Clarity for anbi's on impact investing

Charitable funds can pursue their public benefit objective by investing, also known as impact investing, in social and sustainable enterprises. The Public Benefit Investment Decree, which came into force on 3 April 2024, lays down a number of additional conditions to be able to do so while maintaining the status as a public benefit purpose organisation (anbi).

Previously, there was debate about whether and under what conditions impact investing fits within the Dutch anbi regulation. More specifically, whether it meets the spending criterion. This criterion, also known as the anti cumulation requirement, means that, in principle, an anbi must spend all its income on its purpose and may not hold more assets than necessary for, among other things, the continuity of the organisation and specific projects. The Decree clarifies the conditions under which investments qualify as 'public benefit investment' and thus meet the spending criterion in any case.

Anbi conditions for impact investing

Basically, the tax legislator considers lending money or otherwise making investments - under market conditions - as a normal, business activity. An anbi can do so either to use it to finance its public benefit activities ('commercial/investment activities') or to directly achieve its public benefit objective ('public benefit activities'). In the first case, the organisation must spend the proceeds from the investments on its public benefit purpose within a foreseeable period. For the second case, impact investing, conditions have now been laid down under which those assets fit within the anbi regime and may be maintained within the spending criterion. In this regard it is required that the investment qualifies as a public benefit investment.

Under the following conditions, investments qualify as a public benefit investment.

1. The primary aim of the investment is the direct realisation or promotion of one or more of the public benefit objectives of the anbi, as included in its articles of association. This purpose must be sufficiently concrete and also actually be served (almost) entirely (i.e. at least ninety percent) by the investment.
2. The investment is not a business activity with the primary purpose of deriving a profit from it.
3. The amount of the investment must be used (almost) entirely by the investee organisation for the activity(s) or project related to the purpose of the investing anbi.
4. An anbi board member or a person associated with that board member (natural person or legal entity) is in no way involved as a founder, director, shareholder, other provider of capital or employee in the organisation in which the anbi invests.
5. The anbi recognisably includes the investment in its financial records as a public benefit investment. The anbi also mentions making public benefit investments in its policy plan or interim amendments to it.

The first condition is the most important, conditions 2 and 3 are in fact derived from this. For the investment to qualify as a public benefit investment, it needs to be in line with the public benefit objective of the anbi. For this, the purpose of the investment must be sufficiently concrete. Think of specific projects or activities that directly contribute to the public benefit objective, such as investments to reduce poverty or enhance climate change. The anbi as investor must have an “active attitude and commitment” and ensure that the investment actually fits and continues to fit within its own public benefit objective. It is not (yet) entirely clear, however, how the required “active attitude and involvement” is to be interpreted and whether, for example, supervision through reporting and accountability is sufficient for this purpose.

The Decree further specifies that, for the assessment of whether an investment qualifies as a public benefit investment, it is important that other (commercial) parties are not or insufficiently willing to make the same investment, given the financial risks involved. In practice, an impact fund’s investment is often crucial for the passage of the activity or project being invested in.

At the same time, the Decree indicates that there may also be a tipping point at which the investment no longer qualifies as public benefit investment. Namely when, over time, an investment generates structurally positive returns and other (primarily) profit-oriented parties are increasingly willing to invest. This may be an indication that this investment no longer qualifies as a public benefit investment because it is no longer primarily aimed at realising the public benefit objective of the anbi.

Social enterprises

The clarity provided by this Decree on when impact investing fits within the anbi regime gives certainty to funds when they can invest in social enterprises, for example. Social enterprises focus primarily on making a socially positive impact and making a profit is secondary to this. In essence, they are a form of organisation that sits between charities and primarily profit-oriented companies.

These companies can help solve major societal problems. Because making profit is subordinate to the social purpose, their funding is sometimes a bottleneck. Funds that finance on the basis of a public benefit objective can play an important role here. Now that the criteria are clear under which this type of investment is allowed in any case, anbi's can invest more structurally and scaling up sustainable and social enterprises becomes more feasible.

Background: improvement proposals for the anbi scheme

With the Decree on Public Benefit Investments, the State Secretary is implementing one of the commitments in the context of the improvement proposals for the anbi regulation, see among others the parliamentary letter of 28 March 2019. Two other commitments are still outstanding. For example, the promised clarification that anbi's are allowed to hold reserve assets to absorb possible future fluctuating income. Although the spending criterion allows anbi's to reasonably hold buffer capital, in practice there sometimes appears to be a lack of clarity about this. It would be welcome if, in the foreseeable future, the other commitments under the improvement proposals for the anbi regime are also followed up.