The NOW scheme has been set up to support employers who have suffered a loss of turnover of more than 20% during the Covid-19 crisis with their wage costs. The aim is to facilitate the long-term retention of jobs. Business owners must submit their NOW application at the level of the legal entity or natural person. If the business owner is part of a group, the (total) loss of turnover at group level must be taken into account when applying for the NOW scheme.
Assessment practice has now shown that we are encountering widespread difficulties with the concept of ‘group’ as used in the NOW scheme. On the one hand, we have the definition of ‘group’ in the NOW scheme, which draws on Articles 2:24b and 2:24a of the Dutch Civil Code. On the other hand, the scheme is interpreted (much more broadly) in, amongst other places, the Explanatory Memorandum and FAQs of the Royal Netherlands Institute of Chartered Accountants (NBA). Which interpretation is legally correct?
Article 6(5) of the NOW (1.0) stipulates that, where a legal entity or company forms part of a group as referred to in Article 2:24b of the Dutch Civil Code, the loss of turnover for the employer must be determined on the basis of the loss of turnover of the group as a whole. If the legal entity is a subsidiary as referred to in Article 2:24a of the Dutch Civil Code, the parent company and the subsidiary are treated for the purposes of this scheme as if they were a group. This provision has been retained in NOW 2 and 3.
The idea behind this provision is to prevent the shifting of turnover within a group, which could result in the applicant’s loss of turnover being overstated. The downside is that calculating the group’s loss of turnover can have far-reaching consequences for businesses, such as a lower grant or an obligation to repay the grant received, even though the answer to the question of who belongs to the group under the NOW scheme does not appear to be straightforward. Accountants, too, are still grappling with this issue.
The NOW scheme aligns with the Civil Code (BW) in its definition of ‘Group’. This is clearly evident from the wording of Article 6(5) of the NOW 1, which refers to the group as defined in Article 2:24b of the Civil Code. The parent-subsidiary relationship under Article 2:24a of the BW is also covered by the NOW scheme.
The standard parent-subsidiary relationship, as set out in Article 2:24a of the BW, does not in itself give rise to any qualification issues. For this to apply, there must be a predominant influence over the subsidiary’s policy. This can be established on the basis of two criteria: i) the legal entity holds, either alone or together with other voting shareholders, more than half of the voting rights at the general meeting; and/or ii) a legal entity can appoint or dismiss more than half of the directors or supervisory directors.
The ‘Group’ within the meaning of Article 2:24b of the Dutch Civil Code presents further difficulties in terms of qualification. For this to apply, there must be an economic unit in which legal entities and companies are organisationally linked. Three criteria must be met: i) an economic unit, ii) an organisational link, and iii) central or joint management.
Outside the scope of the NOW, a parent-subsidiary relationship does not automatically satisfy these criteria. For a subsidiary relationship to fall within the group definition of Article 2:24b of the Dutch Civil Code, there must be both a majority shareholding and an economic unit in which they are organisationally linked under common management.
Article 6(5) of the NOW speaks of a group if Article 2:24b of the Civil Code and/or Article 2:24a of the Civil Code are met. This means that also a majority relationship without economic unity, organisational affiliation and central management can be considered a group for the purposes of NOW. That alone is an extension of the legal concept of 'group' ex Section 2:24b of the Civil Code. You can further explain this by the fact that Section 2:24a of the Civil Code is explicitly mentioned in Section 6(5) of the NOW. Determining the group under the NOW only creates real problems because the Explanatory Memorandum to the NOW regulations and the NBA guidelines interpret the group concept more broadly than we set out above.
The NBA has published several guidance documents for accountants on how to apply the NOW. One of these is the interpretation of the group concept of Article 6(5) NOW. According to the NBA, a mother with multiple subsidiary relationships (with only a majority interest) also qualifies as a group under Section 2:24b of the Civil Code. If there is, for example, one mother with two subsidiaries, the three of them should be treated as if they were a group, without there having to be an economic unit that is organisationally connected.
The Explanatory Memorandum to the NOW scheme also explicitly states that a parent company with several subsidiaries is regarded as a group for the purposes of the NOW scheme.
“(…) If, for example, a parent company has several subsidiaries, the turnover of the parent company and the various subsidiaries must therefore be determined jointly. All these companies are regarded collectively as a group. (…)”
“(…) The level at which the decline in turnover is calculated is set out in the sixth and seventh paragraphs (and, where applicable, in Article 6). Depending on the circumstances, this is done on the basis of one of the following two levels:
Strictly speaking, this broad interpretation does not follow from the wording of Article 6(5) of the NOW.
Firstly, the literal wording of the NOW stipulates the following: If the legal entity is a subsidiary as referred to in Article 2:24a of the Dutch Civil Code, the parent company and the subsidiary shall be treated for the purposes of this scheme as if they were a group.
This article refers to a parent company and a subsidiary (singular) and not to a parent company and its subsidiaries.
Furthermore, the interpretation is contrary to the law. A grouping of parent-subsidiary relationships within the meaning of Article 2:24a of the Dutch Civil Code does not automatically result in a group of companies within the meaning of Article 2:24b of the Dutch Civil Code. According to the law and legislative history, the criteria of central management, economic unity and organisational affiliation must first be met.
Practice is hampered by this broad interpretation and would benefit from an objective assessment by the courts. As yet, there have been no court rulings on this matter. It is expected that the courts will attach great weight to the fact that the legislator explicitly anticipated this situation in the Explanatory Memorandum. Furthermore, it will be significant that the NBA was specifically called upon by the Minister for Social Affairs and Employment to provide further guidance and practical guidance on the NOW scheme. Moreover, it is not uncommon in law for a definition in one area of law to be interpreted differently in another; I would cite, for example, the difference in the interpretation of the concept of ‘wages’ in civil and tax law.
If one were to assume that the interpretation provided by the NBA and the Explanatory Memorandum is correct, this would mean that business owners would have to apply a broader definition of group turnover. As a result, a subsidiary experiencing a loss of turnover may suddenly have to include the turnover of a sister company that may have nothing to do with the business owner in question. This could have major consequences for business owners who are already facing difficult times. In practice, we see that entrepreneurs often based their applications on a narrower definition of the group, meaning that the application subsequently turns out not to have been submitted correctly.
The question is whether the legislator actually intended to provide a broader definition of the concept of a ‘group’ under the NOW. Somewhat unexpectedly, the term ‘Group’ has been expanded in the Explanatory Memorandum and by the NBA, without any indication that this was intended to broaden the statutory definition. Moreover, this broadening lacks a legal basis. It is also questionable whether the guidelines were drawn up independently by the NBA, given that they have been coordinated with the Ministry of Social Affairs and Employment.
In our opinion, an independent test should now first be conducted by the court as to whether the group concept should indeed be interpreted as broadly as envisaged by the NBA and the Explanatory Memorandum. In fact, this should have been done before the NBA interpreted the rules. Now a discrepancy seems to have arisen between an interpretation of the NOW desired by the ministry and a correct legal interpretation of the NOW rules. Should this discrepancy be borne by firms in dire straits? That goes against the very purpose of the scheme; sustainable job retention during this crisis. It is precisely this consideration that should guide the explanation and not the loose implicit language that leads to legal uncertainty and possible unequal treatment. On the other hand, a different outcome in legal proceedings could also lead to problems for entrepreneurs who did use the broader group concept. What will it mean for those entrepreneurs if the interpretation of the concept is adjusted? It is expected that this group concept will still lead to many objection and appeal cases.
Do you need advice or want a no-obligation sparring session on this topic? Then contact our NOW specialists!