Update on the position of Dutch Group Finance Companies
In the Legal and Regulatory Risk Note of October 2013, we reported on a proposal to tighten severely the conditions under which Group Finance Companies (GFCs) would be exempted from banking licence requirements and extensive financial supervision. As mentioned in the article, the original proposal was met with strong criticism by several respondents. These criticisms and further consultations with the Ministry have led to a fundamentally changed proposal which was submitted to Parliament last April.
The changed proposal means that the existing exemption facility will remain available for industrial groups largely in the same manner as is currently the case, but the facility will be tightened for groups whose main business is in the banking sector.
Dutch GFCs are subsidiaries of multinational companies, and are used to raise funds by issuing debt instruments. GFCs are set up by multinationals in the Netherlands mainly for reasons of tax and legal convenience. The funds that GFCs attract are on-lent within the group to which the GFC belongs. Because of the special nature of GFCs and their limited objective of group funding, it has always been established policy in the Netherlands to exclude these GFCs from bank licensing requirements and financial supervision, if they meet certain conditions, for example:
- the GFC must have the benefit of an unconditional guarantee by the parent company, a keep well agreement from the parent company, or a guarantee by a third party bank for the liabilities incurred by the GFC; and
- at least 95% of the proceeds of debt instruments issued by it are made available to the group to which the GFC belongs.
The GFC exemption facility has proven to be rather popular, mainly with larger multinational concerns. International banking groups have also used the facility.
Amended Section 3:2 Financial Supervision Act
Under the new proposal, a distinction will be made between GFCs that belong to banking groups and GFCs that belong to other groups.
For GFCs belonging to other groups, the conditions that currently apply will mainly remain the same, such conditions being that:
- 95% of proceeds of debt instruments issued must be made available for use within the group;
- the GFC has the benefit of an unconditional parent guarantee, a keep well undertaking from its parent or a third party bank guarantee (this must be an EU licensed bank or a bank from a designated non-EU country);
- in the case of a parent guarantee or keep well undertaking, the parent must always have positive consolidated shareholders' equity (geconsolideerd eigen vermogen); and
- in the case of a parent guarantee or keep well undertaking, the parent must ensure that the GFC can "at any time" meet its obligations under debt instruments issued by it.
Although the fourth condition listed above sounds like a new provision and lacks clarity, the explanatory notes to the proposal indicate that it is not the intention of the Ministry of Finance to impose financial obligations on the parent in addition to those under the current regime.
The third and fourth conditions would not apply if a bank guarantee is put into place in lieu of a parent guarantee or keep well agreement. Practically speaking, however, a bank guarantee will not be a viable option in most instances because of the high costs involved. In conclusion, for GFCs belonging to groups other than banking groups, there are no fundamental changes to the regime as it currently applies.
For GFCs belonging to banking groups, however, there will be a fundamental change. The exemption facility will only be available if the abovementioned four conditions are met and the parent or any group company to which funds are extended and which uses these funds to grant credit outside of the group, is a bank having a banking licence issued by the Dutch central bank, by a central bank of another EU/EEA Member State or by a central bank of a non-Member State to be designated by the Minister of Finance. Of course the distinction between banking groups and non-banking groups is of crucial importance here.
A banking group is defined in the proposed amended Section 3:2 as a group of which the "main activities" consist of extending credit, for the group's own account, to parties outside of the group. This means that groups that extend credit to third parties will not be considered a banking group if such financing activities are in support of the main activities. There may, however, be possible borderline cases where it may be difficult to determine what "main activities" are as opposed to "support activities".
Like the existing exemption language, the new proposed changes do not clarify who might qualify as the "parent". Normally this would be the ultimate holding company of the group concerned, but group structures may exist where another group company, directly or indirectly, holding the shares in the GFC might be a more logical choice.
The proposed changes still need to be adopted by Parliament, but it is unlikely that Parliament will wish to amend the proposal. The new rules will probably come into force on 1 January 2015. For multinationals that do not qualify as banking groups, there will be no changes in their modus operandi. For banking groups that use GFCs it will be necessary to analyse whether and how the new rules will affect their funding structure. Groups that are uncertain as to whether they would qualify as a banking group for the purposes of this exemption, are advised to seek legal guidance.