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EU Seeks To Prevent BEPS With New Company Law Rules

by Ulrika Lomas, Tax-News.com, Brussels

27 April 2018


The European Commission has announced new company law rules to, on the one hand, make it easier for companies to merge, divide, or transfer from one member state to another, but, on the other, prevent abusive tax avoidance and profit shifting.

Introducing the new EU company law reforms on April 25, 2018, the European Commission said: "The European economy needs a framework that allows companies to easily operate in the Single Market, including when they grow and restructure across borders to adapt to changing market conditions. In the Single Market based on the principle of free establishment, companies must be able to merge, divide, or transfer their registered seat from one member state to another ("conversion") without having to go through liquidation and losing their legal personality, as recognized by the Court of Justice in its Polbud ruling of October 2017 [discussed below]."

"However, it is equally important to ensure that these possibilities are not abused. The proposal therefore sets up strong safeguards to protect the rights and interests of employees, shareholders, and creditors, and to prevent these procedures being used to set up artificial arrangements, including those aimed at obtaining undue tax advantages. The initiative introduces common EU procedures for cross-border conversions and divisions and it updates existing rules on cross-border mergers."

The Commission explained that the reforms respond to a risk that cross-border conversions and divisions could be misused to set up fictitious structures for abusive ends, such as tax avoidance or undermining workers' rights.

"The proposals contain strong safeguards to prevent this risk materializing in the future," the Commission said. Adding: "A crucial element of the conversion and division procedures is therefore that the member state of departure of the company will have to prohibit operations that constitute an artificial arrangement aimed at obtaining undue tax advantages or undermining the legal or contractual rights of employees, creditors, or shareholders."

"In medium and large companies where this analysis may be more complex, an independent expert will be involved in providing the factual elements for the assessment by the authority of the member state of departure. The expert report would need to take into account the following: the characteristics of the establishment in the destination member state, including 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 by the converted company in the destination member state and the departure member state."

In the judgment of the Court of Justice of the EU in the case of Polbud (C-106/16), the Court clarified that based on the principle of free establishment, the member state of departure must allow for cross-border conversions, and that it cannot require the transfer of the "real seat" of the company (i.e. the head office, as opposed to merely the "registered seat.") However, the destination member state may require the real seat on its territory if this forms part of its incorporation requirements. In response to the ruling, the Commission said: "As the Court has stated, it is for the EU legislator to provide for a procedure for cross-border conversions. Moreover, the legal framework clarified by the Polbud judgment needs to be complemented by adequate safeguards with a view to protecting the rights of employees, shareholders, and creditors, as well as preventing abusive use of the cross-border procedure in order to set up artificial arrangements, in particular aiming at obtaining undue tax advantages."

Presently, there are currently only 17 member states that provide a fully online procedure for registering companies. Under the new rules, in all member states, companies will be able to register, set up new branches or file documents to the business register online. The Commission considers that going digital makes the process of setting up a business more efficient and cost effective.

The proposal sets out common procedures at the EU level on how a company can move from one EU country to another, merge, or divide into two or more new entities across borders.

In line with the landmark judgment from the European Court of Justice, companies will be able to move their seat from one member state to another following a simplified procedure.

The new rules are part of the Commission's push for a fairer Single Market. They complement recent initiatives to strengthen the rules on posted workers and the fight against tax evasion and fraud as well as the Commission's proposal on a European Labour Authority. At the same time, the new rules will enable businesses to move or reorganize without unnecessary legal complexities and at a lower cost throughout the Single Market. The Commission estimates cost savings for companies of EUR12,000 (USD14,600) to EUR19,000 per operation and a total of EUR176m to EUR280 million over five years.

TAGS: tax | investment | business | European Commission | tax avoidance | mining | interest | law | employees | transfer pricing | European Union (EU) | Europe | BEPS

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