Investing in Egypt and Turkey: knowing your way around the most commonly used Dutch corporate structure
Over the past few years, our Venture capital team has worked with both VCs and companies on many capital raises involving Egyptian and Turkish companies. Such investments are often structured using a special purpose foundation called a Stichting Administratie Kantoor (STAK).
Aside from tax advantages for investors (which are beyond the scope of this article), such structures have the added benefit of enabling an issuer to keep its cap table clean and organised by limiting the number of direct minority shareholders and keeping the governance of the holding company manageable.
Until now, no international law firm in the MENA region has offered a specialised venture capital team based in Amsterdam, expert in implementing tax-efficient Egyptian and Turkish investments using the Dutch STAK structure. Taylor Wessing has changed the game for MENA-based investors navigating this often unfamiliar framework.”
Abdullah Mutawi
What is a STAK?
The STAK is a foundation incorporated under the laws of the Netherlands with the purpose of holding shares for its beneficiaries. The beneficiaries will in this case be the minority VC investors. Unlike the Dutch ‘BV’ company, which is a limited liability company typically used in the Netherland either as a holding company for foreign subsidiaries or an operating company in the Netherlands, a STAK doesn’t have a share capital or shareholders.
The STAK issues depositary receipts, entitling the holders thereof to the economic benefits of the shares in the BV in which the STAK holds shares. A simplified corporate structure in a Dutch BV could be as follows:
In the simplified corporate chart above, a Dutch BV will be sole owner of all the shares in an operating company, either a Dutch entity or foreign entity. The shares in the Dutch BV will be held by the founders, the lead investors, other major investors and the STAK.
The minority investors will either participate directly by holding shares in the Dutch BV (not illustrated in the corporate chart above) or indirectly through a STAK (as illustrated in the corporate chart above). If they participate indirectly through a STAK, the funds at closing will flow from the minority investors to the STAK, and the STAK will then direct the investment into the capital of the Dutch BV, in return for shares in the capital of the Dutch BV. In this case, the minority investors will hold depositary receipts of shares in the STAK in return.
Therefore, the minority investors won’t become direct shareholders of the Dutch BV and they don’t receive any direct interest in its capital. The depositary receipts of shares usually entitle the holders thereof to only receive the economic benefits of the portion of shares to which the depositary receipts of shares are linked.
Unlike ‘normal shareholders’, the holders of depositary receipts won’t be a party to the shareholders’ agreement on the level of the Dutch BV. They will not have any voting rights in the Dutch BV or be allowed to attend shareholders’ meetings, unless otherwise agreed upon in the articles of association of the Dutch BV. Therefore, the influence that holders of depositary receipts have over the governance of the Dutch BV will be very limited.
Governance of the STAK and power to represent the STAK
The incorporation of the STAK in connection with a venture-backed funding transaction is directed by either the lawyers of the founders or the lawyers of the founders and the lead investors jointly. The STAK will be incorporated by way of a notarial deed, executed before a civil law notary in the Netherlands. The deed of incorporation also includes the articles of association of the STAK. The articles of association of the STAK set out rules on governance and other matters connected to the management of the STAK.
Although not legally required, most STAKs also have what’s referred to as ‘trust conditions’. The trust conditions set out the legal relationship between (i) the holders of depositary receipts (minority investors in this case) and the STAK and (ii) the holders of depositary receipts amongst themselves. The trust conditions would usually include provisions similar to the standard provisions in a shareholders’ agreement, such as:
- transfer restrictions for depositary receipts
- compulsory transfer situations
- cancellation of depositary receipts
- reserved matters
- potential exit provisions.
The articles of association of the STAK include, amongst other matters, rules on the appointment of the STAK’s board, which needs to consist of at least one person. This person may be a natural person or a legal entity.
As the setup of the STAK aims to minimise the involvement of the holders of depositary receipts in the business of the Dutch holding BV, the STAK’s articles of association will provide that its board is appointed by the shareholder majority of the Dutch BV, usually with the affirmative vote of the lead investors, rather than the majority of the holders of depositary receipts.
It’s quite common for the Dutch BV to be appointed as sole member of the STAK’s board, although minority investors in the STAK may insist on board representation by one or more representatives of the minority investors.
In any case, the board is in full control of the STAK and its assets (ie its shares in the Dutch BV). For example, the STAK’s board has the voting power connected to the shares held by it in the Dutch BV and can decide, together with the other shareholders of the Dutch BV, if and when any distributions will be made by the Dutch BV or if the profits of the Dutch BV will be reinvested.
It’s possible to have the STAK board’s control limited by including a governance structure in the STAK’s articles of association, whereby certain important decisions and actions require prior approval of either the majority of the holders of the depositary receipts, the holders of the majority of the shares in the Dutch BV, or even the lead investors. The commercial position of the parties will usually determine the level of involvement of the relevant parties.
The STAK from a Dutch tax perspective
As for the Dutch tax treatment of the holders of the depositary receipts, the STAK will be deemed transparent subject to certain exceptions. This means the same tax qualification applies to the holders of depositary receipts as it applies to regular shareholders, as if the holders of depository receipts were regular shareholders.
The effective (personal or corporate) income tax rate that applies to the benefits derived from the depositary receipts will largely depend on the circumstances, including: a direct or indirect participation (eg participation via an intermediate holding company), the number of receipts held, the entitlements connected to the receipts and the tax residence of the participant.
