Dasos Capital Oy (Dasos) is a timberland and natural capital investment advisory company founded in 2005 in Helsinki, Finland, with the purpose of providing advice and investment management services for the international investor community. Dasos is a pan-European company that invests primarily in the European Union but also more globally. Dasos is authorised to act as an Alternative Investment Fund Manager (AIFM) by the Finnish Financial Supervisory Authority (FSA) on 29 February 2016. Moreover, Dasos has been authorised to act as an Investment Adviser by the Luxembourg financial supervisory authority Commission de Surveillance du Secteur Financier (CSSF). Dasos Capital Oy is a member of the Finnish Venture Capital Association (FVCA) and the American Chamber of Commerce in Finland.
Dasos enacts all its investments according to the market approved sustainable investment principles. Dasos has signed the United Nation’s Principles for Responsible Investment and is a member of the Finnish Sustainable Investment Forum (FINSIF). Dasos invests only in certified or certifiable timberland. Moreover, Dasos takes proactive measures to upgrade uncertified timberland to internationally recognised certification standards.
The following Q&A aims at answering some commonly asked questions regarding Dasos and Timberland Investments.
1. Could a (private equity) timberland fund be established in the jurisdiction of Finland?
Yes, a timberland fund could be established in Finland.
However, certain international investors are unable to invest in Finnish funds. This is the case particularly with investment instruments formed jointly by foreign institutions, also known as fund-of-funds, which would potentially be assessed of having a permanent establishment in Finland because of them investing in Finnish funds (see court rulings KVL 67/2011 and KHO:2002:34), hence leading fund-of-funds to not receive a comparable tax treatment to other, non fund-of-fund investors. Therefore, the Finnish jurisdiction in practice precludes a substantial part of foreign investments (see e.g. “Kasvun nälkä, pääomasijoitetut yritykset muutosagentteina” by M. Pajarinen, P. Rouvinen & M. Ylhäinen, Helsinki 2016, p. 117).
2. Could the Finnish Law be changed to eliminate the current drawback for international investors?
Yes, it would be rather simple to fine-tune the current legislation and to avoid double taxation of foreign investors. Such a legislation is in place in other comparable countries, including the Nordics.
Dasos has been active in proposing alternative structures to be established in the Finnish law which would allow international institutions and households to invest in timberland, including a proposal signed by dozens of members of the Finnish Parliament (see e.g. “Erikoissijoitusrahasto voisi sijoittaa myös metsiin”, Metsälehti 15/2007; “Yhtiöomistus toisi tehoa metsänomistukseen”, Kauppalehti 15 November 2010, “Metsäomistamiseen uusia malleja”, Kauppalehti 16 November 2010; and “Vihreä talous pääomasijoittamisen vientivaltiksi”, Kauppalehti 24 April 2014;).
3. What is the legal framework Luxembourg can offer?
On 13 February 2007, Luxembourg enacted a so called SIF-Law (Law of 13 February 2007 relating to specialised investment funds) which imposes several requirements for investment funds, including funds investing in Timberland. SIFs, constituted in the form of an investment company, may benefit from a large number of double tax treaties concluded by Luxembourg which means that international institutions, including fund-of-funds, do not face double taxation when investing in Luxembourg funds. International investors require that the funds that they invest in are established in a regulated environment, and the SIF-Law responds to this need with multiple obligations imposed to funds.
Further to the SIF-Law, the Alternative Investment Fund Managers Directive, 2011/61/EU (AIFMD) was implemented in Luxembourg on 12 July 2013 with the Law of 12 July 2013 on Alternative Investment Funds (AIF-Law Luxembourg). Its field of application is broad, covering private equity, real estate, commodity and hedge fund investment and other corresponding mutual investment activities. The Directive regulates the management and marketing of alternative investment funds offered to professional investors. The AIFM passport is valid for the entire European single market. The AIF-Law includes rather similar guidance towards fund and fund managers as required by the SIF-Law.
Funds established according to the SIF-Law and the AIF-Law are monitored and authorised by the CSSF. Dasos has been authorised as an Investment Adviser by the CSSF and as an Alternative Investment Fund Manager (AIFM) by the Finnish FSA.
