On 31 December 2020, the transition period between the UK and the EU will come to an end and EU law will cease to apply to the UK. While much of the focus of Brexit planning to date has quite rightly been on the impact of the UK's departure for supply chains, customs readiness and VAT/tax registrations, the expiry of the transition period will also have some corporate compliance implications for UK registered companies operating in Ireland and Irish companies with UK connections which may not have received the same level of attention.
The main impact for companies to consider is that as of 1 January 2021, provisions in the Companies Act 2014 (the “Act”) which make reference to a European Economic Area (“EEA”) member state will no longer be deemed to include the UK and the implications of this will need to be considered carefully. This insight acts as a timely reminder to such companies of the consequences that Brexit will have on corporate governance and compliance matters, and the steps that companies can take to address these issues.
EEA resident director requirement
Pursuant to section 137 of the Act, at least one director of a company must be resident in the EEA. Companies that have fulfilled this obligation by appointing a UK resident director must either:
- replace or augment that director with a director who is resident in the EEA, before 31 December 2020
- avail of one of two exemptions to the requirement to have an EEA resident director namely:
- the posting of a non-resident director bond; or
- the application for a Trading Certificate
Non-resident Director Bond
The requirement to have at least one director resident in the EEA does not apply to companies that put in place a bond to the value of €25,000 in respect of any liability for non-compliance by the company or its officers with their obligations under the Act. The bond has to be put in place for a minimum two year-period and is provided by an insurance company.
This second exception is set out in section 140 of the Act, which provides that the Registrar may grant a certificate to a company who has a “real and continuous link” with one or more economic activities that are being carried on in Ireland. A company must meet one or more of the conditions set out in section 140(9) of the Act for the purpose of satisfying that the company has a real and continuous link with Ireland:
- the affairs of the company are managed by one or more persons from a place of business established in the State and that person or those persons is or are authorised by the company to act on its behalf;
- the company carries on a trade in the State;
- the company is a subsidiary or a holding company of a company or other body corporate that satisfies either or both of the conditions specified in paragraphs (a) and (b);
- the company is a subsidiary of a company, another subsidiary of which satisfies either or both of the conditions specified in paragraphs (a) and (b).
Parent company guarantee
Section 357 of the Act provides that where a company is a subsidiary of a holding company that is established under the laws of an EEA member state, the company shall be exempt from the requirement to publicly file its annual financial statements where certain conditions are met. The key condition is that an irrevocable guarantee is in force for the duration of the relevant financial year, from the holding company of the subsidiary, which covers all commitments entered into by the subsidiary in respect of that financial year.
In practice, this section is often relied on by Irish subsidiary companies who can avoid having to file entity financial statements by instead filing the accounts of an EEA holding company. As this filing exemption is only available to companies that are a subsidiary of a holding company registered in the EEA. Irish subsidiaries of UK holding companies who have previously availed of this exemption will therefore have to be prepared to file the documents required under section 347 and section 348, as appropriate.
Group financial statements exemption
Section 299 of the Act provides that a holding company is exempt from the requirement to prepare group financial statements if that holding company is itself a subsidiary and its holding company is established in a member state of the EEA. As above, companies that are themselves subsidiaries of UK registered holding companies will no longer be able to rely on the exemption from consolidation provided in section 299.
Such companies will instead have to rely on the exemption provided by section 300 of the Act, which applies where the holding company is not established under the laws of the EEA. The conditions to be satisfied under this section are however more restrictive than the criteria for section 299.
Alteration of financial year end
Section 288 of the Act provides that a company shall not change its financial year end date more than once in a five year period. This restriction does not apply to a company that is a subsidiary of an EEA holding company, or is a holding company of an EEA company, if the financial year end date specified coincides with that of the EEA company. This exception will not apply to companies seeking to align their financial year end date with that of their UK holding companies.
Irish branches of UK registered companies
Many companies registered in the UK who operate in Ireland have chosen to establish branches of the UK company in Ireland, as opposed to incorporating an Irish subsidiary. While such branches of the UK companies will not be required to re-register with the Companies Registration Office (“CRO”) or will not be required to incorporate as an Irish subsidiary, they will be subject to filing annual returns and accounting documents with the CRO under section 1305 of the Act, which carries additional filing requirements for non-EEA companies. Further, section 1306 of the Act requires non-EEA companies to provide details of the called up share capital of the company.
Cross-border merger regime
The cross-border merger regime was introduced by the European Union Directive 2005/56/EC (as amended by Directive 2017/1132/EU) and implemented in the Ireland by the European Communities (Cross-Border Mergers) Regulations 2008 (as amended) (the “CBMR”). The CBMR provides a framework for the merger of one or more Irish companies can be completed, provided that the merger is with at least one company from a different EEA member state. One of the key advantages of the regime is that upon completion, all of the assets and liabilities of the transferring company automatically pass to the transferee company, and the transferring company is dissolved and ceases to exist, without the need for any liquidation or administration proceedings. As of 1 January 2021, it will not be possible to use this regime for cross border merger of Irish and UK companies and more traditional corporate reorganisation structures will need to be used.
Irrespective of the extent and nature of the future EU-UK trading relationship, the mere fact of the UK ceasing to be an EEA member state has a vast range of consequences for statutory exemptions that are based on an EEA member state connection. This is none too evident in relation to company law and corporate compliance. Companies that have previously availed of these exceptions on the basis of a UK connection will need to review their affairs and consider the impact this change will have to their corporate compliance and financial reporting obligations.
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.