HLB Schippers Accountants, Tax & Legal Advisors

Amsterdam, 13 July 2011

Introduction

HLB Schippers in a nutshell• Regional audit and tax advisory firm with five offices (Amsterdam,

Amersfoort, Almere, Alkmaar and Den Helder), approximately € 23 million in revenue and approximately 240 employees.

• Member of a world wide (10th largest) network of independent accounting firms and business advisors (HLB International), 100 countries, 450 offices, 14.000 employees)

• Wta/OOB license, covenant with the tax authorities (horizontal monitoring)

• International business desk in Amsterdam (International tax treaties, US GAAP, IFRS, high-level of quality standards, etc)

Agenda

1. Tax update (Jeroen van der Linden)

2. Accounting update (Robert Jan Wassink)

3. Audit update (Pascal Belfroid)

Gerard Brand (VAT), Stephan Dekker (Audit) and Ferdi Boekel (Tax) are also available to answer any questions.

Recent developments in the Dutch corporate income tax act

Jeroen van der LindenJuly 13, 2011

Introduction

• Examples• Announcement December 15, 2008• Consultation paper June 15, 2009• Changes CIT as per January 1, 2010• Fiscal Agenda April 14, 2011• Opinion Ad hoc committee• Decision to reduce transfer tax

Examples

• Difference in treatment between equity and debt for Dutch tax purposes.

• Remuneration for debt is – in principle – tax deductible. Remuneration for equity not.

• Interest vs. dividend.

Example 1

• Bosal Gap

Example 1

• Pre Bosal (before September 2003)

% loan

DividendDividend

Interest only deductible in

relation to acquisition Dutch

participation

Example 2

• After Bosal

% loan

DividendDividend

• Interest deductible in relation to acquisition both participations

• Bosal Gap repaired as from January 1, 2004

• Introduction Thin Capitalization rules • Limitation loss compensation rules /

introduction holding losses

Example 3

Example 3

• Take over holding (e.g. Hema)

% loan

December 15, 2008

• Announcement of legalislative proposal re Dutch tax treatment of intra group interest:

- further investigation into tax treatment of intra group interest, and- interest relating to the acquisition of participations.

Legislative proposal expected first half of 2009

Consultation paperJune 15, 2009

a. Reduction tax rates for group financing income and expenses (to 5% effectively);

b. Partial disallowance of group and 3rd party charges exceeding € 250,000

- relating to investments in participations and group receivables, or- maximum 30% of Ebitda

Consultation paperJune 15, 2009

c. Changes announced in relation to the Dutch participation exemption

January 1, 2010

• Amendments Dutch participation exemption

• What does it do?

• Exempts dividend income from CIT, and• exempts capital gains (and losses) relating to

shares in qualifying participations.

• Requirements up and including 2009:

• One should hold 5% in the nominal share capital of a subsidiary, or be member of a cooperative;

• Sub should not be a low taxed passive investment participation.

• Low taxed passive investment participation:

• More than 50% of assets sub is free portfolio investment, and;

• Sub is subject to corporate income tax at a rate below 10% compared to Dutch standards.

• Sub is not a real estate entity.

• New requirements:

• One should still hold 5% in the nominal share capital of a subsidiary, or member of a cooperative;

• Sub should not be held as passive investment (shareholder’s view).

• New requirements:

• Low taxed passive investment participation-requirement is deleted as from 2010 (remains for previous years!!!);

• Special exemption for real estate entities was deleted / changed.

• New requirements:

• If shares in sub are held as passive investment, the exemption can still apply if one of the 2 tests will be passed:

1) sub is subject to 10% CIT, or2) less than 50% assets is a free investment.

Fiscal AgendaApril 14, 2011

• Starting point for the preparation of a series of legislative changes.

• Should be presented to Parliament later this year and in 2012.

Fiscal AgendaApril 14, 2011

a. (Re) introduction of rules on interest deduction by take over holdings.

