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The Netherlands has been home to a number of well-documented inventive tax structures, from U2’s sheltered music rights repository (alongside the Rolling Stones’) to the meat in US multinationals’ double Irish sandwich, and the charitable foundation controlling Ikea’s global retail empire.
If your Irish mortgage is among thousands sold off to the US vulture fund Cerberus Capital Management, your debt is owned through yet another form of Dutch corporate body – a co-operative.
As the country, just like Ireland, seeks to clean up its international image as a facilitator of tax avoidance, this may be about to change. The New York firm has not replied to The Currency’s questions about its Dutch tax structure, living up to its name – Cerberus is the three-headed hound guarding the gates of the underworld in Greek mythology. Yet, an investigation by The Currency reveals a large part of the story.
50 Promontoria companies in Ireland
Cerberus’s Dutch-based operation to purchase distressed debt across Europe since the financial crash goes by the name of Promontoria. In Ireland, the group has established 50 separate companies under this name since 2013. Over 40 of them own a debt portfolio, many secured against Irish property, but also overseas assets. A handful of intermediary holding companies and one debt servicing subsidiary established last year complete the list.
The first iteration of the Promontoria structure in Ireland, Promontoria Thames Ltd, completed its task in 2016 and Cerberus placed it into voluntary liquidation that year, leading to its dissolution just last month. It was the vehicle for British loans acquired from Lloyds in 2013.
All others are still active, and more continue to be launched into action. Last year was the most active for Promontoria here, with 15 new Irish subsidiaries established. Two more have appeared this year – Promontoria Daytona DAC was registered in January, while Promontoria Mahou DAC was established in April and only received its name (similar to that of a leading Spanish beer brand) last month.
After buying up a series of mostly British and German portfolios through Irish subsidiaries, Cerberus properly set foot on this island in 2014 with the controversial £1.1 billion acquisition of Nama’s Project Eagle debt pool, secured on properties in Northern Ireland. Allegations of conflicts of interest and an estimate by the Comptroller and Auditor General that the transaction was undervalued by £190 million led to the establishment of a formal investigation by retired High Court Judge John Cooke in 2017. Justice Cooke’s reporting deadline at the end of this month will likely be pushed back once more after five consecutive extensions.
Cerberus bought two more portfolios from Nama, Arrow in 2015 and Gem in 2016. By then, it was widening its supplier base to all Irish banks. Promontoria companies have done five deals with Ulster Bank, from project Ram in 2015 to Scariff in 2018. 2016 saw Promontoria Pluto take over Danske’s Irish loans. AIB entered the picture in 2017, with transactions every year since, culminating in the billion-euro deals for Project Beech and Project Alder in 2019 (in the case of AIB, Cerberus partnered with Everyday Finance to purchase portfolios). Bank of Ireland succumbed to Promontoria bids only last August when it sold a €250 million bundle of buy-to-let loans to Promontoria Snow.
After forays into German debt secured on merchant ships, Cerberus’s Irish-based companies have more recently sailed to warmer Mediterranean waters. One Promontoria company acquired the Spanish REIT Optimum RE, while others bear the exact same name as Spanish and Portuguese counterparts reported to be hoovering up distressed debt there.
These entities are the foot soldiers buying people and businesses’ mortgages, collecting debt, launching legal actions for repossession and making news headlines. But they are not the ones making money. In fact, only Promontoria (Oyster) Ltd and Promontoria (Redwood) DAC posted significant net profits last year. Oyster generated €4.5 million from a former Ulster Bank portfolio acquired for €612 million in 2016, and Redwood made €18.9 million from the loans sold by AIB for €800 million in 2018.
These gains were erased by losses at other subsidiaries, while many posted paltry profits in the hundreds of thousands. This is not what Cerberus invested tens of billions in Irish distressed debt for. Like the hound of Hades, its money trail remains subterranean – until it surfaces in the Netherlands.
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Oude Utrechtseweg 32 is the address of a bland office block on a leafy lane paved in typical Dutch herringbone bricks in Baarn, a small town 45 minutes away from Amsterdam. Tenants include the French luxury giant LVMH’s branch in the Netherlands.
