Dividend distribution from a Dutch BV: the two statutory tests

In short: a dividend distribution from a Dutch BV needs two decisions, not one. The general meeting resolves to distribute, but under article 2:216 of the Dutch Civil Code that resolution has no effect until the board approves it. The board may only approve after two tests: the balance sheet test (equity must still exceed the reserves required by law or by the articles) and the distribution test (the company must remain able to pay its debts as they fall due). Directors who approve a distribution they should have known the company could not carry are personally liable for the deficit. A shareholder who knew may have to repay what he received.

A dividend from a Dutch BV is governed by article 2:216 of the Dutch Civil Code, which splits the decision in two. The general meeting decides that a distribution is made and how large it is. The board of directors then decides whether it may actually be paid. The board must refuse approval if it knows, or should reasonably foresee, that the company will not be able to keep paying its due debts afterwards. Without that approval the shareholders resolution has no effect, and paying anyway exposes the directors to personal liability towards the company.

What is a distribution, and who decides on it?

A distribution is a payment to a shareholder on account of the shares, and the general meeting decides on it unless the articles say otherwise. It is one of the two usual ways a director-shareholder (DGA) takes value out of a BV, the other being salary.

Legally, salary and dividend are unrelated. Salary is payment for work performed as a director or employee. A dividend is a distribution to a shareholder because he holds shares. That is why the rules differ so much: employment law protects the person who works, while the distribution rules in Book 2 protect the company’s creditors against a shareholder taking the company empty.

The starting point is that the general meeting is competent to allocate the profit and to resolve on distributions, unless the articles of association give that power to another body. Read your articles before you assume anything. A BV with an investor, a supervisory board or two classes of shares often has a different arrangement, and a resolution taken by the wrong body can be challenged as invalid.

The second point is that a resolution is not the same thing as a meeting. Under Dutch corporate law shareholders can adopt a resolution outside a meeting, unless the articles provide otherwise, provided that everyone entitled to attend meetings has agreed to that way of decision-making. Since the flexible BV reform of 2012 the statute requires consent to the method, not a unanimous vote on the resolution itself. For the single-shareholder BV this is the normal route, and it is entirely valid. You do not have to convene and minute a formal meeting with yourself. What you do need in every case is a written, dated and signed record of the decision. If you do hold a meeting, the articles can allow shareholders to attend and vote electronically.

The third point is the one people miss: the shareholders resolution is conditional. Article 2:216 provides that a resolution to distribute has no effect as long as the board has not approved it. The board is not a rubber stamp. It has its own statutory duty, its own test to perform and its own liability if it gets it wrong. Where the shareholder and the director are the same person, that person wears two hats one after the other and must be able to show it.

Can a BV distribute assets instead of cash, and how does an NV differ?

Yes, a BV can distribute an asset, unless its articles exclude this. Think of a receivable, a car or a participating interest. The two tests apply in exactly the same way, with one extra question: valuation. The amount of the distribution is the value of what is handed over, so a defensible valuation belongs in the file, and it is sensible to have the shareholders agree to it. A distribution in kind also triggers the transfer formalities for the asset itself. Shares in another BV, for example, can only be transferred by notarial deed.

The rules in this article are those for the BV. A public limited company (NV) has a different and stricter regime. It is built around capital maintenance rather than a board-level liquidity test, and the NV still has a minimum capital. If you convert a BV into an NV, or advise the Dutch subsidiary of a foreign group, check which regime applies before you copy a resolution across. The same caution applies to a foundation or a cooperative: whether they may distribute at all depends on the articles and, for a foundation, is restricted by statute.

What does the balance sheet test require?

The balance sheet test asks one question: after the distribution, does the company’s equity still exceed the reserves it must keep under the law or its articles of association? If not, the general meeting may not resolve on the distribution at all. The test is a snapshot based on the figures, and it is the easier of the two to apply.

Two kinds of reserve are locked. Statutory reserves are those the annual accounts rules require a company to form. The best-known example is the reserve for capitalised development costs; a revaluation reserve and certain reserves for participating interests work the same way. Reserves required by the articles are those the shareholders imposed on themselves when the company was set up or when the articles were last amended. Everything above that line is in principle distributable, including retained earnings from previous years.

