Problem Introduction: Brexit and UK Companies based in Germany
Although the United Kingdom officially ceased to be a member state of the European Union on 31 January 2020 and could, therefore, in principle, have been classified as a third country, the transitional period agreed in the Withdrawal Agreement still applied until 31 December 2020. Until then, Great Britain still had to apply European law and remained part of the Single Market and the Customs Union. Brexit’s challenges only fully appeared in practice from 1.1.2021, and it is not yet possible to fully assess how far-reaching the impact will be.
For British companies, especially Ltd companies with registered offices in Germany, the classification of the United Kingdom as a third country already has devastating consequences. The Ltd. company, which has established itself as a popular legal form for German entrepreneurs, could be set up in the UK with very low liability capital and little start-up effort. Then, by establishing a branch office, the administrative seat could be transferred to Germany. Through the case-law of the European Court of Justice on the freedom of establishment, according to Art. 54 TFEU, the legal status of Ltd companies with an administrative seat in Germany was recognised and could be managed as such. This will now no longer apply from 1 January 2021. Since neither the Withdrawal Agreement nor the Trade and Cooperation Agreement contains any provisions in this regard, it will no longer be possible to invoke freedom of establishment. With Brexit and the end of the transitional phase, British Ltd companies will thus become third-country companies.
For the classification of the legal status of Ltd companies with their administrative seat in Germany, the seat theory of German law is relevant from now on. According to this, the company is always subject to the law of the state in which it has its de facto administrative seat. Some Ltd companies may have to establish a branch in Germany but are no longer recognised as a company form there due to the lack of European law regulations. As a result, the company is not treated as a limited liability company but as a partnership, i.e. OHG (general partnership) or GbR (partnership under civil law). As a result, the liability limitations of the partners will cease to apply, and they will, in principle, be personally and unlimitedly liable for all liabilities of the company as of 1 January 2021. The change in status can also have a serious impact on tax issues or business management.
Options for British Limited Companies in Germany / Administration Headquarters in Germany
In view of the far-reaching consequences of Brexit for UK companies with their registered office in Germany or in other EU member states, in particular with regard to considerable liability risks for the shareholders, it is necessary to act without delay. To mitigate the consequences of Brexit, you have various options for action depending on the circumstances of the individual case. We would like to briefly present these to you in the following. However, this is not a substitute for detailed legal advice tailored to your personal situation by our corporate lawyers and therefore only serves to provide you with an initial overview.
Transferring the Registered Office to the UK
Probably the most efficient and uncomplicated solution to maintain the Ltd. company in its original legal form and to avoid liability risks is to (re)transfer the administrative seat to the UK. However, this may entail tax burdens, especially for operationally active Ltd companies, so that this option should be thoroughly weighed up and discussed with experienced legal counsel.
An attractive option to avoid liability risks due to Brexit is to merge the Ltd. company with a German legal entity, for example a GmbH or UG. This results – with some exceptions – in universal succession and the rights, obligations and business of the Ltd. company, including the branch, are transferred to the German legal entity. In German law, this cross-border merger is regulated in §§ 122a et seq. of the German Transformation Act (UmwG). Accordingly, the following steps must be complied with:
- Drawing up of a merger plan with the necessary details,
- Notarial certification of the merger plan and submission to the commercial register as well as subsequent publication,
- Merger report,
- Merger audit,
- Consent of the shareholders,
- Application to the UK register for the cross-border merger in respect of the limited company – register issues certificate of merger which must not be older than 6 months when the merger is finally examined by the commercial register,
- Registration of the merger of the German company with the Commercial Register.
In the case of a cross-border merger, the limited company must also comply with the requirements of British law. However, it is problematic if the merger transactions were not already notarised by the end of 31 December 2020. This is because the option of cross-border mergers under §§ 122a UmwG will no longer be available from 1 January 2021, as from this date the Limited will no longer be recognised in Germany and will be treated as an oHg or GbR. However, if the merger was notarised by 31 December 2020 at the latest, it can be completed by 31 December 2022 at the latest.
As an alternative to the cross-border merger, it was possible to establish a German holding company for the purpose of managing the British limited company until 31 December 2020 at the latest, or to incorporate the limited company into a (new) subsidiary limited liability company and to transfer the administrative seat of the limited company back to the United Kingdom before Brexit to maintain its legal status.
Particularly if no measures were taken by 31 December 2020, establishing a company in Germany, for example a GmbH or UG, offers a further option for action. After the new establishment, an asset deal or share deal can then take place. In the case of an asset deal, the subsequent individual transfer of all assets of the limited company to this company takes place after the formation of the corporation. The advantage of this is that the British authorities are not involved, unlike in the case of a cross-border merger. Depending on the structure of your company, however, the asset deal may be hindered by the fact that the consent of all contractual partners is required, so that this method is mainly suitable for smaller companies with a manageable number of contractual relationships.
In a share deal, the shares in the limited company are transferred to the newly incorporated company, making it the sole shareholder in the limited company. This option allowed for a smooth transition before 31 December 2020. This is because the moment the new legal situation came into effect as a result of Brexit, the limited company ceased to exist and its assets automatically accrued to the new corporation as the sole shareholder. This so-called accrual of the shares in the Limited to a GmbH or UG newly founded in Germany can also take place subsequently, although it must be clarified for this constellation how the Ltd. company registered in the United Kingdom is to be dealt with under tax law in particular.
Furthermore, various conversion options may come into consideration. For British Ltd. companies with their administrative seat in Germany, cross-border conversion, conversion into a Societas Europaea (SE) and conversion into another foreign legal form should be considered in particular.
For cross-border conversion, §§ 190 et seq. UmwG are applied in an interpretation in conformity with European law. Accordingly, it is necessary for the conversion of a British limited company into a German GmbH that it actually carries on business activities in Germany, that it fulfils the formation requirements of a GmbH and that it meets the requirements of §§ 190 ff. UmwG or the relevant British law are met. With regard to additional prerequisites for cross-border conversion, there are still certain uncertainties due to the limited practical experience, so that it is recommended to contact the German and British registries before initiating this project and to ascertain the required documents and practical implementation.
One conversion option for larger companies can be the change of form into a “British” Societas Europaea (SE) by applying the European SE Regulation. In addition, the conversion of the Limited into another foreign legal form can be considered. A foreign legal form comparable to the Limited is, for example, the Irish Limited or the Dutch BV.
Liquidation and New Incorporation
Finally, even after 1 January 2021, there is still the possibility of liquidating the Ltd. company in the United Kingdom and subsequently establishing a new company in Germany. The liquidation of the limited company is possible under the conditions of British law.
Company name and Conversion Tax Law
When deciding on a course of action with regard to the British limited company with its administrative seat in Germany, aspects of company name and conversion tax law should also be taken into account. The German principles of company law, which must be observed when registering the new or changed company in the commercial register, may differ considerably from the British principles.
With regard to the transformation tax, it is particularly important to note that certain options for action, such as the contribution of the British limited company into a newly founded German GmbH, can only be carried out in a tax-neutral manner under § 21 UmwStG if the lock-up period of 7 years is observed. The acquiring GmbH may thus not sell the shares of the Limited for 7 years.