Simplification and relaxation Dutch company law – minimum capital requirement for Dutch BV abolished

This new legislation will enter into force on 1 October 2012. There is no grandfather rule: the new legislation will apply to all newly incorporated and existing BV’s on 1 October 2012.

The new legislation is aimed at simplifying the procedure of the incorporation of a Dutch Limited Liability Company, in Dutch de “Besloten Vennootschap met Beperkte Aansprakelijkheid”, or BV.

The most important changes are:

• The abolishment of the minimum capital requirement upon incorporation, and
• The abolishment of the “bank statement” and “audit statement” for capital contributions to a BV in general.

The new law does also provide for an extended liability for shareholders and directors, in case of (capital or dividend) distributions by a BV. Through the aforementioned changes the incorporation procedure of a Dutch BV is strongly simplified. A BV can now be incorporated and it can be fully operational within a couple of days. Also the costs of incorporation will generally be significantly lower.

Below you will find some technical details about the pending changes.

After the enactment of these bills, the law will primarily have an impact on newly established companies. These companies fall directly under the new rules. Of course, these bills will also affect existing companies. With respect to the latter, it may under certain circumstances be attractive to change the current articles of associations / by-laws of an existing company. The bills have also tax consequences.

Historical perspective / ratio

The question one may ask is: why is a simplification of company law necessary? The current company law has a large number of mandatory law regulations. Under the current company law amongst other, the following requirements apply:

• a mandatory minimum capital of € 18,000 (which actually has to be paid);
• a bank statement / audit statement is required;
• an equity test applies when paying dividends or repurchase of own shares;
• there are mandatory share transfer restrictions (in Dutch: “blokkeringsregeling”);
• etc.

As of 2003, the ministry has proposed the introduction of the so-called “Flex BV”. With the enactment of the bills and as such the introduction of the Flex-BV it is intended to reduce the mandatory law regulations of Book 2 of the Civil Code and to include more regulatory law regulations. There will also be more freedom given to establish/organize the shareholders' rights.

The enactment of the bill will reduce the administrative burden of setting up a company. As such, no longer bank statement / audit statement are required and also the minimum capital requirement will be abolished.

Based on case law of the European Court of Justice (Centros, Überseering, Inspire Art), it is currently possible to set up a company in the Netherlands, which has a foreign (i.e. European) legal form and which has it’s legal seat in the Netherlands. With the enactment of these bills, the Netherlands can compete with other European countries, more specifically with other, more flexible, European legal forms like the UK Ltd, etc.

The bill law simplification and relaxation of the company law is not the only adjustment in the current company law. As of 1 July 2011, the requirement of the ministerial declaration of no objection (necessary for amongst other the set-up of a company) has been abolished. Also, the enactment of the Law Board and Supervisory Board (in Dutch: “Wet Bestuur en Toezicht”) is expected. On 31 May 2011, the Law Board and Supervisory Board are adopted by the Senate. The Law Board and Supervisory Board will be discussed separately.

Main changes in company law

In the proposals for the simplification and relaxation of company law the following adaptations are included (not an exhaustive list):

• The minimum capital requirement of € 18,000 will be abolished;
• The bank statement / audit valuation statement shall vanish;
• BV’s will be allowed to denominate their share capital in another currency than the euro;
• (A large part of) the capital protection provisions will laps (including the so-called “nachgründungsregeling”);
• Shares without voting rights or profit may be issued;
• The shareholders have a greater capacity to give instructions to the board (in that case, shareholders may give concrete instructions to the board);
• The board of the BV must also grant approval for dividend payments, share buy backs, capital reductions;
• The mandatory share transfer restrictions are abolished (optionally: it is possible to include share transfer restrictions in the articles of association/by-laws).

Tax consequences

The tax consequences of the bills remained undiscussed for quite some time. From a tax point of view, comments have been made on the proposed legislation, amongst others in parliamentary debate and in literature. The professional organizations (including the Dutch Association of Tax Advisors) have also commented on the bills.

