Joint ventures are a common phenomenon in today’s commerce and society. They have become an important strategic option for many companies, particularly in a cross-border context. A recent study from the Mergers and Acquisitions Research Centre at Cass Business School reveals that joint venture activity increases in the recovery period after a major economic downturn by 20% compared with the average. 1Source 1: Sharing risk: A study of Corporate Alliances, Cass Business School, 2009. The term ‘joint venture’ however has no specific statutory meaning under Dutch law. It describes a commercial arrangement for partial cooperation between two or more economically independent entities. Characteristic of the joint venture partners is that, in addition to the joint venture business, they (independent of each other) engage in other activities. The joint venture partners may even be competitors outside the scope of their joint venture.
Joint ventures often provide an effective route for a company to expand the scope of its customer base by utilizing the partner’s strength in different geographic markets. Recently there has been an increasing preference for joint ventures as a mode of market entry. In the natural resources sector joint ventures are undertaken for the exploration and development of mutual oil and gas interests. A joint venture also can be a first step in an eventual full disposal or acquisition of a business with a further tranche of the disposal or acquisition being contemplated for a later time. A last example of a particular driver to form a joint venture is the wish to share the significant financial risks that are involved in undertaking a capital-intensive project with another party. Of course, there can be many commercial objectives driving any particular joint venture.
A joint venture is by its very nature a contractual form of cooperation. As a rule the agreements reached between the joint venture partners are recorded in a joint venture agreement. The statutory rules of general contract law2Source 2: Civil Code, ss 6:213-279. apply. The relationships between the parties involved will additionally be subject, depending on the structure chosen, to provisions of Dutch company law and/or partnership law as well as tax law and competition law (at both the European and national levels). The relationships linking the joint venture partners can vary from an exclusively contractual relationship to a corporate structure.
On the one side of the spectrum, where the cooperation is purely contractual, there may well be no pooling of assets used by the partners in the joint venture. Each of the partners is taxed separately for the profits derived from the joint venture business. On the other side of the spectrum the corporate structure typically involves the vesting of all the business activities, assets and liabilities relating to the joint venture business in a single company (or its subsidiaries). In more than one respect the partnership structures lie in between these two extremes: typically they do not provide legal personality and limited liability but they do provide tax transparency. The most significant advantage of the incorporation of a joint venture company is the ability of the partners to limit their liability in respect of the risks, losses and liabilities of the joint venture operations. The flip side is that corporate vehicles are often less tax efficient in the context of a joint venture than partnerships.
Joint ventures are a popular form of foreign direct investments. The Netherlands rank first in the world with regard to the level of inward and outward foreign investment. This top ranking has recently been published on the International Monetary Fund (IMF) website.3Source 3: See http://cdis.imf.org. At the end of 2013, Dutch enterprises invested a total of US $5,217 billion in associated foreign enterprises. This represents approximately 18,5 per cent of the total outward investment as reported by the participating countries to the IMF. Conversely, The Netherlands welcomed an inflow of US $4,342 billion in inward foreign direct investment. The United States followed at some distance with an outward direct investment of US $4,661 billion, but ranked third on the inward direct investments with an inflow of US $2,764 billion. It is Luxembourg that followed The Netherlands on the inward direct investments with an inflow of US $3,252. Luxembourg’s outward direct investments however are with US $4,146 lower than the outward investments of the United States. For the United Kingdom, these figures amounted to US $1,523 billion and US $1,608 billion respectively.
The Netherlands is in particular popular as a jurisdiction to locate the joint venture company where the partners are based in different jurisdictions. An important reason for this is the extensive double taxation treaty network. The established body of law and practice as well as the efficient business, legal and service infrastructure in The Netherlands also is perceived to be attractive. In addition, the establishment of a joint venture with one or more foreign partners is not subject to any governmental approval.
From a purely legal perspective, a contractual joint venture is the simplest form of association. It represents a commercial arrangement under which the partners agree to associate as independent contractors, rather than as shareholders of a company or partners of a partnership. A common example is the joint venture where two or more contractors combine for the purposes of realizing a particular project in the field of construction or research and development. Such an arrangement usually involves the sharing of risks, costs, and resources, rather than the sharing of net profit or loss. The rights and obligations of the partners are generally between themselves.
Here, the content of their legal relationship will basically derive from the provisions of the joint venture agreement and statutory rules of general contract law. The participant in a purely contractual joint venture will, in principle, not have a statutory liability for the acts and omissions of its co-venturers. In terms of representation, any participant only commits itself. However, an individual participant may be granted a power of attorney to commit any other participant.
The main advantages of a purely contractual joint venture include the lack of formality, the flexibility in amending the terms of the legal relationship and the tax transparency of this structure. The main disadvantages of contractual joint ventures however are considered to be the lack of legal personality and identity as well as the lack of a statutory organizational framework. In addition, compared with a corporate or partnership structure, the transfer of the interest of a participant in the joint venture are usually more complex.
Frequently joint ventures involve some degree of sharing of net profits. If this is the case, the commercial arrangements may evolve into a partnership. Under Dutch law a contractual arrangement qualifies as a legal partnership if:
If these tests are met, a partnership exists even if the joint venture agreement includes the express declaration of the intention not to create a partnership. If the joint venture qualifies as a partnership and operates a business under a common name to the outside world, each partner is jointly and severally liable for the debts and obligations of the joint venture. The form of partnership under which each partner has joint and several liability for the debts and obligations of the partnership constitutes a general partnership (vennootschap onder firma). In a well-written joint venture agreement, there will be specific provisions dealing with the representative powers of individual partners and others responsible for management to bind the joint venture vis-à-vis third parties. Limitations of representative powers need to be registered with the Dutch Commercial Register (handelsregister) in order to be effective towards third parties.
A limited partnership (commanditaire vennootschap) is a species of the general partnership. At least one of the partners of such a partnership must be a general partner with unlimited liability for the debts and obligations of the partnership. The liability of the other partners (the limited partners) may be limited to the amount contributed by them in cash or kind to the partnership. Furthermore, a limited partner has no authority to bind the limited partnership and cannot take part in the management of the limited partnership without losing the benefit of limited liability. However, Dutch limited partnership law permits arrangements that enable the limited partners to be involved in certain key decisions on which their approval is required. A further peculiarity of the limited partnership is that the name of the limited partnership may not include the name of a limited partner, again without forfeiting the benefit of limited liability. In The Netherlands limited partnerships are commonly used within the joint venture context.
In partnership structures, all assets originally contributed and those subsequently acquired in the course of the business are partnership property and are held in accordance with the joint venture agreement. There is no need to draw up a separate partnership agreement. Partnership property will effectively be held by the partner in agreed shares. The partners have extensive freedom in agreeing on how the profits or losses of the joint venture are to be shared. However, no partner may be totally excluded from sharing profits. A general partnership or limited partnership is generally tax transparent but does not have legal personality under Dutch law which prevents it from owning assets and contracts in its own right.
The basic choice usually is whether or not to establish a separate legal entity as the vehicle of the joint ventures. For most business joint ventures a limited liability company is likely to prove the most appropriate vehicle. As a separate legal entity the joint venture company can, of course, own assets and contracts. The most significant advantage of a BV (besloten vennootschap met beperkte aansprakelijkheid) or NV (naamloze vennootschap) is perceived to be the ability of the partners to limit their liability in respect of the debts and liabilities of the joint venture. The partners are in fact the shareholders of the joint venture company.
However, it is unlikely that the shareholders will be able to avoid having to support the joint venture through the provisions of (parent) guarantees and other assurances to third parties. Incorporation of a joint venture in the legal form of a BV or NV involves formality and the need to file accounts and other information on a regular basis with the Commercial Register. In terms of overall control and financial planning, the corporate structure provides the possibility to create different types of shares as well as the ability to establish the joint venture through a group of companies. The legal relationship between the partners themselves and between them and the company will primarily be governed by the joint venture agreement and the articles of association of the joint venture company. Depending on the agreed governance structure of the joint venture and the shareholdings of the partners, the company will be a 50/50 joint venture or a company that is to a certain extent controlled by a single shareholder or a group of shareholders.
Detailed provisions in relation to the control of the joint venture business and its management will be set out in the joint venture agreement. This would typically cover the division of powers between the board of the joint venture company, its shareholders and how control is exercised. In some cases the joint venture company is a party to the joint venture agreement and in some cases it is not. There are good arguments for either option. If it is a party to the agreement, the joint venture company can directly undertake obligations to observe relevant restrictions or provisions (e.g. non-compete undertakings of the partners) which is likely to make enforcement easier.
