Letterbox abatement | JURI draft on cross-border conversions, mergers and divisions

On 7 August the rapporteur of the Committee on Legal Affairs of the European Parliament (JURI) published her draft report on a proposal by the European Commission for a directive regarding cross-border conversions, mergers and divisions.

Letterbox-companies use cross-border facilities
According to the explanatory statement in this draft report, European Court of Justice case law has led to the result that companies enjoy the freedom to move to another Member State by registration of its firm (letterbox) in another Member States’ register, even if they don’t have any economic activity in this Member State and only do it for the purpose of enjoying the benefit of more favorable legislation.

The JURI rapporteur refers to Panama Papers and other tax affairs:

The tax scandals of the latest years, since Swiss Leaks and Lux Leaks, followed by the revelations with Panama-Papers, Bahama Leaks and Paradise Papers, have visualized how companies create cross-border operations and „reconstructing“ measures corporate constructions including artificial arrangements in order to avoid or circumvent national tax law. The creation of artificial arrangements, so-called „letterbox-companies“, „shell- companies“ or „front subsidies“ needs to be prevented. Letterbox-companies are artificial creatures of company law, which is therefor the appropriate and best place to tackle their formation as such. They are established by registration in a Member State while conducting its business in other Member states, with the aim to avoid national tax laws, social security contributions, collective agreements, employee participation laws or other national laws affected. In some sectors, e.g. the road transport sector, letterbox-companies with no or very little economic activity in the country of establishment are used frequently with its main objective of sending workers abroad, sometimes even falsely called ‚posted‘.

With the registration of the registered office in another Member State not only the nationality of a company, but also the applicable law and by-laws are changing. Company reconstructing and relocation have an enormous impact on workers’ rights, their job situation and contractual rights. Their basis of existence depend on their jobs, which are put in danger when companies restructure and relocate their business. Employees are the most worth protecting stakeholders. They have a genuine interest of sustainability and long-term success of the companies as their jobs depend on the companies’ success. In the light of the European Pillar of Social Rights, laws must upheld and strengthen the position and protection of workers and employees.

Main points changed
The main points of the rapporteurs’ changes to to the Commission’s proposal are summarized by the rapporteur as follows:

  • Avoidance of artificial arrangements, the so-called „letterbox-companies“.
  • Strengthening employee involvement.
  • Simplification of the procedure and lower the costs for companies.
  • No added value for divisions.
  • Clarification of terms and definitions.

Recital (7)
The JURI rapporteur proposes the following new recital:

(7) The right to convert an existing company formed in a Member State into a company governed by another Member State may not under any circumstances be used for abusive purposes such as for the circumvention of labour standards, social security payments, tax obligations, creditors’, minority shareholders’ rights or rules on employees participation through for example a fictitious establishment not carrying out any genuine economic activity in the territory of the host Member State, in particular in the case of a ‘letterbox’ or ‘front’ subsidiary. In order to combat such possible abuses, a general principle of Union law, Member States are required to ensure that company conversions and mergers correspond with an actual establishment intended to carry out genuine economic activities in the host Member State and that they do not use the cross-border conversion procedure in order to create artificial arrangements which do not reflect economic reality and aimed at escaping the tax normally due on the profits generated, social security payments and or circumventing or infringing the legal or contractual rights of employees, creditors or members. In so far as it constitutes a derogation from a fundamental freedom, the fight against abuses must be interpreted strictly and be based on an individual assessment of all relevant circumstances. A procedural and substantive framework which describes the margin of discretion and allows for the diversity of approach by Member States whilst at the same time setting out the requirements to streamline the actions to be taken by national authorities to fight abuses in conformity with Union law should be laid down.

Artificial arrangement
A definition for “artificial arrangement’ is proposed:

“artificial arrangement’ means a company structure set up for abusive purposes, improperly or fraudulently taking advantage of provisions of Union and national law, such as the circumvention of legal and contractual rights of employees, creditors’, or minority shareholders’, avoidance of rules on employee involvement, social security payments or tax obligations normally due on profits generated, through for example a fictitious establishment not carrying out any substantive economic activity supported by staff, equipment, assets and premises, in particular in the case of a ‘letterbox’ or ‘front’ subsidiary.

Article 86c, paragraph 3
This definition is relevant for article 86c, paragraph 3:

Member States shall ensure that the competent authority of the departure Member State shall not authorise the cross- border conversion where it determines, after an examination of the specific case and having regard to all relevant facts and circumstances, that it constitutes an artificial arrangement.

 

More information:

  • Draft report by a JURI rapporteur, 7 August 2018.
  • The Commission’s proposal for a directive as regards cross-border conversions, mergers and divisions, published at the end of April 2018: proposal for a directive of the European Parliament and of the Council amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions (COM(2018)0241 – C8-0167/2018 – 2018/0114(COD)).

This article is also posted on my general legal blog.

Addition 23 Augustus 2018
A new draft was published.

Over Ellen Timmer, advocaat ondernemingsrecht @Pellicaan

Verbonden aan Pellicaan Advocaten, http://www.pellicaan.nl/, kantoor Rotterdam, telefoon 088-6272287, fax 088-6272280, e-mail ellen.timmer@pellicaan.nl ||| Weblogs: algemeen: https://ellentimmer.com/ || modernisering ondernemingsrecht: https://flexbv.wordpress.com/ ||| Motto: goede bedoelingen rechtvaardigen geen slechte regels
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