Under Dutch law, a foreign individual or company may operate in the Netherlands through an incorporated or unincorporated subsidiary or branch. Dutch corporate law provides a flexible and liberal framework for the organization of subsidiaries or branches. There are no special restrictions for a foreign entrepreneur to do business in the Netherlands.
The business operations can be set up in the Netherlands with or without a legal personality. If a legal entity has legal personality, the entrepreneur cannot be held liable for more than the sum it contributed to the company’s capital.
Dutch law distinguishes 2 types of companies both of which possess legal personality: the private limited liability company (besloten vennootschap met beperkte aansprakelijkheid - BV) and the public limited liability company (naamloze vennootschap - NV). These forms of legal entities are most commonly used for doing business in the Netherlands.
Other common forms of business entities are sole proprietorship (eenmanszaak), general partnership (vennootschap onder firma - VOF), (civil) partnership (maatschap) and limited partnership (commanditaire vennootschap - CV). None of the latter forms possesses legal personality and, as a consequence thereof, the owner or owners will be fully liable for the obligations of the entity.
All entrepreneurs engaged in commercial business and all legal entities have to register their business with the Trade Register (Handelsregister) at the local Chamber of Commerce (Kamer van Koophandel).
This section covers the abovementioned legal entities for doing business in the Netherlands from a legal perspective. After dealing with the distinction between a subsidiary and a branch, the above mentioned entities will be described in greater detail. This will be followed by a summary of the status of intellectual property rights in the Netherlands. Finally, this manual will explain the advantages and disadvantages of doing business through a subsidiary or a branch.
A branch is not a separate legal entity. A branch is a permanent establishment of a company from which business operations are carried out. As a result, the company that establishes a branch in the Netherlands is liable for claims incurred by actions carried out by the branch.
A subsidiary is a separate legal entity that may be established by one or more shareholders. The subsidiary is a legal entity that is controlled by the (parent) company. Control of a subsidiary is mostly achieved through the ownership of more than 50% of the shares in the subsidiary by the (parent) company. However, under certain circumstances it is also possible to obtain control by special voting rights or diversity of the other shareholders. These shares or rights give the (parent) company the votes to determine the composition of the board of the subsidiary and thereby to exercise control. Since a subsidiary has limited liability, a shareholder (the parent company) is, in principle, only liable to the extent of its capital contribution.
Private limited liability company (BV)
The laws regulating the BV are largely based upon rules governing the NV. The shares of a BV are not freely transferable (subject to blocking clauses incorporated in the articles of association) which makes this type of company generally preferred as the vehicle for a privately held company.
A BV is incorporated by one or more incorporators pursuant to the execution of a notarial deed of incorporation before a civil-law notary. The notarial deed of incorporation must be executed in the Dutch language and must at least include the company’s articles of association and the amount of issued share capital. Prior to incorporation, statement of no objection (‘verklaring van geen bezwaar’) must be obtained from the Dutch Ministry of Justice. This statement is required for incorporation and ensures that all statutory requirements for incorporation have been met. Certain information regarding the incorporator(s) must be submitted before approval is granted.
While the BV is in the process of incorporation, business may be conducted on its behalf provided that it adds to its name the letters, ‘i.o.’ (for ‘in oprichting’), which means in the process of being incorporated. The persons acting on behalf of the BV i.o. are severally liable for damages incurred by third parties until the BV (after its incorporation) has expressly or implicitly ratified the actions performed on its behalf during the process of incorporation. A similar liability arises for the persons responsible if the BV is not incorporated or if the BV fails to fulfil its obligations under the ratified actions and the responsible persons knew that the BV would be unable to do so. In the event of bankruptcy within 1 year of incorporation, the burden of proof lies with the persons responsible.
Members of the board of directors are also severally liable to third parties for legal acts performed after incorporation, but preceding the registration of the BV with the Trade Register.
A BV must have an authorized capital, divided into a number of shares with a par value expressed in Euros. Shares without a par value are not permitted. At least 20% of the authorized capital must be issued and at least 25% of the par value of the issued shares must be paidup. The issued and paid-up capital of a BV must amount to at least € 18,000.
Payment for shares can be in cash. If payment for shares is in cash, the civil-law notary must be provided with a statement from a bank to the effect that, upon incorporation, the money will be available to the BV at the bank in question, or that the bank has received the required amount of cash in an account in the name of the BV i.o. This statement may not be issued more than 5 months prior to the date of incorporation.
