This article is part of our special report EU law goes digital.
The European Commission is preparing a new directive on the cross-border transfer of company headquarters, a move that could have far-reaching implications for other areas of corporate governance, including tax planning and cross-border mergers, EURACTIV has learned.
With Brexit on the horizon, UK companies are busy weighing their options for keeping a foothold in the European Union. And one of those is to fiddle with the location of their legal headquarters.
Companies already have options to transfer their seats, for example by forming a subsidiary in their host member state and merging it to create a new company elsewhere. Since 2003, they can also create a European cooperative society and transfer the headquarters to another EU country.
But the system is riddled with loopholes. Large multinational companies in particular routinely shop around Europe for the sweetest tax deals and labour conditions, using legal arrangements such as the dual location of company headquarters.
At worse, they can form “letterbox companies” that take advantage of the parent–subsidiary relationship offered in countries like Luxembourg and the Netherlands to pay no taxes on dividends or capital gains made from the sale of shares.
Social abuses are also frequent, an issue that France has flagged at EU level with attempts to crack down on letterbox companies that use addresses in low-wage EU countries to underpay workers – often truck drivers or construction workers.
The real motive behind splitting company seats “is often the circumvention of legal protection standards at the real seat of the company,” explained Dr Jens Bormann, President of the German Federal Counsel of Notaries.
“An instrument that permits an isolated transfer of the registered office and thus de facto allows the conversion of the company into a letterbox company involves considerable risks of abuse,” Bormann wrote in a note to participants at the 4th Notaries of Europe Congress, taking place in Spain this week.
The risks mentioned by Bormann have unfortunately become all too familiar in recent years. They include tax evasion, money laundering and silent liquidation, when directors and shareholders wind down an insolvent company to the detriment of creditors.
But this could all change. The European Commission is currently preparing a legislative proposal, which for the first time, could establish a harmonised EU framework for the cross-border transfer of company seats.
Commission keeping its cards close to its chest
Věra Jourová, the EU Commissioner for Justice, Consumers and Gender Equality, is in charge of drafting the new law on behalf of the EU executive, known as the 14th company law directive.
And for the time being, she prefers to keep her cards close to her chest.
“Companies should be able to effectively exercise their right to freedom of establishment, but we also want this to happen with full respect of national social and labour prerogatives,” Jourová told EURACTIV in an interview.
She stresses that the main objective of the new company law package will be to stimulate job creation and deepen the single market. Initial Commission estimates show that around €207 million could be saved in start-up and merger costs if only 0.5% of the companies were to move within the EU and use EU rules on the cross-border transfer of registered office, the Commissioner indicated.
“The saved money would be better invested in jobs, innovation and growth,” Jourová said.
The Czech EU Commissioner has plenty of encouragement to legislate. In a 2012 resolution, the European Parliament called on the EU executive to take action in order to prevent “the misuse of post-box offices and shell companies with a view to circumventing legal, social and fiscal conditions”.
A 2016 study for the Parliament’s Legal Affairs Committee (JURI) hammered the point home saying, “There is a real and urgent need for a special EU framework on cross-border transfers of seat” or cross-border conversions.
Unity of seat
However, Jourová also knows she is walking on eggshells.
Last time the Commission tried legislating on the matter, in 1997, EU member states killed the draft bill because they could not agree on the principle of “unity of company seats”, which grounds the location of headquarters to the actual pursuit of an economic activity in the host member state.
This proved too much to swallow for the Netherlands and Luxembourg, where companies can decide to locate their ‘registered seat’ – and pay low taxes – while keeping their ‘real seat’ where their actual business activities are taking place.
The issue is politically awkward for Jean-Claude Juncker, the President of the European Commission who was prime minister of Luxembourg at the time and spearheaded the campaign that shot down the proposal at EU level.
Should he continue opposing the unity of seat principle, he will face accusations of protecting the interests of his native Luxembourg, which makes a lucrative business from registered companies. If he does, he will face accusations of treason at home.
“The Luxembourgish will say they are in favour of the unity of seat principle because they are making a business out of it,” quipped a lawyer with knowledge of the situation. In other words, the Grand Duchy would back the principle as long as it knows companies have an interest in locating to Luxembourg.
Other countries like France and Germany are in theory favourable to the unity of seat principle as a way of fighting tax avoidance and social dumping. But they have their own reasons to be wary of a harmonised EU framework on the cross-border transfer of company seats.
In Germany, the worker code – known as Mitbestimmung – guarantees employees are represented for almost half of the supervisory board of directors. Their fear is that facilitating the transfer of seat at EU level will allow directors to circumvent such laws.
Another source of worry is that majority shareholders might impose a decision to transfer the seat of a company, to the detriment of minority shareholders or creditors in the home country.
“Germany will be reluctant if there is no solution to the unity of seat principle,” the attorney said, attributing the tension to “a clash of culture” between countries like Germany and Austria and those under common law, which have a more liberal approach to the location of company headquarters.
Positions may evolve, however. The unity of seat principle has since been enshrined in the alternative investment fund managers (AIFM) directive, precisely in order to prevent forum shopping, and to ensure effective supervision by national regulators.
It is also recognised in the insolvency regulation, to avoid debtors shirking their responsibilities when winding down a bankrupt firm. What’s more, guaranteeing the unity of seats is fully consistent with the freedom of establishment, one of the four core EU freedoms.
The case for applying the unity of seat principle – reflecting actual business activity rather than tax preferences – also finds an echo in the debate over the taxation of digital giants like Google, Apple and Amazon.
Estonia, the current holder of the rotating EU Presidency, recently proposed taxing digital firms along the principle of “virtual permanent establishment”, whereby companies pay taxes in countries where they have a “significant digital presence”.
But Jourová, for the time being, seems hesitant to impose the unity of seat principle at European level.
“I’m well aware that cross-border conversions are a complex issue that’s why we are carefully assessing how to address it. We want to take into careful consideration all the different interests at stake,” she told EURACTIV.
And Juncker, for the moment, prefers dismissing the issue as a mere “detail” of the upcoming proposal. Pressed by EURACTIV to clarify the President’s position on the unity of seat principle, a spokesperson said, “The aim of the upcoming company law proposal is to enable companies to make the best of digital solutions and provide efficient rules for cross-border operations. However, the exact details and content of this proposal are currently under preparation.”
The Notaries of Europe, for their part, say the current system for company conversions based on the merger directive works reasonably well. But in case a European framework is put in place, they argue it should provide a two-step scrutiny with the home and destination countries, similar to what is done with cross-border EU mergers.
- In a first step, the competent authority in the home country delivers a certificate ensuring that all formalities have been lawfully completed on their side.
- Authorities in the host member state then check that the conditions of their own legislation for the formation and registration of the company are fulfilled.
This should enable authorities in each country to focus on their own legislation, guaranteeing the legal certainty of the procedure, the Notaries argue.
In any event, notaries warn that a future EU directive should not allow the isolated transfer of registered seat, due to the notorious risk of abuse this represents.
“If no political consensus can be found on the codification of the unity of seats, a European directive on the cross-border transfer of seat should at least require the existence of a genuine link between the company and the host member state in order to prevent the most extreme cases of abuse through the conversion of the company into a mere letterbox company,” says Dr Jens Bormann, President of the German Federal Counsel of Notaries.