The Dutch foundation
The Dutch foundation (in Dutch ‘stichting’) has been around for hundreds of years and has been used for a variety of purposes. A stichting is a legal entity with limited liability. It is often described as a ‘purpose capital’ (in Dutch, ‘doelvermogen’) or money set aside for a specific purpose that has a life of its own. It has no members and it cannot have the obligation to make payments to the founders or other people as its purpose, with some exceptions that will be discussed below. Its funds must be used in accordance with its object and must not be used to pay certain beneficiaries. It must be created by notarial deed by a founder. The founder is no longer involved after the creation of the stichting but can be appointed as a director. In Article 2:285 of the Dutch Civil Law Code a stichting is defined as follows:
Definition of a ‘stichting’; no members and no (profit) distributions allowed
- A stichting is a legal person formed by means of a juridical act, that has no members, and that intends to realise an objective (purpose), mentioned in its articles of incorporation, by using capital (property) which has been brought in for this purpose.
- If the articles of incorporation grant one or more persons the power to fill vacancies in a body of the stichting, then solely on this ground the stichting cannot be regarded to have members.
- The objective (purpose) of a stichting may not include the making of distributions to its founders (incorporators) or to those who are participating in its bodies or to others, except, as regards the latter, when these distributions are made for charitable (philanthropic) or social purposes.’
The stichting needs a minimum of one director who can be a corporate director (company or other stichting). The director does not need to be Dutch.
A stichting can have a wide variety of purposes and can be involved in a business, such as a shop or a consulting business. In such cases the people involved do not want to accumulate capital and only accept salary as payment. Profits are accumulated in the stichting to be used in accordance with its objectives. The general rule is that the stichting pays company tax on business income. Business income under Dutch tax case law is defined as income generated in a competitive environment; merely investing its funds is not regarded as a business activity. In practice the stichting can carry out two distinct activities: a business (shop, factory, etc) where it pays tax, and an investment side, where it does not pay tax. A stichting does not need to have a charitable objective. Generally this may be of interest only if a donor to a stichting wants to claim a tax deduction for a gift to such a stichting.
Stichtings have been used for many different activities. In the 17th century wealthy people created housing estates, such as Begijnhof in Amsterdam or Bruges, orphanages for children, churches, museums, etc that were structured in a stichting. Many of these stichtings still exist.
A common way to use stichtings nowadays is in the ownership structure of a company. Basically the shares in a company are owned by the stichting. The stichting holds the voting rights but issues certificates to people who receive the financial rights, such as dividends, and the proceeds of capital on dissolution or other distributions. Many well-known Dutch companies use stichtings in this manner, e.g. a Dutch multinational has used a stichting structure to hold ultimate voting rights and control. That stichting was based in the Netherlands but would move automatically to another country in the case of war; this was to ensure that in a future war an occupier in the Netherlands could not seize the company, as happened in the Second World War.
Exceptions to the rule
As to the general rule that a stichting cannot have members, there is one exception: a stichting can operate a pension fund and the members of that pension fund are ‘members’ of the stichting. Article 2:304 of the Dutch Civil Law Code reads:
A pension fund in the form of a stichting
- For the purpose of Article 2:285, participants in a pension fund or in a fund as referred to in Article 7:631, paragraph 3, under (c), will not be regarded as members of a stichting that operates as such a fund.
- For the purpose of Article 2:285, paragraph 3, distributions resulting from an entitlement to pension or from an entitlement on the basis of an employment agreement in which a stipulation as meant in Article 7:631, paragraph 3, under (c) is included, will not be regarded as distributions to the founders of such a stichting or to those who participate in its bodies.
In practice the stichting can carry out two distinct activities: a business where it pays tax, and an investment side, where it does not pay tax
Many Dutch companies operate stichting pension funds. In the Netherlands, the contributions to such pension funds are tax-deductible, but the pensions (benefits), when paid, will be taxed.
In international planning, stichtings can be used as stichting pension funds. These entities can be structured in such a way that the ‘members’ have only a right to be considered (a discretionary right) and the stichting is the owner of the assets until it decides to grant a benefit or pension to the member. The tax treatment of that benefit or pension will depend on the law of the country where the beneficiary is tax resident. Naturally, investment profits may not be taxed, but the actual situation can vary depending on the place of operation. Stichtings can have bank accounts in a number of countries. Generally, just having a bank account or investment portfolio does not create a permanent establishment for tax purposes. In principle the income of the resulting investments is not subject to company tax in the Netherlands, although it may be subject to withholding taxes in the source countries. Stichtings may benefit from preferential provisions under double-tax treaties in the same way companies in the Netherlands benefit.
Dutch foundations have been around for many centuries. They are distinct from the modern foundations that can be found in common-law jurisdictions and are easier to operate as they do not require multi-tier governance structures. Moreover, there are no beneficiaries by law unless the stichting operates as a pension fund. In practice, certain countries, such as the US, do not know how to deal with this type of foundation, and they may declare a stichting to be a trust, which it obviously is not. Consequently, many advisors prefer to use stichtings for people who generate income outside their country of residence. If this income is generated in the stichting, the income does not belong to them.
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