In case of private companies with limited liability (BVs) and public companies (NVs), other than those listed on a regulated market or 100% subsidiaries of such entities, a natural person who directly or indirectly holds more than 25% of the shares, voting rights or ownership interest in the company should be considered as the ultimate beneficial owner (UBO). In practice, however, it is sometimes difficult for a legal entity to determine the UBO. Such difficulty is well illustrated by the example set out below, regarding a BV that has issued cumulative preference shares.
What are (cumulative) preference shares?
Preference shares are a type of shares with certain special financial rights, for example regarding preference with respect to dividends and the proceeds of a liquidity event (e.g. winding up of a company). Preference shares generally entitle the holder to a fixed percentage of the profit before a profit distribution is made on the ordinary shares.
Preference shares may also have cumulative rights (‘cumulative preference shares’ or ‘cumprefs’). In such a case, if the company was not able to pay out dividend, for lack of profit in the respective financial year, then the amount of the preferred dividend will accumulate and has to be paid in full before dividend can be paid on the ordinary shares.
Let’s assume that BV X has two shareholders; Y and P.
Y holds 80 ordinary shares with a nominal value of EUR 1 per share in BV X.
P holds 20 cumulative preference shares with a nominal value of EUR 1,000.- per share in BV X. These cumulative preference shares are entitled to an annual profit distribution of 5% of the nominal value.
P holds less than 25% of all shares in BV X ((20/100)*100 = 20%). However, based on the different nominal values of the different types of shares in the share capital of BV X, P may be entitled to more than 25% of the ownership interest in BV X and thus qualify as an UBO.
Example 1. Payment of a dividend
A dividend is a portion of the earnings of a company (e.g. BV X) that is distributed to the shareholders of a company.
The definition of ownership interest under the UBO legislation in this example applies to the relative interest P has in the dividend distribution.
In this case, the cumulative preference shareholder is entitled to an (fixed) annual dividend payment of EUR 1,000.- (5% x (20 x EUR 1,000.-) = EUR 1,000.-). If BV X distributes dividend in the amount of EUR 10,000.- to its shareholders, P is entitled to 10% ((1,000.-/10,000.-)*100 = 10%) of the total dividend distributions, which means he will not qualify as an UBO.
If, on the other hand, BV X distributes dividend in the amount of EUR 2,000.-, P is entitled to 50% ((1,000.-/2,000.-)*100 = 50%) of the total dividend, which means P qualifies as an UBO.
Example 2. Dividend distributed on winding up BV X
The same applies to P’s relative entitlement to liquidation distributions.
Let’s assume that the cumulative preference shareholder (P) is entitled to receive with preference EUR 20,000.- of the equity capital in the event of winding up BV X. If the (liquidation) value of BV X is EUR 60,000.-, the ordinary shareholder (Y) is entitled to the remaining EUR 40,000.-. In such case, P is entitled to more than 25% ((20,000.-/60,000.-)*100 = 30%) of the liquidation distribution, and therefore qualifies as an UBO.
If, on the other hand, the (liquidation) value of BV X is EUR 100,000.-, P is still entitled to the (fixed) amount of EUR 20,000.-. In such case, P is ‘only’ entitled to 20% of the liquidation value, which means that P will not qualify as an UBO.
Unclear laws and regulations
The current legislation and regulations concerning the UBO(-definition) are unclear and lead to new questions and undesirable consequences.
As with the determination of the UBO in the context of the distribution of a dividend in a given year (example 1). This leads to the undesirable situation that only after the end of the (book)year and the preparation of the annual accounts, it becomes clear that the cumulative preference shareholder has actually received more than 25% of the ‘distribution of profits’. If, for example, the annual accounts for 2020 are adopted in December 2021, it would not be clear for a long period if a natural person qualified as an UBO for the financial year 2020.
And what happens if the cumulative preference shareholder has already sold his shares to his co-shareholder(s) or a third party, before the distributable amount has been determined? The Minister of Finance has replied in the memorandum of reply (dated 29 May 2020): “If the shareholder has already sold his shares before the company determined the amount of the distribution of profits, it is not likely that such a shareholder would have to be registered as an UBO with retroactive effect on the basis of a dividend paid to the acquirer of those shares at a later stage“. This answer is not clear and leads to new questions.
The examples above illustrate that a shareholder of a BV (or non-listed NV) may qualify as an UBO depending on the amount of the distribution of a dividend in a given year and/or the liquidation value of a BV.
This could lead to a different composition of UBOs each year, without any legal changes to the corporate structure. Each BV (and non-listed NV) is obliged to determine, every year, whether a natural person is entitled to more than 25% of (i) the distributed dividend and/or (ii) the liquidation distribution upon winding up the company. If such person qualifies as an UBO, then he/she has to be registered with the UBO register.
If you have any questions with respect to this article please do not hesitate to contact Marein Smits (firstname.lastname@example.org) or Onno Cusell (email@example.com).
 In this articles, reference is made to ‘traditional’ preference shares under Dutch law; on the other hand, startup and venture investment documentation (heavily influenced by Silicon Valley practice) commonly use preference shares or ‘prefs’ (vs common shares or founder shares) to refer to shares with special financial and/or control rights, which not necessarily coincide with the Dutch traditional preference shares – these prefs often incorporate elements of the Dutch traditional preference shares and ‘priority shares’.
 In most cases, preference shares yield a fixed dividend based on the subscription price of the preference shares. In this case the subscription price / total paid up amount of the cum prefs is: 20 x EUR 1,000.- = EUR 20,000.-.
This publication was written by Onno Cusell