In the case of a BV (or unlisted NV), a natural person who directly or indirectly holds more than 25% of the shares, voting rights or the ownership interest in the company, as ultimate beneficial owner (UBO) must be considered. In practice, however, it is not always easy for a legal entity to determine the UBO. This is illustrated below using a private limited company (BV) that has issued cumulative preference shares.

What are (cumulative) preference shares?

Preference shares[1] are shares to which special statutory financial rights are attached, for example with regard to profit distribution and/or liquidation distribution. Preference shares entitle the holder to a fixed percentage of the profit before the ordinary shares a profit distribution is made.

Shares can also cumulative preference are (cumprefs). If a company has been unable to distribute dividends to the cumulative preference shareholder because no or insufficient profit was made in a financial year, this shareholder has the right to "catch up" on that distribution later, as soon as and to the extent that future profits available for distribution allow.

Case position

Suppose that BV X has two shareholders: Mrs Y and Mr P.

Mrs Y keeps 80 ordinary shares with a nominal value of EUR 1 per share in BV X. Mr. P holds 20 cumulative preference shares with a nominal value of EUR 1,000 per share in BV X. Those cumulative preference Shares entitle the holder to an annual profit sharing of 5% of the nominal value.[2]

In this case, Mr. P (cumulative preference shareholder) holds less than 25% of all shares in BV X. However, depending on the value of the different types of shares, Mr. P may be entitled to more than 25% of the ownership interest in BV X and thus still qualify as a UBO.

Example 1. Right to annual benefits

The definition of ownership interest under the UBO legislation in this example applies to the relative interest that P has in the dividend distribution.

In this case, the cumulative preference shares entitle the holder to an annual dividend payment of EUR 1,000 (5% x (20 x EUR 1,000) = EUR 1,000). If BV X pays out EUR 10,000 in dividends in any year, Mr P is entitled to 10% of those dividend payments and he qualifies not as UBO.

However, if BV X pays out 2,000 euros in dividends in any year, Mr P is entitled to 50% of the dividend distribution and he qualifies well as UBO.

Example 2. Right to liquidation distributions

The same applies with regard to P’s relative entitlement to liquidation distributions.

Suppose that the cumulative preference shares entitle the holder to a priority distribution of EUR 20,000 from the equity of BV X upon liquidation. If the (liquidation) value in economic traffic of BV X is EUR 60,000, then Mrs Y is entitled to the remaining EUR 40,000 with her ordinary shares. Mr P is therefore entitled to more than EUR 25% ((20,000/60,000)*100 = 30%) of the liquidation distribution and thus qualifies well as UBO.

However, if the (liquidation) value in economic traffic of BV X is 100,000 euros, then Mr P is still entitled to a (fixed) liquidation distribution of 20,000 euros. In that case, he 'only' receives 20% of any liquidation distribution and thus qualifies not as UBO.

Unclear laws and regulations

The current legislation and regulations regarding the UBO (definition) are unclear and lead to new questions and undesirable consequences.

As in the case of determining the UBO in the context of a dividend distribution (example 1). This leads to the undesirable situation that only after the end of the (financial) year and the preparation of the annual accounts does it become clear whether the cumulative preference shareholder actually owns more than 25% of the '‘amount eligible for distribution’' has received. If the 2020 annual accounts are approved in December 2021, it will be unclear for a long time whether someone qualified as a UBO for the 2020 financial year.

And what happens if the cumulative preference shareholder has already sold his shares to another person before the amount to be distributed has been determined? The Minister of Finance has addressed this issue in the further explanatory memorandum to the bill on the UBO register (as of May 29, 2020) stated the following: “If the shareholder has already sold his shares to another person before the amount to be distributed has been determined, it is not obvious that the shareholder should be registered retroactively as a UBO on the basis of dividend arrears subsequently paid to the person to whom he sold his shares.“. This answer is also not very clear and could lead to new questions.

Conclusion

The aforementioned examples show that qualifying as a UBO can depend heavily on the amount of the dividend distribution and the market value of the BV in question. This means that the composition changes every year. can are UBOs without legally changing the corporate structure. Every private limited company (BV) (and unlisted public limited company) must determine annually whether a natural person is entitled to more than 25% of i) the distributed profit, or ii) the liquidation balance, because that person then qualifies as a UBO, resulting in a registration obligation.

If you have any questions following this contribution or if you have any doubts about establishing and/or registering a UBO with your own legal entity, you can contact Marein Smits (marein.smits@wintertaling.com) or Onno Cusell (onno.cusell@wintertaling.com).

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[1] This article refers to 'traditional' preference shares under Dutch law; however, in start-up and venture investment documentation (which are strongly influenced by Silicon Valley practice) preference shares are often used (preference shares or ‘preferences‘') (besides common shares or founder shares) to refer to shares with special financial and/or control rights, which do not necessarily coincide with the Dutch traditional preference shares – these preferences often contain elements of the Dutch traditional preference shares and 'priority shares'.

[2] The profit entitlement for preferred shares usually consists of a certain percentage of the nominal value or the total paid-up amount. In this case, the total nominal/paid-up amount of the cum preferred shares is: 20 x €1,000 = € 20.000,-.