Payment for shares can also be in kind. Payments in kind are contributions of property and/or other non-cash items. These payments are restricted to items that can be objectively appraised. If these payments take place upon incorporation of the BV, the incorporators must describe the contributed assets and an auditor must issue a statement to the effect that the value of the contribution is at least equal to the par value of the shares. The statement of the auditor is to be provided to the civil-law notary involved prior to incorporation and may not be issued more than 5 months prior to the date of incorporation.
A BV may only issue registered shares. Besides ordinary shares, a BV may also issue priority shares, to which certain (usually voting) rights are allocated in the articles of association, and preference shares, which entitle the shareholder to fixed dividends that have preference over any dividends on ordinary shares. Within a given type of share, the articles of association may also create different classes of shares (e.g. A, B and C shares) to which certain specific rights are allocated (e.g. upon liquidation).
Dutch law does not allow for the existence of non-voting shares. All shareholders must at least have one vote. However, by using a trust office, the voting power can be separated from the beneficial interest.
The articles of association of a BV must stipulate limitations on the transferability of the shares. Dutch law provides for 2 possible restrictions, which require the transferor either to:
- offer his shares to the other shareholders, the right of first refusal, or;
- obtain approval for the transfer of shares from the corporate body, as specified in the articles of association.
Shares in a BV are transferred by a deed of transfer executed before a civil-law notary.
The board of directors of a BV must keep an up-to-date shareholders’ register, which lists the names and addresses of all shareholders, the number of shares, the amount paid-up on each share and the particulars of any transfer, pledge or usufruct of the shares.
The management of a BV consists of the board of directors and the general meeting of shareholders. A BV can, in addition, under certain circumstances have a supervisory board.
General meeting of shareholders
At least one shareholders’ meeting should be held each year. Shareholders resolutions are usually adopted by a majority of votes, unless the articles of association provide otherwise. As a rule, the shareholders may not give specific instructions to the board of directors with respect to the management of the company, but only general directions.
The supervisory board’s sole concern is the interest of the BV. Its primary responsibility is to supervise and advise the board of directors. Pursuant to the Large Companies Regime (Structuurregeling), the supervisory board is only a mandatory body for a Large BV; however this is optional for other BVs.
Board of directors
The board of directors is responsible for managing the BV. The members of the board of directors are appointed and removed by the shareholders (unless the BV is a Large BV). The articles of association generally state that each director is solely authorized to represent the company. However, the articles of association may provide that the directors are only jointly authorized. Such a provision in the articles of association can be invoked against third parties.
The articles of association may provide that certain acts of the board of directors require the prior approval of another corporate body such as the shareholders’ meeting or the supervisory board. Such a provision is only internally applicable and cannot be invoked against a third party, except where the party in question is aware of the provision and did not act in good faith.
A member of the board of directors of the company can be held liable by the BV, as well as by third parties. The entire board of directors can be held liable to the BV for mismanagement. An individual member of the board of directors can be held liable with respect to specific assigned duties. The shareholders can discharge the members of the board of directors from their liability to the company by adopting an express resolution barring statutory restrictions.
Besides the aforementioned liability prior to incorporation and registration, liability towards third parties can occur in several situations. For example, in case of the bankruptcy of the BV, the members of the board of directors are severally liable for the deficit if the bankruptcy was caused by negligence or improper management in the preceding 3 years. An individual member of the board of directors can exonerate himself by proving that he is not responsible for the negligence or improper management.
Simplification and flexibilization of Dutch private company law
Dutch private company law is currently subject to extensive discussion. A Bill to simplify Dutch private company law was submitted on 31 May 2007 and is currently pending in the Dutch Parliament. The Bill will abolish many of the formalities that are currently required to set up a BV; e.g. the requirement of a minimum capital of €18,000. The new legislation will make it easier for entrepreneurs to set up a BV in the future.
Public limited liability company (NV)
In general, everything mentioned above that applies to the BV also applies to the NV. This section will outline the most significant differences between the NV and the BV.
Share capital and shares
The minimum issued and paid-up share capital is € 45,000. Besides registered shares, a NV may also issue bearer shares. Bearer shares must be fully paid up and are freely transferable. Registered shares have to be transferred by executing a deed of transfer before a civil-law notary, and in contrast to a BV, it is not a statutory requirement that the articles of association of an NV provide for limitations with respect to the transferability of the registered shares. An NV is authorized to issue share certificates (certificaten).
Other common forms of business entities
Entrepreneurs in the liberal professions (such as doctors, lawyers and graphic designers) often set up partnerships (maatschap).
A partnership is an arrangement by means of which at least two partners, who may be individuals or legal entities, agree to conduct a joint business. Each partner brings money, goods and/or manpower into the business. Each partner is personally, either jointly or severally, liable for all the obligations of the partnership. A partnership does not possess legal personality.
