In 2014, concealing income or the heritage of funds is generally frowned upon and all too many times classified as fraud or tax evasion. In the past, views on this were very different however, and perhaps these views weren’t all that unreasonable. It may not always be good for relationships, but nevertheless still not illegal if a man or woman tries to seclude specific assets from his or her spouse, only to protect his or her own wealth in the event of an unpleasant break-up.

You might be surprised however, that options exist to fully separate assets in a very pleasant, straightforward and transparent jurisdiction and, depending on your local legislation, being able to access this wealth in a tax-efficient manner. This article introduces the Dutch Foundation; an orphan legal entity capable of securing assets and allowing access by means of loan funding and designated distributions.

Legal aspects of a Foundation in the Netherlands

A Dutch Foundation (in Dutch: Stichting) is an orphan legal entity which has no members or shareholders. A Foundation is established in a notarial deed, by one or more people or entities. The civil law notary requires specific information when establishing a Foundation, for instance the personalia of establisher and the purpose of the Foundation. After establishment, the Foundation has to be registered with the Dutch Chamber of Commerce (KvK).

The purpose of a Foundation should be to pursue specific goals (specified in the Foundation’s articles of association) with the use of its assets which can be obtained by means of donations or loans. Goals effecting distributions to the Foundation’s establishers or associated parties are illegal. A goal resulting in distributions to third parties is only allowed if the third party has a social ideal or can be considered as charity. Examples of Foundation types are the general welfare Foundation, the private pension fund and the Administrative Office Foundation or STAK. An interesting aspect of a STAK is that, contrary to the general rule prohibiting distributions to non-charity, it is established to distribute dividends it receives from its subsidiary to the holder of the depository receipts. It is entitled to make distributions solely to the holders of those depository receipts.

Although the Foundation is often used for charity or social purpose, in recent years, the Foundation has been used more frequently as a means to conduct business or as a holding entity. In fact, the Foundation as a commercial entity is the second most popular means for doing business in the Netherlands (although the Dutch Cooperative is gaining in popularity fast). As mentioned above however, difficulty lies in the fact that a Foundation cannot make distributions to its establishers or organs. Nonetheless, in Dutch literature it has been said that if a distribution is made to a person (either natural or corporate) who is not involved in the Foundation, that distribution is not prohibited by law, the articles of association or the nature of the Foundation.

Since the Foundation is an independent legal entity in accordance with Dutch law it can conclude all forms of legal actions, such as signing of agreements and more in specific of loan agreements. This can also be used in international tax planning.

From a foreign perspective a huge benefit can be found in precisely the fact that the Foundation does not have any kind of shareholder or other legal parent (hence the term orphan legal entity). This is because any parties involved in the Foundation, apart from the Foundation’s board of directors remain undisclosed. Furthermore, due to its orphan status, the Foundation can be used as a top entity in a group structure since the main advantage of it is that a Foundation is recognized as the so-called ‘Ultimate Beneficiary Owner’ (UBO) of a structure, although the source of funds and underlying parties should be disclosed to the Dutch Central Bank (DNB).

Another interesting aspect is that only Foundations which have a commercial business and have a net turnover of at least EUR 4,400,000 per year in two subsequent years will have to publish their annual accounts.

Tax planning possibilities using a Dutch Foundation

Basically, a Dutch Foundation is not subject to taxation in the Netherlands such as corporate income tax (CIT) or value added tax (VAT) as determined by Dutch tax law. However if a Foundation carries out an enterprise and by doing so competes with other enterprises, a Foundation could be considered as a taxable for the above mentioned forms of taxation. However, this can also be a useful tool in tax planning.

In Dutch case law, it has been determined that a Foundation which is considered solely to be a holding Foundation will not subject to Dutch CIT. Nonetheless, in certain situations it could be useful to have the Foundation be taxable for CIT purposes, for instance if it were to receive dividends from a Dutch subsidiary. The reason for this is that if the parent company of a Dutch company is eligible to the participation exemption, no Dutch dividend withholding tax (DWT) will need to be withheld upon distribution of funds to its parent. However, if the Foundation is not subject to Dutch CIT, the participation exemption will not be applicable and hence, the distribution of dividends to the Foundation will be subject to Dutch DWT. Moreover, due to the participation exemption, the Foundation will not be taxable for any dividend income derived from its subsidiary. Nor will this be the case in the event of a capital gain realized on the sale of shares of the subsidiary.