Limitation applies to interest exceeding € 500,000 and leverage exceeds a certain level.

Example

• Take over holding (e.g. Hema)

% loan

Interest deduction denied to the extent financing cost exceeds € 500,000 and leverage tax group exceeds certain reasonable levels (3:2 debt/equity).

Fiscal AgendaApril 14, 2011

• Note that an ad hoc committee has to form an opinion on Bosal gap measures by June 14th.

• Bosal gap: deduction of financing charges incurred by the taxpayer on financing raised for the acquisition of a qualifying participation

Example

• Bosal gap

% loan

DividendDividend

Interest deductible in relation to

acquisition both participations

Fiscal AgendaApril 14, 2011

b. Introduction of object exemption for foreign permanent establishments.

Example

• Current treatment p.e.

Germany

p.e. losses can be offset against profits of NL BV.

p.e. profits are exempt, to the extent “old” p.e. losses have been settled.

Example

• Proposed object exemption p.e.

Germany

p.e. losses and p.e. profits are exempt.

Fiscal AgendaApril 14, 2011

c. Reduction of the Dutch corporate income tax rate to 24%

Fiscal AgendaApril 14, 2011

d. Changes announced in the rules governing taxation of foreign corporate shareholders with a substantial interest in Dutch companies.

Substantial interest

• Follows income tax act at least 5% of the shares and substantial interest is not attributable to an enterprise

Foreign entity can become subject to tax in the Netherlands for:• Ordinary income (dividends)• Capital gains• Interest

Example

Cyprus

NL BV

Sale of the shares B.V. NL may cause Cyprus to become subject to tax in the NL

Opinion Ad Hoc CommitteeJune 17, 2011

• Letter Chairman Top Team Headquarters:

• “I wish to advise against a general limitation of participation interest as it will have a strong negative impact on the establishment environment in the Netherlands.”

Decision to reduce transfer taxJuly 1, 2011

• Transfer tax on residential property will be lowered from 6% to 2% for a period of 1 year.

• The temporarily reduction will be financed amongst others by prohibiting the deduction of interest relating to the acquisition of participations as per January 1, 2012.

Accounting Update

•Size criteria•Consolidation criteria and exemptions•IFRS and IFRS for SME update

Size criteria• BV’s, NVs and Co-operatives are required to prepare (consolidated)

financial statements for each financial year and file those with the trade register at the Chamber of Commerce.

• Auditing and publication requirements vary according to the size of the company, with only medium-sized and large companies’ (consolidated) financial statements being subject to auditing in the Netherlands.

• A company is classified as large, medium-sized or small by three criteria:

– Total assets (based on the historical cost convention)– Net revenues– Average number of employees

Criteria Small Medium-sized Large

Total assets (in EUR) ≤ 4.4 mln ≤ 17.5 mln > 17.5 mln

Net revenues (in EUR) ≤ 8.8 mln ≤ 35 mln > 35 mln

Average number of employees (in FTE) < 50 < 250 ≥ 250

The criteria and limits per category are currently as follows:

In case the financial year is in excess of 12 months, Dutch law does not provide guidance but it is generally recommended to recalculate to 12 months.

Temporary workers (uitzendkrachten) are not considered employees since they usually have a labor contract with the agency.

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Size criteria (Cont’d)

Size criteria• It falls into a particular category when it has met at least two out of three

criteria; moving from one category to another is only required when the criteria for the other category have been met for two consecutive years.

• Holding or parent companies are classified based on their consolidated figures unless the consolidation exemption can be applied.

• In case the entity has to move to another category, it is not required to adjust the comparative figures (as it does not meet the 4th EC Directive)

• In the year of incorporation, the size criteria at the end of the first year will determine the category for the first and second year.

• The financial statements of Dutch incorporated companies must be prepared in accordance with Generally Accepted Accounting Standards in the Netherlands (“NL GAAP”).

