Does your company need to set up an EU entity now?
Understandably, 2020 was supposed to be the year that Brexit again grabbed all the headlines. We all know that Covid had other ideas, but with the transition period coming to an end on 31st December, 2020, the uncertainty about Brexit continues.
With effect from 1 January 2021, UK incorporated companies will be no longer be automatically recognised as EU companies and will be subject to national laws as a “third country-incorporated” company. A “third country” for the purposes of EU legislation is a jurisdiction that is not part of the EEA.
Implications for UK incorporated companies
What does this mean for UK incorporated companies that currently operate in one of the 27 other EU member states? This can include accepting orders from overseas based customers on your website.
Whilst the company will remain incorporated under UK laws, its legal position will be determined separately by each member state in accordance with the relevant member state’s own national laws and, if applicable, any international treaties it has in place. In effect, the legal personality and limited liability of UK incorporated companies and partnerships may not be recognised by other member states, in part or at all.
For example, we have advised groups that have held certain EU licences, allowing them to carry out certain regulated business activities within the EU. Such licences can only be held by an EU entity, and therefore our client has set up a new subsidiary in Belgium (any EU state would have sufficed) to which it has transferred the licence and certain other assets.
Given the uncertainty of the implications of these varying determinations, all UK incorporated companies who wish to operate as EU companies after 31 December 2020 should quickly consider whether they should incorporate a company in an EU member state. If necessary, they should also consider whether it is necessary to arrange for the transfer of some or all of the UK incorporated company’s assets to ensure a smooth continuation of operations after31 December 2020.
Implications for group structures
The recognition of UK incorporated companies as a third country company will also impact group companies which are registered within the UK but have their central administration or principal place of business in another EU Member State.
Given the uncertainty about recognition, these companies may wish to reconsider their group structure to ensure each company within its group is recognised appropriately.
Implications for director appointments
Group companies registered in a member state should carefully consider whether there are any specific requirements that will need to be reconsidered in light of Brexit. For example, certain member states require that at least one director is an EU national. The only requirement under UK company law is that at all times the company has at least one director who is a “natural” person.
This consideration will be particularly pertinent for any member state companies with a sole UK director. If this is the case, swift action should be taken to identify and appoint a suitable additional director/officer who can fulfil this position, before 1 January 2021.
The position will remain unchanged in respect of UK incorporated companies, which can continue to have non-EU residents appointed as directors.
Implications for company filings
There will be a number of changes to the reporting regime following 31 December 2020, including additional filing requirements which will apply to EEA and/or UK companies, for example:
- EEA companies with a UK incorporated subsidiary which we were previously eligible from an exemption for filing accounts will no longer be able to rely on such exemption from 1 January 2021.
- Any UK parent companies with EEA subsidiaries should check the individual reporting requirements in the specific member state in which the subsidiary is based.
- All UK registered dormant companies with EEA parents will need to file individual accounts with Companies House for accounting periods beginning in January 2021
- All UK incorporated companies which previously reported under EU IAS will need to report under the UK equivalent for financial years beginning after 1 January 2021.
- Any UK public companies which are listed in the UK and EEA will need to comply with additional rules. For example UK incorporated groups which issue debt from an EEA subsidiary will need to i) comply with the rules of the EEA country where the subsidiary is based and ii) will need to produce accounts which are compliant with the UK Companies Act 2006.
Time is not on your side!
Given the implications noted above, careful consideration and urgent forward planning will be key to help your company or group structure be prepared in advance of the upcoming changes.
If you have any questions about changes to the group structure of your company in light of the UK’s departure the EU on 1 January 2021, get in touch with your usual Fox Williams contact or the authors of this article.