In recent years, the migration of individuals has caused an uproar in many developed countries. Yet, there is another type of migration – that of companies or 'legal persons' – which occurs quite frequently and goes virtually unnoticed. Although companies are invisible persons, they are still capable of moving from country to country. Indeed, in certain cases, the process for a company to migrate is as easy, if not easier, than that for an individual. Why and how would a company leave a country to 'settle' in another?
There are a myriad reasons to do so: one of the most popular is tax related: multinational businesses may move their group companies from zero/low-taxed countries to higher-taxed or EU countries due to 'Controlled Foreign Company' (CFC) rules. In brief, the objective of CFC rules is to tax the profits of companies based in zero/low-taxed countries as if the company were located in the country of its shareholder, thus rendering the tax benefits of being located in the zero/low-taxed country useless.
A number of companies have indeed moved to Malta precisely for this reason. Other reasons may be that another country provides a more flexible economic and/or legal landscape or because the individual shareholder himself is migrating out and wishes to manage his company in the same country in which he resides.
How does a company move country? The various alternatives are briefly explained below.
1.Redomiciliation /continuation of companies
Under this type of move, the company de-registers from the departing country and registers in the destination country. All legal ties with the departing country are broken and the migrating company becomes a 'normal' company in the destination country. Both the departing country and the destination country must provide for enabling laws to allow this type of move. Not all countries allow this, though Malta introduced this possibility in 2002 by virtue of the Continuation of Companies Regulations (Subsidiary Legislation 386.05). In 2014 and 2015, 177 companies moved to Malta compared to only 34 that moved out of Malta.*
2. Transfer of effective management
This is the fastest of all options. Though the company remains incorporated in the departing country and thus remains subject to its corporate laws, it would become resident for tax purposes in the destination country. 'Effective management' is normally interpreted as meaning the place where the power of the affairs of the company is located and where its real business is carried on. Essentially, it is the place where key decisions are made. Such decisions are normally taken by the board of directors. If the board of directors starts meeting and taking key decisions in the destination country, the effective management of the company would be considered to have moved to that destination country.
3. Converting into an SE and moving the seat
This move can be done in terms of the European Council Regulation 2157/2001 and therefore is only possible to move from one EEA member state to another EEA member state. Under this option, the company in the departing member state must already be a European company (SE). If not, it must first convert into an SE. It is only then that it can move to the destination country by following the formal procedure set out in the Maltese Transfer of Registered Office of a European Company (SE) Regulations (Subsidiary Legislation 386.17).
4. Cross border merger
This move is also sourced in EU law – more specifically EC Directive 2005/56/EC. There are various alternatives within this option. The simplest is that a company in an EEA member state is fully absorbed by its parent based in another EEA member state. However, it is also possible for, say, five companies incorporated in all different EEA member states to merge and form into a new company in another EEA member state, say Malta.
The best option depends on the specific facts and circumstances of the case. In a situation involving a non-EEA country, options three and four would not be possible. Careful planning is required under option two as it might give rise to sophisticated tax issues.
One could also consider the complete closure (by liquidation) of a company and the incorporation of a new company in the destination country. However, one of the advantages of migration of a company is that that same company remains in existence with the consequence that all contracts do not need to be terminated with the 'old' company and renegotiated with the 'new' company. Likewise, in a migration, the contract of employment of the employees do not need to be terminated.
* Source: MFSA Annual Report 2015.
Originally published by The Times of Malta.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.