• Since 2005, the Dutch authorities also allow companies to prepare their (consolidated) financial statements in accordance with International Financial Reporting Standards as adopted by the European Union (“IFRS”).

• To date, IFRS for Small & Medium-sized Entities (“IFRS for SMEs”) are not yet accepted by the Dutch government although the differences between NL GAAP and IFRS for SMEs are considered to be fairly limited.

• NL GAAP requires much less details in the notes to the (consolidated) financial statements compared to IFRS or US GAAP.

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Generally Accepted Accounting Principles

• Article 408

• Article 407

• Article 403

• Stichting Administratiekantoor

• Commanditaire vennootschap

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Consolidation exemptions

• A holding or intermediate holding company may be exempt from preparing consolidated financial statements when it follows the requirements set forth in Article 408 of the Netherlands Civil Code which states, in part, the following:

– the financial information which the legal person should consolidate has been included in the consolidated annual accounts of a larger entity.

– The consolidated annual accounts of the larger entity must be prepared in accordance with the Seventh Directive of the Council of the European Communities on Company Law or in an equivalent manner (HLB Schippers: US GAAP is considered equivalent).

– The consolidated annual accounts of the larger entity together with the auditor’s report have been filed with the trade register at the Chamber of Commerce in the Netherlands.

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Consolidation exemptions (Article 408)

• If Article 408 can be applied, the category is determined based on the standalone figures of the holding or intermediate holding company. Usually a statutory audit is not required as the main elements of the standalone financial statements are participating interests and equity and hence the category would be “small” and no audit requirement applicable.

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Consolidation exemptions (Article 408)

Dutch law does not require the entity to prepare consolidated financial statements (Article 2:407) provided that certain conditions have been met:

•The consolidated figures of the Group do not exceed the criteria for the “small” category;

•The entity does not have financial instruments (debt/equity) publicly listed (in accordance with Article 1.1 of the Financial Supervision Act (WFT);

•No more than 10% of the shareholders (ordinary shares) have objected to the use of Article 407;

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Consolidation exemptions (Article 407)

•Entities that are considered immaterial –Individually, and –In the aggregate

•Entities whose figures can only be obtained at unreasonable cost or with significant delay

– Only to be used in extraordinary situations– I.e. a new subsidiary whose reporting system(s) cannot be brought in line with the parent company’s accounting policies within a reasonable period of time.

•Entities that have been acquired with the intention of selling– Sale decision must have been taken– Execution of the sale has started– Price is in accordance with fair value– It is not expected that the sales plan will be materially adjusted– The entity can be sold in its present situation

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Consolidation exemptions (Article 407)

A legal person which forms part of a group need not to present its annual accounts in accordance with NL GAAP, provided that certain conditions are met as outlined in Article 403 of the Netherlands Civil Code which states, in part, the following:

•The parent company must assume joint and several liability for any liabilities arising from the legal acts of the legal person;•Such declaration must be filed with the trade register at the Chamber of Commerce where the legal person is registered;•This declaration remains in effect until the parent company withdraws the declaration.

In case Article 403 is applied, the Dutch company still needs to prepare (consolidated) financial statements for statutory purposes but no audit is required (irrespective the category of that company) and no publication requirements exist.

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Article 403

An assessment need to be made whether or not the Stichting Administratiekantoor is to be considered part of the group.

Important aspects:

– Control (to be able to exercise significant influence over the financial and operational policies). In Dutch: feitelijk beleidsbepalende invloed

–Shareholding is not the only decisive factor. Voting rights, options, warrants, convertible notes, etc may also play a significant role as well as the ability to nominate and/or dismiss the majority of the Board of Directors.

–It is not relevant whether management/shareholders have indicated not to use their power.

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Stichting Administratiekantoor

Certain structures include so-called “commanditaire vennootschappen” (limited partnership). These limited partnerships usually consist of silent and active partners. The silent partner is not liable in person in case of bankruptcy provided he acted in accordance with the provisions.

