Balance test
For a Dutch BV (private limited company), the balance test limits distributions to equity above the statutory reserves and the reserves required by the articles of association.
What does balance test mean?
For a Dutch BV (private limited company), the balance test limits distributions to equity above the statutory reserves and the reserves required by the articles of association.
A positive bank balance is not enough; what counts is the equity that may legally be distributed. After the balance test, the board must also carry out the distribution test.
How does it work?
The balance test is set out in art. 2:216(1) DCC: the general meeting of a BV may only resolve on a distribution to the extent that equity exceeds the reserves that must be maintained by law or under the articles of association. For a BV, issued capital and share premium do not form part of this restricted equity.
You carry out the test at the time of the distribution resolution, using the most recent figures. The law does not require a BV to prepare an interim statement of assets for this, as it does for the NV (art. 2:105(4) DCC), but without a current calculation you cannot demonstrate the outcome later. After the balance test comes the board's test: it must refuse approval if it knows or should foresee that, after the distribution, the BV will not be able to keep paying its due debts (paragraph 2).
Example
On 30 June a BV has: issued capital € 100, share premium € 20.000, revaluation reserve € 30.000, statutory reserve for development costs € 15.000, reserve under the articles of association € 5.000 and other reserves € 49.900. Equity: € 120.000. Restricted: 30.000 + 15.000 + 5.000 = € 50.000. Room under the balance test: 120.000 − 50.000 = € 70.000. The meeting wants to distribute € 80.000; that is € 10.000 too much. A resolution for € 70.000 passes the balance test, but only takes effect once the board has assessed whether the BV can pay its debts and has given its approval.
In the annual accounts
Equity and the dividend resolution; no separate P&L line.
Difference from the distribution test
The balance test is a calculation on equity: is there more than the restricted reserves? The distribution test looks ahead and is about cash: can the BV keep paying its due debts after the distribution? For the balance test it is the general meeting that has to satisfy it, for the distribution test the board, with joint and several liability for the shortfall (art. 2:216(3) DCC).
Common mistakes
- Counting restricted reserves as distributable
- Skipping the liquidity assessment
What should you watch for?
- Calculate with equity after the movements of the current year; a loss since the last annual accounts reduces the room.
- The same limit applies to repayment of capital and to the repurchase of own shares (art. 2:208(6) DCC and art. 2:207(2) DCC).
- The size class does not change the test. However, in a micro balance sheet the statutory reserves are not shown separately (art. 2:395a(4) DCC); take them from the bookkeeping then.
Legal basis and source
art. 2:216(1) DCC
Frequently asked questions
Does the balance test also apply to an NV?
A stricter variant applies to the NV (public limited company): art. 2:105(2) DCC also counts paid-up and called-up capital as restricted equity. An interim distribution by an NV also requires a statement of assets that is filed with the Business Register (paragraph 4).
What if a BV makes a distribution that the balance test does not allow?
A resolution contrary to the law is void (art. 2:14(1) DCC). If the distribution leaves the BV unable to pay its due debts, directors who knew or should have foreseen this are also jointly and severally liable for the shortfall (art. 2:216(3) DCC).
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Preparing Dutch annual accounts?
Your first set of annual accounts is free, for every size class. Create an account and prepare the annual accounts of your Dutch company under Title 9 of Book 2 of the Dutch Civil Code.
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