The Netherlands Revenue Based Finance- Debt

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This analysis was provided by Hogan Lovells

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The Analysis for The Netherlands includes articles on Revenue Based Finance – Debt, and Revenue Based Finance – Preference Shares

Executive Summary

Although it is important to note that the current legal landscape in the Netherlands lacks distinct provisions for revenue-based financing – as there are no codified revenue-based financing structures – we have identified two ways in which such financing can be structured using existing Dutch law concepts:

  1. through issuance of equity like instrument in the form of preference shares (preferente aandelen); and 
  2. through the issuance of debt like instrument in the form of loans (leningen). 

In the schedules below, the focus is only on private companies with limited liability (besloten vennootschap met beperkte aansprakelijkheid), incorporated under the laws of the Netherlands and having their corporate seat (statutaire zetel) in The Netherlands. A private limited liability company is the most customary legal form in The Netherlands. 

Loans (leningen): Revenue-based financing in The Netherlands can be structured as a loan repaid based on a percentage of monthly revenues (on a contractual basis). This option aligns the investor’s interests with the company’s performance, as returns are directly linked to the company’s growth. Dutch law provides flexibility in creating board observer roles and allows for collateral-backed loans to have priority in insolvency proceedings. Lenders operating in The Netherlands should ensure compliance with regulatory constraints and licensing requirements. Given the freedom of contract under Dutch law, revenue-based financing through a loan structure may be an ideal solution for revenue-based financing. 

This memorandum is provided for general informational purposes only and should not be considered as legal advice or a substitute for professional advice tailored to any specific situation. The structuring of any financing arrangement always depends on the particular facts and circumstances, and it is essential to consult with legal counsels before taking any actions or making decisions based on this information. This summary does not purport to be complete or cover all aspects of the subject matter and should not be relied upon as a basis for any decision or action that may affect your interests.

Investment Structure Summary

The provision of a loan which is repaid based on a percentage of the monthly revenue would be an option for revenue-based financing under Dutch law given the freedom of contract

This is structured as a loan and repaid through monthly payments based on a percentage of revenues. These monthly payments continue until a repayment threshold has been reached. The loan can be paid off sooner, if the company grows in fast pace. The returns for the loan provider are directly linked to the company’s performance, in contrast with preference shares. The investor’s interest therefore is in harmony with the company’s interest. In this scenario, the amount owed by the company will be treated as a liability.

Category

According to Dutch law, a loan is classified as debt. However, its classification may vary when viewed from the standpoint of accounting and tax regulations.

Category for tax purposes

Please refer to Critical Tax Considerations below.

Governance Rights

In general, debt instrument holders do not have corporate and voting rights with respect to the company and its management. Nevertheless, exceptions can occur during enforcement, like when a lender acquires voting rights by transferring them based on a share pledge. 

However, due to the considerable flexibility provided by Dutch company law and the lack of definitive case law or scholarly doctrine, it is also possible to establish, for instance, board observer roles by contract.

Investor Qualification Requirements

Lenders operating in The Netherlands must navigate various regulatory constraints and may require a license under the Dutch Financial Supervision Act (Wft) to lend legally. As per the Capital Requirements Directive, EU member states, including The Netherlands, have discretion over lending activities by non-bank entities. In The Netherlands, a license is generally not needed for financing that excludes regulated mortgages or consumer credit, while deposit-taking faces certain restrictions. Ensuring compliance with these regulations is essential to avoid complications or penalties.

Currency Considerations

There is no specific restriction under Dutch law in terms of the currency for the payment obligations. 

Collateral

Security interests and guarantees can be granted in connection with financing in the Netherlands, where security is typically provided as in rem security (zakelijk zekerheidrecht). A right of pledge (pandrecht) can be granted for tangible assets and receivables. For tangible assets, a pledge may be possessory or non-possessory, while for receivables, it can be disclosed (i.e. by serving a notice on the debtor) or undisclosed. A right of mortgage (hypotheekrecht) serves as a security interest for real estate and related rights

Priority Payment Rights

Under Dutch law, there are no statutory preferences for financing arrangements that grant parties the right to receive distributions according to agreed percentages of gross revenues, free cash flow, or net income. However, the ranking during insolvency in the Netherlands is determined by whether or not the loan is secured.

For more information regarding priority payment rights, please refer to Status in Insolvency Proceedings below.

Distribution and Redemption Limitations

There are no statutory limitations or restrictions on the repayment of debt instruments; however, the loan documentation may include negative contractual covenants that prohibit the borrower from distributing dividends and profits to its shareholders.

Please refer to Investment Structure Summary for the distribution of payments to lenders. 

Legal limitations to pricing or total return

Under Dutch law, usury is not regulated other than in relation to consumer credit loans. There are no laws or restrictions that limit interest amounts, as long as the credit provided does not pertain to consumers. However, in exceptional cases, a contractual clause stipulating excessive interest may be invalidated based on principles of reasonableness and fairness or good morals. 

Status in Insolvency Proceedings

In Dutch insolvency law, two standard proceedings exist: bankruptcy (faillissement) and suspension of payments (surseance van betaling). Secured creditors are generally unaffected by bankruptcy, and their claims are paid from the enforcement proceeds of the security right.  Secured creditors have a strong position and can enforce their rights as if no insolvency is occurring.

Payment priority in Dutch bankruptcy scenarios, subject to exceptions, follows a specific order: general costs, secured creditors, specific and general privileged creditors, unsecured creditors, subordinated creditors, and shareholders.

Limitation of Liability

Lenders’ liability is limited to disbursing committed funds on the basis of contractual obligations. They are generally not liable vis-à-vis third parties for actions or omissions of the company

Transfer Restrictions

In accordance with Dutch law, the assignability of a loan is subject to the nature of the underlying agreement. A highly personal nature of the claim is one factor that may render it non-transferable. Furthermore, the transferability of claims may be limited by the agreement between debtor and creditor, as well as by the nature of the claim.

Critical Tax Considerations

Dutch borrowers are subject to Dutch corporate income tax at the prevailing statutory rates. Generally, no withholding tax is imposed on arm’s-length interest payments, principal repayments, or related fees in the Netherlands. Consequently, borrowers are not accountable for withholding tax and do not need to indemnify lenders for such taxes, as interest charges are tax-deductible.

It is advisable to seek tax advice in each specific case. While the Netherlands typically does not impose withholding tax on arm’s-length interest payments, principal repayments, or related fees, exceptions exist (for example in certain (tax abuse) situations), and these should be assessed on an individual basis.

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