON is not a legal entity but a contractual relationship between participants under which they agree to pool assets for the purpose of collective investment. Despite not being a legal entity, it can hold assets in its own name, can enter into agreements in its own name and it can sue or be sued in its own name.
The ICON is governed by an administrator which, under Bahamian law, must be the fund administrator under the Bahamian Investment Funds Act. The ICON may choose to split the role of the administrator into that of general administrator and governing administrator. In such a case the governing administrator is the operator of the fund. The role of the governing administrator can be compared with a managing director of a company. As such the governing administrator has the power to bind the ICON and bears fiduciary responsibility to the participants.
The ICON is not subject to tax in the Bahamas provided that it does not hold Bahamian assets.
The ICON is not allowed to distribute dividends or profits under the Bahamian ICON Act. Profits are distributed when the ICON is dissolved or the participant chooses to dispose of its interest in the ICON.
Curaçao fund for mutual account (Fonds voor gemenerekening)
Contrary to the ICON, the fund for mutual account (Fonds voor gemenerekening, hereafter FGR) does not have a legal basis in the Curaçao Civil Code. The FGR is, however, a known figure in Curaçao's Ordinance on Profit Tax.
Curaçao tax aspects of the FGR
The FGR is defined in the Curaçao Ordinance on Profit Tax as "a fund to obtain benefits for the participants by investing or otherwise using money, provided that the entitlement of participation appears from certificates of participation that can be transferred". Participations in a FGR are not considered freely transferable if:
- the participations can only be transferred with the permission of all other participants; or
- the participations can only be repurchased by the FGR or transferred to relatives in the direct line. In this case it is not necessary to obtain the permission of the other participants.
For Curaçao tax purposes, the FGR can be tax transparent or it can be a taxable entity. In case of tax transparency, the FGR needs to be a 'closed' FGR (besloten FGR). This means that all members have to approve the admittance of new members or the resignation of present members or the participations can only be repurchased by the FGR or transferred to relatives in the direct line.
In case of tax transparency, the profits of the FGR will be taxed at the hand of the members at a rate which is proportional to their interest in the FGR. Whether the non-resident participants are taxed in Curaçao for their interest depends on whether the FGR has any Curaçao source income.
Whether the non-resident participants are taxed for their interest in the FGR or only upon receipt of income from the FGR depends on the country of residence of the participants.
An open FGR is a taxable entity. It is not explicitly mentioned in the Ordinance on Profit Tax that the profit of the open FGR is subject to tax, but from the articles relating to the special purpose investment company (doelvermogen) it can be derived that the open FGR is indeed subject to tax. The special purpose investment company can, on request and provided that it meets certain demands, be subject to an effective tax rate of 10% instead of the normal tax rate of 25%. The Ordinance on Profit Tax explicitly states that only the open FGR can opt for the lower 10% rate. I therefore conclude that the open FGR, like the open partnership, will be subject to 25% profit tax if it does not meet the demands for a taxable special purpose investment company and does not file the request to be considered as special purpose investment company.
In order to be considered a special purpose investment company, the FGR must meet the following demands:
- The management must keep a register with the names and addresses of all participants in the FGR;
- The management of the FGR consists of an individual resident of Curaçao or a certified fiduciary office in Curaçao;
- The purpose of the FGR must be limited to investing in shares, bonds and deposits, finance and license activities;
- The financial statements must include an expert statement; and
- The FGR may not be a bank or financial institution subject to the supervision of the Central Bank of Curaçao and St. Maarten. Note that an exception is made for investment funds which are under the supervision of the Central Bank of Curaçao and St. Maarten.
Note that the above demands are only applicable on a taxable FGR that wishes to qualify as a special investment purpose company and not for the closed FGR, which is tax transparent.
