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Share capital vs. share premium for capital funding of a Dutch company

When a shareholder wants to fund its Dutch Limited Liability Company (BV) with capital there are two choices: share capital or share premium. Are there any pros and cons in regard the use of both options? 


General characteristics

Share capital and share premium are both considered to be part of the equity of a BV 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 existing shares of a company. 

Under Dutch GAAP (RJ 240.403), all transactions of an entity with its shareholders that affect the financial relationship between these parties are to be accounted for directly in the equity. Share capital 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 issuance of new shares will be recorded in the Equity. According to the Dutch Accounting Standard RJ 240.221, 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 capital premium (in Dutch: agio). In the Financial statements funding under share premium contribution will be shown under Equity as a separate balance post (article 2: 373 subsection 1 Dutch Civil Code).


Increase of equity


Increasing the capital of a company 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 required. Normally, the notary drafts the notarial deed, power of attorney and resolution.

When the shareholder of a BV is a foreign party, the notary will require a legalised resolution. Sometimes also with an apostille and an authority statement (in some cases, the formality of legalisation and apostille can be avoided by having the Dutch notary to identify the signee. 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. 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. 

A contribution of share premium will require a share premium contribution agreement concluded between the shareholder and the company, plus a shareholder’s 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 there are not many formalities, a share premium contribution can, in case of urgency, be executed within a day.

In case of repetitive share premium contributions, it is reasonable to conclude a share premium contribution facility agreement whereby the shareholder and the company can agree on share premium contributions up to a certain 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 kinds 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 shareholder is that the company should have already distributed all its profits and does not expect any profits in the next two years. This scenario is often used in case of liquidation of a company. 
If the conditions mentioned above cannot be met, it is still possible to redeem the share premium without any dividend withholding taxes levied. The share premium shall first be converted by means of a notarial deed 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 can only be executed in a tax neutral way by means of a decrease of the nominal value of the shares. This decrease of the nominal value can only be realised by means of a notarial deed.  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. 

 

Comparison

In relation to accounting and taxation, share capital and share premium are both considered to be part of the equity and are treated in an equal way. Therefore, it is recommendable to make use of the type of equity that can be applied most easily. A contribution of share premium takes less time and brings less legal expenses and paperwork. 

As funding of a company and the repayment of capital have several tax aspects, e.g. possible taxation for dividend withholding tax purposes, it is advisable to have a tax advisor to guide the process. 
Feel free to contact our legal team in case of any questions or need for support with a capital contribution. 


Useful links: 

Dutch Civil Code in English: http://www.dutchcivillaw.com/civilcodegeneral.htm

NBA (Netherlands Institute of Chartered Accounctants) guidance on contribution in kind: https://www.nba.nl/globalassets/wet--en-regelgeving/nba-handreikingen/nba-handreiking_1129_storting_op_aandelen_anders_dan_in_geld_inbreng_in_natura.pdf

Dutch Accounting Standards Board: https://www.rjnet.nl/engelse-pagina/