A public partnership (openbare maatschap) participates in judicial matters under a common name. The possessions of a public partnership are legally separated from the possessions of the partners.
General/commercial partnership (VOF)
A general partnership can be defined as a public partnership that conducts a business instead of a profession. A public partnership and the partners must be registered in the Commercial Register at the Chamber of Commerce.
A limited partnership (CV)
A limited partnership is a special form of the general partnership (VOF) which has both active and limited (or sleeping/silent) partners.
An active partner is active as an entrepreneur and is liable, as in the case of the general partnership.
The silent partner, however, tends to finance the business and stays in the background. The silent partner is liable only up to the amount of his capital contribution. He is not allowed to act as an active partner and his name cannot be used in the name of the partnership. If the silent partner enters the business (to provide extra finance for growth) he becomes liable as an active partner.
Sole proprietorship (eenmanszaak)
In the case of a sole proprietorship (eenmanszaak), 1 (natural) person is fully responsible and liable for the business. A sole proprietorship does not posses legal capacity and there is no distinction between the business assets and private assets of the natural (person).
There is currently a bill pending in the Dutch Parliament which provides for replacement of the partnerships described above by a new legal form of partnership. Depending on whether it is public or not, it will be possible for such a partnership to obtain legal personality and, consequently, to hold property, to contract in its own name, to sue and be sued. Obtaining legal personality, however, does not result in a reduction of the liability of the owners or partners in the partnership. This new form of partnership will be introduced in the Dutch Civil Code in the near future.
A trust company is entitled to perform corporate trust services for payment, such as the administration and management of a company that conducts business in the Netherlands. A trust company can take care of (required) administrative services, such as the preparation of annual reports. In certain instances the trust company is the (sole) director of the company for which it provides the services.
The Benelux Convention on Intellectual Property regulates the provisions regarding the registration, use and protection of trade marks, designs and models in the Netherlands, Belgium and Luxembourg.
Trademarks can be names, drawings, stamps, letters, numbers, shapes of goods or packages and all other signs used to distinguish the goods of one company from those of others. A registered trademark is protected for a period of 10 years from the registration date and the protection can be extended by a further 10 years. Renewal must be requested and all due fees paid. The rightful owner is entitled to claim damages for infringement of its rights (such as the use of the trademark by another party).
A design or model is the new appearance of a utility product. A registered model or design is protected for 5 years from the registration date onwards and the protection can be extended by 4 periods of 5 years each, up to a maximum of 25 years. Renewal will be effective upon timely settlement of all fees due. The rightful owner is entitled to claim damages for any infringement of its rights (such as the use of the model or design by another party).
Copyright Act 1912 (Auteurswet 1912) contains provisions regarding the protection of copyrights. Copyright does not require registration in the Netherlands and applies (amongst other things) to literature, dramatic, musical and artistic work, sound recordings, films and computer programs. A copyright expires 70 years after the author’s death.
Council Regulation (EC) No 40/94 on the Community trademark introduces a system for the award of Community trade marks by the Office for Harmonisation in the Internal Market (OHIM). The Community trademark system of the European Union enables the uniform identification of products and services of enterprises throughout the European Union. Requiring no more than a single application to OHIM, the Community trade mark has a unitary character in the sense that it produces the same effects throughout the Community. The Community trade mark contains provisions concerning the registration and use of Community trademarks by (legal) persons and the protection of the rightful owners of such Community trademarks. A registered trademark is protected for 10 years from the registration date onwards and the protection can be extended repeatedly by subsequent ten-year periods. Renewal must be requested and all fees due settled in good time. The rightful owner is entitled to claim damages for infringement of its rights (such as the use of the trademark by another party).
Branch or Subsidiary
Many foreign companies make use of a subsidiary rather than a branch. The main legal reason to set up a subsidiary, instead of a branch, is limitation of liability. As a shareholder of a subsidiary, the foreign company’s liability is, in principle, limited to the extent of its capital contribution; whereas, if the foreign company makes use of a branch, it is fully responsible for all the obligations and liabilities of the branch.
One major advantage of setting up a branch is that it does not, in principle, require the same legal formalities required for setting up a subsidiary. However, the simplification and flexibilization of the Dutch limited company law (as mentioned above) may well diminish this advantage.
Another important aspect to consider with respect to the choice of setting up a branch or a subsidiary in the Netherlands is the matter of local tax regulations. The choice of setting up a branch or a subsidiary will be determined based on the circumstances and relevant factors with respect to the business as such, and the Dutch tax regulations and tax treaties.
Author: Harry den Hond, Schagen Lensen & van Krieken Accountants, www.slk.nl