4. Is Luxembourg a regulated environment for a timberland fund?
Yes, Luxembourg is a strictly regulated environment.
In Europe, the Luxembourg SIF-Law has been a pioneer of investment fund regulation. The well-established framework of the SIF-Law has provided European institutional investors with a low policy-risk platform to enter investments, and has been suitable for new and exotic asset class such as timberland.
Because the SIF-Law provided a strictly regulated framework which was seen particularly favourable amongst institutional investors, including the European Investment Bank in Luxembourg, it quickly occupied substantial market share as one of the most popular forms for a fund.
It should be noted that whilst the SIF-Law was enacted in Luxembourg in 2007 and the AIF-Law Luxembourg in 2013, the AIFMD was implemented in Finland only on 7 March 2014 (AIF-Law Finland), i.e. seven years later than the SIF-Law in Luxembourg. Before the implementation of the AIFMD, Finland did not have legislation directed particularly at private equity funds and which would have corresponding requirements to the Luxembourg SIF-Law.
5. What are the regulatory cornerstones for a timberland fund?
According to the SIF-Law, a (timberland) fund must have fulfil, among others, the following requirements:
- Funds shall have a custodian institution (“Custodian”) for investor funds (Article 33);
- A fundamental task for a Custodian is the safe keeping of (timberland) assets held by a fund (Article 35);
- All monetary transfers and transactions are to be transmitted through the Custodian, including dividends, wood sales revenue, due diligence payments, etc.;
- Custodian, or another authorized institution, maintains the accounting and bookkeeping of the fund;
- Funds (SCA-SICAV-SIF) shall have a General Partner (GP) company in Luxembourg for which all bookkeeping, accounting and monetary transfers are maintained by the Custodian. Being part of the investment framework, the GP is equally supervised and monitored by the CSSF;
- Funds shall perform an annual asset valuation by an independent third party expert (”Independent Appraiser”).
Dasos Timberland Fund I, SCA-SICAV-SIF, established in 2009, and Dasos Timberland Fund II, SCA-SICAV-SIF, established in 2013, are regulated by the SIF-Law and monitored by the CSSF in Luxembourg. In Finland, a regulatory framework equal to SIF-Law did not exist at the time of establishment of the above mentioned funds.
The AIFMD was implemented in Luxembourg in 12 July 2013 (AIF-Law Luxembourg) and finally in Finland on 7 March 2014 (AIF-Law Finland). The Directive is focused on regulating the managers of alternative investment funds and imposes, among others, the following requirements on fund managers:
- Risk management and liquidity management;
- A separate securities depository for each fund;
- Arrangement of yield calculations;
- Reporting of data to supervisory authorities;
- Disclosure of investor information.
6. Are there tax advantages in Luxembourg?
For investors, the issue of single taxation is of fundamental importance. For investor aspects, please see the webpage of TELA, an organisation representing all Finnish statutory employee pension companies (http://www.tela.fi/veroparatiisi).
For alternative investment managers and general partners, the Luxembourg corporate income tax rate was around 29% in year 2016. The Finnish corporate income tax rate was 20% in 2016. The average corporate tax rate for Dasos GP companies has been around 25% during recent years.
It is a market practice to request a preliminary ruling by the Luxembourg tax official to ensure the future tax treatment. Only the first one of the three (so far) established Dasos GP companies has received a preliminary ruling from the Luxembourg tax official. The preliminary ruling was based on timberland being considered a new asset class in Luxembourg and Europe with high establishment costs.
7. Is establishing a fund in Luxembourg less expensive than establishing one in Finland?
No, for a GP company Luxembourg is clearly more expensive than Finland.
The SIF-Law implies extensive costs incurred by custodian, accounting and legal services.
Recently, the current AIF-Law is causing a need to acquire similar services also in Finland. However, the unit prices in Luxembourg tend to be substantially higher. In terms of cost, the GP does not benefit from having a base in Luxembourg jurisdiction.