In addition, a direct right of enforcement against the company may assist where there is judged to be a risk that the managing directors of the joint venture company may not observe constraints or arrangements contractually agreed between the shareholders. Conversely, the partners may prefer that the terms of their joint venture agreement do not involve the joint venture company so that in the event of disputes or changed circumstances, they can take any wider issue into account without the consent of the joint venture company being required.
The joint venture agreement and the articles of association, together, contain the legal rules governing the partners’ ongoing relationship as shareholders of the joint venture company. In practice it is a point of law how much of the contractual arrangement also should be reflected in the articles of association. Contractual arrangements and provisions laid down in articles of association do not always have the same legal effect. As an example, the rights and obligations under a joint venture agreement do not automatically apply to a transferee of shares because it is a contract between the existing parties. The rights and obligations under the articles of association, however, do automatically apply to a new shareholder.
Another difference is that a joint venture agreement is a private document (and can be kept secret) while articles of association are subject to public scrutiny pursuant to the filing of this document (in its entirety) with the Commercial Register. A last example relates to the transferability of shares in the joint venture company. Virtually all joint ventures contain provisions on the transfer of shares and in many corporate joint ventures such transfer is prohibited without the consent of the other partner or partners, in any event for an initial “lock-up” period. If shares are transferred contrary to a share transfer restriction clause recorded in the joint venture agreement the transfer is valid, be it in breach of an contractual arrangement. The usual contractual remedies may be applied, including specific performance, but the fact of the matter is that the control over the shares is lost. Share transfers in violation of a share transfer restriction laid down in the articles of association are, on the contrary, not legally valid which means that the shares were actually not transferred at all. The transferor of the shares simply remains to be the shareholder.
It is of crucial importance to align the joint venture agreement with the articles of association of the joint venture company. In most cases joint venture agreements are declared to take preference over the articles of association but under Dutch law this is unfortunately not bullet proof. If agreement and articles of association deviate the legal consequence may well be that the articles of association are leading, especially where it concerns clauses that are based on statutory provisions of Dutch company law. However, recent case law shows that a more sophisticated approach is contemplated if all shareholders are a party to the shareholders agreement.4Source 4: District Court of The Hague, August 1, 2012, JOR 2012/286 (Vanka-Kawat); Supreme Court of Amsterdam, January 16, 2014, JOR 2014/1577 (Kekk/Delfino); Supreme Court of Amsterdam, January 21, 2014, JOR 2014/158 (De Wildt/RBOC).
At the time of writing, Dutch company law leaves, as a matter of mandatory law, no room for the inclusion of a clause in the articles of association to the effect that during the first few years of existence of the joint venture, the shares in the joint venture company are not transferable. However, this will change pursuant to a bill on the liberalization of the rules on share capital and corporate governance of BVs (hereafter, the ” BV Reform Bill”) that will come into effect on 1 October 2012.
This company law reform entails the biggest legislative operation since the introduction of BVs in 1971. It aims to abolish inefficient capital maintenance rules and to facilitate the tailoring of the internal structure and governance of a BV. Very broadly, the BV Reform Bill enacts a more contractual approach towards the BV and its articles of association. As a result, the articles of association and the joint venture agreement can be aligned to a very large extent that will make the BV a suitable vehicle for almost any joint venture. The key elements of this new Bill are set out below.
The BV Reform Bill abolishes the requirement of a mandatory minimum capital. A BV will be allowed to have an issued share capital of €1. All existing mandatory provisions regarding the authorized, issued, and paid-up capital are abolished (but may be voluntarily introduced in the articles of association). Furthermore, the current requirement of a bank statement with respect to the contribution on shares in cash will be abolished, as well as the auditor’s statement with respect to contribution on shares in kind.
Appointment and Dismissal of Members of Management and Supervisory Board and Shareholder Instructions
The partners usually wish to entrench certain rights relating to the appointment and dismissal of managing directors and/or supervisory directors of ‘their’ joint venture company: each partner wishes to be able to appoint and dismiss its own director. However, currently Dutch company law provides that members of the management and supervisory board of a BV are appointed and dismissed by the general meeting of shareholders (as to management board members: with the exception of the so-called full large company regime).
The BV Reform Bill allows that the right of appointment and dismissal of members of the management and supervisory board of a BV may be granted to the meeting of holders of shares of a certain class or series. The articles of association also can provide that members of the management board may be dismissed by the supervisory board. In case the articles of association provide that directors are appointed pursuant to a binding nomination, it will no longer be necessary to nominate two persons for each vacancy.
The new rules on the internal governance of the BV also allow the partner to give specific instructions to members of the management and supervisory board provided that the instruction is not contrary to the interest of the company (vennootschappelijke belang) which includes the interests of the joint venture partners as shareholders.
General meetings may be held outside The Netherlands. The minimum period for giving notice for a general meeting of shareholders will be reduced from 15 to 8 days. In addition, shareholders may adopt resolutions without convening a meeting if all shareholders and other persons having the right to attend general meetings consent to this manner of adopting resolutions. In that case, resolutions may be adopted with any majority of votes stipulated in the articles of association.
Non-Voting Shares and Non-Profit Participating Shares
Sometimes, joint venture partners agree that despite additional injections of capital into the joint venture by a specific partner the voting rights should remain unaltered. The BV Reform Bill introduces the possibility to create classes or series of shares with increased voting rights, limited voting rights or even without any voting rights at all. The same applies to profit rights.
It is not possible, however, to create shares without both voting rights and profit rights. If a class or series of shares with differentiated voting rights has been created, this voting right regime applies to all resolutions of the general meeting of shareholders.
No Cash Traps
As the BV Reform Bill will abolish capital maintenance rules, distributions to the shareholders of a joint venture BV may be made at the expense of the share capital. The new rules provide that distributions to shareholders, such as dividends, repayment of share premium or profit reserves, reductions of capital or share buy backs can be made if the company upon distribution will be able to continue paying its debts when they become due and to the extent that the company’s assets exceed its mandatory (non-distributable) reserves. All distributions and repayments are made subject to board approval. It is the task of the members of the management board to assess the company’s financial position before deciding on any distribution or repayments.
The management board is obliged to refuse approval if it knows or should foresee that the company, upon the distribution or repayment, would not be able to continue paying its debts when they become due. If the company does not meet this test, the members of the management board who knew or should have foreseen this may be jointly and severally liable for the shortfall (plus statutory interest) caused by the distribution or repayment. The shareholder who received the distribution and who knew or should have foreseen this can also be liable for the shortfall caused by the distribution or repayment for a maximum of the amount received by it (plus statutory interest). Members of the management board who have paid the shortfall, will have recourse on the beneficiary of the distribution or repayment. A board member is not liable if he cannot be blamed for the distribution or repayment taking place and took measures to avoid its adverse effect.
Reductions of share capital will be permitted in respect of all shares except for one share with voting rights. The BV Reform Bill abolishes the right of creditors to oppose against share capital reductions. Share buy backs also will be permitted in respect of all shares except for one share with voting rights subject to the approval of the management board. The liability of members of the management board as described above, applies accordingly.
Financial Assistance and Nachgründung
The prohibition for a BV to provide financial assistance will be abolished. A transaction resulting in financial assistance will, however, remain subject to the general corporate test whether the transaction concerned is in the interest of the joint venture BV and whether the board members, by granting the financial assistance, have met the standard of proper fulfillment of their task. Finally the Nachgründung provision, regulating certain transactions between a BV and its shareholders, will cease to exist.
A more detailed overview of the changes pursuant to the BV Reform Bill is attached as Annex 1.
A cooperative (coöperatie) may also be considered as a legal vehicle for a joint venture. The Civil Code 5Source 5: Civil Code, s 2:53 para 1. states that a cooperative must supply in certain material interests of its members through economic interaction between the cooperative and its members. This implies that the purpose of a cooperative is to earn income and/or to save expenses for its members. The cooperative maintains therefore a joint business for its members. The business activities of a cooperative stem from the economic activities of the members.
In itself, the cooperative has no incentive to maximize profits. A cooperative may be a suitable vehicle for certain specific types of joint ventures like research and development projects and joint operating agreements in the oil and gas industry. The key elements of a cooperative are its legal personality, the fact that no incorporation capital is required and the ability of the members to exclude their liability in respect of the debts and liabilities of the cooperative (UA, which means “excluded liability”). A limiting aspect of the cooperative lies in the fact that its members, in principle, have the freedom to terminate their membership. The Civil Code6Source 6: Civil Code, s 2:60. opens the possibility to impose restrictions regarding the termination of membership on the condition that such restrictions are of importance for safeguarding the continuity of the cooperative enterprise. However, these restrictions may not have the effect that withdrawal is made virtually impossible.