This answers a frequent question. A BV that made a loss this year may still distribute, because the test looks at accumulated equity, not at the result for the year. It also explains why the balance sheet test is a weak constraint for the typical owner-managed BV. A company without statutory or contractual reserves passes the test as long as its equity does not go negative. Since 2012 the BV has no minimum capital, so there is no capital floor underneath either. The real limit on what you can safely take out is the second test.

One technical point. When each distribution is calculated, the shares the company holds in its own capital do not count, unless the articles provide otherwise (article 2:216 paragraph 5). The articles may also give classes of shares different profit rights. Where they do, the resolution must follow that division rather than a simple pro rata split.

What does the distribution test require, and what should the board document?

The distribution test is the board’s test: the board must refuse approval if it knows, or should reasonably foresee, that after the distribution the company cannot continue to pay its due and payable debts. That is a forward-looking judgement about liquidity, not a calculation, and it is where directors get into trouble.

The statute does not name a period. The twelve-month horizon that advisers commonly use comes from the parliamentary history of the flexible BV legislation and from practice. It is a sensible working rule, not a statutory deadline. If the company has an obligation falling due in month fifteen that it plainly cannot meet, the board cannot hide behind a twelve-month window. On the other hand, a board does not have to guarantee the future. It has to make a reasonable assessment on the information reasonably available at the time.

A defensible assessment looks at the whole picture:

• the liquidity forecast for the coming year;
• corporation tax and VAT still to be paid;
• wage and rent obligations;
• repayment and covenant schedules on loans;
• dependence on a few large customers;
• committed investments, pending claims and disputes;
• any guarantee or group liability the company has taken on.

If the company is part of a group, the position of the other group companies belongs in the assessment too. An intercompany claim is only worth what the debtor is worth.

Write it down. The board resolution should record that both tests were performed, state in a few concrete sentences what the board looked at, give the conclusion, and be dated and signed before the money moves. Attach the figures used. A resolution written after the fact, or a file containing only the sentence that the tests were carried out, is worth very little when a trustee in bankruptcy asks the question two years later. This is the cheapest piece of evidence a director will ever create, and often the one that is missing.

Who is liable if the distribution test was wrong?

The directors who knew or should have foreseen the problem are jointly and severally liable to the company, and a shareholder who knew may have to repay. Under article 2:216 paragraph 3, if the company cannot pay its due debts after the distribution, those directors must make good the shortfall caused by the distribution, plus statutory interest from the day of the distribution. The claim belongs to the company, so in practice a trustee in bankruptcy brings it.

A director can escape liability by proving that the failure is not his fault and that he was not negligent in taking measures to avert the consequences. That is a real defence, but a narrow one. Dissenting in the boardroom and recording the dissent is very different from having been absent or uninformed. A director who signs an approval without asking for the figures has, in effect, given away the defence.

The shareholder is not out of range either. Someone who received a distribution while knowing, or having reason to foresee, that the company would be unable to keep paying its debts must compensate the shortfall. Each recipient is liable for at most the amount or value of the distribution he received, plus statutory interest from the day of the distribution. Where director and shareholder are the same person, the knowledge requirement will usually be met, which is why a badly documented dividend in an owner-managed BV is a double exposure. Under article 2:216 paragraph 4, liability also reaches anyone who has determined the company’s policy as if he were a director. Stepping back from the formal board seat therefore does not solve the problem.

Article 2:216 does not stand alone. A distribution that harms creditors can also support a claim for improper performance of duties towards the company and, in bankruptcy, a claim for manifestly improper management. A director who let the company take on obligations he knew it could not meet can also be liable in tort to the individual creditor. Our article on directors’ liability in a Dutch BV explains how these routes interact, and the article on internal directors’ liability covers the duty owed to the company itself.

In what order should you take the steps?

Prepare the figures first, then the shareholders resolution, then the board approval, and only then pay. The order matters, because a step taken out of sequence can undermine the ones after it.