8. Does Dasos employ people in Luxembourg?
Dasos has for several years paid compensations for two leading experts in Luxembourg with decades of experience in international financing, law, forestry and agriculture. Their expertise is widely utilised in Dasos investment decision making and due diligence as well as forest management across geographies.
9. Does Dasos employ people in Finland?
With headquarters in Helsinki and AIFM authorisation in Finland, Dasos currently provides direct employment for 10 people in Finland. Helsinki can be considered as a “forest capital in a global context”, and the Finnish forest expertise is well appreciated amongst international investors. The forest know-how is a growing export industry with the international investor community as an increasingly demanding client (see also Dasos article “Vihreä talous pääomasijoittamisen vientivaltiksi”, Kauppalehti 24 April 2014). In addition, Dasos forestry operations employ tens of people on full or part-time basis in Finland.
It should be noted that Dasos is a pan-European company which invests across the European Union and on a global basis. The Nordic forestry know-how is of essence, but ultimately the aim of Dasos is to identify the best international and local relevant knowledge for each investment, and subsequently to employ it. All in all, Dasos investments create jobs for several hundreds of people internationally, employing highly-qualified forestry experts as well as people in rural areas.
10. What are the forms of forestry taxes?
In many European countries, including Finland, individual persons or cooperatives owning forest have to pay a single tax based on the stumpage revenue actually received.
Typically, timberland funds have to structure their forest ownership in terms of a limited liability company. Such companies pay tax at the company level. In Finland, forestry incentives (Kemera subsidies) are not compensated to limited liability companies. Thus, timberland funds have a tax disadvantage in general terms.
Also, the Finnish law allows individual and cooperative forest owners to subtract a notable part (60%) of the acquisition cost of the timberland asset from the stumpage revenue on an annual basis (in Finnish “metsävähennys”), effectively freeing the forestry revenue from all tax for several years. This notable tax release is not available for forest funds such as Dasos.
Dasos forest ownership in Finland does not receive Kemera subsidies. Nor does Dasos utilise the tax release through a subtraction of the acquisition cost.
To achieve tax neutrality and to mitigate its current disadvantageous position, Dasos has in several occasions proposed fair and neutral forest ownership structures treating all forest owners equally (see e.g. “Erikoissijoitusrahasto voisi sijoittaa myös metsiin”, Metsälehti 15/2007, and “Yhtiöomistus toisi tehoa metsänomistukseen”, Kauppalehti 15 November 2010).
As a trivial general fact, the land property rights and taxation of forest income are broadly similar in the Europe and the North America. However, in Russia, Asia and Africa, the forestry “tax” is based on so‑called “stumpage fee” which is not related to actual harvesting income but on the potential to harvest. Such stumpage fee payable to the government are typically at least 20-30% of actual stumpage revenue. In some geographies, even greenfield tree planting operations are liable to pay the stumpage fee although there is no harvesting revenue. The stumpage fee is typically neutral and independent of the form of the ownership, i.e. limited liability companies, such as the ones operated by Dasos, pay the same fee as individuals. In tropical zone investments, Dasos also typically cooperates with a local government sharing the risk and revenue. For example, Dasos has retained in a minority shareholding position for its Malesian investment with the remaining shareholding being held by other investors, including the local government. Because the stumpage fee has to be paid regardless of the actual harvesting level and actual stumpage revenue, it forms a remarkable additional fee and increases the risks of investing in these geographies.
11. Who are buying forest properties in Finland?
National Land Survey (NLS) statistics (http://www.maanmittauslaitos.fi/kauppahintatilastot) indicate that a total area of 174,000 ha of forest properties entered into the forest property market in Finland during 2010-2012. The market share of Dasos of the properties that changed ownership was 4,9%.
More than 90% of the 174,000 ha was acquired by private individual forest owners (PIFO), forest cooperatives (FC), retail investment funds (RIF; note: Dasos is not a “retail investment fund”), as well as trade unions (TU).
All these entities enjoy a substantial tax advantage in various ways: PIFOs and FCs can subtract 60% of the acquisition price of the forest property from the forthcoming tax on timber sales revenue (Metsävähennys, see above question 10); RIFs have a tax release concerning income tax; and TUs are freed from tax in general, particularly from capital tax.
