The Argentinian cancellation of the tax treaty with Spain followed by the financial crisis in Cyprus made companies aware of the pros and cons of their chosen holding company structure. Currently companies are looking into the options they have to strengthen their holding company structure within the EU. One of the jurisdictions which comes to mind is The Netherlands.

Introduction

Through domestic law changes and the EU jurisprudence, the international mobility of corporations is definitely increasing. One of the options EU/EEA body corporates have is to convert into the entity of another jurisdiction.
In The Netherlands domestic legislation is being prepared to ease a cross-border conversion. I will highlight the current practice of holding company restructuring and introduce the concept of conversion. Further the ECJ jurisprudence with regard to cross-border conversions as well as the draft Dutch domestic legislation is discussed. At the end I will provide some Dutch tax considerations regarding outbound and inbound conversions as well as my conclusions.

Current practice

Interposing a new holding company or a new holding company location within a group structure can be done many ways. Merely transferring the residency of a company by transferring the effective management and control is an option, however this may not always be practical. The body corporate is typically bound by law of its original home country and also needs to adapt to the host country rules. This increases the corporate compliance.

Another option is to create a new holding company in another jurisdiction and transferring the assets of the obsolete holding company to the new holding company. If no unilateral succession is needed in the corporate structure, then the transfer can be done via an asset deal or via a liquidation/dissolution. This has a couple of draw-backs, such as the legal transfer of ownership of assets and triggering unrealized capital gains, because a legal transfer is generally regarded to be a recognition event.

The assets of a company can be transferred under unilateral succession (within the EU) by performing a cross-border legal merger. In The Netherlands it is in any case possible to perform a cross-border legal merger between Dutch companies which have a capital divided by shares (BV/NV) and specific EU companies. A merger between a non-EU company and a BV/NV is not facilitated in Dutch corporate law.[2] Within the EU cross-border mergers are becoming more and more common practice. Cross-border mergers benefit from EU legislation which instructed the member countries to not hinder an EU cross-border merger. These rules are laid down from a EU corporate law perspective in the Directive 2005/56/EC[3] and from tax perspective via the EU Merger directive[4].

Conversion via ECJ jurisprudence

The Vale case[5] 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, this should also be allowed by the host Member State for companies from other EU/EEA countries. 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. Based on the Vale case it could be argued that companies from other EU/EEA countries are eligible to convert into a vast array of Dutch legal entities as well.

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.[6] However, based on the ECJ Cartesio[7] case the Commission Corporation law spontaneously issued advice on February 12^th, 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 was that the position of employees, creditors and minority shareholders might be infringed if no domestic legislation was in place. Moreover, it indicated that European Parliament requested the European Commission to draw-up a new Directive, but the uncertainty when this directive would come into force, made the need to come with domestic legislation greater. Therefore, the Commission advised to legalize the conversion of Dutch companies which have a capital divided by shares (BV/NV) into other similar EU/EEA companies.

The Dutch Minister of Security and Justice is working on legislation to protect the position of employees, creditors and minority shareholders. His focus is on the Dutch outbound situation, whereby there are various protection mechanisms in place for the benefit of the stakeholders. One example is that in case of abusive situations the Dutch Minister of Security and Justice has the right to object. For every protection mechanism which doesn’t apply for a Dutch domestic conversion it can be questioned if the legislation is in line with the prevailing ECJ jurisprudence.
For Dutch inbound situations the new legislation prescribes that an EU/EEA company can only be converted in a Dutch BV or Dutch NV. The requirements to be fulfilled are (a.o.) a notarial deed, which is drawn up in Dutch as well as documentation that the procedure in the home country has been full-filled. In case a conversion takes place in a Dutch NV an audit certificate is necessary to prove that the minimum capital requirement is met. Currently it is unknown when this legislation will be finalized.

Because Dutch domestic legislation currently allows the conversion of a variety of Dutch legal entities which conversions are not limited to the BV or NV, the draft legislation regarding cross-border conversions would likely not be all-inclusive enough and therefore not be in line with ECJ jurisprudence. Therefore, if a conversion into another company than a BV or NV is contemplated, the direct application of ECJ jurisprudence would need to be employed.

Dutch tax legislation

From a Dutch tax perspective a conversion of a BV into an NV and vice versa is not regarded to be a liquidation of the company for corporate income tax (CIT) purposes (article 28b of the Dutch CITA). If other Dutch companies (such as a cooperative) are converted into another legal form, this is regarded to be a liquidation from a Dutch CIT, Dutch dividend withholding tax (DWT) and Dutch personal income tax (PIT) perspective. The question arises how the conversion into an EU/EEA company will be treated in Dutch outbound situations. Will the conversion be treated the same as a BV/NV conversion, not entailing a liquidation, or would it be treated as a liquidation.

A company is deemed to be a Dutch resident for Dutch CIT and Dutch DWT purposes, if it is incorporated under Dutch corporate law. The question arises how this would be applied by the home and host state after a conversion takes place. The practical hurdles would likely be solved over time, the 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 is aimed at providing alternatives to companies which wish to strengthen their holding company structure in the current volatile environment. Updates regarding this topic will be twittered….