Consolidation in the Netherlands

Everything to look out for in (Dutch) group financial statements(s)

Dutch law states that financial statements mean “the company’s financial statements consisting of the company balance sheet and profit and loss account including the notes and the consolidated financial statements if the legal entity prepares consolidated financial statements (article 361 paragraph 1 of book 2 of the Dutch Civil Code (“DCC”)). That is quite a mouthful. But what are “consolidated financial statements”? When do you have to prepare them and when are you exempted? And how should you prepare consolidated financial statements which are in accordance with Dutch law? We will tell you more about that below. 

The company financial statements

A company’s financial statements provide insight into a company’s assets, earnings, and, to the extent possible, its solvency and liquidity. To achieve a good understanding of the company’s equity, it is important that the reader of the financial statements can distinguish the asset and liability items. After all, equity is a result of all these items together.  

For example, a company that also has interests in other companies will show these items as participating interests (deelnemingen) on the balance sheet of its company financial statements. But this provides only a limited picture of the assets and liability items of these companies as a group. This applies not only to equity but also to earnings.  

Also, the company financial statements (enkelvoudige jaarrekeningen) offer a limited, and sometimes even distorted, picture of the solvency of the company and its group. Although the total equity of the group may be visible in the company financial statements, there is only limited insight into the total of the group’s liabilities. This means that a different solvency ratio results from the company financial statements than from the consolidated financial statements.

Introduction to consolidation in the Netherlands.

In short, consolidated financial statements offer more insight, as required by law. However, there are also challenges involved in preparing consolidated financial statements under Dutch law. For example, it may not always be clear in practice when a company is required to consolidate. Determining the scope of consolidation depends on the circumstances and is not always straightforward based on capital interests alone. In addition, intercompany transactions between group companies must be eliminated when preparing consolidated financial statements.  

It is also important whether a company prepares financial statements based on the Dutch Guidelines for Annual Reporting (Nederlandse Richtlijnen voor de Jaarverslaggeving) or based on IFRS. The provisions differ in some respects. In the paragraphs below we focus on the provisions in the Dutch Guidelines for Annual Reporting.

Does your company follow the IFRS standards, and do you have questions about consolidation?

Then please contact our expert.

Hanneke Knoop

Head of audit

Scope of consolidation: who should/can consolidate in the Netherlands?

To the question of who should consolidate, Article 2:406 (1) DCC gives the following answer: the legal entity that heads its group prepares consolidated financial statements. This means that determining the group is an important requirement when preparing consolidated financial statements.

Identification of the group and the scope of consolidation

Identifying the group and its consolidation scope is essential in preparing consolidated financial statements. This process also includes understanding and identifying the group entities to be combined in the consolidated financial statements, thereby providing a complete and accurate picture of the assets, earnings, solvency, and liquidity position of the group.  

Under Dutch law, the term “group” is defined as “an economic unit in which legal entities and companies are organizationally affiliated” (Art. 24b of the DCC). From this, two concepts stand out: “economic unit” (economische eenheid) and “organizational affiliation” (organisatorische verbondenheid) And although not separately named in this article of the law, Dutch case law shows that “central management” (centrale leiding) is also an important criterion in determining a group under Dutch law.

Economic unit, organizational affiliation, and central management

The three concepts mentioned are very closely related. The issue is whether a company can exercise control over another company. If so, they form a group. The company that can exercise control is then the group head and is therefore subject to consolidation. 

The “consolidation scope” (consolidatiekring) are all companies that are aggregated in the parent’s consolidated financial statements. The identification process starts with determining the degree of control that can be exercised by the parent.

Organizational affiliation

Organizational affiliation refers to the degree to which different entities within a group are connected and interdependent. To determine whether organizational affiliation exists, you can look at the following factors, among others: 

1. Majority interest: usually control can be exercised when a company has more than half of the voting rights in the general meeting.  
2. Minority interest where most voting rights can still be exercised through bylaws or other agreements. 
3. The possibility of appointing or dismissing more than half of the board members or supervisory directors. 
4. Financial instruments that, for example, contain potential voting rights and can be exercised as such are also included in the analysis to determine whether control can be exercised. An example is calling options (exercisable immediately) to buy back a certain percentage of shares. 

The factual situation determines whether there is a group relationship. 

Economic unit

1. Joint investments: group companies can jointly invest in projects, assets, or other business initiatives. 
2. Joint brand identity: group companies can share the same brand, logo, or company name. 
3. Internal agreements: the existence of internal agreements such as license agreements, service contracts or mutual financial arrangements including, for example, liabilities, guarantees, and the like may indicate that the entities are closely related. 
4. Intercompany transactions conducted at arm’s length or otherwise.  

