Following years of lobbying, the introduction of a new framework will make it easier for charitable funds and family offices to make impact investments, FD reports.

Wealth funds linked to wealthy families and companies, and charitable funds in the Netherlands will have greater opportunities to invest their money instead of just giving it away. That’s because the Dutch tax authorities are opening the door to impact investments under certain conditions, according to a decision by outgoing Dutch minister of finance Steven van Weyenberg.

“This is a very good outcome after two years of working on the subject,” said Siep Wijsenbeek, director of FIN, the association of charitable funds and foundations in The Netherlands. The introduction of a new framework has “removed” barriers to financing social and sustainable enterprises, Wijsenbeek said.

Strong lobby

The sector has been lobbying for years to adapt the tax rules to ‘new’ forms of philanthropy. Instead of a ‘traditional’ donation, impact investments are increasingly being made by providing equity and loans to social enterprises.

“For us impact investors, this is an important milestone,” said Jamy Goewie, partner of Shaping Impact, which invests money from wealthy families in social enterprises. “It is now much easier for social entrepreneurs to raise money from both charities and investment funds. We can now also invest more easily together with charities.”

Impact investing usually involves investments that commercial parties consider too risky. But according to Paul Smeets, a professor of philanthropy at the University of Amsterdam, investing may nevertheless be better than giving money away. “The companies have to prove that they can keep themselves going. It gives them time and it improves their scaling up and commercial opportunities,” Smeets said.

New framework

The new framework can further encourage investing with social returns. According to experts, this is very much needed. “Research we conducted a few years ago among wealth funds showed that they hardly made any impact investments at all,” said René Bekkers, a professor at VU Amsterdam. This may change now that the rules have been clarified, according to Bekkers.

Wealth funds and charitable funds with ANBI status (Public Benefit Institution) are set to benefit from the new framework because it is fiscally attractive to donate to these institutions. The tax-exempt institutions are obliged to spend 90% of their expenditure in a ‘generally useful’ manner. That’s why they may not hold more capital than is necessary to pay for the work needed to achieve their objective.

Capital funds whose main objective since its inception has been to build up core capital are obliged to spend most of the benefits from this capital.

‘No hoarding allowed’

In practice, there was a lot of uncertainty about how impact investments relate to these requirements. The funds were desperate for clarity, said Otto Beelaerts, an advisor to wealthy families and foundations. “Strictly speaking, many fundraising foundations were not allowed to invest. And the hoarding of assets is subject to strict rules. Now there is more room to manoeuver.”

Still, the ‘public benefit investment’ may not be a business activity with the primary aim of achieving profit. If a profit is made, it may flow back to the institution, but it must then be spent on the actual objective. Furthermore, the investment must be used for activities that fit the purpose of the institution. Conflicts of interest between directors and investments are unacceptable.

“The decision provides legal certainty, but not all discussions have now been resolved,” said Maiko van Bakel, a tax advisor at PwC who is affiliated with Tilburg University. “For example, questions about whether the investment serves a public benefit, or how you deal with new investors” remain.

Reduced workload

The workload for both funds and the tax authorities will be reduced, according to professor Bekkers. Until now, existing and yet-to-be-established funds had to conduct individual discussions with the tax authorities about their financial affairs. That is no longer the case.

The rule change, which came into effect on Tuesday, was reached together with the collaboration of the Collaborating Trade Organisations for Philanthropy (SBF), which in turn was advised by a committee led by Professor Alexander Rinnooy Kan.

“Few people can be against it,” said accountant Martin Bauman, who was a member of the advisory committee. “The commercial world and the social world are becoming increasingly intertwined. This requires a clear framework.”

This article originally appeared in Dutch business newspaper FD, on 3 April, 2024.