BRUSH UP: DUTCH STATUTORY AUDIT AND CONSOLIDATION REQUIREMENTS

Too often directors as well as ultimate beneficial owners of a Dutch private limited liability company (“Besloten Vennootschap or B.V.”) or a public limited liability company (“Naamloze Vennootschap or N.V.”) that act as a top or intermediary holding company of an international group do not realize that the company should comply with Dutch statutory audit and consolidation requirements, i.e. to prepare consolidated financial statements and/ or have financial statements audited by a Dutch registered auditor or accounting consultant authorised to certify financial statements. It is important to note that directors not complying with these rules may face personal criminal and civil liability.

Therefore, this article wishes to brush-up the Dutch statutory audit and consolidations requirements. As these requirements seem to be complex we have also made a flowchart, where every stakeholder of a Dutch company can check whether their company meets the Dutch statutory audit and consolidation requirements.

Size criteria: small, medium-sized and large
To what extent a Dutch company should comply with Dutch statutory audit and consolidation requirements depends on the size of the company.

A Dutch company qualifies as a small, medium-sized or large company if at least two out of three of the pertinent size criteria are met for two consecutive financial years, using consolidated figures of the Dutch company. The size of the company calculated at the end of the first financial year is decisive for the classification of the first and second financial year.
 

SIZE Small Medium-sized *) Large
CRITERIA      
Total assets in the balance sheet Up to € 4,4 million Up to € 17,5 million More than € 17,5 million
Net turnover Up to € 8,8 million Up to € 35 million More than € 35 million
Average number of employees Less than 50 Less than 250 250 or more

*) It should not qualify as a small company.

These criteria are effective as of 1 January 2004.

Size criteria on a consolidated basis
It is important to note that, whether or not there is a legal requirement to have the financial statements consolidated, these criteria should be checked on a consolidated basis, i.e. the value of the total assets and net turnover in accordance with its stand-alone figures and those of its group companies, whereas the average number of employees includes the employees of group companies.

There is an exception to this rule if the company has applied for the intercompany holding company regime under article 408 Book 2 Dutch Civil Code, as explained below. In that case the company is not obliged to consolidate and it can use just use its own financial information to determine its size on the basis of these criteria.

The total assets in the balance sheet must be determined on a historical cost basis. The net turnover is defined as delivered goods and services excluding VAT minus discounts. When calculating the turnover, please note that dividend income is not considered turnover. Interest income is not considered turnover when the related loans are in fact an extension of the net investment in the investments of the company. Interest income is considered turnover when the income results from activities that are characteristic of the company.
 

Audit requirement
Under Dutch law an audit is only legally required for medium-sized and large companies and thus not for small companies.

Accordingly, an audit is not required if a Dutch company qualifies as a small company meeting at least two out of three of the following criteria for two consecutive financial years using consolidated figures:

  1. The value of the total assets in the balance sheet does not exceed € 4,400,000;
  2. The net turnover does not exceed € 8,800,000;
  3. The average number of employees is less than 50.

A company of which the financial data have been included in the consolidated financial statements of another company may be exempt from audit, subject to certain conditions being met (article 403 Book 2 Dutch Civil Code).

Any stakeholder may require a company to comply with the audit requirement. Not-compliance is an economic offence in accordance with the Economic Offences Act (Wet op de economische delicten).
 

Consolidation requirements
Under Dutch law the head of (part of) a group should generally prepare consolidated annual accounts as part of the explanatory notes, i.e. it should include the financial information of controlled subsidiaries and other group companies. Accordingly, it must prepare individual (stand-alone) accounts as well as consolidated accounts.

The head of a group (holding company)
The head of a group is the holding company which exercises dominant (policy-making) control over at least one other company, i.e. it gives instructions to this group company on at least the broad lines of policy in terms of both strategy and financing.

The fact that the holding company could exercise this control is not enough. The policy instructions must be enforceable. Generally speaking this enforceability manifests itself through a majority of the voting rights at the meeting of shareholders.

