Profit Entitlement Agreement - PDF

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					  New Dutch Legislation on Partnerships
  January 8, 2010

  Introduction                                                Non-mandatory law

  1.        On 15 December 2009, a supplemental bill          3.     Title 7.13 will in principle be of a non-
            was approved by the Second Chamber of the                mandatory nature (geen dwingendrechtelijk
            Dutch Parliament, which relates to statutory             karakter). This means that deviations from
            regulations for fields of law adjacent to new            the provisions of the law are possible, unless
            title 13 of Book 7 Dutch Civil Code (Burgerlijk          deviations are explicitly prohibited in title
            Wetboek, "DCC"). Title 7.13 DCC regards                  7.13 or deviations are not possible because
            Dutch partnerships                                       of the nature of the provisions included in
            (personenvennootschappen) and was                        title 7.13. In practice, title 7.13 contains
            approved in 2005.                                        various explicit prohibitions on deviations
                                                                     from the law.
  Coming into force. Transitional provisions
                                                              New definition of partnership
  2.        Title 7.13 and the supplemental bill are
            expected to come into force in the course of      4.     Under the new legislation a partnership is
            2010. Although transitional provisions                   defined as an agreement between two or
            facilitate the enactment of this new                     more persons - the partners - to co-operate
            legislation, it is advisable to review your              for joint account. The co-operation must be
            current partnership agreement well in                    aimed at obtaining benefits for all partners by
            advance to determine if preparatory actions              means of contributions made by each of the
            are desired or needed. In any case                       partners.
            provisions regarding profit and loss
            entitlement, representation authority,            5.     Title 7.13 recognises two types of
            continuation of the partnership and, for a               partnerships:
            limited partnership (commanditaire                       a.       the "silent" partnership (stille
            vennootschap, "CV"), the partnership                              vennootschap); and
            structure, merit re-consideration.                       b.       the "public" partnership (openbare

                                                              6.     The current "public" partnership (openbare
                                                                     maatschap) and the current general

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New Dutch Legislation on Partnerships
January 8, 2010

               partnership (vennootschap onder firma,                c.       if an existing partnership without
               "VOF") will be public partnerships. The                        legal personality converts into a
               current limited partnership will be a species                  partnership with legal personality,
               of the public partnership. The CV will have                    confirmation of the contribution of
               one or more limited partners in addition to                    assets to the partnership-legal
               one or more managing partners.                                 entity.

     7.        A public partnership is a partnership to        11.   The notarial deed of a partnership-legal
               practise a profession or undertake a                  entity must in any case include provisions
               business or to perform professional or                regarding its legal personality, name, seat -
               business acts. The partnership must present           which must be in the Netherlands - and
               itself externally as a public partnership in          objects.
               such manner as easily recognisable for third
               parties.                                        12.   The name of the partnership-legal entity
                                                                     must include the words "Openbare
     8.        A silent partnership is defined as any                Vennootschap met rechtspersoonlijkheid" or
               partnership that is not a public partnership.         the abbreviation "OVR", which means public
               The current “non public” partnership (stille          partnership with legal personality. In the case
               maatschap) will be a silent partnership.              of a CV-legal entity, this should be
                                                                     "Commanditaire Vennootschap met
     Scope of this Legal Alert                                       rechtspersoonlijkheid" or "CVR".

     9.        This Legal Alert addresses only the public      13.   The consequences of legal personality are
               partnership and all references to a                   limited. There is no impact on the liability of
               partnership should be read as references to           the partners; the partnership-legal entity is
               a public partnership. If in this Legal Alert          liable for partnership debts but the partners
               reference is made to a (public) partnership,          (also) remain jointly and severally liable for
               the CV is included unless specifically                partnership debts (see also paragraph 23).
               indicated otherwise. Partners of a                    The main advantage of legal personality
               partnership can be legal entities or                  relates to the possibility for the partnership to
               individuals. This Legal Alert addresses only          acquire legal title to assets in its own name.
               partners-legal entities.                              This simplifies both the acquisition and
                                                                     transfer of assets as well as admission and
     Legal personality                                               withdrawal of partners. Furthermore, a
                                                                     partnership-legal entity can convert into a BV
     10.       One of the main deviations from current               (reference is made to paragraph 42).
               legislation is that under title 7.13 a
               partnership can obtain, or can be created       14.   A partnership-legal entity can opt to give up
               with, legal personality. Legal personality            legal personality and continue to exist as a
               requires:                                             partnership-non legal entity. At such time the
               a.        a partnership agreement which               assets and liabilities of the partnership-legal
                         stipulates that the partnership has         entity will have to be contributed to the joint
                         legal personality;                          ownership of the partners. Giving up legal
               b.        a notarial deed executed in the             personality does not affect security rights
                         Dutch language before a civil law           vested on (future) assets of the partnership
                         notary in the Netherlands, which            securing (future) claims on the partnership
                         incorporates the partnership
                         agreement or at least those           15.   Specific provisions have been included to
                         provisions of the partnership               safeguard that a conversion of a partnership
                         agreement described in paragraph            into a partnership-legal entity or vice versa
                         11; and