In the context of a joint venture between companies which are located within the European Economic Area (EEA) consideration may be given to forming the joint venture as a European Economic Interest Grouping (EEIG). The concept of the EEIG was created with a view to providing a common basis for developing economic activity through joint ventures on a basis which does not rely on the domestic law of any particular member state. As a model for a business joint venture, however, the EEIG has many limitations which include:
Another European legal form was created by the Counsel of the European communities on 8 October 2001, the Societas Europaea (SE). The objective was to create a European company with its own legislative framework. This would allow companies incorporated in the different states of the EEA to merge, form a holding company or a joint subsidiary while avoiding the legal and practical constrains arising from the existence of thirty different legal systems. However, in practice, the SE has to comply with many different regulatory systems.
Thus far, companies have primarily used the SE to create a European identity to set the ground for cross-border restructuring within the group and to determine employee participation. For Dutch tax purposes, the SE has an equal footing with the NV. If a SE is incorporated under the laws of The Netherlands it is deemed to be a Dutch tax resident and therefore subject to Dutch corporate tax. Such SE can also be tax resident in another jurisdiction under the laws of such jurisdiction, e.g., because of the fact that the SE is effectively managed and controlled out of such jurisdiction. In these situations, applicable tax treaties typically provide that only such other jurisdiction has the right to effectively tax the worldwide profits of the SE.
In most cases, the choice of legal form will be governed by the following considerations:
A number of taxation aspects have to be taken into account when forming a joint venture. For example, the concept of fiscal transparency is eminently important to the tax qualification for Dutch or foreign entities. A closer look at the tax aspects of joint ventures concluded that tax transparency for corporate and individual income tax purposes is the dominant criterion when selecting possible legal forms.
In general, the choice of legal form should avoid unnecessary tax costs, enabling the partners to obtain tax value for any (start-up) losses or other expenses and constitute an efficient medium for the flow of profits to the partners. In a cross-border structure there are significant additional tax problems with corporate vehicles.
Losses realized by a corporate entity in one jurisdiction will rarely be capable of offset against profits of a separate corporate entity in another jurisdiction. Conversely, taxes paid on profits earned by a corporate joint venture company may not be fully creditable against taxes payable on distribution of those profits to the joint venture partners. On the other hand, a corporate joint venture may be more efficient if it is profitable, taxpaying and subject to a lower marginal rate of tax than the joint venture partners.
There may be real advantages in conducting the joint venture operations through a partnership structure which is tax transparent in The Netherlands. As mentioned above, the disadvantages of the Dutch partnership model are the lack of legal personality and the unlimited liability of the partners for the debts and obligations of the partnership.
Conflicting considerations may sometimes be reconciled by the use of hybrid vehicles. A combination of tax transparency and limited liability can be achieved if the partners of a general partnership or the general partner of a limited partnership are limited-liability companies.
It is possible that a legal entity can be qualified as transparent for tax purposes in one jurisdiction, while being opaque in another jurisdiction. This “mismatch” can result in issues of double taxation, but it can also result in tax planning opportunities. For instance, a Dutch limited liability company can be treated as a partnership for US federal income tax purposes by a simple election under the United States “check the box” regulations (unless it is a so-called per se corporation, as is the case with a Dutch NV).
Pursuant to the 1969 Corporate Tax Act (Wet op de vennootschapsbelasting 1969), corporate taxation is levied on NVs, BVs, cooperatives and open limited partnerships. Corporate tax is levied on the taxable profits made by a taxable entity in a given year (after deduction of certain losses). The (2012) statutory corporate tax rate is 20 per cent on the first €200,000 of the taxable profits and at 25 per cent on taxable profits in excess of €200,000.7Source 7: Corporate Tax Act 1969, s 22.
A non-transparent entity may only offset its losses retroactively against its taxable profits for the preceding year (carry back) and against its taxable profits for the nine years to come (carry forward).[soure]Corporate Tax Act 1969, s 20, para 2.[/source] If the joint venture will never be profitable or not profitable within the first nine years of its existence, this (start-up) loss will never be utilized at the level of the joint venture. A “negative tax” refund from the tax authorities in a loss year (i.e., a tax refund without such losses being offset against taxable profits) is not available in The Netherlands.
The relationship between shareholders and companies in Dutch tax law is in essence predominated by the participation exemption.8Source 8: Corporate Tax Act 1969, s 13. The rationale of the participation exemption is the ne bis in idem doctrine: the same profits or gains are not subject to taxation more than once at the different levels of a corporate structure. Conversely, loss is not eligible for loss deduction on more than one level.
Pursuant to the Dutch participation exemption a joint venture company is generally exempt from Dutch corporate tax with respect to all benefits derived from a qualifying participation in a Dutch or foreign subsidiary, including dividends received and capital gains realized (including capital gains as a result of currency exchange rate fluctuations). The participation exemption will generally apply to the shareholding in a subsidiary if the following requirements are cumulatively met:
Generally, the first test will be met unless the shares in the subsidiary are held with the aim of obtaining an increase in value and a yield that could be expected in the case of standard active asset management (normaal vermogensbeheer). Typically, this test is met in case of a joint venture with active business operations.
The advent of the BV Reform Bill has caused some query with respect to the question whether the participation exemption also applies with regard to non-profit participating shares. Based on the participation exemption rules a qualifying participation exists if the joint venture partners own at least 5 per cent of the nominal paid-up share capital. The principle behind this is that the joint venture company should be entitled to at least 5 per cent of the profits of the relevant subsidiary. However, after the BV Reform Bill has entered into force, application of the participation exemption can easily be established by the issuance of non-profit participating shares.
The structures which are commonly used in The Netherlands for 50/50 joint ventures are described below along with the main pros and cons.
The first picture shows the envisaged joint venture partners A and B who have set up a joint venture BV. If the joint venture partners are individuals instead of legal entities they can participate through personal holding companies. The liability of the joint venture partners is in principle limited to value of contributions to the joint venture BV but any (start-up) losses of the joint venture BV may not be offset against the business income of its shareholders A and B. The reason for this is that the joint venture BV is not tax transparent and can only deduct (start-up) losses against its own business profits.
If the same joint venture partners A and B contribute the business to a general partnership they are jointly and severally liable for all partnership debts.
According to Dutch tax law the general partnership will in principle be tax transparent for Dutch tax purposes. This means that the profits, losses, assets and liabilities are directly attributed for tax purposes to the joint venture partners.
If the general partners in the general partnership are limited liability companies, the business result of the general partnership is subject to Dutch corporate tax at the level of the limited liability companies equal to their interest in the general partnership.
The losses realized at the level of the partnership can directly be offset against the profit of the general partners. The same treatment applies if the partners are individuals although, in that case, the business result of the general partnership is subject to Dutch individual income tax.
Somewhat similar to the previous structure is the variant in which a “closed” limited partnership is being used as the joint venture vehicle. Unlike the “open” limited partnership, the profits of a closed limited partnership are, in this example, subject to Dutch corporate tax at the level of the general and limited partners A, B, and C.
The (start-up) losses can directly be offset against (other) results of the limited and general partners. In this variant the liability of limited partners is in principle limited to the amount of their contribution to the limited partnership. However, the limited partners can become jointly and severally liable if they take part in the management of the limited partnership.
In the above structure both joint venture partners (A BV and B BV) have set up 100 per cent subsidiaries, C BV and D BV respectively, having a very low capital i.e. €1.00. Subsequently C BV and D BV have entered into a general partnership. As a result the joint venture partners A BV and B BV have protection against the joint and several liability for the debts of the general partnership.
The (start-up) losses of the joint venture may not be directly offset against the profits of A BV and B BV. However, if A BV and C BV respectively B BV and D BV form a so-called fiscal unity for Dutch corporate tax purposes, the (start-up) loss of C BV and D BV can effectively be set-off directly against other profits of A BV and B BV respectively. A fiscal unity between a parent company and one or more subsidiaries is basically a consolidation for Dutch corporate tax purposes, as a result of which these subsidiaries will be disregarded as separate legal entities for Dutch corporate tax purposes.
