Holding and operating company structure in the Netherlands

A holding structure is a group of at least two Dutch private limited companies (besloten vennootschap, BV) in which one company, the holding, holds the shares in another, the operating company (werkmaatschappij), while the entrepreneur holds the shares in the holding. The operating company carries the commercial activity and the risk; the holding keeps the value out of that risk. The structure is used for asset protection, for a cleaner sale of the business and for keeping several activities separate, and it is created by notarial deed.

It is also frequently oversold. A holding does not make a director immune from liability, it does not make money in the operating company untouchable retroactively, and it does not turn a badly documented group into a well-run one. Below we explain what the structure does under Dutch corporate law, which rules decide whether the protection holds when it is tested, what it takes to run, and when it is worth setting up.

How does a holding and operating company structure work?

The operating company trades and carries the risk; the holding owns the shares in the operating company and keeps the assets you want to protect. Both are separate legal persons, and that separation must be kept up in practice.

The operating company is the entity that trades. It concludes contracts with customers and suppliers, employs staff, holds the stock and the operating assets, and bears the claims that arise from all of that. To the outside world it is the business.

The holding usually has no commercial activity of its own. It holds the shares in the operating company, typically all of them, and it is the natural place for the assets that should not be exposed to trading risk: retained profits, intellectual property, a property from which the business operates, and often the management agreement of the director-major shareholder. Both companies are separate legal persons with their own board, their own accounts and their own tax return, and that separateness is the whole point. It also has to be maintained in practice, because a group that treats the two entities as one wallet loses much of the protection it paid for.

Two structural choices are made at the start and are worth thinking through. The first is who is appointed as director of the operating company: the holding itself, or the entrepreneur in person. The second is how the shares in the holding are held, directly or through a foundation issuing depositary receipts, which separates economic entitlement from voting control; we discuss that in our article on STAKs and share certificates. Neither choice is neutral, as the next section shows.

What does a holding protect you against, and what not?

A holding protects value that has lawfully been moved out of the operating company against that company’s creditors. It does not protect you, as a director, against personal liability.

The protection a holding offers is real but specific: it shields value that has lawfully been moved out of the operating company from the creditors of that operating company. If the operating company becomes insolvent, the retained profits, the intellectual property and the property that sit in the holding are not part of its estate. That is the benefit, and it is a substantial one for any business with genuine liability exposure.

What the structure does not do is remove the director from the picture. Under article 2:9 of the Burgerlijk Wetboek (Dutch Civil Code) a director is liable to the company for improper performance of his duties. In bankruptcy, article 2:248 makes the board liable for the deficit where the board has manifestly performed its duties improperly and that is a significant cause of the bankruptcy, and a failure to keep proper accounts or to file the annual accounts on time creates an irrebuttable presumption of improper management and a rebuttable presumption of causation. Alongside that, a director who enters into an obligation on behalf of the company knowing that the company will not be able to perform and will offer no recourse commits a tort in his own person under article 6:162.

The provision that surprises entrepreneurs most is article 2:11. Where a legal person is a director, liability as a director also rests jointly and severally on each person who was a director of that legal person. If your holding is the director of the operating company, a claim against the operating company board runs through the holding and lands on you personally. Placing a BV between yourself and the board seat does not create a liability buffer, and it is worth understanding that before designing the structure around it. Our article on directors liability for Dutch BV directors works through the grounds in detail.

Two further leaks are worth naming. A holding that has filed a declaration of joint liability under article 2:403 in order to exempt a subsidiary from publishing its own annual accounts is liable for the debts arising from that subsidiary legal acts, and withdrawing the declaration does not end the liability for existing debts without following a statutory procedure. And a holding that guarantees the bank facility or the lease of the operating company, which lenders and landlords routinely require, has voluntarily reconnected the two balance sheets for that debt.

How can you move profits to the holding safely?

Through a dividend that meets the statutory tests, paid in good times and properly documented. A dividend paid when the operating company is already in difficulty can be clawed back and can make you personally liable.

