Following recent legislation to provide for Discretionary Trusts in the Netherlands, John Graham, Graham Smith, provides an insight into the benefits and opportunities provided by these new services.
Recently, the Netherlands has seen some important new developments, in particular in company law where the so-called Flex BV has been introduced, and in tax law with respect to the taxation of trusts. Both pieces of legislation offer significant benefits and opportunities but can be onerous in certain situations.
The new company rules simplify setting a company up but also introduce some onerous provisions to help ensure that companies are not abused. It should be noted that the rules apply to BVs (private companies) and not to NVs (public companies).
First the simplifications,
The minimum capital requirement of €18,000 has been abolished and it is no longer necessary to have an authorised capital. Shares are still required to have a nominal value but this may now be in a foreign currency.
When capital is paid in it is no longer necessary to have either a bank declaration or (for payment of capital in kind) an auditors’ report. It is up to the directors to determine the value of what is paid in. It used to be a requirement for shares to be at least 25 per cent paid up but this is no longer required.
It used to be quite difficult to have shares with restricted rights but it is now possible to have shares either without voting rights or without a right to a share of the profit. However, it is not possible to have a share which has no rights to profits and also no votes (presumably it would not have many of the attributes of a share in such a case). A share which has no rights to profits can have a limited right to vote. Shares do not all have to have the same voting rights.
Different groups of shareholders can be given a specific right to appoint a director, although each shareholder with voting rights must have the right to vote for at least one director.
The shareholders can decide on a dividend of the excess of the net assets over the reserves which are required to be kept under the law. However, before it can be paid, the board of directors must approve this decision and if there is a shortfall (ie, the dividend exceeds what can legally be paid out), the board members can be held jointly and severally liable. If too much dividend is paid it can be reclaimed from the shareholders. Any dividend tax deducted from the original dividend will not be recoverable. Similar rules apply for a repayment of capital and the purchase by a company of its own shares. A company can now buy its own shares without this being specifically provided for in the company’s articles: the only requirement is that at least one share must be held by a third party so a company cannot hold 100 per cent of itself.
A BV used to be required to have a limitation on the transfer of its shares, either by the shareholder who wishes to sell his shares being required to offer the shares to other shareholders or by being required to get their approval to transfer to an outside party. This is now optional, so that unless the articles provide for a restriction, a shareholder is free to transfer his shares to whoever he likes,however, it is still possible to include such a restriction on the transfer of shares in the company’s articles.
Written shareholders' resolutions are also easier than they were, since they can be passed even if depository receipts have been issued and only a normal majority is required rather than unanimity which used to be the case. It is not necessary for this changed situation to be specifically included in the articles of the company.
The minimum time period for calling a meeting of shareholders has been reduced to eight days. A shareholder will therefore have to be more diligent because if he does not respond in time decisions may be taken without him.
In certain cases the articles of the company need to be adjusted for the new arrangements to apply but in others the changes are automatic, therefore, it may be worth reviewing a company's articles and updating them anyway.
The new rules make it easier to structure succession issues (children can be given non-voting shares with full profit rights) or to have external participation with no or fewer voting rights.
In international situations it is important to make sure that amending the articles to create more flexibility does not change the status of the entity for foreign (tax) purposes, for instance removal of the restriction on the transfer of shares or similar might prevent it being treated as a transparent entity.
To summarise, the Flex BV changes mean that it is much easier to set up a company in the Netherlands but the relatively onerous provisions if reserves are paid out of the company mean that directors need to be certain that the company has sufficient funds and liquidity to make the dividend payment or repayment of capital.
Taxation of Trusts
The other important area which has seen changes is that of discretionary trusts. The taxation of discretionary trusts in the Netherlands was uncertain for a long period, although case law had covered some elements. Rules have now been introduced to deal with what is referred to as a ‘separate private fund’ (‘afgezonderd particulier vermogen’ or APV). An APV does not have to take the form of a trust and can include for instance a foundation (for simplicity I refer to a trust in the rest of this article).
Basically, if a trust is set up with discretionary beneficiaries, it is effectively considered to be transparent for certain tax purposes so that the assets are allocated to the settlor (there are deeming provisions as to who may be considered as settlor such as in the case where the settlor is not the person who puts most of the assets into the trust). Technically, the trust is not actually transparent; this is dealt with briefly below.
The rules basically mean that the settlor is subject to income tax on the income from the trust, and if the trust pays a distribution to a beneficiary who is not the settlor, that is deemed to be a gift from the settlor to the beneficiary and subject to Dutch gift tax, if applicable. Similarly, if the settlor dies, then the assets in the trust are deemed to be left by him to his heirs and where appropriate will be subject to inheritance tax. In international situations this can result in no tax or double tax. If the settlor is resident outside the Netherlands and the assets are not of a type automatically subject to tax in the Netherlands (real estate in the Netherlands would automatically be subject to tax there) then neither the settlor nor the beneficiary is subject to Dutch tax on the income and or on receiving a distribution from the trust. The reverse situation, and where a settlor is a resident of the Netherlands and the beneficiaries are resident outside the Netherlands can result in an unpleasant situation, since the settlor will be subject to tax on the income in the Netherlands but a distribution may also be subject to tax in the hands of the beneficiaries in the country in which they live. In that situation there are also likely to be more gift and inheritance tax issues.
Particular care is needed where settlors or beneficiaries move from one country to another, as a tax liability can arise without the person moving realising it.
The ‘transparency’ does not apply for all taxes, in particular real estate transfer taxes. While most assets can therefore be transferred to a trust without Dutch tax consequences, this is not the case for real estate because the transfer tax will remain payable.
If the trust is subject to tax on specific assets at a rate of 10 per cent (the income should be calculated on a Dutch basis) then the transparency for income tax purposes does not apply. This is looked at on an asset by asset basis. In the right circumstances this can actually result in tax mitigation, especially since the trust would be subject to corporate income tax rather than personal income tax and so certain income may be exempt for corporate tax purposes even if it is not for personal income tax purposes.
Under the new rules it is relatively easy for a settlor to transfer assets to a trust and yet subsequently still be able to benefit from those assets. This could give a measure of asset protection, since the assets are no longer legally owned by the settlor himself and he may not have an enforceable right against the trust. There is no gift tax on transferring assets to the trust in such a case.
There can be unexpected pitfalls, for instance in situations where a settlor moves to the Netherlands without appreciating the existence of this legislation. In particular many wealthy Americans have set up family trusts and the settlors and the beneficiaries of such trusts sometimes arrive in the Netherlands without advice on the consequences.
There are also some draconian provisions where a Dutch company is owned by a discretionary trust and the settlor does not pay tax on the trust income that is allocated to him. In that case the corporate veil can be pierced and assets taken from that company in proportion to the trust’s share in it. This rather extreme measure seems to have passed almost unnoticed into the Dutch legislation and can create interesting problems for an auditor of a company if he does not know who the shareholders are and, even if he does, he does not know whether they fall under this legislation and have paid their taxes.
As a result, some care is needed to negotiate the new legislation covering the Dutch taxation of discretionary trusts but in the right situations it allows interesting planning possibilities.
John is Partner of Graham Smith & Partners International Tax Counsel, specialising in international taxation, including family owned companies and the (international) families behind them, trusts in civil law jurisdictions, international structures and expatriates. He has written for various publications on international and Dutch taxation, and is the former editor of the International Handbook of Corporate and Personal Tax (Chapman & Hall). He also taught International Tax and European Tax Policy at the School of International Studies, AVANS University of Applied Science.