Each Irish Promontoria company is owned by a Dutch limited (BV) company based in this building – a shelf entity named Promontoria Holding XX BV, where XX is the serial number from an assembly line churning out companies by the hundred. The latest structure launched last year, Promontoria Mars DAC, is owned by Promontoria Holding 330 BV.
The Dutch holding company is typically owned by another BV, and always ultimately held by a co-operative operating under the laws of the Netherlands. The oldest such co-op, Promontoria Holding Coöperatie UA, dates back to 2011 and indirectly owns the Project Eagle portfolio. For a while, these structures had names reflecting their purposes, such as the Hampton portfolio purchased from Bank of Scotland in 2013 or German loans placed under the ownership of Cerberus Germany Coöperatie UA in 2015. Afterwards, however, the co-op holding structure became industrialised, too, with numbered entities pulled off the shelf for each transaction – all the way to Promontoria Mars DAC’s ultimate European parent, Promontoria 106 Coöperatie UA.
All Irish and Dutch Promontoria entities have one director in common, 54-year-old Geert-Jan Schipper (or Gerardus Johannes Skipper according to some Dutch filings).
Click on the image below to download the corporate map.
Funds are mixed – and profits made – in the intermediate BVs. In the typical, two-layer structure, one acts as the portfolio’s asset manager and charges fees for the service. For example, Promontoria Eagle’s indirect parent Promontoria Holding 82 BV collected £1.3 million in fees from its Irish subsidiary in 2018 and £4 million the previous year. Meanwhile, Promontoria Redwood’s immediate parent Promontoria Holding 238 BV charged it €3 million in management fees for the first seven months of its operation.
The other BV is where financing is assembled, combining Cerberus’s own funds with cheap European loans for leverage. Sticking with our two older and newer examples, Promontoria Eagle purchased Nama loans with combined funding from Nomura (since repaid) and from its direct parent Promontoria Holding 83 BV. The Dutch holding company extended two long-term loan facilities to its Irish subsidiary: £600 million at a 10 per cent interest rate, and £200 million at a variable rate indexed on profits. Promontoria Eagle paid £4.3 million in interest to its Dutch parent in 2018 and £11.8 million the previous year.
For its part, Promontoria Redwood funded the acquisition of its AIB portfolio with a capital contribution of €106.3 million from its indirect parent Promontoria Holding 237 BV, which also loaned it €107.7 million at 8.5 per cent. The leverage came from €520 million borrowed overseas from Deutsche Bank and BAWAG PSK Bank at 2.75 per cent. In its first seven-month accounting period, Promontoria Redwood incurred an interest expense of €3.9 million to Promontoria Holding 237 BV.
Millions in fees and interests
Between management fees and loan interests, Promontoria Eagle thus paid its Dutch parents a total of £21.4 million in two years, and Promontoria Redwood €6.9 million in seven months, irrespective of their taxable profits.
Multiply this by the number of Promontoria companies operating in Ireland, and it appears that large amounts of wealth extracted from debt portfolios acquired by Cerberus emerge in the Netherlands without having been taxed in Ireland. This is despite changes applied since 2016 to so-called Section 110 tax advantages – the profit-dependent share of loan interests originally due from Promontoria Eagle, for example, would no longer enjoy a tax break. Yet the company declared a tax charge of only £2,259 in 2018 and £4,648 in 2017.
So, Irish special-purpose vehicles sweat the debt assets, and their Dutch BV parents collect the resulting funds. How much exactly is difficult to gauge – they are exempt from publishing detailed accounts in the Netherlands and file simplified balance sheets only. For example, Promontoria Redwood’s direct parent, Promontoria Holding 238 BV, added €43.6 million to its balance sheet in 2019.
Yet this money is still an ocean away from its ultimate owners in New York. This is where the co-ops come into play.
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At the top of each Dutch-Irish debt portfolio structure sits a co-operative registered in the Netherlands. Its members are typically two Cerberus entities including one in the US. For example, Promontoria 106 Coöperatie UA, the latest used to own an Irish-based structure, was formed last October by Promontoria Europe Investments 212 LDC, a Cayman Islands company, and Cerberus European Investments LLC in the US state of Delaware. Promontoria 56 Coöperatie UA, which indirectly owns Ulster Bank’s former Scariff portfolio, also has a member in Delaware (Cerberus Partner LP) and another in Grand Cayman (Promontoria Europe Investments 163 LDC).
