From October 2012 The Netherlands Will Become An Even More Attractive Venue For Business

Marc Klerks
Harmen Holtrop
Loyens & Loeff

FOR numerous years, the Netherlands has been a very interesting place of establishment for large, medium sized but also small internationally oriented businesses, often with their origin in the United States. A key driver has always been the attractive, very competitive Dutch tax regime combined with a huge number of tax treaties. Dutch corporate lawon private limited liability companies ("BV's") on the other hand was deemed less flexible. Luckily the Dutch legislator saw the necessity to make the law more flexible to accommodate the expectations of Dutch and foreign investors. As a result, from 1 October 2012 (the date on which therelevant act (the "Act") will enter into full force and effect), the Netherlands will become an even more attractive venue for all sorts of businesses.

There are too many technical changes to the Act to provide for an extensive review in this article, but below we have covered the most relevant changes from a corporate and tax law perspective. These changes may seem very straight forward at first glance, but are perceived as ground breaking in the Netherlands.

CORPORATE LAW
The paying in of shares at incorporation with at least 18,000 Euro is no longer required. This alleviates the administrative burden of opening a bank account in the name of the BV during the process of incorporation. The client acceptance procedure of the bank shall therefore no longer be afactor, drastically reducing the time needed to incorporate a BV (in fact, to as little as a single day). Moreover, the issued share capital can be as little as one share with a nominal value of a single euro cent, as opposed to the current minimum contribution of 18,000 Euro. Contrary to the current law, shares may be converted into non-voting shares or shares which do not entitle the holder to profit or reserves. What remains is that a Dutch civil-law notary will guide the incorporator of a BV through the process of incorporation, culminating in the execution of the notarial deed of incorporation.

The mandatory or even statutory restrictions on transfers of shares in the capital of a BV have always been subject to debate. After the first of October, one can draw up articles of association for a BV that make a choice from either complete control on the one hand (e.g. in the form of a lock up),to on the other hand complete freedom in transferring shares.

Up to now it was questionable under Dutch law to what extent a shareholder could instruct the board of directors of a BV to act in a certainway. In performing its duties, a director still has to act in the best interest ofthe stakeholders because of the fiduciary duties it owes to the company. But, in addition there to, a corporate body of the company (e.g. the general meeting of shareholders or the board of non-executives) can from the first of October give instructions to the directors, which directions must befollowed unless they are contrary to the interests of the company and its stakeholders.

The Netherlands was one of the few countries in the European Union that voluntarily introduced capital protection rules on private limited liability companies. The Dutch legislator has now chosen to abolish the rules on, amongst others, financial assistance, acquisition of own shares and capital reduction. The most burdensome prerequisites such as obtaining an auditor's statements and abiding statutory grace periods shall therefore become a thing of the past.

TAX LAW
Although the legislator repeatedly stated that the Act will hardly have material impact on the Dutch tax legislation, there will certainly be direct and indirect effects. As an obvious example, the enactment of the Act will also lead to an amendment to the fiscal unity legislation. Based on the fiscal unity regime (tax consolidation), qualifying companies can be treated as one taxpayer for Dutch corporate income tax purposes. Within the fiscal unity, transactions between the fiscal unity companies are disregarded. Inaddition, profits of one company can be off-set against losses of another company. The main condition for forming a fiscal unity is that the parent company owns the legal and economic ownership of at least 95% of the shares in one or more subsidiaries. In those cases where the subsidiary has multiple classes of shares, the shares of which the parent company has the legal and economic ownership should entitle the parent company to at least 95% of profit and equity of the subsidiary. There is no separate condition when it comes to voting rights. Following the announced amendment to the fiscal unity legislation, this will change in that the parent company will also require 95% of the voting rights in the subsidiary. For existing fiscal unities which include subsidiaries with multiple classes of shares, this means that it must be reviewed whether the new requirements are met. If not, the fiscal unity will cease to exist in respect of that company.

An obvious improvement resulting from the increased flexibility in differentiating in voting and economic rights on shares, can be found in the participation exemption regime. The participation exemption, which is one of the pillars of the attractive Dutch tax regime, provides that dividends and capital gains are exempt from Dutch corporate income tax incase the shareholder owns a stake of at least 5% inthe nominal paid-up capital of the subsidiary (and certain other conditions are met). It has explicitly been confirmed by the legislator that all shares (be it voting, non-voting, profit or non-profit) count for purposes of the 5% threshold. This makes it much easier to arrange fora 5% participation in situations where, economically, the stake is lower and, hence, benefit from the participation exemption. Differentiating voting rights and economic rights can also be beneficial when making use of a tax treaty. For example, the tax treaty between the United States and the Netherlands provides for reduced taxation (even to zero) on dividends depending on the voting rights of the parent company in the subsidiary.

In short, the Act shall provide the flexibility the market deemed necessary. Each BV in existence or new "Flex BV" shall as a result be able to take immediate advantage of (or should contemplate taking appropriate actions in relation to) all of the above and other changes.

Authors:Marc Klerks is a tax lawyer and Harmen Holtrop is a corporate lawyer at Loyens & Loeff. Loyens & Loeff N.V. is an independent full-service law firm specialised in providing legal and tax advice to enterprises, financial organisations and governments. The intensive cooperation between attorneys, tax lawyers and civil law notaries places Loyens & Loeff in a unique position in its home market, the Benelux. Loyens & Loeff has over 1.600 employees, including about 900 legal and tax experts in six of the Benelux offices and twelve branches in the major international financial centres.

Marc Klerks
E-mail: marc.klerks@loyensloeff.com

Harmen Holtrop
E-mail: harmen.holtrop@loyensloeff.com

Tel: +31 20 578 57 85

www.loyensloeff.com