by Julie Martin, MNE Tax
The European Commission today proposed harmonized rules that would prevent companies from moving their registered offices to letterbox companies located in other EU countries thereby creating undue tax advantages. Similar rules are provided for cross-border company divisions.
The EU proposals are part of a package of company law rules aimed at making it easier for EU companies to convert, merge, or divide across borders within the EU single market. Other proposals presented today provide for online company registration and establishment of branches in all States, dispensing with the need to for physical presence except in cases of suspected fraud.
“In our thriving EU Single Market, companies have the freedom to move and grow. But this needs to happen in a fair way. Today’s proposal puts in place clear procedures for companies, with strong safeguards to protect employees’ rights and, for the first time, to prevent artificial arrangements aiming at tax avoidance and other abuses,” said Commission First Vice-President Frans Timmermans.
The Commission has proposed a uniform multi-step process for cross-border conversions and divisions. Generally, the proposal calls for the company to prepare the draft terms of the cross-border conversion or division transaction along with reports addressing the implications for shareholders and employees. For large and medium-sized companies, these reports must be examined for accuracy by an independent expert who will also assess whether the transaction constitutes an artificial arrangement.
The legality of the cross-border conversion or division would then be scrutinized, first by the competent authority of the departure Member State and then by the destination Member State. If the Member State of departure has serious concerns that an artificial arrangement may be created, it may perform an in-depth examination, and, if this confirms that the arrangement is artificial, the authority can block the operation.
Factors to be used to determine the existence of an artificial arrangement include the intent, the sector, the investment, the net turnover and profit or loss, number of employees, the composition of the balance sheet, the tax residence, the assets and their location, the habitual place of work of the employees and of specific groups of employees, the place where social contributions are due and the commercial risks assumed, the proposed directive says.
The proposal is designed to replace a patchwork of incompatible, inconsistent, and missing laws in the Member States, the Commission said.
The Commission said also that its proposal on cross-border conversions is consistent with the EU Court of Justice’s October 2017 decision Polbud, (C-106/16) which concluded that freedom of establishment principles were violated by a Polish law that required a company to liquidate before it could transfer its registered office from Poland to Luxembourg, even though in that case the company had no intention of conducting any real business in Luxembourg.
The new procedures on conversions ensure that companies keep their legal personality throughout the process without the need to dissolve or liquidate in the departure Member State and form a new entity in the destination Member State, the Commission said.
The Commission said the cross-border division provisions do not address a situation where a company being divided transfers assets and liabilities to existing companies in different Member States because of the complexity of dealing with risks of abuse in this situation. Instead, the directive only covers a situation where new companies are created in a cross-border division.
To become effective, the proposal must be approved by the EU states and presented to European Parliament.
Julie Martin
Founder & Editor at MNE Tax
Julie Martin is the founder of MNE Tax. She edits the publication and regularly contributes articles on new developments in cross-border business taxation.
Julie has worked as a tax journalist and editor for more than 13 years. Prior to that, she worked as an in-house tax attorney in New York. She also holds an LLM in taxation from New York University School of Law.
Julie can be reached at [email protected].
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Julie can be reached at [email protected].
Interesting article and development