The importance of paying up issued shares in a Dutch limited liability company
On the first day of October 2012 new legislation with regard to the Dutch limited liability company (“BV”) came into force which provides for more flexibility in the tailoring of the BV. Hence the legislation is called “Flex-BV legislation”. Before this date, shares issued upon the incorporation of a BV needed to be paid up coinciding with the incorporation of the BV. Following the coming into effect of the Flex-BV legislation, this is not compulsory anymore. Dutch law now prescribes that it can be opted for not to pay up the shares issued at incorporation directly, but that said payment obligation is only due upon request thereto by the company. Thus, this means that when a BV is incorporated, the incorporators are not obliged to pay up the issued shares immediately. Each shareholder is however still obliged to pay up its shares in the future. Whilst not having to actually pay up the shares immediately may seem convenient, there are also reasons to consider to pay the shares up immediately after all.
Reasons to pay up your shares:
First, when the shares are not being paid up immediately, the shareholder will in principle still remain liable vis-a-vis the company for the amount which still needs to be paid up on the shares. This liability remains, even when the shares are transferred.
Example 1.
Person A incorporated a BV and at incorporation 10,000 shares with a nominal value of € 1.- were issued. A did not pay up the shares at incorporation. After several months, A sells and transfers his shares to person B. After that, the BV goes bankrupt. The trustee (curator) of the bankrupt BV will then still have a claim on person A for the amount of € 10,000.- since person A is still obliged to pay up the shares.
Second, not paying up your shares can have big consequences as a result of specific tax regulations. For instance, to qualify for the participation exemption (deelnemingsvrijstelling) pursuant to the Corporation Tax Act 1969 (Wet op de vennootschapsbelasting 1969), the mother company needs to hold at least 5% of the paid up shares in its subsidiary to be eligible for the participation exemption. The participation exemption is a facility which provides for an exemption from corporate income tax of proftis derived from the investement in a company. As a consequence, dividends and capital gains arising from such participation are tax exempt (and capital losses and cost of acquisition/disposal are not deductible).
Not paying up your shares can also have big consequences for the requirements to establish a fiscal unity pursuant to the Corporation Tax Act 1969 (Wet op de vennootschapsbelasting 1969). To establish a fiscal unity a mother company needs to hold at least 95% of the paid up shares in its subsidiary. When a fiscal unity is established, the mother company and its subsidiary are seen together as one company for VAT.
If you want to learn more about the participation exemption and the fiscal unity we would be happy to bring you in contact with one of the tax law firms we work with.
Advice: pay up your shares!
Now that I summed up some of the reasons why it could be important for you to pay up your shares I also wish to stress that you should keep proof of the payment made to pay up the shares. This could mean filing a copy of the bank statement showing the paying up of shares in the administration of the BV (and keep a copy in your own administration as well of course). In addition the paying up of the shares should be registered with the Dutch trade register of the Chamber of Commerce.
If you have any questions regarding the aforementioned, please do not hesitate to contact the Startup Team.