The holding only protects value that has actually reached it, and the route by which value reaches it is a dividend distribution. That distribution is regulated, and getting it wrong is the single most common way in which the intended protection turns into a personal liability.

Under Article 2:216 of the Dutch Civil Code (Burgerlijk Wetboek, BW) a distribution by a BV must pass two tests. First, the company may only distribute to the extent that its equity exceeds the reserves it must keep under the law or its articles of association. Second, the general meeting resolves to distribute, but the resolution has no effect until the board approves it, and the board must withhold approval if it knows or ought reasonably to foresee that the company will not be able to continue paying its debts as they fall due. That second test, the distribution test, looks forward, typically over the coming year, and it is a matter of judgement that the board has to be able to justify afterwards. A director who approved a distribution while he knew or should have foreseen the consequences is jointly and severally liable to the company for the resulting deficit, and a shareholder who knew is liable for what he received.

Insolvency law adds a second filter. A trustee in bankruptcy can annul a voluntary legal act performed within the suspect period where the company and the counterparty knew or should have known that creditors would be prejudiced, under article 42 of the Faillissementswet, and the statute presumes that knowledge for certain acts performed within a year of the bankruptcy, including distributions within a group. In other words, a dividend paid to the holding when the operating company was already in difficulty is not safe; it is exactly the transaction a trustee looks for first.

Three practical rules follow. Distribute regularly and in good times rather than in one large sweep when a claim appears on the horizon. Record the distribution test in the board minutes with the figures on which it was based, because that document is the defence. And do not use the current account between the two companies as an informal substitute for dividends: an intercompany loan needs a written agreement, an arm-length interest rate and a repayment schedule, or it will be characterised afterwards as something else entirely.

Which tax rules make a holding attractive?

Mainly the participation exemption and the option of a fiscal unity. Both are matters for your tax adviser; we set them out only so that you know what to ask.

Two features of Dutch corporate tax law explain much of the popularity of the structure, and both are matters for your tax adviser rather than for your lawyer. We set them out here only so that you know what to ask about.

The first is the participation exemption (deelnemingsvrijstelling) in the Wet op de vennootschapsbelasting 1969. Where a company holds an interest of at least five per cent in another company and the conditions are met, dividends received from that interest and gains realised on its sale are exempt from corporate income tax at the level of the recipient. That is why profits can be moved from the operating company to the holding, and why the proceeds of a share sale can arrive there, without a tax charge at that moment. It is a deferral of personal taxation rather than an elimination of it: tax follows when the money leaves the holding for the shareholder in person.

The second is the fiscal unity (fiscale eenheid) for corporate income tax, which requires among other things a shareholding of at least ninety-five per cent and a request to the Belastingdienst. Within a fiscal unity the results of the companies are consolidated, so a loss in one can be set against a profit in another in the same year. A fiscal unity also has consequences that cut the other way, including joint and several liability for the corporate income tax debt of the group, so it is a choice to be made deliberately.

Rates, brackets and thresholds in Box 2 and in corporate income tax are set annually in the Belastingplan and change regularly, so any figure you read in an article is likely to be out of date by the time you act on it. Law & More does not provide tax advice; we structure the group, draft the documentation and work alongside your tax adviser or accountant, who should run the calculation on your own figures before you incorporate anything.

How does a holding help with several activities, a sale or succession?

It keeps the failure of one activity away from the others, and it lets you sell or transfer an operating company without selling the entity that holds your wealth.

The second reason to build a group is separation of activities. An entrepreneur who runs a consultancy, a webshop and a property portfolio in one BV has combined three risk profiles in one estate: a supplier claim against the webshop reaches the property. Placing each activity in its own operating company under the same holding keeps the failure of one out of the others, provided the companies really are run separately and the group does not guarantee everything for everyone.

