Dutch CLOs hit with VAT bill – Ireland is likely to be their new home

Dutch tax authorities have recently revoked a previous tax ruling in which collateral and administration fees were deemed as VAT exempt. Now, a 21% Dutch VAT rate will retrospectively apply on them from 01 April 2019.

The most tangible economic impact will be a drop in yield of about 10 basis points to be borne by equity noteholders. Other potential implications could materialise in the way of rating changes across deals’ capital structures and certain mark-to-market volatility.

Research shows that about 20% of all European CLOS are incorporated in the Netherlands, with Ireland accounting for over 70% of that market. Expectations are that Collateral Managers may decide to relocate their investment vehicles to alternative jurisdictions to avoid the increased cost of having to cover Dutch VAT charges. In this regard, Ireland features as a preferred jurisdiction of choice due to the already existing gold standard eco-system for servicing CLO structures. With a favourable issuer regime, a minimal share capital requirement of €1 for incorporation purposes, and a reputable listing exchange (Euronext Dublin), Ireland is an attractive business jurisdiction.

We’re liaising with a number of business partners with regards to the legal mechanisms that may provide for the migration of CLOs from the Netherlands to any other jurisdiction. There are currently a number of different strategies being considered depending on where in the life cycle the deal is at. Deal resets or cross border merger processes are seemingly the best workable alternatives, with each option attracting different degrees of complexity.

We remain at the forefront of these developments, so please get in touch to discuss the most appropriate solution for your position.