Netherlands

Netherlands

Green funds in for a crushing blow -- Tax wheeze gone wrong

Fund managers in the Netherlands are finding it tough to cope with a surge of green fund investment inspired by new tax regulations. Following a finance ministry announcement clarifying the fiscal advantages of green fund investment under the new tax regime, Dutch green fund schemes booked a record NLG 2.25 billion of new investment in the final quarter of last year bringing total reserves to nearly NLG 5 billion. Unfortunately, green fund regulations stipulate that 70% of these funds have to be invested in projects approved by the environment ministry (VROM) within three months. In the past three years VROM has approved projects worth only NLG 1 billion annually.

A sudden surge in the volume of green fund investment in the Netherlands to stay ahead of new tax regulations has left fund managers with a major headache: there are not enough green projects in which to invest the money raised -- and time is running out if the investments are to keep their privileged green status.

Following a finance ministry announcement clarifying the fiscal advantages of green fund investment under the new tax regime, Dutch green fund schemes booked a record NLG 2.25 billion of new investment in the final quarter of last year bringing total reserves to nearly NLG 5 billion.

Unfortunately, green fund regulations stipulate that 70% of these funds have to be invested in projects approved by the environment ministry (VROM) within three months. In the past three years VROM has approved projects worth only NLG 1 billion annually, and the finance ministry looks unlikely to be sympathetic to the banks' pleas for leniency. The banks should first find projects and then attract finance, is the banks view. "The banks have taken a great risk on behalf of their clients," says a ministry spokesperson.

Introduced in 1994, green funds -- which offer a lower than normal but tax-free return to provide cheap capital for green projects -- have proved popular. Last year, however, tax reforms introducing a fixed rate charge on all investment capital threatened to remove this advantage, with the result that the coffers began to empty. Following questions in parliament, new proposals from the finance ministry exempting the first NLG 100,000 of green fund capital from the new flat rate tax, plus allowing an additional 2.5% of green capital investment against income tax on sums invested before 2001, dramatically enhanced the green funds' pulling power.

The ministry's apparent generosity was, however, coupled with a proposal to cap the annual tax income it was prepared to "lose" to green financing. The banks' requests for a temporary relaxation of the regulations have consequently been given a frosty reception with a finance spokesman saying the banks "sought to take maximum advantage of a transitional regulation. They can't expect that we will look the other way and forget the three month rule." Should the finance ministry decide to play hard ball, the investments can expect to lose their fiscal advantages.

Cold comfort

There is not much comfort forthcoming from VROM, which might have been expected to relax the regulations governing project eligibility: "This is a problem for the banks and we are not prepared to discuss it further. We're certainly not prepared to start fiddling with the criteria for approving green projects," says a spokesperson.

The banks most affected are the Rabo Groen Bank and the Postbank Groen, which booked green investments of NLG 1.4 billion and NLG 640 million, respectively, in the last quarter of 2000. ING Bank took NLG 170 million, while green funds pioneer Triodos Bank saw income increase by 50% with new investments worth NLG 100 million. Over the same period ABN Amro Green funds took nearly NLG 90 million, and the ASN Green projects funds booked NLG 29 million.

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