Central leadership

1. Common management: when different entities within a group are managed by the same executives or board members. 
2. Shared business strategy: if the group companies share similar business strategies, objectives, and plans. 
3. Shared operating activities: when group companies share the same core activities, such as manufacturing, distribution or research and development. 
4. Shared IT infrastructure: when group companies share the same IT systems, software, and infrastructure. 
5. Interdependence: when the financial performance of one entity directly affects the performance of other entities within the group. 

It is important to realize that these factors are not isolated and that the overall picture must be considered when assessing the degree of affiliation between the various companies. 

Consolidation scope: not simply determined

There may also be special purpose entities, joint ventures or affiliated companies that may or may not need to be included in the consolidation. Again, this depends on the degree of control the consolidating company can exercise.  

In short, identifying the group and consolidation scope is a complex process that requires a deep understanding of ownership structures and interrelationships between entities. The goal is to provide an accurate and transparent picture of the financial performance and position of the entire group so that stakeholders can make more informed decisions. Failure to correctly identify the group and consolidation scope can lead to inaccurate financial reporting and misinterpretations of the organization’s financial health.  

When in doubt, it is helpful to seek expert advice. At Crowe Peak, our experts are happy to assist you. Please contact us.

Exceptions to the Dutch consolidation requirement and exemptions

There are certain exceptions and circumstances in which a parent company may not be required to prepare consolidated financial statements even if it can exercise control. These include, for example, the following situations:

Personal holdings  

A personal holding company is an entity whose shares are fully and directly held by a natural person (and possibly other natural persons, who have a close (family) relationship with this natural person), which guarantees and structures the private interests of this natural person. A personal holding company may hold, alone or with other entities, an interest in one or more underlying companies in order to guarantee and structure the private interests of its shareholder. As a result of that shareholding, such a personal holding company which owns a majority of the shares in another company often has the majority of the voting rights in the general of that company and a majority of the economic rewards of that company. This need not, however, mean that the personal holding company heads the group.

For personal holding companies, the Dutch Accounting Standards include the possibility of an exemption. If the personal holding entity is an extension of the shareholder (being a natural person), and not an extension from management/control, then the personal holding exemption can be applied. A condition is that no shareholders in this personal holding entity are on the payroll of this personal holding, or that the personal holding has not assumed joint and several liability or guaranteed the underlying companies. In that case, the personal holding is considered an extension of management/control, and the exemption will not apply. 

When multiple interests are held by the holding company, it is more likely for it to be considered a group head. Again, this depends on the specific facts and circumstances.

Private equity firms and investment entities

For private equity firms and investment entities, it is important to assess very carefully the extent of control. These companies sometimes have controlling interests, but (in practice) do not always exercise control over their participations. An exemption from consolidation is also possible if an investment entity holds participations held for sale, if a specific exit strategy was formulated with respect to these majority holdings from the time of purchase such that it is clear that these participating interests are only being held for sale at a time defined in the exit strategy.

Regime micro and small businesses (Art. 2: 407(2) DCC)

If there is a small group (as per the criteria of Dutch law), then the group head does not have to prepare consolidated financial statements. However, there are conditions attached to this:  

• On a consolidated basis, the group must meet the criteria for micro or small enterprises.  
• The group must not include legal entities referred to in Article 2:398(7) DCC Code (PIEs).  
• No objection must have been made by at least 10% of the members of the general meeting (within six months of the start of the fiscal year).  

Do you think your company or group might fall under the regime for micro and small businesses and do you need more information on this topic? Please contact our specialists for advice.

Intermediate parent company exemption (art 2: 408 DCC) 

A group head that in turn is also part of a group, a so-called intermediate parent company (tussenhoudstermaatschappij), is in principle required to consolidate. An intermediate holding company can, however, invoke the so-called “intermediate holding company exemption” (art 2: 408 DCC). If a company makes use of this, consolidated financial statements at the level of this intermediate holding company may be omitted. The purpose of this exemption is to reduce administrative burdens for certain groups while meeting the insight requirement.  

This does come with some conditions:  

• The financial data that the intermediate holding company should consolidate are integrally consolidated in the financial statements of a (ultimate) parent entity. 
• The financial statements of this (ultimate) parent entity must be prepared in accordance with the requirements of the EU (European Union) Accounting Directive or in an equivalent manner (e.g., financial statements of a U.S. parent or an English parent, or financial statements based on IFRS). 
• The financial statements of this (ultimate) parent entity must be prepared or translated into Dutch, French, German or English. 
• The financial statements of the larger entity must be filed with the Trade Register in the Netherlands within 6 months after the balance sheet date or within one month after the deferral period.  
• No written objection may be made by at least 10% of shareholders within 6 months of the start of the financial year.  