Why use the favourite corporate structure of Dutch farmers, used by household names like dairy co-op FrieslandCampina, in an investment fund structure? In its guide Doing business in the Netherlands 2020-2021, the Chicago law firm Baker McKenzie, famous for advising large US multinationals on global tax planning, extolls this corporate form: “Although historically used by agricultural groups, the Dutch co-operative is now often used as a legal entity in (international) holding structures. The main reasons are its favorable tax treatment and its corporate flexibility,” its advisers wrote.
Minimising dividend withholding tax
Presented with the Promontoria structure, Henk Vording, Professor of Tax Law at the University of Leiden in the Netherlands, told The Currency that it would minimise dividend withholding tax – normally charged at 15 per cent under Dutch law.
“The dividends paid by the Irish subsidiaries (out of profits taxable in Ireland, I assume) will be received by the Dutch parents under the participation exemption. In principle, no dividend withholding tax will be due in Ireland (based on the EU Parent/Subsidiary Directive),” Vording said – although he warned that increased EU and international scrutiny applied here, and the Irish tax authorities may question eligibility to the exemption under EU rules. As we have seen, however, Cerberus is well able to skirt around this hurdle by shifting wealth to the Netherlands in non-dividend form, way above the bottom line of its Irish subsidiaries.
According to Vording, the taxation of dividends is again relevant between the Dutch BV companies and their co-op parents: “When these dividends accrue to their owner, the holding co-operative, the same exemption will apply (probably, the BVs and the co-op will use a fiscal consolidation facility, which means that they are treated as a single taxpayer for corporate income tax. The result is that taxable income and deductible costs – e.g. interest payable to another group entity – can be merged).”
It is not possible to verify this in the case of Cerberus, because its co-operatives, just like its BV companies, are availing of filing exemptions for small companies. Promontoria 49 Coöperatie UA, the indirect owner of AIB’s Redwood portfolio, posted no change to its balance sheet between 2018 and 2019, with €106 million in both assets and liabilities apparently reflecting the capital contribution used to acquire the loans in the first place.
Once consolidation has taken place at the level of the Dutch co-op, Vording explained the tax implications: “The holding co-operative is taxable for corporate income tax. In principle, it must also withhold dividend tax on its payments to its members,” he said. “However, if the members are resident in a country that has a tax treaty with the Netherlands, and this tax treaty has a dividend clause, Dutch law allows the co-op to not withhold tax.”
This applies to the US, where a Cerberus member of each co-op is based. It is less clear for the other, Cayman-based member. Vording noted that there is only a limited tax treaty between the Netherlands and the Cayman Islands, and the Caribbean nation is on a Dutch tax blacklist. “This list is going to be used for the conditional withholding tax on interest and royalties (recently adopted and to be applied from 2021). The plan is to extend the use of the blacklist to dividend taxation (from 2024 on),” Vording said. “As far as Cerberus is driven by Dutch tax considerations, it will now probably reconsider its Cayman route.”
“This is a case where new and stricter anti-abuse rules should apply.”
Henk Vording
Even the US route to extract dividends from Dutch co-ops without paying the 15 per cent withholding tax is coming under increased pressure. “This allowance is subject to an anti-abuse test. The members of the co-op do not qualify for withholding exemption if their purpose is mainly to save withholding tax (compared to direct payments to the ultimate owner), and if the structure used is artificial (has no economic purpose),” Vording said. “Again, this anti-abuse test has been stepped up recently, following the EU ATAD Directive.”
In Vording’s opinion, Cerberus’s tax structure “is a case where new and stricter anti-abuse rules should apply” – but he warned that enforcement is another story.
“My best guess would be that the structure as described will be challenged by the Dutch tax administration within the next few years, which may result in the co-op losing access to the exemption for dividend withholding,” the academic said. “But this is, of course, a matter of administrative priorities, which are hard to predict and not very transparent.”