This means that the assets and liabilities of these subsidiaries – as well as their profits or losses – are deemed to be “absorbed” into the parent company. From a civil law perspective, the parent company and the subsidiaries still remain to exist as separate legal entities. The fiscal unity as facility has several advantages, the most relevant being the following:
In order to form a fiscal unity several conditions have to be met,10Source 10: Corporate Tax Act 1969, s 15, para 3.including:
Furthermore, the parent company and its subsidiary or subsidiaries need to reside in The Netherlands for Dutch corporate tax purposes in accordance with Dutch tax law and double-taxation treaties. If non-voting shares are issued to an outside shareholder and these shares give entitlement to the profits of the subsidiary, the fiscal unity will be deconsolidated if the parent company ends up with an entitlement of less than 95 per cent of the profits of the subsidiary.
The choice of governing law is always an important topic in international transactions. Even if a detailed contract has been fully drafted with the aim to set out the rights and obligations of the parties, there will often be gaps to be filled. Substantive questions of interpretation can rise. The governing law of the contract which also will be the law applicable to the substance of disputes should therefore be clearly specified. It is generally desirable to select the law of The Netherlands if the joint venture vehicle is a Dutch entity.
If a Dutch limited liability company or partnership is established, Dutch law will govern all matters relating to the powers and organizational documents of such a company or partnership. The choice of another law may cause extra complications. In exceptional cases it may be desirable to modify a governing law clause by giving an arbitral tribunal the power to resolve certain disputes ex aequo et bono. Under this concept, the tribunal need not apply strict legal rules of interpretation to the obligations of the parties if they consider that a strict legal approach would lead to an inequitable result.
In some cases, the parties may wish that different parts of the joint venture contracts will be governed by different laws. However, it can never be certain that such choice of governing laws will be upheld by the relevant court or arbitral tribunal. Expensive and time-consuming disputes may arise if the issue whether one party may terminate or withhold performance on account of the other party’s breach and the underlying contractual obligations are governed by different laws.
Dutch law practitioners tend to see the joint venture agreements as a means to fit the individual legal situation of the partner into a grid of legal rules which consist of the Civil Code, the Commercial Code and court decisions. They will concentrate on making adjustments to this background law. Dutch joint venture agreements will most likely outline the main obligations of both parties and cover those situations which have in the past proven to be important, in particular where the draftsperson feels that the position of his client is not adequately covered by the background law.
Common Law practitioners, on the other hand, do not see statutes and case law as background law to rely on, but rather as rules which will be incorporated or circumvented as the case may require. However, the increasing number of international transactions and the influence of common law style techniques has led to increasing similarity in practice and documentation in relation to international joint ventures.
The joint venture agreement or partnership agreement is a private deed and need not to be recorded in the Dutch language. However, the deed of incorporation of a BV or NV (including the articles of association) must be executed in the Dutch language before a Dutch civil law notary. If there is a conflict between any translation of the articles of association and the Dutch original wording, the latter will prevail.
The description of the scope of business activity is the backbone of any joint venture agreement. It provides a stronger foundation if the joint venture partners agree on the scope of the business objectives before undertaking detailed negotiations on issues of financing, control and valuation. As mentioned above, a joint venture can be defined as a partial cooperation between independent companies. The partners may, in addition to the joint venture business, also engage in other activities.
Therefore, defining the scope of business has two functions: describing the scope of the business to be undertaken by the joint venture and, at the same time, determining the business arena where the joint venture partners remain autonomous and may even compete with each other. The definition of the scope of business also determines the extent of the loyalty obligations between the joint venture partners and towards the joint venture company.
Another important factor is that the geographical spread of the joint venture activities also should be agreed upon. The description of the business objective affects the applicable regulation of the joint venture under both national and European competition laws. Having said this, the description of the business objective is typically outlined in the joint venture agreement in considerable detail. The motives of the partners for entering into the joint venture are usually recorded in the preamble of the agreement.
The true intentions of the joint venture partners may be clearer from such preamble than from the body of the contract itself. Dutch law courts tend not to apply as literal an approach to contract interpretation as common law courts seem to do. They have a greater readiness to imply terms or fall back on general principles of reasonableness and fairness (redelijkheid en billijkheid). Dutch law courts are also willing to investigate more deeply behind the scenes in order to ascertain the true motives and intend of the partners.
How should the business objective of the joint venture be translated into the partnership agreement or articles of association of a cooperative, BV, or NV? According to Dutch law,11Source 11: Commercial Code, s 17, para 2. the purpose of a partnership also defines the powers of representation of the partners. The general rule is that each partner is, by law, authorized to represent the partnership, but only within the scope of the purpose clause as filed with the Commercial Register. If the purpose clause of the partnership is not filed with the Commercial Register, third parties may assume that each partner has unlimited representative powers. In case of ultra vires actions the partnership is authorized to ratify such acts after the fact.12Source 12: Civil Code, s 3:69.
The purpose clause laid down in the articles of association of a cooperative, BV or NV has another legal impact. The legal act of a cooperative, BV, or NV may be nullified by the legal entity itself if such act was ultra vires and the contract party knew or could have known, without specific investigations in this respect, that the purpose clause was transgressed.13Source 13: Civil Code, s 2:7. Therefore, strictly speaking, the purpose clause of a BV or NV does not limit the representative powers of the members of the board.
The choice of funding method and capital structure will be particularly influenced by tax considerations, the existing and future capital requirements of the joint venture and the legal nature of the joint venture vehicle. In some contractual joint ventures each partner is responsible for bearing its own costs and expenditure without any need to establish joint funding arrangements. The partners simple agree what initial funding is required and, if appropriate, establish a joint account into which agreed funds are contributed and from which expenditure is paid out. Where subsequent funding of a joint account is required to meet project expenditure, rules for draw down of cash contributions will need to be developed in the joint venture documents. In major project joint ventures, in particular joint operating or development agreements, a specific feature is that the capital investment program may spread over many years and may be unpredictable as to the timing of the cash contributions.
The partners usually agree to an obligation to make cash contributions in proportion to their proportionate interest in the underlying project. In most such joint ventures, sophisticated funding arrangements are agreed upon, starting with a budget approval by a special committee on behalf of the joint venture partners, followed by particular authorities for expenditure established in relation to specific milestones. Subsequently cash calls are made on all joint venture partners to fund if certain milestones have been reached.
In the case of a partnership, there are generally no fixed rules regarding contribution to capital or its maintenance. Funding by contribution of cash or non-cash assets will be represented by a capital account for each partner in accordance with the partnership agreement. A partner may under the partnership agreement be required to inject further funding from time to time in the form of contribution to be credited to the capital account or by making loans to the partnership. Under Dutch law, there are no rules regarding the maintenance or repayment from the partner’s capital account. Repayment, therefore, may take place at any time in accordance with the terms of the partnership agreement or by another requisite agreement of the partners.
Corporate joint ventures give rise to a variety of funding methods and practices. The starting point is the capital structure consisting of an equal holding by the partners of ordinary shares in the capital of the joint venture company. Each partner will agree at the outset to pay up these shares (whether or not including share premium). The rights attaching to the shares (e.g., voting rights and profit rights) will usually be the same for each partner. However, a venture capital or similar finance provider taking equity in the joint venture company may seek special preference rights in relation to dividends and return of capital. This requires the creation of preference shares or cumulative preference shares which is allowed under Dutch corporate law.
The issue of shares (including shares of a particular class) will often be supplemented by loans from the partners to the joint venture company. The debt/equity ratio for the joint venture company will depend on tax considerations and the influence of market considerations which may lead to the need to demonstrate a sound shareholder’s equity base for the company. In principle the interest paid on these loans will be deductible at the level of the joint venture company for Dutch tax purposes. Of course, this is only an advantage if there is tax capacity to actually benefit from the deduction. Interest payments by Dutch BVs or NVs will in general qualify for deduction subject to certain restrictions, including if interest payments are at a non-commercial rate or if interest payments are made to ‘related parties’ (generally direct or indirect holders of one-third or more of the share capital of the joint venture company). Interest payments to third parties (e.g., banks) are in principle fully deductible for Dutch tax purposes, except in specific situations of leveraged acquisitions. If loans are raised from the shareholders an important issue is whether the loan should be subordinated to the rights of third party providers of debt finance and, if so, the terms of subordination.
