The incorporation of limited liability companies in The Netherlands and in Spain

Where is it more suitable to set up a new limited liability company in Europe?

I will deal in this article with two countries I know well (Spain and The Netherlands) and focus on the minimum capital requested and the online incorporation of a limited liability company, sharing some thoughts and my takeaways.

Spain: the “Create and Grow Law”

In Spain, the Business Creation and Growth Law 18/2022, of September 28, 2022 (related to aspects of incorporation of companies), known as the “Create and Grow Law”, was approved last September within the framework of the Recovery, Transformation and Resilience Plan of the Spanish government. This plan channels European funds to alleviate the consequences of the Covid-19 crisis. This law is an initiative that reflects this flexibility and, as its explanatory statement indicates, aims to encourage the creation and growth of companies, in order to contribute to the economic growth of the country and its long-term resilience. Spain thus aligns itself with other neighboring countries, where there is no minimum capital to set up a company of this type.

Is this new law interesting for foreign investors or companies looking to establish themselves in Spain?

It is certainly very interesting. The fact that the Spanish legislator abandons this reference figure of 3,000 euros is very favorable for medium-large companies willing to have a permanent establishment in Spain Nevertheless, as long as the capital does not reach the figure of €3,000, the following rules will be applied, which are intended to protect the interests of creditors or third parties that contract with the company:  (i) 20% of the profit must be allocated to the legal reserve until said reserve together with the social capital reach the figure of €3,000 (the legislator seeks that the SLs constituted in this way do not remain “undercapitalized”), and (ii) as a safeguard clause for creditors of the company, in the event of voluntary or forced liquidation of the company, if the company’s assets are insufficient to meet its obligations of payment, the partners will be jointly and severally liable for the difference between the subscribed capital and the figure of 3,000 euros.

Online incorporation of a company in Spain

The “CIRCE system” (procedure dependent on the Ministry of Industry, Commerce and Tourism that allows the start of the process of creating companies “over the Internet” ) entails an electronic procedure through agreements and communications with all the organizations and administrations that intervene in the process of incorporating companies.

The entrepreneur will only have to complete the Single Electronic Document (DUE) that includes a multitude of forms and CIRCE will automatically carry out all the necessary procedures to establish the company, communicating with all the organizations involved (Tax Agency, Social Security, Mercantile Registry, Notary, etc.). There is an obligation to review and sign the DUE before sending it. This system is not active yet, but it is expected that it will be in place when other complementary laws that support this digital process are approved by the Spanish Legislator which is necessary for the well-functioning of the system.

The Netherlands: The Flex BV law

The Flex BV law came into force on October 4, 2011. This law has given a lot of flexibility to the incorporation of new limited liability companies which has been very favorable for international companies working with different product lines, allowing to have one company for every product or service offered.

The Flex BV law has, among others, the following characteristics:

• the creation of a Limited Liability Company is flexible, easy to establish and without many costs;
• it only requires one shareholder who must be registered with the Dutch Trade Register. The minimum share capital for setting it up is 1 euro. The liability of the shareholder is limited to the amount of money he has invested in the company. Being a limited liability company, the BV is liable for any debts, not the director or shareholder as private individuals, except in case of mismanagement or fraud. The company requires at least one director, and the shareholders can fill this position. The company registration procedure is quite fast due to the minimum documentation required.

Online incorporation of a company in the Netherlands

 In the case of the Netherlands, in the Explanatory Memorandum of the bill implementing the Directive (EU) 2019/1151 of the European Parliament and of the Council of 20 June 2019 amending Directive (EU) 2017/1132 with regard to the use of digital instruments, it is proposed that incorporation of a BV electronically is only possible if payment on the shares takes place in cash, in order to initially limit the online formation of companies to simple situations. If it turns out that online formation works well, it can be considered whether it is useful to extend this possibility to situations in which contributions are made in a manner other than in money. Incorporation by natural persons using a model deed of incorporation must be possible within five working days from the date on which the notary has received all documents and information from the applicant or the date of payment of the share capital.

The incorporation of a BV digitally is postponed to the summer of 2023 since the House Committee for Justice and Security has decided that the act must be discussed in plenary.

