Letter-box companies and coordination of social security systems

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV.COM Ltd.

mailboxes [Georgi Gotev]

Ahead of a vote in the Council on Friday (29 March), which risks derailing the updating of the Regulations on Coordination of Social Security systems, Marek Benio provides some timely insight and advice.

Marek Benio is the vice-president of the Labour Mobility Initiative.

The Regulations on Coordination of Social Security systems are being amended. Wednesday’s voting (27 March) in COREPER, when the member state sit, was postponed to Friday, formally due to a large number of technical questions raised by few governments, but the truth is that the Polish abstention may result in the lack of majority in favour, and the whole project will be postponed to autumn.

This would be bad news for the Romanian Presidency, EP Rapporteur Guillaume Balas and for the Commission, who all want this dossier closed before the May elections.

Two issues remain very disputable: unemployment benefit extension and anti-letter-box companies criteria when determining applicable legislation for persons working in two or more member states. Yet, isn’t “who will scoop the contributions of mobile workers” the real question?

Letter-box companies still exercise EU freedoms

An idea to set up a letter-box company grows in the minds of businessmen or managers of a company established in a high-cost member state. By exercising the freedom of establishment in the EU, they seek to optimise the costs.

To this end, they register a company (or subsidiary) in a member state with significantly lower security contributions. But they keep their customers in the “mother” member state. They have no intention to run any operations in the member state of formal establishment.

They don’t run any marketing activities there. They have a single-desk office or virtual office only. Most or all their contractors are outside the member state of establishment. Their employees, albeit recruited and employed in the member state of establishment, carry out most or all the work abroad. Most of or all the turnover is made abroad.

The Council trying to act

It seemed logical and fair to determine the real “place of registered office or place of activity” by looking at where the turnover or where the most of the working time is and not where the company is formally registered. So did the Council when amending the Regulations on Social Security Coordination.

The place of registered office has always been and will be one of determining factors for the applicable social security legislation of persons working in two or more member states. This will not change.

Wait a minute! If a small company from a low-contribution member state exports services by virtue of posting its skilled workers to a high-wage member state, most of its turnover and most of the working time of its employees is also abroad. And yet – no doubt – this is not a letter-box company.

So what’s the difference between an abuse of the rules on coordination of social security systems by establishing a fake letter-box company and taking legitimate advantage of one’s government policy to keep contributions low for its genuine companies which export their services?

Well, the major contractor or service recipient of a letter-box company is the mother company. There is personal and/or financial dependency between a letter-box company and its main foreign contractor(s).

Most of, or all bank operations and financial transactions are done in the host member state, where the main bank account of the group is typically situated. Members of the board live, take key decisions, held general meetings outside the member state of establishment.

What is the real intention?

Oddly, those more apparent features of letter-box companies clearly distinguishing them from genuine, but small companies, have been deleted from the project on earlier stages of negotiations.

This brings me to an important question: what is the purpose of the criteria to determine the real location of the “registered office or place of activity” – listed in draft Article14 (5a) of the Regulation 987/2009/EU?

Is it prevention of abuse by letter-box companies or is it the mere desire of high contributions’ member state to collect contributions of workers carrying out their work in two or more member states?

In any case, the original objective to save a mobile worker from the risk of frequent changes of applicable legislation is not near the centre of consideration any more.

There is a thin line between spotting an abuser who artificially moves its registered office towards low-cost peripheries and forcing a genuine company to artificially move its registered office to a high-cost centre.

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