A recent tax ruling of the Belgian tax authority (the Tax Ruling) confirms that a transfer of the registered seat of a company from the United States to The Netherlands via Belgium should not trigger any tax consequences in Belgium. Although the Tax Ruling does not create a legal precedent, the decision may open up a new gateway into the European Union for companies that would like to re-domicile to an EU country that does not otherwise allow a direct transfer of registered seat from a non-EU jurisdiction.
In this article, “registered seat” refers to its nationality and the laws that apply to it. There are two different theories: the “center of management seat” model and the “country of incorporation” model.
According to the “center of management seat” model, a company is subject to the laws of the state where its effective center of management is located, irrespective of its country of incorporation. Jurisdictions applying this model include Luxembourg, Germany, France and Spain.
According to the “country of incorporation” model, a company is subject to the laws of the state where it was incorporated (i.e., where its “registered office” or “statutory seat” is), irrespective of where it is effectively managed. Under this model, a company retains the nationality of the country in which it was originally incorporated, even if it transfers the center of its management to another country. Jurisdictions using this model include England, The Netherlands and the United States.
However, in many jurisdictions that use the “country of incorporation” model, whether a company is subject to tax in those jurisdictions does not depend (at least not exclusively) on its country of incorporation. Instead, this may be determined by other independent connecting factors, such as its “central management and control” for UK tax purposes or its “effective management” for Dutch tax purposes.
Transfer of registered seat (or re-domiciliation)
The transfer of a company's registered seat is also known as re-domiciliation. Generally, the transfer of a company's registered seat will only affect the corporate law applicable to the company. Re-domiciliation may have non-tax rationales, such as benefitting from the destination country's network of (non-tax) treaties and regulatory framework. Sometimes, a re-domiciliation to a more tax-friendly jurisdiction may bring tax advantages if the company is subject to tax in its original jurisdiction because it was incorporated or has its registered seat there. For example, if a company is subject to tax in a “country of incorporation” model jurisdiction because its effective management is situated there, a re-domiciliation coupled with a transfer of the location of their effective management to another jurisdiction may reduce their administrative burden ensuring that they are subject to both the corporate laws and taxing regime of the destination jurisdiction.
Whether re-domiciliation (into or out of a country) is permitted depends on the domestic law of that country. A line of case law of the European Court of Justice (including Cartesio (2008), Vale (2012) and Polbud (2018)) is relevant in this context. These cases, subject to certain conditions, allow a company that is formed in accordance with the legislation of an EU Member State to convert itself into a company governed by the law of another EU Member State. Some EU Member States that do not otherwise allow re-domiciliation (such as The Netherlands) have relied on this case law to allow cross-border conversions or divisions from and to other EU Member States.
Belgium as a springboard
Belgium can potentially be a springboard for a non-EU company that would like (and is allowed under its domestic law) to re-domicile to a specific EU state not accepting re-domiciliation other than from an EU Member State (such as The Netherlands).
Pursuant to the new Belgian Code of Companies and Association (the CCA), Belgium recently adopted the “country of incorporation” model. Accordingly, from a Belgian law perspective, the applicable company law is determined on the basis of the formal criterion of the “statutory seat.” A formal procedure for a cross-border transfer of a company's registered seat into and from Belgium has also been introduced in the CCA. However, for the purposes of Belgian corporate tax, the company's effective management remains the criterion. A new rebuttable presumption has been added such that a company with a Belgian statutory seat will be presumed to have its effective management in Belgium. This presumption can be rebutted if it can be demonstrated that:
- the effective management of the company (for the purposes of Belgian tax law) is not located in Belgium but in another state; and
- the company is tax resident in a state other than Belgium pursuant to both domestic tax law in that other state and applicable tax treaties.
The Tax Ruling examined an arrangement that would take advantage of the new regime in the CCA by re-domiciling a company from the United States to The Netherlands via Belgium. The arrangement would broadly involve the following steps in accordance with the CCA (where applicable):
- First, the company would transfer its seat of effective management from the United States to The Netherlands. It would register as a foreign company in the trade register of The Netherlands Chamber of Commerce. In doing so, it would also become a Dutch tax resident.
- Second, it would transfer its statutory seat from the United States to Belgium. It would thereby be converted into a Belgian limited company and become subject to Belgian company law.
- Third, after waiting for two months as required by the CCA, it would transfer its statutory seat from Belgium to The Netherlands. It would finally be converted into a Dutch limited company.
The Tax Ruling held that the presumption would be rebutted under these circumstances. The company in question would not be considered a Belgian resident company, so it could not be subject to Belgian corporate tax. It may only be subject to some minor compliance formalities, such as filing an annual account for the financial year in which the statutory seat would be registered in Belgium.
It is worth noting that the Tax Ruling above does not create a legal precedent. Each case must therefore still be considered on its own merits. Also, one should also carefully assess the tax and non-tax consequences of the re-domiciliation in the company's original and destination jurisdictions.
Useful for UK companies after Brexit?
How useful will this potential gateway for re-domiciliation be for companies in the UK before and after Brexit? At present, UK law does not include any provisions that allow a true re-domiciliation (i.e., transfer of “registered office”) into or out of the UK. Even though the European Court of Justice's case law (such as Cartesio, Vale and Polbud) bind the UK (at least before Brexit), most practitioners note that these cases have not been enshrined in UK law.
Some practitioners suggest that although the European Commission can commence infringement proceedings against the UK for failing to implement EU law, in practice it seems unlikely that the UK government will introduce any such provisions in the UK before the end of the Brexit transition period. Even if such provisions were introduced into UK law, it would be unnecessary to use Belgium as a springboard into the EU as a UK company could directly re-domicile to any EU Member State.
Originally Published by Cadwalader, December 2020
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.