In a Memorandum (in Dutch: “Nadere Memorie van Antwoord”) from parliamentary debate, some tax implications are explicitly addressed:

• Under the new rules, it is possible that civil law will prohibit profit distributions due to lack of sufficient equity and / or reserves. According to the Minister of Justice this will not lead to a change of status of a company (i.e. this will not lead to a loss of status of a fiscal investment company);
• There will not be an optional rule for fiscal transparency of (certain) corporate bodies;
• If a parent company owns 95% of the shares in the subsidiary (i.e. legal and economical ownership), the parent company and the subsidiary can form a fiscal unity for corporate income tax purposes if certain conditions are met. There is a Decree for fiscal unity, in which certain conditions are explicitly addressed. In this Decree there is an arrangement in case a subsidiary has different classes of shares. If the subsidiary has different classes of shares, the shares the parent company owns should always give rise to at least 95% of the profits and at least 95% of the assets of the subsidiary. The Minister of Justice has indicated that the possession requirement of at least 95% of the shares in the subsidiary means that at least 95% of the voting rights in the subsidiary may be exercised. The Minister also indicated that the requirement of the voting rights will explicitly be included in the Decree and that this does not lead to a change from current practice.

For the rest, we note that there is no fiscal arrangements have been provided yet. However, the bills may have tax consequences, such as:

Related entity / person
Several legal articles in the Corporation Tax Act refer to related entity or person. This term “related entity / related person” is further defined in Article 10a paragraph 4 Corporate Tax Act 1969 (hereinafter CITA). A “related entity/person” is an entity/person, who - in short – has an interest of at least one third or more in another company. The term "interest" plays a decisive role for both the financial interest and controlling interest (i.e. voting rights). As such, it is possible that under the (current, but also new rules) more than three entities/persons will have an interest in a company. It is advisable to have this checked.

Participation exemption
The participation exemption is applicable in case a company owns at least 5% of the nominal capital of a company which is wholly or partly divided into shares. From the legislative debate we derive that the participation exemption may apply to both profit and non-voting shares. It is thus easier to comply with the 5% requirement. It is also important that the other requirements of the participation exemption are met (i.e. the shareholding in the subsidiary must not be a passive investment. As can be derived, the participation exemption is not applicable if the shares in a subsidiary are held as passive investment. The decisive criteria for the qualification as passive investment are the intentions of the shareholder (motive test). In addition, or if the motive test is not met, the participation exemption nevertheless applies if one of the following conditions is met:

• not more than 50% of the assets of the subsidiary consists of free passive portfolio investments (asset test);
• the subsidiary is subject to tax at a minimum rate of 10% (tax test).

Substantial interest
A taxpayer (individual) among others has a substantial interest if he, alone or together with his partner, directly or indirectly, for at least 5% of the issued capital, is a shareholder in a company which is wholly or partly divided in shares. If the company has different classes of shares, the taxpayer has a substantial interest if he or together with his partner, directly or indirectly, owns at least 5% of the issued capital of a class of shares. Shares without voting rights or limited voting- and/or profit rights qualify as a distinct classes of shares. Therefore, it is possible it is easier to have a substantial interest. As such, other tax provisions may apply sooner. It is advisable to have this checked.

Consequences existing companies

Following the enactment of bills, the new law also applies for all existing companies (BV’s). However, the articles of association/by-laws of these existing companies may not comply with the new rules. As such, it may be advisable to review the articles of association/by-laws and determine whether it is advisable under the new law to change the articles of association/by-laws. It is not obligatory to change the articles of association/by-laws.

In addition, it is noted that it may be attractive to apply a reduction in capital. After the enactment of the bills, there is no mandatory minimum capital and therefore it could be attractive from a tax point of view to apply for a reduction in capital. If the shares are held in private, this may lead to a tax saving of 25%. For example, let assume that an existing company has a required minimum capital of € 18,000. If for example a capital reduction is proposed of € 16,000, then may lead to a saving of € 4,000 (i.e. 25% of € 16,000).