The following article will discuss from a corporate and tax perspective how to fund a Dutch private company with limited liability (besloten vennootschap met beperkte aansprakelijkheid). Both equity funding and debt funding are discussed, as well as how to withdraw cash from a Dutch company.
Equity funding may be done either by an issue of new shares or by making a share premium contribution on existing shares in the capital of the company.
Issuing shares in the capital of a Dutch private limited liability company typically requires a shareholders resolution and a notarial deed of issue. The notarial deed will have to be executed before a civil law notary practicing in the Netherlands, which is usually done on the basis of powers of attorney. These powers of attorney need to be duly legalized (see How it works…legalization in the Netherlands, in the May 2009 Benelux Roundup).
Share premium contribution
Share premium (in Dutch: agio) is the amount paid up on shares in excess of the nominal or par value of the shares. A cash share premium contribution is the simplest manner of equity funding. It typically only requires a shareholders resolution, and the procedure can be completed within a day.
In the Netherlands, no capital duty is due on equity funding.
Typically, debt funding is done by granting a loan to the company. The loan must be in the interest of the company, and the borrowing must not endanger the financial position of the company.
There are no stamp duties or other documentary taxes in the Netherlands on debt funding. Interest payments on debt are not subject to withholding tax and can generally be deducted from the pre-tax profits. An at arm's length principle and several anti-avoidance measures do apply, mainly for intra-group debt structures. However, it should be noted that under certain circumstances, debt, despite its legal form, may be re-characterized as equity (factors taken into account include: a term exceeding 50 years, subordination and profit dependant payments).
Withdrawing cash from a Dutch company
Dutch law provides for a number of methods to withdraw cash from a company. Typically, this is accomplished by (i) a cash distribution out of the existing reserves of the company, (ii) a repurchase of shares by the company or (iii) a capital reduction.
(i) Distributions out of the reserves
The easiest and quickest manner to withdraw cash from a company is by making distributions out of the freely distributable reserves of the company, such as the share premium reserve and the profit reserve. This typically only requires a shareholders resolution, and the procedure can be completed within a day. However, it should be noted that pursuant to Dutch law, such distributions can only be made up to the amount of the freely distributable reserves of the company.
(ii) Repurchase of shares
If allowed by the articles of association of the company, shares can be repurchased by the company from its shareholders. Dutch law provides for certain restrictions, such as (a) repurchase is only possible up to the amount of the freely distributable reserves, (b) only half of the issued share capital may be repurchased and (c) the repurchase is not allowed if more than six months have lapsed after the last financial year without adopting the annual accounts for that year. A repurchase typically requires a notarial deed of repurchase, a shareholders resolution and powers of attorney to execute the notarial deed.
(iii) Capital reduction
The capital of a company can be reduced by cancellation of shares or by a reduction of the nominal value of shares. Only shares held by the company or all shares of a certain class can be cancelled. A capital reduction typically requires a shareholders resolution, publication in a Dutch newspaper and, if the nominal value of the shares is reduced, a notarial deed of amendment to the articles of association of the company. Dutch law provides that creditors must be given the opportunity to object against a capital reduction for a period of two months.
Repayment of share premium is not subject to dividend withholding tax if the company does not have, and does not anticipate, any retained earnings. If retained earnings do exist, repayment of equity may be done without the levy of dividend withholding tax by first converting any available share premium into shares (i.e. shares are being issued, which are paid up against the share premium reserve) and subsequently reducing the issued share capital of the company.
In principle, dividends (i.e. distributions of profits in whatever form) are subject to Dutch dividend withholding tax (general rate 15%) and cannot be deducted from the company's profits. The tax treaty between the U.S. and the Netherlands provides for reduced withholding tax rates for certain shareholders.
Repayment of nominal share capital is normally not subject to dividend withholding tax.