The open FGR and closed FGR must not be confused with the terms 'closed-end fund' or 'open-end fund'. The terms 'open-end' or 'closed-end' determine the extent to which the fund is obligated to repurchase participations in its own capital. As we have seen before, from a tax point of view the terms 'closed fund' or 'open fund' determine that the extent to which participations can be freely sold and the extent to which new members can freely join the FGR without the express permission of the other participants.
Governance and civil law aspects of the FGR
Though the FGR is not regulated in the Curaçao Civil Code, the National Ordinance on Supervision Investment Institutions and Administrators (NOSIIA) recognises that an investment fund is either an investment company with legal personality (beleggingsmaatschappij) or an investment fund (beleggingsfonds) without legal personality. The NOSIIA defines the fund without legal personality as a "non-incorporated capital comprising pecuniary means or other property raised or obtained for collective investment with the objective of allowing the participants to benefit from the revenues of the investments". The explanatory notes of the NOSIIA do not give any examples of investment funds without legal personality but the definition in the NOSIIA contains the same elements as the definition of the FGR, that is, investing or using money for mutual account in order to obtain benefits for the participants. The definition of the fund without legal personality does not mention that the fund has a legally separated capital. As the investment fund does not have any legal personality it cannot hold any rights or duties. The NOSIIA however provides that in such cases the rights and duties are directed at management of the fund.
The investment fund without legal personality is governed by a fund manager (beheerder) and a depositary (bewaarder).
Legally separated capital
As mentioned above, the investment fund without legal personality does not have a separated capital. However, for the protection of the participants, the NOSIIA provides for a mechanism to separate the capital of the investment fund from receivables of participants or third parties and creditors of the fund.
The capital of the fund must be held by the depositary (bewaarder) to whom it is entrusted and therefore separated from the capital of the fund manager (beheerder) who is entrusted with the management of the fund. The fund manager as well as the depositary must be legal entities as a result of which the capital of the fund is separated from the capital of the management and depositary. The depositary has a crucial role as it is his responsibility to see to it that the fund manager acts according the articles of association and regulations of the fund. The fund manager needs the cooperation of the depositary and it is therefore important that both the depositary and fund manager are independent from each other.
Is the FGR a partnership?
As the FGR is not a legal entity, the question rises whether the FGR is a partnership. The answer to this question is important as the participants might be held liable in such case.
The Dutch Supreme Court ruled in the Union case that an investment fund is a partnership. However this decision does not mean that this is always the case.
The depositary opens an investment account with a prime broker in his name but with regard to the FGR. He deposits 100.
In connection with pre-financing buy and sell transactions of stocks, the fund manager has entered into a debt with the prime broker in name of the depositary. The debt is also 100. The prime broker can redress his receivable of 100 on the depositary.
The fund manager enters into a derivate contract with the broker in name of the depositary with regard to the fund. Under this contract the depositary holds a receivable of 50 on the broker.
The depositary and the broker can set off 50 against each other's debt/receivable. What remains is a receivable of 50 that the broker holds on the depositary. The broker can redress the 50 on the investment account of the depositary (which has a value of 100).
The agreement under which the FGR is formed is important. The FGR agreement must be drafted in such a way that the participants of the FGR are not held obligated towards each other to make a capital contribution, but are held obligated to make a capital contribution towards the fund manager or depositary. In such a case there should not exist a mutual obligation to make a capital contribution as is the case in a partnership. The ratio or relation between the fund manager and depositary and the participants should not be qualified as a partnership as the investment fund is managed for the account of the participants.
This brings us to the question of whether participants in an FGR that cannot be qualified as a partnership can be held severely liable for the obligations of the fund. The liability of the participants on a FGR is closely related with the question of who legally represents the FGR. Usually the fund manager closes the transactions. But does the fund manager do this in his own name or in the name of the depositary or on behalf of the fund?
As mentioned, under the rules of the NOSIIA, the capital of the fund is entrusted to a depositary. The assets and liabilities of the fund are in his name. To prevent a situation where the participants of the FGR could be held severally liable for the obligations of the FGR, the transactions for the fund must be performed on behalf of the depositary. Transaction profits and losses fall in the capital of the depositary.
