The Argentinian cancellation of the tax treaty with Spain highlighted the pros and cons of holding company structures. The financial crisis in Cyprus did the same. Companies are now exploring options to strengthen their structures within the EU. This includes converting into a Dutch entity. One of the jurisdictions which comes to mind is The Netherlands.
Introduction
Through domestic legislative changes and the EU jurisprudence, the international mobility of corporations is significantly increasing. One of the options EU/EEA body corporates have is to convert into the entity of another jurisdiction.
In The Netherlands, lawmakers are preparing domestic legislation to facilitate cross-border conversions. I will highlight the current practice of holding company restructuring and introduce the concept of conversion. We will also discuss the ECJ jurisprudence on cross-border conversions and the upcoming Dutch domestic legislation. Finally, I will present Dutch tax considerations for outbound and inbound conversions and share my conclusions.
Current practice
You can interpose a new holding company or a new holding company location within a group structure in numerous ways. Transferring a company’s residency by moving effective management and control is an option, but it may not be practical. The body corporate must follow its original home country’s legislation and adapt to the host country’s rules. This increases the corporate compliance.
You can create a new holding company in another jurisdiction and transfer the assets of the obsolete holding company to the new one. If the corporate structure does not require unilateral succession, you can transfer assets via an asset deal or liquidation/dissolution. This approach has drawbacks, such as the legal transfer of asset ownership and triggering unrealized capital gains, as a legal transfer is generally considered a recognition event.
You can transfer a company’s assets under unilateral succession (within the EU) by performing a cross-border legal merger. In The Netherlands, you can perform a cross-border legal merger between Dutch companies with capital divided by shares (BV/NV) and specific EU companies. Dutch corporate law does not facilitate a merger between a non-EU company and a BV/NV. Within the EU, cross-border mergers are becoming more common. EU legislation instructs member countries not to hinder an EU cross-border merger. These rules are established from an EU corporate law perspective in Directive 2005/56/EC and from a tax perspective via the EU Merger Directive.
Conversion via ECJ jurisprudence
The Vale case [4] was ruled on July 12th, 2012 by the ECJ. The ECJ ruled that article 49 Treaty on the Functioning of the European Union (further: ”TFEU”) and 54 TFEU regarding the freedom of establishment are infringed if the host Member State does not treat the domestic conversions the same as a foreign conversion. In summary this entails that a cross-border conversion by a host Member State within the EU/EEA should be allowed, if a domestic conversion by the host Member State is also allowed. The judgment states:
“However, the principles of equivalence and effectiveness, respectively, preclude the host Member State from refusing, in relation to cross-border conversions, to record the company which has applied to convert as the ‘predecessor in law’, if such a record is made of the predecessor company in the commercial register for domestic conversions, refusing to take due account, when examining a company’s application for registration, of documents obtained from the authorities of the Member State of origin.”
The TFEU upholds that if you can domestically convert one company into another, the host Member State should also allow this for companies from other EU/EEA countries. Based on the Vale case, one could argue that companies from other EU/EEA countries are eligible to convert into a wide range of Dutch legal entities.
In The Netherlands it is possible to convert a Dutch legal entity into another Dutch legal entity. Conversions can take place in The Netherlands between BVs, NVs, foundations, cooperatives and associations.
Conversion via Dutch domestic legislation
Currently there is no Dutch legislation which covers the conversion of EU/EEA companies with a capital divided by shares into a similar Dutch company. [5] However, based on the ECJ Cartesio [6] case the Commission Corporation law spontaneously issued an advice on February 12th, 2012. It advised to incorporate Dutch legislation to facilitate cross-border conversion of Dutch companies into EU/EEA companies.
The reasons to incorporate domestic legislation were to protect employees, creditors, and minority shareholders. Without domestic legislation, their positions might be infringed. Moreover, the European Parliament requested the European Commission to draft a new directive. The uncertainty of when this directive would come into force increased the need for domestic legislation. Therefore, the Commission advised legalizing the conversion of Dutch companies with capital divided by shares (BV/NV) into similar EU/EEA companies.
The Dutch Minister of Security and Justice is working on legislation to protect employees, creditors, and minority shareholders. His focus is on Dutch outbound situations, ensuring protection mechanisms for stakeholders. For example, in abusive situations, the Dutch Minister of Security and Justice has the right to object. If protection mechanisms do not apply to Dutch domestic conversions, it questions the legislation’s alignment with prevailing ECJ jurisprudence.
For Dutch inbound situations, the new legislation prescribes that an EU/EEA company can only be converted into a Dutch BV or Dutch NV. Requirements include a notarial deed in Dutch and documentation proving the procedure in the home country is complete. If converting to a Dutch NV, an audit certificate is necessary to prove the minimum capital requirement is met.
Currently it is unknown when this legislation will be finalized. Dutch domestic legislation currently allows the conversion of various legal entities, not just BV or NV. As a result, the draft legislation on cross-border conversions might not be comprehensive enough. It may not align with ECJ jurisprudence. Therefore, if considering a conversion to a company other than a BV or NV, direct application of ECJ jurisprudence is necessary.
Dutch tax legislation
From a Dutch tax perspective, converting a BV into an NV and vice versa does not constitute a liquidation for corporate income tax (CIT) purposes (Article 28b of the Dutch CITA). Converting other Dutch companies, such as cooperatives, into another legal form constitutes a liquidation for Dutch CIT, Dutch dividend withholding tax (DWT), and Dutch personal income tax (PIT) purposes. The question arises whether Dutch outbound conversions to EU/EEA companies will receive the same treatment as BV/NV conversions, avoiding liquidation.
Dutch law deems a company a Dutch resident for CIT and DWT purposes if it incorporates under Dutch corporate law. We need to consider how the home and host states will apply this after a conversion. We expect to solve practical hurdles over time, but tax technical discussions have not yet begun.
Conclusion
International corporate mobility is providing for additional flexibility with regard to international corporate restructurings within the EU/EEA. The ECJ’s position is broader than the subsequent Dutch reaction reflected in the draft legislation. This article provides alternatives for companies wishing to strengthen their holding company structure in the current volatile environment.
Take the next step in securing your company’s future. Contact us today to learn how converting into a Dutch entity can benefit your business.
[1] An option is to relocate the non-EU company to a suitable EU location where it can be converted into an EU company and then perform the cross-border merger with the Dutch BV/NV.
[2] Directive 2005/56/EC Of The European Parliament and of The Council of 26 October 2005 on cross-border mergers of limited liability companies.
[3] Council Directive 2009/133/EC of 19 October 2009 on the common system of taxation applicable to mergers, divisions, partial divisions, transfer of assets and exchanges of shares concerning companies of different member States…
[4] ECJ 12 July 2012, nr. C-378-10 (Vale Építésikft).
[5] The SCE (European Cooperative Society, whereby SCE stands for SocietasCooperativaEuropaea) has its own set of applicable rules, laid down in the Council Regulation (EC) No 1435/2003 of 22 July 2003 on the Statute for a European Cooperative Society. An SCE can be converted into a Dutch cooperative without losing its legal form.
[6] ECJ 16 December 2008, nr. C-210/06 (Cartesio).