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New Dutch Legislation on Partnerships
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               does not affect security rights granted by the            possible to exclusively assign the
               partnership.                                              management of the partnership to one or
                                                                         more third parties.
     Registration with the Trade Register
                                                                 20.     Under the new legislation, each managing
     16.       Business enterprises in the Netherlands                   partner may represent the partnership
               must be registered with the Trade Register of             without limitation in acts that may be
               the Chamber of Commerce. A partnership                    conducive to the realisation of the objects of
               that practises a profession or performs                   the partnership. The partnership agreement
               professional acts must (also) be registered               can provide otherwise. The rules under
               with the Trade Register. The registration                 current legislation are similar.
               requirement includes specific information on
               the partnership and the partners, such as the     21.     Both current and new legislation further
               name and objects of the partnership and                   provide that as long as a partnership is not
               details on the managing partners and their                registered with the Trade Register of the
               representation authority. There is no                     Chamber of Commerce in accordance with
               obligation to make the partnership                        applicable requirements, third parties may
               agreement public. These principles do not                 assume that the partnership has been
               change under the proposed legislation.                    entered into for an indefinite period, for any
                                                                         purpose and without representation
     Bookkeeping and publication of accounts                             limitations for (legal) acts for any of the
                                                                         managing partners. However, unlimited
     17.       The managing partners must at least                       representation authority may not be assumed
               annually prepare a balance sheet and a                    by a third party if the third party
               profit and loss account (jointly "annual                  (nevertheless) knows about exclusion or
               accounts"). If all fully liable partners of a             limitations contained in the partnership
               public partnership are companies with a                   agreement.
               capital divided into shares
               (kapitaalvennootschappen) under foreign           Profit entitlement and internal liability
               law, title 9 of Book 2 DCC is applicable to the   (draagplicht)
               preparation of the annual accounts. Title 9
               includes audit and publication obligations.       22.     Under title 7.13 as a premise all partners are
               Certain statutory exemptions from those                   equally entitled to profits and are internally
               obligations may apply due to the (limited)                equally liable for any losses of the
               size of the partnership. This also applies                partnership, regardless of their respective
               under current law.                                        contribution to the partnership. The
                                                                         partnership agreement can provide
     18.       In principle, the annual accounts are to be               otherwise. Under current legislation the
               adopted by all partners jointly. Adoption by a            reverse applies: the entitlement to profits and
               majority, or by one or more third parties, is             the internal liability of partners is determined
               possible if the partnership agreement so                  based on the amount of the respective
               stipulates. In case of adoption by a majority             contributions unless otherwise agreed in the
               all partners are to be involved in the                    partnership agreement.
               decision-making process.
                                                                 External liability: general
     Management and external representation
     (vertegenwoordiging)                                        23.     As a premise, the partners of a partnership
                                                                         are jointly and severally liable (hoofdelijk
     19.       Except for limited partners in CVs, every                 aansprakelijk) for obligations of the
               partner is managing partner and is obliged to             partnership.
               duly perform its management task. It is