If the terms of subordination are satisfactory, third party lenders will frequently be prepared to regard subordinated loans from partners as equal to equity which is usually advantageous (e.g., in relation to debt/equity ratio’s). The joint venture partners may, of course, also seek to raise finance for the joint venture from outside banks or other financing sources. This itself may take several forms, including bank overdraft facilities for working capital, term loans, venture capital or project finance. Outside finance will particularly be appropriate where it is intended that the joint venture company should operate in an autonomous manner independent from the joint venture partners.
The joint venture projects which are funded by project finance are frequently referred to as limited recourse or non-recourse finance. The key element of this form of financing is that it does not provide lenders with unrestricted access to the shareholders of the joint venture company. Instead, the lenders must accept a degree of risk: if the joint venture is not successful, they may not recover their loan in full since their recourse is limited to project assets and revenues of the joint venture company.
As per 2012, the deductability for Dutch tax purposes of interest paid on third party loans can be restricted. This limitation only applies if an entity takes up a loan to acquire a Dutch target company and subsequently forms a fiscal unity with the target company or merges into the target company. In these situations, the interest on the bank debt is fully deductible against the profits of the borrowing entity (excluding the profits attributable to the target companies after a legal merger). If, however, the borrowing entity would not have sufficient profits itself, the deductibility of the interest on the acquisition loan may be restricted.
This restriction however, does not apply for acquisition loans up to 60 per cent of the acquisition price of the relevant target company (such percentage to be reduced by 5 per cent each year to 25 per cent). This means for an acquisition of €100 million, interest on €60 million would be fully deductible in the first year, interest on €55 million in the second year, and interest on €50 million in the third year. As from the eighth year, interest on €25 million would remain deductible. A €1 million threshold applies, i.e., interest up to €1 million per annum is in any event deductible.
If profits are to be extracted by way of dividends, the level of withholding taxes is of primary concern. The European Union (EU) Parent/Subsidiary Directive, as implemented in Dutch law, has eliminated withholding tax on dividends paid by a Dutch joint venture company to companies in another member state if the recipient owns at least 5 per cent of the shares in the joint venture company. The Directive safeguards that inserting an intermediate Dutch holding company in European structures should not impose additional tax costs.
The Dutch participation exemption regime essentially exempts earnings derived from holdings in foreign companies from local taxation. These earnings may be passed through to another member state without additional taxation and this offers valuable opportunities if a Dutch joint venture company comprises holdings in various European operating companies.
Most joint venture arrangements involve the payment of fees to the partners. This may be for the right to use valuable intellectual property (patents, copyright) or it may be for more intangible but equally valuable rights (the use of a trading or brand name, the right to exploit a franchise, access to consumer lists or the right to valuable know-how). These arrangements are tax effective if payment is deductible against taxable profits because The Netherlands does not levy withholding tax on royalties and license fees. The use of a Dutch joint venture BV or NV as a royalty of licensing company can offer both a mechanism for reducing withholding tax (by access to the extensive network of double tax treaties) and, deferring payments being taxed in the partner company’s home state.
A number of competition law aspects have to be taken into account when forming a joint venture. In general, the competition law issues under the laws of The Netherlands are similar to those under European law. The formation of a full-function joint venture constitutes a concentration which must be notified to the Dutch Competition Authority (Nederlandse Mededingingsautoriteit or NMa) if certain turnover thresholds referred to below are met. Full-function joint ventures have to be understood as joint ventures that perform all the functions of an autonomous economic entity on a lasting basis. The Dutch concept of full-functionality is identical to the concept of full-functionality in the EU Merger Regulation.14Source 14: Regulation 139/2004 of 20 January 2004 on the control of concentrations between undertakings, OJ L-24, at pp 1-22. A relevant factor for full-functionality is the independent operation of the joint venture. If the joint venture is highly dependent upon its parent companies for its products, the Dutch Competition Authority will generally not accept the full-functionality of the joint venture.
If a full-function joint venture has an EU dimension and, therefore, falls within the jurisdiction of the European Commission under the EU Merger Regulation, the Dutch regulation is not applicable.15Source 15: EU Merger Regulation, s 21, para 3. Full-function joint ventures that do not fall within the jurisdiction of the European Commission and that exceed the following thresholds must be notified to the Dutch Competition Authority by the parties acquiring the joint control of the joint venture (i.e. the joint venture partners):
The notification can be submitted by the joint venture partners jointly. Full-function joint ventures that fall within the jurisdiction of the Dutch Competition Authority, are assessed by whether they significantly impede effective competition on (a part of) the Dutch market, in particular as a result of the creation or strengthening of a dominant position on that market. The cooperative aspects of full-function joint ventures are assessed in line with section 2, paragraph 4, of the EU Merger Regulation.16Source 16: It should be assessed, in accordance with the criteria of article 101(1) and (3) of the Treaty on the Functioning of the European Union, to what extent the formation of the joint venture has the coordination of the competitive behavior of the joint venture partners as its object or effect.
The joint venture partners are obliged to suspend the formation of the full-function joint venture until clearance by the Dutch Competition Authority has been obtained or the waiting period within which the Dutch Competition Authority has to adopt a decision, has passed. The parties are free to decide at what point in time they notify. Usually notification is done at the moment that the intention to form a joint venture is sufficiently concrete so that the required information for the notification is readily available. If the full-function joint venture that is to be notified to the Dutch Competition Authority is created without notification, or prior to a clearance decision, the creation of the joint venture may be invalid.
There have not yet been any court decisions on the effects of such invalidity. Moreover, the Dutch Competition Authority can impose administrative fines of up to €450,000 or, if that is more, 10 per cent of the turnover (in the preceding fiscal year) of the joint venture partner or partners that failed to notify and it can impose periodic penalty payments. In principle, the Dutch Competition Authority has to decide within four weeks upon notification of the joint venture whether a license is required. This time limit may be extended if the Dutch Competition Authority requires additional information for the assessment. The Dutch Competition Authority often extends the waiting period in complex cases with substantive competition issues.
A license for the proposed joint venture will be required if the Dutch Competition Authority has reason to believe that the joint venture will significantly impede effective competition on (a part of) the Dutch market. If a license is required, the Dutch Competition Authority has to decide within thirteen weeks upon the submission of the request for the license (i.e. a more detailed notification of the transaction) whether or not to (conditionally) approve the transaction. If the Dutch Competition Authority requires additional information for the assessment this time limit may also be extended. During the initial notification period and the period for the license request, the parties are not allowed to implement the joint venture. The concentration stands cleared if the Dutch Competition Authority fails to act and the waiting periods have passed.
Whether ancillary restraints, such as non-compete and non-solicitation clauses, are compatible with Dutch competition law is assessed in accordance with the Ancillary Restraints Notice of the European Commission.17Source 17: Commission Notice on restrictions directly related and necessary to concentrations (Ancillary restraints notice) of 5 March 2005, OJ C-56, at pp 24-31. Ancillary restraints that are directly related and necessary for the formation of the full-function joint venture are considered justified.18Source 18: Competition Act, s 10. Under Dutch merger control rules the joint venture partners have the possibility to request the Dutch Competition Authority to assess in the decision whether certain contractual provisions qualify as ancillary restraints.
Non full-function joint ventures, i.e. joint ventures that do not perform all the functions of an autonomous economic entity on a lasting basis, are assessed under the prohibition of restrictive agreements19Source 19: Competition Act, s 6. and the prohibition of abuse of dominance,20Source 20: Competition Act, s 24. which are modeled on Article 101(1) and 102 of the Treaty on the Functioning of the European Union (TFEU). The assessment of these joint ventures is also similar to the test under the TFEU.
Decisions by the Dutch Competition Authority whether or not to require and/or grant a license are subject to judicial review by the District Court of Rotterdam in first instance and on appeal by the Trade and Industry Appeals Tribunal (College van Beroep voor het bedrijfsleven). All other decisions by the Dutch Competition Authority are subject to administrative review by the Dutch Competition Authority itself, before an appeal may be brought before the District Court of Rotterdam or the Trade and Industry Appeals Tribunal.
As stated above, the joint venture company may either be established in the form of a limited liability company, a partnership, or a combination thereof. Partnership law is by its nature more flexible than corporate law and therefore may largely enable the parties to tailor the structure of their cooperation to their needs. However, this distinction is not clear-cut. On the one hand, the governance of a partnership may be modeled as a limited liability company with a one or two tier board; on the other hand, the BV Reform Bill will provide the partners with ample means to tailor the articles of association of the joint ventureBV. In some aspects, the BV Reform Bill will make the BV even more flexible than the partnership: a BV may issue shares with no or limited profit rights but each partner of a partnership must participate in the partnership’s profits.