The intermediate holding company exemption is not possible for companies listed on the stock exchange.

Exemption based on group regime Article 2: 403 DCC

Article 2:403 DCC regulates that when a parent company is fully liable for the subsidiary, this subsidiary does not have to prepare full annual accounts based on title 9 of the second book of the DCC. It can suffice with (company) annual accounts that meet certain minimum requirements. In addition, these limited annual accounts do not have to be audited. Finally, these annual accounts do not have to be published at the Chamber of Commerce.  

However, the application of this article is subject to several conditions:  

• The parent company declares in writing that it is jointly and severally liable for the debts arising from the legal acts of the company. This “declaration of liability” is filed with the Chamber of Commerce.  
• The parent must prepare its group financial statements according to the reporting guidelines of one of the countries within the European Union or based on IFRS as accepted and approved by the EU. The financial data of the subsidiary applying for the exemption of Article 2:403 must be included in full in the consolidated financial statements of the parent.  
• The group financial statements must be prepared or translated into Dutch, French, German or English. The auditor’s report and the management report must be in the same language as the consolidated financial statements. 
• Shareholders must consent in writing to the application of this article after the start of the financial year and before the adoption of the financial statements. This is the so-called “statement of consent” (instemmingsverklaring). This declaration must also be filed with the Chamber of Commerce within six months of the balance sheet date or within one month of any permissible subsequent disclosure.  

Article 2: 403 DCC and concurrence with article 2: 408 DCC

In a group, the application of both article 403 (group exemption) and article 408 (intermediate holding company exemption) may occur. In this case, the following points of interest are important: 

• The Dutch Standards for Annual Reporting (217.216) state that if an intermediate holding company makes use of Section 2: 408 DCC and therefore does not prepare consolidated financial statements, it cannot at the same time issue a declaration of liability for the companies belonging to its group. These subsidiaries cannot then use the exemption for preparing financial statements of Title 9 DCC 2 and there is no exemption for the audit.  
• This concurrence could occur, however, if the parent company above the intermediate holding company does prepare consolidated financial statements and issues the liability statement on behalf of its “granddaughters.” The consequences for the group are then as follows:  
  • The “granddaughters” have an exemption from preparing financial statements under Book 2 Title 9 DCC. No audit is required. The liability statement must be filed with the chamber of commerce.
  • The intermediate holding company applies article 2:408 DCC according to the applicable conditions and does not prepare consolidated financial statements.  
  • The “grandmother” prepares consolidated financial statements and consolidates in them the financial data of the intermediate holding company and the granddaughters. Moreover, it discloses in the financial statements the issued liability according to the conditions of article 2: 403 DCC. This “grandmother” must then fall under EU law or the EU-IFRS regulation. If this is not the case, the concurrence cannot take place.  
• For the sake of completeness, we also mention that shareholders must agree to the application of Article 2: 403 DCC.  

Applying Article 2:403 DCC has both advantages and disadvantages, depending on the specific situation and interests of the parties involved.  

Reducing the administrative burden and associated costs are seen as important benefits of applying this article. However, it is important to carefully consider the liability risk incurred by the parent company.  

The decision whether to apply article 2:403 DCC depends on the specific facts and circumstances of a group and the weighing of the advantages and disadvantages in that context. When deciding, it is advisable to seek legal and financial advice. Contact us here.

Consolidation scope exemptions

There are circumstances where the data of group entities need not be included in the consolidated financial statements. These include  

• Group companies that are negligible within the consolidation scope;
• Group companies held solely for the purpose of short-term disposal; or 
• Group companies whose data can only be obtained at disproportionate cost or with lengthy delays. 

Applying the above exceptions and exemptions requires an incredibly careful examination of the factual circumstances. Need help with this? We are happy to advise you. Describe your situation here. 

Commencement and end of the consolidation obligation 

The consolidation obligation of the group head starts when it can exercise control over the group entity. Group entities can also be acquired during the year. In that case, the results of these companies are included in the consolidation from the moment the head of the group gained control. Usually this is the date on which the purchase agreement takes place at the notary. In practice, however, the date of control could differ from the moment the purchase agreement is concluded. For example, if it is a preliminary purchase agreement without resolutive conditions. Again, it is important to look at the factual circumstances. Need help with that? Our specialists are here for you. Please contact us.  