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New Dutch Legislation on Partnerships
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     24.       An important exception to the premise of                   liability will apply if the limited partner acts in
               joint and several liability of partners as                 the name of the CV, or if the limited partner
               referred to in paragraph 23 is that if a                   through its acts exercises a decisive
               partnership has received a commission                      influence on the performance of the
               (opdracht), each of the partners - except                  managing partner(s). All of this applies
               limited partners of a CV - is fully liable for             unless an act does not justify the extension.
               any shortcoming in the performance, unless
               the shortcoming cannot be attributed to such        29.    The liability of a limited partner will, however,
               partner.                                                   be limited to the obligations that are created
                                                                          as from the moment the decisive influence
     25.       In relation to external liability of a                     arises or as from the moment a limited
               withdrawing partner, title 7.13 provides that              partner has acted in the name of the CV. The
               claims against a partner to perform                        explanatory notes to title 7.13 explicitly state
               obligations of the partnership that exist at the           that if a limited partner is managing
               time of the withdrawal, lapse at the moment                director/sole shareholder of a managing
               that the claims against the partnership lapse,             partner, it is assumed that the limited partner
               and in any case after a five-year period,                  exercises a decisive influence on the
               starting the day after the withdrawal is filed             performance of such managing partner.
               with the Trade Register of the Chamber of
               Commerce. If a claim only becomes due and           Separate partnership equity (afgescheiden
               payable after filing of the withdrawal then the     vermogen)
               period referred to above starts at such time.
               This will be the case for claims relating to        30.    Both under current law and pursuant to title
               performance under a durable agreement                      7.13, private creditors of a partner can only
               (duurovereenkomst).                                        recover claims from the assets of a partner
                                                                          to the extent such assets do not form part of
     26.       Title 7.13 specifically provides that as a                 the separate partnership equity. Only
               starting point new partners are only liable for            creditors of the partnership can recover
               obligations of the partnership that are                    claims from the assets of the partnership.
               created after their accession or succession.
               However, a succeeding partner can accept            Withdrawal
               rights and obligations from the moment of
               withdrawal of its predecessor.                      31.    Upon withdrawal of a partner, an amount will
                                                                          be distributed to such partner equal to the
     27.       Title 7.13 provides that if, after dissolution of          value of its economic entitlement to the
               the partnership, the assets of the partnership             assets of the partnership as such entitlement
               are insufficient to pay off the partnership                may be further stipulated in or pursuant to
               debts, the liquidator(s) can demand payment                the partnership agreement. The partnership
               into the liquidation account from each of the              agreement can provide that the distribution
               former partners in the proportion that each is             will be made in one or more terms or will be
               to share in the losses of the partnership. As              subject to occurrence of a future event.
               indicated in paragraph 22, the partnership
               agreement may contain a deviation from the          32.    If a partnership is not a legal entity, the
               premise of an equal share in the profits and               interest of the withdrawing partner in the
               losses of the partnership.                                 partnership equity is attributed (toegedeeld)
                                                                          to the remaining partners. This attribution
     External liability: CV                                               must be effected by transferring all
                                                                          partnership assets with due observance of
     28.       In the case of a CV, a limited partner is not,             the required transfer formalities.
               but can become, jointly and severally liable
               for obligations of the CV. This extension of

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New Dutch Legislation on Partnerships
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     Dissolution. Continuation (voortzetting)                    36.    A termination notification will be voidable
                                                                        (vernietigbaar) if such notification is
     33.       Title 7.13 provides that the partnership is              unacceptable according to the principles of
               dissolved in its entirety:                               reasonableness and fairness (redelijkheid en
               a.       in such circumstances as provided               billijkheid).
                        in the partnership agreement;
               b.       pursuant to an agreement of the          37.    Under current law, the premise is that a
                        partners to that extent;                        partnership is a personal relationship
               c.       if one or more partners withdraw and            between the partners. Consequently, if a
                        not at least two partners remain - in           partner withdraws, the partnership
                        the case of a CV, at least one                  agreement is dissolved unless the partners
                        managing partner and one limited                have agreed on continuation prior to the
                        partner -; or                                   withdrawal.
               d.       in case of bankruptcy of the
                        partnership.                             Bankruptcy
               In addition, a court may decide that the
               partnership is dissolved in such                  38.    As set out under the preceding heading,
               circumstances as provided for in the law.                under the new legislation bankruptcy of the
                                                                        partnership will result in the dissolution of the
     34.       If the partners tacitly continue a partnership           partnership. The partnership can be
               after the term for which it was entered into             continued if the bankruptcy ends because of
               has expired, the partnership is extended for             court approval of a settlement (homologatie
               an indefinite period.                                    van een akkoord). In deviation from current
                                                                        legislation, bankruptcy of one of the partners
     35.       In deviation from current law, title 7.13                will not result in dissolution of the
               stipulates that under certain circumstances              partnership, unless because of the
               the partnership agreement is dissolved with              bankruptcy fewer than two partners remain.
               respect to a certain withdrawing partner only.
               The partnership will automatically be             Liquidation process
               continued between the remaining partners.
               This applies if the withdrawal of the partner     39.    Title 7.13 provides for a statutory liquidation
               is the consequence of:                                   process (vereffeningsprocedure). After
               a.       an agreement between the partners               dissolution all known creditors of the
                        for that purpose;                               partnership must be notified by letter. In
               b.       the partner going bankrupt, or                  addition a notification must be placed in the
                        ceasing to exist;                               official gazette (Staatscourant) pursuant to
               c.       the partnership agreement providing             which creditors are requested to submit their
                        for a withdrawal time which is                  claims on the partnership within two months
                        reached; or                                     after the publication in the official gazette. If
               d.       a termination notification                      the assets of the partnership are insufficient
                        (opzegging) to the other partners,              to pay off the creditors of the partnership, the
                        unless the partnership agreement                liquidator(s) can demand payment into the
                        provides otherwise, or a termination            liquidation account from each of the former
                        notification by one or more of the              partners in the proportion that each is
                        other partners, if provided for in the          obliged to share in the losses. Reference is
                        partnership agreement.                          made to paragraph 27.
               In addition in such circumstances as
               provided for in the law, a court may dissolve     40.    Title 7.13 provides that the former managing
               the partnership with respect to a certain                partners jointly liquidate the partnership
               partner.                                                 unless provided otherwise in or pursuant to
                                                                        the partnership agreement. After liquidation,