The Dutch courts have ruled that in the absence of a specific provision in a partnership agreement it is a violation of good faith and the obligation to strive for the achievement of the object of the partnership if a partner competes with any interest of the partnership.21Source 21: Supreme Court Judgment (HR), 19 October 1990, NJ 1991, 21 (Koghee/Akkoca). A similar non-competition obligation derived from the principle of reasonableness and fairness has been assumed to exist for shareholders of joint venture companies.22Source 22: Amsterdam Court of Appeal Judgment (Enterprise Chamber) 16 March 1995, JOR, 1996, 54 (Holstar).
However, it is advisable to include a well-drafted non-competition covenant in the constitutional documents of the joint venture. As mentioned above, a non-competition provision may be void if it is in violation with antitrust and competition law.
In order to enter into a joint venture, the management board of a Dutch limited liability company may need the approval of the supervisory board or the shareholders’ meeting, depending on the articles of association. In the case of a so-called large company, the approval of the supervisory board is required for the commencement or termination of a major long-lasting participation in another company or partnership or the participation as a fully liable partner in a general or limited partnership. A limited liability company qualifies as a large company if the following three cumulative tests are met:
A dependent company is defined in the law as a legal person in which the company, or any of its dependent companies, solely or jointly and for their own account, contributes half or more of the issued capital and a partnership with a business enterprise registered with the Commercial Register in which the company or a dependent company is a fully liable partner.
A large company must have a supervisory board consisting of at least three members who need to be individuals. This supervisory board is empowered to appoint, suspend and remove the members of the management board. The works council must be notified and given the opportunity to render non-binding advice prior to the appointment. The management board must obtain the prior approval of the supervisory board for a number of important actions.23Source 23: Civil Code, s 2:164. The members of the supervisory board of a large company are appointed by the shareholders’ meeting on the basis of nominations drawn up by the supervisory board. The works council has the right to make a binding recommendation of one-third of the members of the supervisory board. Unless the recommended person is unsuitable for the performance of the duties of a supervisory board member or if, as a result of the appointment the supervisory board will not be appropriately composed, the supervisory board is required to nominate the person recommended by the works council. However, with the prior approval of the supervisory board and the works council the articles of association of the large company may deviate from the above mentioned procedure and provide that the shareholders’ meeting may appoint, suspend and dismiss members of the supervisory board without any restrictions.
An exemption from the large company regime exists if the majority of the employees of the company in question and its group companies are employed outside The Netherlands and if at least one-half or more of the issued shares of such company is held by (a) a legal entity (or its dependent companies), the majority of whose employees are employed outside The Netherlands or (b) one or more legal entities (or their dependent companies) that meet the test referred to under (a), above, pursuant to a so-called mutual cooperation agreement. In this respect, a joint venture agreement generally qualifies as a mutual corporation agreement.
In terms of legal documents required for the formation of the joint venture, no specific rules apply. There are no standard forms published by the Dutch authorities. Joint venture agreements are generally enforceable even if the contractual arrangements are not reflected in the articles of association. Remedies include specific performance and damages. There may be a preference, however, to lay down certain provisions in the articles of association. For instance, restrictions on transfer of shares are typically included in the articles of association. The main advantage of having these restrictions included in the articles of association is that a share transfer in violation of the articles of association is null and void. The same applies to minority protection rights included in the articles of association.
The Merger Code 2000 (SER Fusie gedragsregels 2000) provides that trade unions should be informed and consulted with respect to mergers or joint ventures which involve companies employing fifty or more employees in The Netherlands or which form part of a group of companies employing more than fifty employees in The Netherlands. The trade unions merely have to right to receive information and to give their views. They do not have a right of veto. If a party entering into a joint venture has established a works council, advice must be sought from such works council prior to agreeing on the terms of the joint venture.
Joint ventures frequently require regulatory approval and it is vital to review at an early stage the likely regulatory impact on a particular joint venture. The section on antitrust and competition law, below, discusses the regulatory impact if effective competitions on the Dutch market is impeded in more detail.
Industry-specific approvals may apply for certain regulated businesses. Examples are banking, insurance, financial services, and consumer credit business. Approvals will generally be issued through a licensing procedure. A party entering into a joint venture will, as a commercial matter, wish to consider the impact of the venture on existing contractual arrangements. If existing contracts need to be assigned, the consent of counter parties to relevant contracts will usually be required.
Similarly, even if there is no change in legal identity of the contracting party itself, the setting up of a joint venture may involve a change of control of that party such as to give rise to a right of termination by the counter party under the terms of the relevant contract. Since the so-called declaration of no objection for the incorporation of a Dutch BV or NV was abolished in July 2011, there is no need to obtain approval for any particular joint venture from governmental or other authorities in The Netherlands.
Joint ventures call for clear, well-drafted documentation. Apart from the joint venture agreement and the articles of association of the joint venture company, ancillary contracts are equally important for the commercial and legal functioning of the joint venture. These contracts usually involve one or more of the joint venture partners. It may even be the case that a partner plans to make its commercial gain from the joint venture trough its remuneration or receipt of goods or services under ancillary contracts rather than through dividends on its shares in the joint venture company.
If the joint venture company is to operate as a manufacturing facility, there will commonly be separate supply agreements between one or more of the joint venture partners and the joint venture company for the supply of goods, components or raw materials. If, on the other hand, the joint venture company is established at a distribution centre for products manufactured by one of the partners, separate distribution agreements are put in place between the latter and the joint venture company. These contracts give rise to issues common to all supply or distribution contracts within the joint venture context. No particular issues arise in The Netherlands.
Typically, a joint venture will use parent companies’ existing technology under license to the joint venture. The owner of such technology will often be unwilling to assign its rights to the joint venture for fear that the adventure will fail. The license is usually granted on arm’s length terms as it may well continue beyond the partners’ interests as shareholders in the joint venture company. The consideration for the license will reflect the nature of the joint venture. Royalty on sales of manufactured products will be available in a production joint venture, or for the production element of a full-function joint venture.
In a research and development joint venture, an initial payment may be appropriate. When drafting such licensing agreement it can also be necessary to consider what to do about new technology coming into possession of the parent company during the term of the joint venture where such technology is of relevance to the joint venture. The transfer of technology to the joint venture company may require review under competition regulations but in The Netherlands no specific laws exist that regulate the terms on which technology may be licensed to a joint venture company.
A joint venture company has the same statutory obligations towards its employees as any other employer. Generally, The Netherlands has strict employment laws. A so-called works council must be established if the joint venture business employs at least fifty employees in The Netherlands. If a works council has been established, it may have a right to give advice on a proposed appointment or dismissal of a managing director. In the event of a transfer by a joint venture partner of its business to the joint venture company, the rights and obligations of employment contracts between the transferor and the employees concerned are transferred by operation of law if such transfer qualifies as the transfer of an “economic entity” that retains its identity. In such cases the works council has a right to give its advice with regard to the transfer of the business. The works council has also a right to give its advice with regard to the financing of such transaction in case the business for which the works council was established enters into any financing agreements as borrower or guarantor.
In The Netherlands there are several tax incentives available to foreign joint venture partners to invest in The Netherlands. As mentioned above, the tax regime in The Netherlands can be considered attractive as a result of:
For Dutch joint venture entities, a facility for income from certain research and development projects is available (the “Innovation box”). The Innovation box is also available for the Dutch joint venture partners who are engaged as general partners of a general partnership if and to the extent that these partners are subject to Dutch corporate tax.
This facility relating to income derived from intangible assets is an optional system. The joint venture entity needs to obtain either a patent or a research and development declaration that has been issued by the relevant Dutch authorities. The patent itself can be Dutch or non-Dutch, but it must have been developed by the Dutch joint venture entity (i.e., in principle, it does not apply to intangible assets that have been acquired from another entity). The net profits derived from self-developed intangible assets is subject to an effective corporate tax rate of 5 per cent.
In addition to the innovation box, a tax credit for particular research and development is available. The tax credit is a contribution in respect of Dutch wage tax paid for employees directly involved in research and development. This tax benefit is available for Dutch joint venture entities as well as for (the Dutch joint venture partners who are engaged as general partners of) a general partnership.
The tax benefit consists of a reduction of wage tax and social security contributions (premie volksverzekeringen) paid for these research and development employees. In 2015 this so-called research and development deduction was 60 per cent of the first €110,000 in research and development wage costs and 18 per cent for the remaining research and development wage costs. This effectively reduced the wage costs for employees engaged in this type of activities.