The third reason is the exit. A buyer of a Dutch business almost always prefers to buy the shares in the operating company rather than its assets, because a share purchase carries the contracts, the permits and the staff across without individual transfers. A holding makes that possible without you having to sell the entity that holds your accumulated wealth, and it lets you sell one activity while keeping the others. It also makes a phased transfer to a successor or a management team feasible, since shares can be transferred in tranches and the holding can retain a minority stake.

Preparation is what determines the price. A buyer will run a due diligence exercise on the operating company, and the recurring findings are the same: intellectual property that was never formally transferred to the company that uses it, key contracts with change-of-control clauses, employment terms that were never documented, and intercompany balances without an underlying agreement. Cleaning those up years before a sale is considerably cheaper than negotiating warranties around them, as we describe in our overview of due diligence in Dutch M and A transactions. Where more than one shareholder is involved, a shareholders agreement setting out transfer restrictions, deadlock and exit arrangements prevents the disputes described in our article on shareholder disputes.

How do you set up and run a holding structure?

Each BV is incorporated by notarial deed, and an existing BV is placed under a new holding by contributing or exchanging its shares. After that, both companies must be run and documented as separate entities.

A BV is incorporated by a deed executed before a Dutch civil-law notary, and the shares in a BV can only be transferred by notarial deed as well. There is no minimum capital requirement since the introduction of the flexible BV regime, so a company can be incorporated with an issued capital of one eurocent, although banks and counterparties often expect something more substantial. Each company is registered in the Handelsregister at the Kamer van Koophandel, and the ultimate beneficial owners must be registered in the UBO register.

If you are starting from scratch, the holding is incorporated first and then incorporates the operating company as its sole shareholder. If you already trade through a BV, a holding is placed above it, usually by contributing or exchanging your shares. That step has tax consequences that must be arranged in advance, because an unplanned transfer can trigger immediate taxation of the value built up in the company, and any relief that may be available comes with conditions and continuation periods. This is the moment to have the notary and the tax adviser at the same table. Our guide on the legal steps from idea to BV covers the incorporation itself in more detail.

After incorporation the group has to be run as a group. That means separate bank accounts and separate bookkeeping, annual accounts prepared and filed for each company within the statutory period, a written management agreement between the holding and the operating company with a defensible fee, and written agreements for any loan between them. It also means keeping the corporate records in order: a shareholders register, minutes of the resolutions that matter, and a record of the distribution tests. These are not formalities; they are the evidence that the two companies are genuinely separate, and they are the first documents a trustee or an opposing party asks for.

The costs are the mirror image of the benefits. Two incorporations mean two notarial deeds, and two entities mean two sets of annual accounts, two tax returns and a larger accountancy bill every year. Notarial and accountancy fees differ per office and per situation and are quoted in advance, so ask for written quotations before deciding. There is no profit figure at which a holding suddenly becomes sensible; the structure earns its keep when there is profit worth retaining outside the trading risk, when valuable assets need to sit apart from that risk, or when a sale or succession is genuinely in prospect.

Is a holding structure right for your situation?

A holding and operating company structure is a good answer to three specific questions: how to keep accumulated value away from trading risk, how to keep separate activities from dragging each other down, and how to make a future sale or transfer possible without dismantling the business. It is a poor answer to a general wish to pay less tax, and it is no answer at all to weak governance, because the rules on distributions, on director liability and on group guarantees will find that out.

In summary

• A holding owns the shares in the operating company and keeps valuable assets outside the trading risk.
• It does not protect directors against personal liability; where the holding is the director, Article 2:11 BW passes liability on to you.
• Profits reach the holding safely only through a dividend that passes the tests of Article 2:216 BW and is paid in good times.
• A holding makes it easier to separate activities and to sell or transfer an operating company.
• The tax consequences, such as the participation exemption and fiscal unity, belong with your tax adviser.

Frequently asked questions

Law & More advises entrepreneurs on the design of the group and drafts the management, loan and shareholder documentation, working with your notary and tax adviser; read more about our business law practice. Unsure where you stand? Tell us about your situation. We will let you know your options within one working day.