The head of part of a group (intermediate holding company)
If the company is the head of a part of a group (a sub-group), it qualifies as an intermediate holding company, also if it has only one subsidiary.

Although it may be difficult in certain cases to determine whether or not the intermediate holding company has the obligation to prepare consolidated accounts, the general view is that an intermediate holding company with at least one other company in its part of the group over which it has the power to control or perform central management is obliged to consolidate. This is generally the case if the company has a majority of the voting rights at the meeting of shareholders of the subsidiary.
 

Exemptions to the consolidation requirement
There are three important exceptions to the general rule that the head of (part of) a group should generally prepare consolidated annual accounts as well as stand-alone accounts:

  1. The holding company or the intermediate holding company qualifies as a small company in accordance with the size criteria mentioned above;
  2. Application of the intermediate holding company regime (article 408 Book 2 of the Dutch Civil Code).
  3. Application of the group regime (article 403 Book 2 of the Dutch Civil Code Book).

Application of the intermediate holding company regime (article 2:408)
If an intermediate holding company applies for article 2:408, it is not obliged to prepare consolidated financial statements if the financial data that the intermediate holding company should consolidate, have been included in the consolidated financial statements of a larger group, i.e. at a higher level within the group, hereinafter the (ultimate) parent company.

A written objection against this application can be made by at least ten per cent of the members or holders of at least ten per cent of the capital within six months after the beginning of the financial year.

The consolidated financial statements of the parent company and the management board’s report should be prepared in conformity with the requirements of the Seventh EC Directive on Company Law or the requirements of one of the Directives of the Council of the European Communities on (consolidated) financial statements of banks and other financial institutions or of insurance companies or according to a similar method if these requirements are not applicable.
 

If the parent company is resident outside the European Economic Area the requirements to prepare consolidated financial statements should be similar to those of the Seventh EC Directive on Company Law or the other requirements mentioned above. This will need to be checked on a case-by case basis. If the pertinent legal system does not require the publication of consolidated annual accounts, the Dutch company can not apply for the exemption of article 408.

Moreover, the consolidated financial statements of the (ultimate) parent company including auditor’s report and management board’s report, as far as these are not prepared or translated into Dutch, should be prepared or translated into French, German or English and should be filed together with the stand-alone accounts of the intermediate holding company within six months after the balance sheet date or within one month after a later date when the parent company may publish its consolidated accounts, with the Trade Register of the Chamber of Commerce in the place where the intermediate holding company has its domicile or registered address (although reference may be made to another file with the Trade Register in the Netherlands).

In the notes to the stand-alone financial statements of the intermediate holding company disclosure should be made of the fact that the exemption under article 408 has been applied; the name and domicile of the company that has filed the consolidated financial statements that include the intermediate holding company’s data; and the location of the Trade Register in the Netherlands in which such consolidated statements have been filed.

A consequence of applying the intermediate holding company regime is that the company can value all subsidiaries in its stand-alone accounts at cost rather than at net asset value. Moreover the stand-alone accounts can be used when determining the size of the company, as a consequence whereof the company often qualifies as a small company as intermediate holding companies tend to have hardly any employees and a low net turnover.
 

Application of the group regime (article 2:403)
If a company applies for the group regime of article 403 Book 2 of the Dutch Civil Code, it is neither required to prepare consolidated financial statements, nor to have these financial statements audited. It is even not obliged to file abbreviated accounts with the Trade Register of the Dutch Chamber of Commerce.

Reason for applying the group regime include competition considerations and cost saving.

In order to apply for this exemption, the financial data of the company should be included in the consolidated annual accounts of a legal person or partnership at a higher level within the group, which is an indirect or direct shareholder of the company, the (ultimate) parent company.

These consolidated annual accounts and the management board’s report should be in Dutch, English, French or German and should be prepared in accordance with the legal system where it is resident in line with the requirements of the Seventh EC Directive on Company Law or the requirements of one of the Directives of the Council of the European Communities on (consolidated) financial statements of banks and other financial institutions or of insurance companies or according to a similar method if these requirements are not applicable. Moreover, the auditor’s report and the management board’s report should be prepared in the same language as these consolidated financial statements.