Employees from another company who come to work in The Netherlands for a Dutch joint venture company or general partnership, may be eligible for a special expense allowance scheme, i.e., the 30 per cent facility. As of 1 January 2012, these criteria are (partially) replaced by a salary threshold, of €35,000, excluding the 30 per cent tax free part. In practice, this means that employees can only benefit from this if their remuneration will exceed an amount of €50,000.
The facility allows the employer (i.e., the joint venture company) to grant a tax-free lump-sum allowance for the extra costs of the employee’s stay in The Netherlands (extra territorial costs). This lump-sum allowance amounts to a maximum of 30 per cent of the sum of the wages and the allowance.24Source 24: In order to calculate the maximum allowance, the wage is, therefore, multiplied by 100/70, and the result then multiplied by 30 per cent. If the actual costs are higher, they may be reimbursed free of tax under the condition that the authenticity of all costs (including the costs that would be reimbursed under the 30 per cent facility) can be ascertained.
In addition, Dutch tax law provides for various other incentives for joint venture companies or partnerships, including the investment deductions, e.g., small-scale investment deduction (kleinschaligheidinvesteringsaftrek), energy investment deduction (energieinvesteringsaftrek), and environmental investment deduction (milieu-investeringsaftrek).
The Netherlands also offers numerous local and national subsidy programs for companies and non-profit organizations that are, for example, willing to innovate in new products or processes, to invest in energy saving techniques, to cooperate with undertakings in developing countries or to reduce emission of harmful substances. Also in the areas of employment, personnel and training, nature, landscape, and water management many subsidies are available.
Subsidies are governed by the General Administrative Law Act (Algemene wet bestuursrecht) and more specifically by so-called framework acts (kaderwetten) which are designed to set out the framework for certain subsidies. When a subsidy is granted for a certain period or project, the subsidy will automatically end when this period has expired or the project has finished, but a subsidy which has been granted for years generally cannot simply be terminated or reduced. This would be contrary to the principle of legal certainty. However, all subsidies should have an end date.25Source 25: General Administrative Law Act, s 4:32. The extent to which a subsidy may be terminated or modified is first of all determined by the specific subsidy regime and only secondly by the General Administrative Law Act. The subsidy regime determines the degree of policy freedom a governing body has in terminating or reducing a subsidy. In practice many subsidy regimes do provide for a high degree of policy freedom to the governing body.
The general rules on termination or reduction of the subsidy can be found in the General Administrative Law Act. If, for instance, a subsidy is granted for a certain period of time the subsidizer is only allowed to terminate or reduce the subsidy before the end date in three cases, namely:
The Dutch government does not place any regulatory restrictions on the activities of the foreign joint venture partner in terms of type of business which may be undertaken, access to and exploitation of locally developed technology and know-how, removal of assets from The Netherlands or repatriation of profits. However, withholding taxes apply to dividends paid by a Dutch joint venture company.
The domestic rate is 15 per cent but tax treaties generally reduce this tax burden to 0 per cent or 5 per cent for joint venture partners owning more than 10 per cent or 25 per cent of the shares and voting rights; other joint venture partners pay 15 per cent. There is a full exemption if the dividends are paid to a qualifying EU parent company that owns at least 5 per cent of the shares. Accordingly, if the parent company is resident in an EU member state with which The Netherlands has concluded a tax treaty providing for voting rights as the criterion for benefiting from a reduced dividend withholding tax rate, a shareholding in the Dutch joint venture that represents 5 per cent or more of the voting rights also qualifies for the EU dividend withholding tax exemption. There are no exchange control regulations and no material restrictions on foreign participation or the duration of a joint venture
Most joint venture disputes will be resolved commercially without recourse to legal process. In case a dispute cannot be settled by negotiation, litigation in national courts or arbitration are the traditional methods to obtain a formal and binding decision. Having said this, in many joint ventures, dispute resolution mechanisms are embodied in the governance structure of the joint venture itself.
The board of the joint venture company usually has a role in dealing with disputes which cannot be settled at an operational level. The next stage will involve some form of escalation of the dispute to higher levels within the organizations of the joint venture partners.
A final step is usually for the dispute to be referred ultimately to the chairmen or chief executives of the joint venture partners. A frequently applied provision is to stipulate in the joint venture agreement the principle that neither partner may proceed with litigation or arbitration until the expiry of a stated period after the dispute has been referred to the chairmen or chief executives of the joint venture partners. However, third-party intervention may be unavoidable at some stage. In these cases alternative dispute resolution techniques are available, including mediation, mini-trial and non-binding arbitration.
Especially mediators, coming independently to the problem, can bring additional value by suggesting alternatives that can facilitate the resolution of seemingly insolvable disputes. However, it is always necessary to provide a mechanism for achieving binding solutions to the dispute either by litigation or through arbitration. In international joint ventures, the national courts of one joint venture partner may not be commercially acceptable; there may be unwillingness to permit dispute to be determined in another partner’s home territory. In these instances the discussions on the methods of dispute resolution often lead to arbitration.
Reference may be made to The Netherlands Arbitration Institute, but also arbitration outside The Netherlands, such as through the International Chamber of Commerce (ICC), the American Arbitration Association (AAA) or the London Court of International Arbitration (LCIA) is acceptable. The Netherlands is a signatory to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.
In relation to dispute settlement, the BV Reform Bill allows that detailed dispute settlement arrangements are incorporated in the articles of association of the joint venture BV, including the clause that voting and profit rights of a non-complying shareholder are suspended or that he is obliged to transfer his shares. Put- and call options triggered by non-compliance of a certain shareholder also can be included in the articles of association.
Dutch law is applied equally to both Dutch and foreign companies. Therefore, subsequent changes in the law will be applicable to both local and foreign companies unless there is a transitional provision that applies. In some cases, it may be desirable to obtain an advance tax ruling from the Dutch tax authorities to avoid or mitigate the effect of subsequent changes in tax law.
The Netherlands has signed approximately hundred treaties for the avoidance of double taxation, ninety of which are still in force and effective as of 1 January 2012. The Netherlands has signed double tax treaties with Albania, Argentina, Armenia, Australia, Azerbaijan, Austria, Bahrain, Bangladesh, Barbados, Belarus, Belgium, Bermuda (the agreement applies only to individuals), BES Islands, Brazil, Bulgaria, Canada, China, Croatia, Czech Republic, Denmark, Egypt, Estonia, Finland, France, Georgia, Germany, Ghana, Greece, Great Britain and Northern Ireland, Hong Kong, Hungary, Iceland, Ireland, India, Indonesia, Israel, Italy, Japan, Jordan, Kazakhstan, Kuwait, Korea, Latvia, Lithuania, Luxembourg, Macedonia, Malawi, Malaysia, Malta, Mexico, Moldavia, Mongolia, Morocco, The Netherlands Antilles (Aruba, Saint Martin, Curacao), New Zealand, Nigeria, Norway, Oman, Pakistan, Panama, Poland, Portugal, Qatar, Romania, the Russian Federation, Saudi Arabia, Singapore, Slovak Republic, Slovenia, South Africa, South Korea, the Soviet Union (applicable to Kyrgyzstan and Turkmenistan), Spain, Sri Lanka, Surinam, Sweden, Switzerland, Taiwan, Tajikistan, Thailand, Tunisia, Turkey, the United Arab Emirates, the United States, Uganda, Ukraine, Uzbekistan, Venezuela, Vietnam, Yugoslavia (applicable to Bosnia-Herzegovina and Serbia and Montenegro), Zambia, and Zimbabwe.
The main purpose of double taxation treaties is to avoid or mitigate double taxation. Double taxation can occur if two sovereign states, based on their domestic tax laws, have the right to levy tax over the same object of income (e.g., cross-border investments or distributions). The following illustrates the application of double-taxation treaties based on:
Generally, the double taxation treaties apply to persons who are residents of one (or both) contracting states and to the extent the relevant domestic tax is explicitly mentioned in the double-taxation agreement.27Source 27: For example, the double-taxation agreement between Bermuda and The Netherlands does not apply to the (Dutch) Corporate Tax. The term “resident” means in this case any person who, under the laws of the relevant state is liable to pay tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature.
Under Dutch corporate tax law, the dividends received by joint venture partners A and B are, in principle, subject to Dutch corporate tax. Accordingly, if the joint venture BV decides to dispose the interest in the foreign subsidiary, any gain will in principle be subject to a statutory Dutch corporate tax rate of 25 per cent. However, in the case at hand, the joint venture partner should typically be able to apply the participation exemption because of their active involvement in the joint venture and the lower tier subsidiaries.