When transactions are performed, it must be disclosed that the depositary (or the fund manager on behalf of the depositary) acts with regard to, or concerning (inzake), the FGR in order to realise that the goods belong the separate capital of the FGR and the counterparty can redress his receivable on the fund. See Example 1. As a result the obligations of the FGR are obligations of the depositary and the participants cannot be held severally liable.
It is not always clear for the counterparty with whom he deals. Under Curaçao case law it is important to understand whether it is known to the counterparty that the depositary is appointed as owner by way of management and it is clear to the counterparty that the depositary acts as depositary with regard to the fund.
To prevent the liability of the participants of the FGR it is therefore essential that:
- the depositary becomes the owner of the capital of the FGR; and
- with transaction on behalf of the FGR such transactions are done by the depositary or by the fund manager on behalf of the depositary with regard to the FGR.
In such case the depositary is fully liable toward the counterparty.
Cost benefit analysis
- The FGR has many similarities with the Bahamian ICON and can therefore be an interesting alternative fund structuring tool for the Latin American market.
- From a Curaçao tax perspective, the closed FGR is tax transparent if the transferability of the participation is dependent on the approval of all participants or by obligating the FGR to repurchase the certificates of participations or restrict the transferability to relatives in the direct line, or the FGR is not tax transparent and becomes subject to tax.
- The participants of the closed FGR are taxed for their interest in the closed FGR. Non-resident participants will only be subject for Curaçao income tax if the FGR has Curaçao source income.
- The open FGR is subject to profit tax and on request it can be qualified as a special purpose investment company (doelvermogen). In such case the profits will be subject to an effective tax rate of 10% provided certain conditions are met.
- Participations in an open FGR may qualify for the participation exemption rules provided certain conditions are met.
- The FGR is not a legal entity.
- Under the rules of the NOSIIA, the capital of the fund is legally separated from the receivables from the participants and creditors of the fund.
- The capital of the fund is entrusted to a depositary who must be a legal entity and a fund manager who is entrusted with the management of the fund. Fund management and depositary must be separated.
- Though the FGR has many characteristics of a partnership, the agreement of the FGR should be drafted in such a way that the participants do not have any obligations towards each other, but have an obligation to contribute capital towards the depositary.
- The participants of an FGR are not severally liable for the obligations of the FGR, such as in a partnership, provided that the depositary becomes the owner of the assets and liabilities of the FGR and the depositary, or the fund manager on his behalf, acts with regard to the fund (and not on behalf of the fund).
Steevensz|Beckers Tax Lawyers
Emile is a tax lawyer and partner with Steevensz|Beckers Tax Lawyers in Curaçao. Emile holds a BA in tax law from the Academy of the Dutch Federation of Tax Advisers and holds an LLM in tax law from the University of Leiden.
He started his career with Deloitte in the Netherlands, moving to Curaçao in 2001. He continued his career at the Curaçao office of Loyens & Loeff and, since April 1 2011, he has been a tax partner of Steevensz|Beckers Tax Lawyers.
Emile is working in the general tax practice with a focus on international tax structures and international tax planning, private equity structures, ruling practice, due diligence, aircraft lease, mergers and acquisitions, international trading structures and asset protection. Emile frequently advises high net worth individuals and their companies. In his work he frequently represents clients for foreign law offices in Europe, the US and Latin America.
Emile is associated as of counsel tax lawyer with Kraaijveld Coppus Legal, an international tax boutique in Amsterdam, The Netherlands.
Emile is a contributor to the Bloomberg/BNA VAT Monitor for Curaçao, St. Maarten and the Caribbean Netherlands.
Emile has published on Curaçao tax topics in International Tax Review, the Dutch Caribbean Legal Portal, Tax Notes International, Bloomberg/BNA and International Law Review, among others. In his most recent publication in International Tax Review he describes the M&A landscape in Curaçao.