First, prepare the figures. Establish the distributable equity on the most recent adopted annual accounts, adjusted for what has happened since, and prepare the liquidity forecast the board will rely on. Second, adopt the shareholders resolution, in a meeting or in writing outside a meeting if everyone entitled to attend has agreed to that method. Record the amount, the shares it relates to and the date. Third, have the board perform and document both tests and adopt a signed approval resolution. Only then does the distribution take effect and can the shareholder claim the amount.

Fourth, pay the dividend and book it correctly, so that the reduction in equity is visible in the accounts. Fifth, file the dividend withholding tax return and pay the tax. According to the Tax and Customs Administration (Belastingdienst), both must happen within one month after the day the dividend is made available, not after the date of the bank transfer. Keep the resolutions, the figures used and the tax return together in one file. If the question ever arises, that file is your answer.

Dividend process and documentation

Why do the annual accounts and their filing matter here?

Because the distribution is normally measured against the equity in the most recent adopted annual accounts, and because late filing weakens the director’s position in a later bankruptcy. The board draws up the accounts, the general meeting adopts them, and the adopted accounts are filed with the Chamber of Commerce (KVK). The outer deadline for filing is twelve months after the end of the financial year. In a BV where all shareholders are also directors, the signing of the accounts by all directors counts as adoption, which brings the filing moment forward.

The liability consequence is what connects this to dividends. In a bankruptcy, failure to file the accounts on time counts as improper management. It also creates a presumption that the improper management was an important cause of the bankruptcy, which the director then has to rebut. A director who filed late and also approved a distribution starts the conversation with a trustee in a weak position, because one file has to answer two questions at once. Filing on time is therefore not administrative housekeeping; it helps keep the distribution defensible.

The same applies to the underlying administration. A company must keep records from which its rights and obligations can be established at any time. If those records do not show what the liquidity position was on the day of the distribution, the distribution test cannot be reconstructed afterwards, whatever the resolution says.

Can you still distribute when the company is under pressure?

Only with great care, because the two tests are most demanding exactly when the money is most wanted. A company that is trading through a difficult period, negotiating with its bank or preparing a restructuring should treat any distribution as a decision that someone with an interest in reversing it will review with hindsight.

Three consequences follow. First, the distribution test must be based on a forecast that takes the downside seriously, such as losing a major customer, the bank calling a facility or losing a pending court case. Second, a director who doubts the position should say so in writing and record what was decided. A documented dissent is a defence; an unrecorded misgiving is not. Third, a trustee in bankruptcy can attack a distribution made while the company was heading for insolvency not only under the distribution rules, but also under the rules on prejudicial transactions (actio pauliana) in the Bankruptcy Act (Faillissementswet). Those rules apply more readily to an act without consideration, such as a dividend, and to payments to a party connected with the company. As a result, the shareholder may have to hand the money back even where the director’s own liability is disputed.

If the company is genuinely in difficulty, the right order is the opposite of the instinctive one. Address the balance sheet and the financing first, and consider a distribution only once the position is stable. If a restructuring is on the table, take advice before any payment leaves the company. A distribution made in the run-up to a composition or a court-approved arrangement will be one of the first items examined.

Can you pay an interim dividend, and what other routes are there?

Yes. A dividend does not have to wait for the annual accounts: an interim distribution (tussentijdse uitkering) is permitted, and exactly the same two tests apply. The difference is evidential. Without adopted accounts to rely on, the board should in practice base the balance sheet test on an interim statement of assets and liabilities and be able to explain how it reached the distributable amount. Interim dividends taken casually during the year and only reconciled at year end are a weak spot that a trustee will look at first.

A distribution is not the only way value leaves a company, and the neighbouring routes have their own rules:

• A repurchase of its own shares by the BV is also subject to the distribution test, and to further restrictions in Book 2 and in the articles.
• A formal capital reduction by amendment of the articles requires a separate procedure with a period in which creditors can object.
• A loan from the company to the director-shareholder is not a distribution, but it is scrutinised closely. An arrangement no third party would have accepted can be recharacterised, and trustees treat an unsecured current account balance that keeps growing as value taken out without a resolution.