Under the relevant double-taxation agreement, the dividends, interest, and royalties that are received by the Dutch joint venture BV may be taxed in the state where the joint venture BV is resident (i.e., The Netherlands). Conversely, a gain derived by the joint venture partners from the alienation of the shares in the joint venture BV will, in principle be taxable only in a state where the joint ventures partner are resident.
In some cases, the Dutch joint venture BV can benefit from a foreign tax credit. The credit method usually applies under tax agreements for foreign withholding taxes on income received by the joint venture BV such as dividends, interest and royalties. In accordance with the 2001 Unilateral Decree on the Avoidance of Double Taxation, the credit method only applies to dividends, interest and royalties received by the joint venture BV from subsidiaries in designated developing countries.28Source 28: According to section 2 of the Implementation Decree of the 2001 Unilateral Decree on the Avoidance of Double Taxation, the designated developing countries are: Afghanistan, Albania, Algeria, Angola, Armenia, Belize, Benin, Bhutan, Bolivia, Botswana, Burkina Faso, Burundi, Cambodia, Central African Republic, Colombia, Comoros, Republic of Congo, Costa Rica, Cuba, the Democratic Republic of Congo, Djibouti, Dominica, the Dominican Republic, Equator, El Salvador, Equatorial Guinea, Eritrea, Ethiopia, Fiji, Gambia, Georgia, Ghana, Grenada, Guatemala, Guinea, Guinea-Bissau, Guyana, Haiti, Honduras, Iraq, Iran, Ivory Coast, Jamaica, Yemen, Jordan, Cape Verde, Cameroon, Kenya, Kiribati, Laos, Lesotho, Lebanon, Liberia, Madagascar, Maldives, Mali, Marshall Islands, Mauritania, Micronesia, Mongolia, Mozambique, Myanmar, Namibia, Nepal, Nicaragua, Niger, North Korea, Uganda, the Palau Islands, the territories administered by the Palestinian Authority, Panama, Papua New Guinea, Paraguay, Peru, Ruanda, St. Vincent and the Grenadines, Solomon Islands, Sao Tome and Principe, Senegal, Sierra Leone, Sudan, Somalia, Swaziland, Syria, Tanzania, Togo, Tonga, Chad, Tuvalu, Vanuatu, and Western Samoa. The withholding tax for which the tax credit is allowed is usually levied on a gross basis and Dutch corporate tax is levied on a net basis. In some cases, the Dutch tax will not be sufficient to provide credit for the tax levied in the country of the foreign subsidiary. This is particularly the case if the participation exemption applies, i.e., in this situation, there will be no tax credit for any foreign withholding taxes on dividend income that falls under the participation exemption.
The exemption method applies to foreign objects of income for Dutch corporate tax purposes. Generally, the foreign objects of income are exempt per individual country. The exemption method means that reductions will be granted for Dutch tax relating to foreign income. The participation exemption and the exemption for business income from foreign permanent establishments (objectvrijstelling) in the 1969 Corporate Tax Act are an example of the domestic exemption method.29Source 29: Corporate Tax 1969, s 15e.
Under the condition that the foreign subsidiary is a transparent entity for Dutch corporate tax purposes, the exemption for business income from foreign permanent establishments will, in principle, apply. Before 2012, the business income of foreign permanent establishments was effectively included in the taxable income of the Dutch joint venture BV. This entails that the Dutch joint venture BV was subject to tax on its worldwide profits, with a relief of double taxation for profits attributable to its foreign permanent establishment.
Accordingly, losses attributable to a foreign permanent establishment were effectively fully deductible from Dutch source profits. As per 2012, with the introduction of the exemption for business income from foreign permanent establishments (objectvrijstelling), the positive and negative result of the permanent establishment will be eliminated from the income of the Dutch joint venture BV. Under this new rule, the results of permanent establishments are treated generally in the same manner as if the results were realized by the (non-transparent) foreign subsidiary of the Dutch joint venture BV, i.e., foreign source losses would no longer effectively be deductible from Dutch source profits.
If there is no arrangement for avoiding double taxation – and accordingly the relevant foreign source income is fully included in the Dutch tax base, foreign taxes may be deducted as costs related to the relevant income. This applies to the year in which the income is received and to the total amount of dividends, royalties and interest received in that year.
The joint venture partners A and B who are pictured above own their interest in the foreign subsidiaries through a general partnership which is a transparent entity for Dutch tax purposes. The dividends, interest, and royalties paid by the (non-transparent) foreign subsidiaries to the Dutch general partnership will be taxed at the level of joint venture partners A and B and not at the level of the general partnership itself.
The dividends received by joint venture partners A and B are, in principle, subject to a statutory rate of 25 per cent Dutch corporate tax, unless the Dutch joint venture partners are entitled to the participation exemption with respect to their (pro rata) interest in the subsidiaries held by the partnership.
In the above example, the Dutch joint venture company is non-transparent for Dutch tax purposes. Accordingly, if it makes a (dividend, interest or royalty) payment to its foreign joint venture partners, typically, these dividends (but also interest and royalties) may under the applicable tax treaties also be taxed in the state of which the joint venture paying the dividends is resident, i.e., The Netherlands.
As discussed above, The Netherlands has a domestic withholding tax on dividends of 15 per cent, but no domestic withholding tax on outbound interest and royalty payments. However, applicable tax treaties or domestic dividend withholding tax exemption may provide for a reduced rate of, or exemption of, dividend withholding tax.
If foreign joint venture partners conduct their interest in the subsidiaries through a general partnership, the general partnership is considered a transparent entity and may be considered a permanent establishment of the foreign joint venture partners for Dutch tax purposes.
For the purposes of the double-taxation agreements,30Source 30: 2010 Model Tax Convention. the term “permanent establishment” means generally the fixed place of business through which the business of an enterprise is wholly or partly carried on. The term ‘permanent establishment’ includes a place of management, branch, office, workplace, factory or a mine, an oil or gas well, a quarry, or any other place of extraction of natural resources.31Source 31: 2010 Model Tax Convention, s 5, paras 1, 2, and 3; 2001 Unilateral Decree on the Avoidance of Double Taxation, s 2. Whether a general partnership results in a permanent establishment for Dutch tax purposes depends on the facts and circumstances.
As discussed above The Netherlands has concluded approximately hundred bilateral tax treaties to help avoid double taxation. The treaties generally provide for substantial reductions of withholding tax on dividends, interest and royalties, and as mentioned before The Netherlands does not withhold any tax on interest and royalty payments leaving The Netherlands. In addition, The Netherlands has created unilateral provisions to mitigate situations of double taxation in which a tax treaty is absent or does not contain a provision with regard to a certain type of income.
The Netherlands has also entered into some ninety-seven investor bilateral investment treaties. In addition to The Netherlands being a favorable holding jurisdiction from a tax perspective, The Netherlands bilateral investment treaties could be an important argument to set up an intermediate holding company in The Netherlands. Bilateral investment treaties establish terms and conditions for the protection of investors of one state and their investments in state and are generally perceived as a “free insurance” since treaty protection often can be achieved at minimal cost, for example by interposing a holding company in a jurisdiction that has a favorable BIT with the country in which the investment is made. The Netherlands bilateral investment treaties generally offer protection for indirect investments made by a Dutch company through local subsidiaries. In addition, The Netherlands has a large number of investor friendly bilateral investment treaties that offer direct access to international arbitration as opposed to being obliged to exhaust proceedings with a local court first.
The Dutch bilateral investment treaties can offer protection to foreign investors on several levels. First, the host state has the obligation to treat foreign investments in a manner that is just, equal, non-discriminatory and conducive to fostering the promotion of foreign investment. In practice, this means that the same laws apply to all foreign and national undertakings and that they enjoy equal protection and advantages. The second safeguard a Dutch bilateral investment treaty can provide is that the host state is not allowed to expropriate, nationalize, or take similar measures against investors from the other state, unless the expropriation is in the public interest, not discriminatory and done for compensation. Such compensation must be equivalent to the fair market value of the investment.
The third safeguard is the national treatment and most-favoured nation clause. Dutch investment treaties often require the host state to treat investors from the other state at least as favorably as national investors (“national treatment”) and to treat investors from the other state not less favorably than other foreign investors (“most favored nation treatment”). Finally, Dutch bilateral investment treaties include a commitment by the host state to observe all obligations it has entered into with regard to investments in its territory by investors from the other state.