Incidentally, it is permissible, for practical reasons, to choose a different date (for example, around the end of a month) if this has no material impact on equity and results. Conversely, this also means that the consolidation obligation of the head of the group stops when control is lost. This is often the date on which the sale transaction is notarized. The results of group companies that are disposed of during the year are included until the actual disposal takes place.

Full consolidation versus proportional consolidation

Full and proportional consolidation are two different methods used when consolidating financial data of subsidiaries in the parent’s consolidated financial statements. Under full consolidation, the financial data of subsidiaries are included 100% in the consolidated financial statements of the parent company. This means that all assets, liabilities, income, and expenses of the subsidiaries are directly included in the consolidated figures, this after any adjustments for different accounting policies and transactions between them.

Minority shareholders and consolidation

If the group head does not hold the full 100% (but has policy and influence/control) of the equity interest in the group entities, there are minority shareholders. In this case, the assets and liabilities of the group entities are still fully consolidated, but an adjustment is made to the consolidated equity and earnings for the “third-party share.”  

Proportional consolidation occurs within Dutch accounting rules only in the case of joint control. With proportional consolidation, only the parent company’s share of the assets, liabilities, income, and expenses of the subsidiary (joint venture) is included in the consolidated financial statements. This is only possible if:  

1. There is a joint venture where neither party has control; and 
2. the insight requirement is still met.  

Under the proportional consolidation method, no third-party interest arises as it does under full consolidation, since only the interest held by the parent company in the joint venture is included in the consolidation.  

Horizontal consolidation under Dutch law

In practice, a company may be able to exercise control over an affiliated company. This, even though there are no mutual capital interests. In that case, the company that can exercise control has an obligation to consolidate and includes the financial data of the affiliated company in the consolidated financial statements. This is also known as horizontal consolidation.  

This can occur with a shareholder who holds both an interest in entity A and in entity B. When entity A can exercise control over entity B despite not holding a direct interest in entity B, the consolidation requirement still applies.  

The figures of the affiliated company are therefore consolidated in full. Compared to the consolidation of the group entities where the group head does have a capital interest in the relevant group entities, horizontal consolidation does have a distinctive feature. In the consolidated financial statements, the assets and liabilities items of the group companies are consolidated, but in the absence of mutual capital interests, these cannot be eliminated. This means that a difference may arise between the consolidated equity and result and the company equity and result. This difference must be explained in the financial statements. 

Specific consolidation rules in the Netherlands: group company with negative equity

A participating interest may have negative equity. This participating interest’s financial data are consolidated normally in the consolidated financial statements of the parent company. In the company financial statements of the parent company, the accounting principle may be different. When the group head is liable for the losses of the participating interest, these negative losses are recognized. However, when the parent is not liable for the losses of the participating interest, the participation is impaired till zero. There will then be a difference between group equity and company only equity. The parent company will then not provide for the losses of the participation. This difference will have to be disclosed in the company financial statements.

The consolidation process in the Netherlands

Collection of financial data

Once the group head and the consolidation scope have been determined, the consolidation process can begin. This starts with collecting the financial data of both the parent company and the companies within the consolidation scope. This includes the balance sheet, profit, and loss account and other relevant (financial) information, for example for the notes. The data of the companies to be consolidated must be based on the same accounting principles. There are conceivable circumstances in which the balance sheet date of the companies to be consolidated differs from the balance sheet date of the parent company. This deviation may not exceed three months.

Elimination of intercompany transactions 

Identify and eliminate intercompany transactions and balances to avoid multiple recognition of the same transaction in the consolidated financial statements. Several types of intercompany transactions can be distinguished:  

1. Downstream: this refers to a transaction from the parent company to a group company or associate. 
2. Upstream: this is a transaction from a group company or associate to the parent. 
3. Side stream: These are transactions that take place between two subsidiaries within a group. 

Results of intercompany transactions must be eliminated to the extent that they have not yet been realized by a transfer to third parties, i.e., outside the group.

Determine minority interests.  

If there are minority interests in subsidiaries, calculate the third-party share of equity and earnings of these subsidiaries.

Compilation of financial data and preparation of consolidated financial statements 

Add up the assets, liabilities, income and expenses of the parent and subsidiaries to calculate the consolidated balance sheet, income statement and cash flow statement. Add notes to the consolidated financial statements. If differences exist between consolidated and company only equity and results, they should be explained in the company financial statements. The notes should list companies included in the consolidation.

Crowe Peak for Dutch consolidation and structure advice

Preparing consolidated financial statements requires in-depth knowledge of financial reporting and consolidation principles and can be complex depending on the group structure. Our specialists are ready to help. Want to know more about our practices? Contact us here.