As mentioned, we know that a Foundation cannot distribute funds to any parties involved. However funds can be transferred to non-involved parties and in the event of liquidation the proceeds can end up in the hands of its installers. More so, regardless of legislation governing distributions of a Foundation, a Foundation is free to conclude loan agreements meaning that funds can be repatriated via these loan agreements.

Apart from the above, we also know that if a Foundation is subject to Dutch CIT, dividends derived from a Dutch subsidiary will be exempt of 15% Dutch DWT due to the Dutch participation exemption (if specific requirements are met). Moreover, if a Foundation is subject to Dutch CIT, the Foundation will, in principle, be entitled to tax treaty protection. This means that lower foreign DWT rates will be applicable. As a safeguard, the Foundation may be the sole shareholder of a Dutch ‘Besloten Vennootschap’ (BV – the Dutch equivalent of a Limited Liability Company), for instance to have optimal access to the EU parent-subsidiary directive and a subsequent disallowance of the right to levy foreign DWT. Moreover the use of a BV can often provide more security under international tax treaties concluded by the Netherlands as not all tax treaties grant Foundations the same benefits as a BV.

The above tax planning is generally used by individuals to protect their assets and still have access to them. The downside to such planning is however that the instigator will have to accept that those assets will no longer be legally his. Should such an instigator have a history in dealing with Trust funds then this should not be of major concern to him or her. Moreover the fact that the jurisdiction involved is the Netherlands and not a sunny island in the Caribbean should make him or her feel more relaxed as the Netherlands is generally recognized as a jurisdiction which has as main aim to combat tax evasion and fraud.

Further benefits of the Foundation

As I explained above, the Foundation is of good use in family situations as an asset protection instrument or as an instrument to seclude specific assets from others. In the event of a divorce for instance, assets secluded to a Foundation are no longer part of the (marital) community property as they now belong to a separate legal entity. As a comparison to many Trust funds, an additional benefit is that no trustee needs to be appointed, and no letter of wishes needs to be written which, in many cases, cannot be revoked or amended after it has been written; the board of directors of the Foundation may change the articles of association at any point in time, which is a lot more flexible than the most Trust funds. This specific distinction with a Trust fund provides an additional incentive to Dutch residents for using a Foundation; in the Netherlands, since 2010, all assets secluded to a Trust fund by a Dutch resident are allocated to his Dutch wealth or income, regardless of any foreign taxation being due on the Trust fund. All assets secluded to a Foundation can however not be allocated to the Dutch residents wealth or income anymore.

Other Examples for use of the Foundation

Although difficult to verify due to its private character, it has been proven that Foundations have also been used in (hostile) takeover situations of target companies. As an example, let’s say that a large multinational company is interested in buying a target company in say Belgium. If the large multinational company were to show its interest so the owners of that target company directly you can be sure that the price they wish to receive for their shares will be substantially higher than if an unknown company shows its interest. In this case a Foundation structure could provide a solution as it can be formed by the multinational company as an orphan legal entity so it does not have any publicly known ties to the Foundation. The Foundation in turn could incorporate a BV, allowing full access to tax treaty protection, EU directives and the Dutch participation exemption, enabling a tax free transfer of the target company, to be initially bought by the BV and then sold on to the multinational company in a tax neutral environment. Of course this manner of doing business may not always be considered as very elegant, but why pay more for an acquisition solely because of your status as a large company with money to burn?

Conclusion

As you have been able to read above, the possibilities of using a Dutch Foundation for tax or estate planning purposes are virtually endless. A wealthy individual trying to protect his or her assets, small and medium size businesses and even large multinational corporations can make use of the Dutch Foundation. As I concluded my previous article, the benefit of the jurisdiction of the Foundation being the Netherlands only adds to the Foundation’s attractiveness; enterprises can substantiate developing their business via the Netherlands, individuals can park their assets as a means of providing charity and large multinationals can use the Netherlands as a gateway to Europe. We must not forget the Netherlands’ ideal position for logistics within Europe, with its highest density of (nearly traffic jam free) highways, the largest sea port in Europe and the fourth largest but voted most pleasant Airport of Europe in 2013, Amsterdam Airport, Schiphol. Perhaps this is why so many large Chinese corporations have recently shown their interest in the Netherlands?