HOWEVER, in case your client is a silent partner in a setup for a particular structure (i.e. the construction of sea vessels) and all risks and terms have been agreed upfront as such that there would be no need for the silent partner to interfere during the life of the limited partnership to control his stake, that is considered an “automatic pilot mechanism”. When all other elements indicate that ‘control’ exist, the limited partnership must be consolidated by the silent partner.

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Commanditaire vennootschappen

• Investments holdings can apply the consolidation exemption as well when certain conditions are met (i.e. exit strategy exist).

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Investment holdings

• IFRS developments have been moderate. The reason thereto is the statement of the IASB to slow down on the issuance of new statements and interpretations.

• The convergence project between the IASB and the SEC is ongoing and should result in all US states to adopt IFRS in 2014. This will entail that many new IFRS statements will become effective in 2014

• IFRS for SME is still not accepted by most countries. Major breakthrough may be that UK GAAP will be replaced by IFRS for SME.

• Note that IFRS does not result in more transparant reporting as the options under IFRS (i.e. historical cost versus fair value) are still widespread AND countries can adopt only part of IFRS or not follow the effective dates (i.e. China).

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IFRS Update

• IFRS 10 'Consolidated Financial Statements' will supersed SIC-12 'Consolidation – Special Purpose Entities' (Effective for annual reporting periods beginning on or after 1 January 2013).

• IFRS 11 "Joint Arrangements" - will supersed SIC-13 'Jointly Controlled Entities – Non-Monetary Contributions by Venturers' (Effective for annual reporting periods beginning on or after 1 January 2013).

• IFRS 12 'Disclosure of interests in other entities' (Effective for annual reporting periods beginning on or after 1 January 2013).

• IFRS 13 'Fair Value Measurement' (effective for annual reporting periods beginning on or after 1 January 2013).

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IFRS Update

• Amendments to IFRS 1 - Limited Exemption from Comparative IFRS 7 Disclosures for First- time Adopters (Effective for annual periods beginning on or after 1 July 2010).

• Amendments to IFRS 7 - Disclosures – Transfers of Financial Assets (Effective for annual periods beginning on or after 1 July 2011).

• IFRS 9 (as amended in 2010) - Financial Instruments (Effective for annual periods beginning on or after 1 January 2013).

• IAS 24 (revised in 2009) - Related Party Disclosures (Effective for annual periods beginning on or after 1 January 2011)

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IFRS Update

• Amendments to IAS 32 - Classification of Rights Issues (Effective for annual periods beginning on or after 1 January 2011).

• Amendments to IFRIC 14 - Prepayments of a Minimum Funding Requirement (Effective for annual periods beginning on or after 1 January 2011).

• IFRIC 19 - Extinguishing Financial Liabilities with Equity Instruments (Effective for annual periods beginning on or after 1 July 2010 and 1 January 2011, as appropriate).

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IFRS Update

Audit Update

• COS 600

• The Auditing Standard 600 requires group auditors of the group financial statements to follow strict requirements which includes:

– To communicate clearly with component auditors about the scope and timing of their work on financial information related to components and their findings; and

– To obtain sufficient appropriate audit evidence regarding the financial information of the components and the consolidation process to express an opinion whether the group financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework.

• The group auditor shall establish an overall group audit strategy and shall develop a group audit plan and communicate this with the component auditor.

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COS 600 Audits of Group Financial Statements

• Important aspects to consider:

– Scoping• Components that are not significant components• Significant components• Scoping includes the risk assessment (risk of material errors or fraud) at the level

of the Group and the components. Note that the Group auditor must drive this process.

• Establish audit procedures to address the risks at Group and component level

– Evaluating the sufficiency and appropriateness of audit evidence obtained (at Group and Component level). This also includes the on-site visits by the Group auditor of significant components and to discuss the audit, financial statements and other relevant aspects of the audit with component management and component auditor.

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COS 600 Audits of Group Financial Statements