If the parent company is resident outside the European Economic Area the requirements to prepare consolidated financial statements should be similar to those of the Seventh EC Directive on Company Law or the other requirements mentioned above. This will need to be checked on a case-by case basis. If the pertinent legal system does not require the publication of consolidated annual accounts, the Dutch company can not apply for the exemption of article 403.

These consolidated annual accounts should be filed together with the annual report and the auditor’s opinion should be filed within six months after the balance sheet date or within one month after a later date when the parent company may publish its consolidated accounts, with the Trade Register of the Chamber of Commerce in the place where the intermediate holding company has its domicile or registered address (although reference may be made to another file with the Trade Register in the Netherlands).

Moreover, the parent company should accept liability for debts arising from legal acts by the company. The parent does not have to accept liability for statutory debts, such as taxes. The parent company should file a statement to that extent with the Trade Register only once, the so-called “2:403 liability statement”.

Furthermore, the members/ shareholders of the company should approve the application of the group regime after the start of the financial year and prior to the adoption of the financial statements, which statement should be filed with the Trade Register every year, the so-called “consent-statement”.

Finally, the company must prepare a condensed balance and profit and loss account within five months after the end of the financial year or within eleven months of the meeting of shareholders has granted a extension thereof. There is no need to have these annual accounts filed with the Trade Register.
 

The companies to be consolidated
If a holding company or intermediate holding company has an obligation to consolidate, the financial information of the following companies should be consolidated:

  1. The holding company or the (intermediate) holding company. However, in exceptional cases this information can be omitted from the consolidated annual accounts.
  2. The group companies of the (intermediate) holding company, i.e. the companies over which it exercises actual dominant policy-making control.
  3. Companies over which the (intermediate) holding company can exercise dominant policy-making control because the company can exercise the majority of the voting rights at the meeting of shareholders or because the company can exercise control because of a contractual arrangement, such as a shareholders agreement.
  4. Companies under central control by or on behalf of the company, i.e. the (intermediate) holding company can exercise actual policy- making control, without formally being able to enforce compliance with the policy instructions.

The (intermediate) holding company may not include any other company that does not fall into one of the categories above, such as minority interests.
 

Exemptions to the companies to be consolidated (article 407)
In accordance with article 407 Book 2 Dutch Civil Code, under certain circumstances, one or more of the aforementioned companies can be excluded from the consolidated annual accounts:

  • Group companies whose total significance is immaterial to the group as a whole;
  • Group companies whose financial data can only be obtained at disproportional cost or with great delay;
  • Group companies which are only held for disposal.

Proportionate consolidation
The (intermediate) holding company may include the financial information of a joint venture in its consolidated annual accounts in proportion to the interest held in this joint venture if:

  1. The (intermediate) holding company is also obliged to prepare consolidated annual accounts, even without the joint venture;
  2. The joint venture must be based on a cooperation agreement with the other participants in the joint venture;
  3. The proportionate consolidation complies with the statutory requirement that annual accounts should provide a true and fair view.

If the requirements are not met, or if the holding company or intermediate holding company opts not to consolidate the joint venture proportionally, the joint venture will be included in the consolidated annual accounts at net asset value. Please note that these rules will very probably be changed in the near future.

Note
Since Dutch trust offices tend to prepare financial statements tend at cost price, at a first glance it may seem that a Dutch (intermediate) holding company without any employees, domiciled a Dutch trust office and without any profit does not meet the Dutch statutory audit and consolidation requirements.

But if it for example holds a 100% interest in a foreign company that qualifies as a medium sized company, the Dutch company does meet these criteria because of the rule that it should be determined using consolidated figures. Therefore, these requirements should be checked thoroughly and on a regular basis. Not complying may lead to personal criminal and civil liability of the directors. We trust that flow-chart is of assistance to you.


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