Similar to the standard limited liability company (osakeyhtiö) structures also utilised by Dasos, the above competing entities commonly apply debt leverage with tax-deductible interest costs.
12. Who is paying and how much?
In 2014, a Finnish forest owner publication called “Käytännön Maamies” claimed that Mielikki Timber Oy (Ltd), a Dasos owned company, acquired a property (called “Tervaniemi”) for an exceptionally high price of EUR 7,8 million.
In fact, Mielikki Timber paid the above price for the acquisition of two properties, Tervaniemi (38% of the total area) and Käkipuro (62% of the total area), gaining an area of 2,532 ha, i.e. almost three times larger than erroneously claimed by the publication.
Thus, the price compensated by Mielikki Timber Oy converts to EUR 3,080 per ha, or 25 EUR/m3. NLS statistics indicate that the average regional price in 2013 was EUR 3,123 per ha, or 29 EUR/m3 (Metsälehti monthly statistics, December 2014).
At the end of 2016, PIFOs and RIFs have realized several deals in Pohjois-Savo and Pohjois-Karjala regions in Finland paying on average EUR 4,170 per ha (35 EUR/m3) for properties larger than 100 ha, i.e. a good premium over Dasos acquisitions in the area during earlier years.
In years 2010 and 2012, Sustainable Forestry Finland Oy (Ltd), a Dasos owned company, acquired altogether 6,072 ha of auctioned forest properties with an average price of EUR 2,500 per ha.
At the same time, competing large deals were closed e.g. by TUs (trade unions Paperiliitto and Metalliliitto) paying a price of EUR 3,575 per ha for a total area of 1,585 ha in the municipalities of Nummipusula and Raasepori. The price represents a rather high end of the price range for the period up to 2012 regarding large properties.
13. Do we need to invest in forests and forest plantations?
It has been estimated that about 45-55 million hectares of new industrial planted forests (both fast growing plantations and semi-managed planted forests) would be needed worldwide to fill the projected roundwood gap of some 700 million m3 during the next decades (see “FSC Strategic Review of the Future of Forest Plantations”).
This would require investments in the range of EUR 80-100 billion by 2050.
If major investments are not realised, the remaining natural forests will be put under increasing pressure since the wood must simply come from somewhere.
Most of the investments in fast-growing plantations will take place in Latin America, South East Asia and also in Australia/New Zealand which serve the increasing needs of China and India.
There are opportunities to increase sustainable production of wood from the managed natural forests in Europe, and to make better use of the current growth potential. Forest investments can be seen as a means to shift forestry into an active operation from passive and quiet status, as well as to consolidate fragmented forest lots into larger entities more valuable not only for economic use but also for conservation.
14. Does Dasos have a policy for sustainability of forest investments?
Yes, there is a well-established policy for sustainable forest management.
Dasos invests only in certified, or certifiable, projects which fit the following descriptions:
- For Boreal and Temperate forests: Acquisition and management of existing commercial forest areas, afforestation and reforestation.
- For Tropical and sub-Tropical forests: Forest plantations on degraded forest land. Permitted end-usage of forest products is to provide wood, fibre, energy generation and environment regeneration. The management and use of natural tropical forests is permissible only by small holders or environmentally oriented projects.
- For tree farming plantation projects: Projects which alleviate shortage of wood fibre/fuel wood in the region and globally, provide social and economic benefits, and help maintain and conserve natural forests.
In addition, and for all three categories, all forestry project investments should be structured and executed in order to enhance:
- Their economic and financial profitability;
- Their impact on biodiversity improvement;
- Their impact on climate change;
- Utilisation of carbon credits; and
- Social benefit spillovers.
Dasos is a proactive forest owner with a targeted approach and a well-defined modus operandi.
In general, the Dasos forest management concept compares favourably with the most advanced institutions active in international or national forestry. Most large forest owners and public entities have well-designed policy benchmarks. In Finland, notable exceptions are the municipalities (0.4 million ha; apart from some larger cities) as well as the Church of Finland (0.1 million ha) for which such fundamental issues as the certification status remain unclear.