The so called DOBV-system (Digital establishment of a BV), will entail a change in a number of work processes in the notaries in The Netherlands but for the Chamber of Commerce, no major changes will follow because the civil-law notary will supply the registration documents digitally to the Chamber of Commerce. Consequences the civil-law notary is the one who will have to offer a certain digital form of service, which citizens and companies will be able to use.

What positive and negative aspects can be highlighted?

Positives aspects:

• it is very positive that through this new standard, many investors or international companies from both countries will be encouraged to create new SPVs, as the minimum capital is considered by many companies as a “barrier to entry”;
• it will expedite the procedures for incorporating companies, essential vehicles for channeling the economic activities of businessmen in their transcendental task of creating wealth and employment, without notary and registration costs;
• it will create a healthy competition between all the Notaries in Spain and between the notaries of Spain and the Netherlands. The Dutch notary bond expects that a further digitization of the notarial process could be achieved first in the real estate chain and subsequently also in business practice. It is important that the business market may be capable to respond quickly to this demand;
• the share capital of a company will serve its partners to have the necessary funds with which to start their project, acquire the goods and resources necessary to start the economic activity and consolidate a long-term project (such as, for example, to buy the goods and services necessary to start up activities or to hire employees);
• it creates business growth through financing alternatives to bank financing, such as crowdfunding or participatory financing, collective investment and venture capital.

Negatives aspects:

• to search financing externally to start the company’s activity, which will also surely have a cost (in the form of loans, for example, with their corresponding interest rate). Additionally, in the short or medium term the company must have a capital increase to normalize their patrimonial situation and solve this evident “underfinancing” of own resources, with which, this will also suppose an additional cost in the form of notary and registry fees that must be faced in the medium or long term after the incorporation;
• the possibility of establishing a limited liability company with only 1 euro of share capital can facilitate the creation of fictitious legal entities by people who do not wish to carry out a real economic activity, but only use the companies as a suitable instrument for the development of legal or illegal activities;
• additionally, it also implies a clear risk for the legal certainty and the responsibility of those companies in large contracts with third parties, leaving a limit to their minimum liability while their businesses are millionaires;
• the online constitution system can be rigid and can also generate management and processing problems if the interested parties have not been properly advised and guided by the professionals involved before arriving at the Notary. Additionally, CIRCE’s telematic systems must function properly in order to correctly serve all those interested in the constitution of a capital company;
• there are new requirements for companies related to anti-laundry controls, for instance, to include relevant information on invoices and payments to suppliers in their annual reports and on their corporate website.

Conclusions

Although it may apparently imply a boom in the creation of limited liability companies due to the ease of incorporation, there is still much to be done at the level of corporate law at the national level and collaboration between notaries of both countries.

Spain is, with the entering into force of the Law Creation and Growth, considered among the most advanced countries in facilitating the creation of companies, reducing regulatory obstacles and favoring business restructuring and viability. The final decision will depend on the specific needs of the business, access to finance and tax regime, among others.

Additionally, to the incorporation flexibilities, we must not forget a couple of important aspects for the shareholders and directors to be aware of:

• a company needs to be managed as well and we need to be aware of the treasury, labor or other obligations of the companies already incorporated, even if they are non-active, they must continue to publish the annual accounts and complying with all governance requirements and formal public register notifications;
• the responsibility of the shareholders is also important to consider. A shareholder who has direct involvement in the management, may face liability in case of bankruptcy, also in the country where the subsidiary is located. As mentioned above, in Spain, in the event of voluntary or forced liquidation of the company, if the company’s assets are insufficient to meet its obligations of payment, the partners will be jointly and severally liable for the difference between the subscribed capital and the figure of 3,000 euros;
• the last important aspect when you are doing business mainly in Europe is to consider restructuring your business or consider other forms of incorporation of companies, depending of the business model that you have opted to, for instance the use of the Societas Europaea (SE) which has the possibility to set up a holding company or a joint subsidiary together and to transfer the seat of the company without winding up the entity. The disadvantage is that you need €120,000 starting capital to set up and to have a minimum of 2 companies governed by the laws of different Member States. Other forms of incorporation are the European Cooperative Society (SCE) and the European Economic Interest Grouping (EEIG).

If you need additional information or you are planning to incorporate a limited liability company in Spain or in The Netherlands, get in touch to know more about your options and the right corporate advice for your business.