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               the managing partners must keep the books                respect to its proportionate interest in the
               and records of the partnership for seven                 results of the partnership. A partner’s tax
               years.                                                   position depends on its country of residence,
                                                                        its legal form and certain other
     41.       Title 7.13 provides for an exception from the            characteristics. Furthermore, distributions of
               mandatory liquidation process if the (former)            profits by a partnership are generally not
               partners so agree in writing and the business            subject to withholding tax. However, an
               undertaking or profession of the partnership             “open CV” is subject to corporate income tax
               is continued by an entity that is appointed by           insofar as its profits are attributable to its
               the partners in writing and the entity has               limited partner(s), furthermore, distributions
               accepted this appointment in writing. This               by an “open CV” to a limited partner are
               entity can be a former partner of the                    generally subject to 15% withholding tax. A
               partnership or a third party. The partnership            CV’s tax qualification as an “open CV” is
               assets must be transferred to the entity that            based on its contractual provisions regarding
               continues the business undertaking or                    the admission and transfer of limited
               profession. Liabilities of the partnership               partners, a CV that is not an open CV” is
               transfer by operation of law to the entity that          generally referred to as a “closed CV”.
               continues the business. Partnership creditors
               that risk non- or unreasonable late payment        44.   While under title 7.13 a partnership may
               because of application of the exception can              elect to be or become an OVR or CVR, this
               request a court to appoint a liquidator.                 election will not have any consequences for
                                                                        the fiscal transparency of an OVR or a CVR
     Conversion into a private company with limited                     that meets the requirements of a “closed
     liability (a "BV") or vice versa                                   CV”. For purposes of the corporate income
                                                                        tax and dividend withholding tax legislation, a
     42.       Pursuant to title 7.13, a partnership-legal              CVR that meets the requirements for an
               entity can convert into a BV and vice versa.             “open CV” will be opaque insofar as the
               Claims against partners of the partnership               profits accrue to its limited partners.
               existing at the moment of conversion lapse
               after a five-year period, starting the day after   45.   In contrast, for purposes of the 6% ad
               the conversion is filed with the Trade                   valorem Real Estate Transfer Tax, due by a
               Register of the Chamber of Commerce. If a                transferee in case of a transfer of real estate
               claim only becomes due and payable after                 situated in the Netherlands, an OVR and
               registration of the conversion - which will be           CVR will be treated as entities separate from
               the case for claims under durable                        their partners as opposed to a partnership
               agreements - then the period referred to                 without legal personality, which will be
               above starts at such time. Conversion does               treated as one with its partners.
               not terminate the existence of the legal                 Consequently, the acquisition of Dutch real
               entity. After the partnership-legal entity is            estate by an OVR or CVR may result in a
               converted into a BV, it can subsequently be              transfer tax liability for the OVR or CVR.
               converted into another legal entity.

     Tax treatment

     43.       Under current Dutch tax laws, a partnership
               is generally considered fully transparent for
               corporate income tax and dividend
               withholding tax purposes. As a result, the
               partnership itself is not subject to corporate
               income tax at all whereas a partner may be
               subject to Dutch corporate income tax with

   6 Legal Alert
New Dutch Legislation on Partnerships                       Amsterdam
                                                            Claude Debussylaan 80
January 8, 2010
                                                            P.O. Box 75084
                                                            1070 AB Amsterdam
                                                            The Netherlands
     Contact information                                    T +31 20 577 1771
                                                            F +31 20 577 1775

     If you have any questions on issues reported in this   London
     Legal Alert, please contact any one of the following   2nd Floor, Triton Court
     persons:                                               14 Finsbury Square
                                                            London EC2A 1BR
                                                            United Kingdom
     Martin van Olffen
                                                            T +44 20 7614 4920
     +31 (0)20 577 1500                                     F +44 20 7614 4941
                                                            New York
     Paul Sleurink                                          650 Fifth Avenue, 4th floor
                                                            New York, NY 10019-6108
     +31 20 577 1719
                                                            United States                              T +1 212 259 4100
                                                            F +1 212 259 4111
     Kees Groffen
     +31 (0) 577 1025

     Jean Schoonbrood
     +31 20 577 1837

     Mariëlle Legein
     +31 20 577 1629
                                                            This publication is intended
     Bart Veldkamp                                          to highlight issues.
     +31 20 577 1510                                        It does not intend to be                              comprehensive or to provide
                                                            legal advice.

     Bartheke Weerstra
     +31 20 577 1094

   7 Legal Alert

Description: Profit Entitlement Agreement document sample