Where a company is close to insolvency, all of these routes raise the same question as a dividend: were the creditors prejudiced?

Many entrepreneurs hold their operating company through a personal holding company. Legally this changes who the shareholder is, not what the rules are. A distribution from the operating BV to the holding must pass both tests at the level of the operating BV. A later distribution from the holding to the individual must pass both tests again at the level of the holding. The board of each company makes its own assessment. The advantage usually cited for this structure is a tax one, and whether it is available and worthwhile in your case is a question for a tax adviser rather than for us.

What are the tax consequences, and who advises on them?

A distribution has tax consequences at two levels, and your tax adviser is the right person to assess them. The company must withhold dividend withholding tax and file a return and pay within one month after the dividend is made available. A shareholder with a substantial interest declares the distribution in box 2 of the personal income tax return, and the tax withheld is credited against the tax due. Those are the mechanics.

We deliberately do not give rates, thresholds or a worked calculation here. The box 2 brackets, the withholding tax rate and the interaction with the customary salary rules for a director-shareholder change regularly, and a figure that was right when an article was written becomes a trap once it is not. More importantly, choosing between salary and dividend, timing distributions across tax years and structuring a holding are tax questions, and we do not give tax advice. Discuss them with your accountant or tax adviser, and let us make sure the corporate resolutions underneath the outcome are valid.

Where does it typically go wrong?

The typical problems are procedural rather than exotic. The first is a missing or backdated board approval. The shareholder signs a distribution resolution, the money is transferred, and the board resolution is drafted months later at the accountant’s request. In a later bankruptcy that sequence is easy to reconstruct from the bank statements and hard to defend.

The second is a distribution test based on the wrong information, usually a profit figure instead of a liquidity forecast. Profit is not cash: a company can be profitable and still be unable to pay a tax assessment falling due in three months. The third is ignoring the articles of association. They may give the decision to another body, require supervisory board approval, give classes of shares different profit rights or prescribe a reserve that the balance sheet test must respect.

The fourth is the position of shareholders who are not directors. A distribution decided by a majority against the interest of the company, or a persistent refusal to distribute anything at all, can be tested before the courts, and a minority shareholder is not without remedies. Our article on the position of minority shareholders in the Netherlands deals with that. The fifth is timing around a transaction. A dividend declared shortly before a sale, a refinancing or a restructuring will be examined afterwards with hindsight, and the board file must be strong enough to survive that.

What should you arrange before the next distribution?

Three documents and one habit cover most of the risk. The first document is a current set of articles of association, actually read, so that you know which body decides, whether a reserve is prescribed and whether the classes of shares have different profit rights. The second is the shareholders resolution, dated and signed, adopted in a meeting or in writing outside a meeting with everyone entitled to attend having agreed to that method. The third is the board approval, dated and signed before payment, stating in plain sentences what the board examined and why it concluded that the company can continue to meet its obligations.

The habit is to keep the underlying figures with the resolutions. A one-page liquidity forecast, the trial balance the equity figure came from and a note of the known commitments for the coming year turn a formal document into evidence. If the company has several shareholders, agree the distribution policy in the shareholders agreement instead of deciding it afresh under time pressure each year, and make sure that policy is consistent with the articles.

Finally, keep the corporate and the tax decisions separate. The tax adviser determines what is efficient; the board determines what is permitted. When the two answers conflict, the corporate answer governs, because no tax advantage protects a director against liability for a distribution the company could not carry.

In summary

• Under article 2:216 of the Dutch Civil Code a dividend needs a shareholders resolution and board approval; without approval the resolution has no effect.
• The balance sheet test: after the distribution, equity must exceed the reserves required by law or the articles.
• The distribution test: the board must refuse approval if it knows or should foresee that the company cannot keep paying its due debts. Document this before payment.
• Directors who should have known are jointly and severally liable for the shortfall; a shareholder who knew must repay, up to what he received.
• File the dividend withholding tax return and pay within one month after the dividend is made available, and leave tax planning to your tax adviser.

Frequently asked questions

The answers below are general. The position in your company depends on its articles of association, its figures and its commitments.

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