Share capital or share premium for your Dutch company?
You have incorporated and registered a Dutch business and wish to fund it with equity. Should you capitalize the company with share capital or share premium? In this article both options will be discussed.
Share capital and share premium (in Dutch: agio) are both considered to be part of the capital of a Dutch limited liability company and therefore both are in principal a tax neutral instrument. Share capital can be brought into a company by paying up issued shares in cash or in kind. Share premium can be brought into a company by a contribution in cash or in kind on the payed up shares of a BV.
Under Dutch GAAP (RJ 240.403), all transactions of a company with its shareholders that affect the financial relationship between these parties are to be accounted for directly in the equity. Share issuance and share premium contribution should both be considered as equity. Under Dutch GAAP share capital and share premium will not impact the Profit or Loss account.
According to the Dutch Accounting Standards funding of a BV by share issue will be recorded in the Equity as Share Capital. Dutch Accounting Standard RJ 240.221 states that capital contributions made by existing shareholders on account of their financial relationship to the entity that are executed conducted without actual disbursement of new shares (or rights to receive or call shares) are to be recognized as share premium. In the Financial statements funding under share premium contribution will be shown in Equity under Share Capital.
Increase of equity
Increasing the capital of a BV by means of capital requires the execution of a deed by a Dutch civil law notary. For the execution, the notary will require a resolution from the shareholder which also includes a power of attorney. Additionally, a power of attorney from the company will be necessary. Normally, the notary takes care for drafting the notarial deed, power of attorney and resolution.
When the shareholder of a Dutch company is a foreign legal or natural person, the notary will require a legalized resolution. Under certain circumstance also with an apostille and an authority statement (in some cases, the formality of legalization and apostille can be avoided by having the Dutch notary identify the signer. This identification only has to take place once).
After the execution of the shares the notary will take care of the registration of the increase of share capital at the Dutch trade register. Before or after the execution of the deed, the newly issued shares can be paid up by the shareholder by means of a transfer to the company's bank account.
A share premium contribution requires a share premium contribution agreement concluded between the shareholder and the BV, in combination with a shareholders resolution. There is no registration of share premium with the Dutch trade register or in the shareholders register. After the conclusion of the share premium contribution agreement and adoption of the resolution, the share premium can be paid by the shareholder to the company by means of a transfer. As amount of formalities is limited, a share premium contribution can, in case of urgency, be executed within a day.
In situation where repetitive share premium contributions are planned, it is wise to conclude a share premium contribution facility agreement whereby the shareholder and the company can agree on share premium contributions up to a capped amount. This will help the involved parties to avoid conclusion of multiple agreements and resolutions and will give flexibility in case the need for capital can not be assessed in advance.
Share premium and share capital redemption
Both types of capital can under certain conditions be redeemed without any dividend withholding taxes being levied. A condition for tax neutral repayment of share premium to its shareholders is that the company shall have distributed all its profits and does not expect any profits within the next two years. This scenario is often used in case of liquidation of a company. In case the conditions mentioned above cannot be met, it is still possible to repay the share premium without any dividend withholding taxes levied. The share premium shall first be converted by means of a deed of a civil notary into a share capital.
In case of liquidation, redemption of share capital can be executed without any formalities and in a tax neutral way. In case the company will be continued, the share capital redemption can only be executed in a tax neutral way by means of decreasing the nominal value of the shares. Such decrease of the nominal value can only be realized by means of a notarial deed. As an example: in case of a decrease of the nominal value of the shares with 50 per cent, an amount equal to 50 per cent of the initial share capital can be distributed to the shareholder. This distribution will be exempted from dividend withholding tax.
For accounting and taxation purposes, share capital and share premium are both considered to be part of the equity and are treated in a similar way. Therefore, it is recommendable to make use of share premium after company registration as it can be applied more easily. A contribution of share premium takes less time, does not need to be registered with the trade register and saves notarial expenses.
As funding of a company and the repayment of capital can have several tax consequences, e.g. possible taxation for dividend withholding tax purposes, it is advisable to have a tax advisor guide the process of share capital redemption.