CONSULEGIS Handbook - 2012 International Corporate Structures

Corporate Law in Angola

  1. Compliance with regulations concerning foreign investments in Angola

General

Angolan law does not differentiate significantly between a domestic owned company and a foreign owned company. However, Angola imposes significant restrictions to foreign investors who wish to acquire Angolan companies or businesses. Companies whose head office is abroad should have permanent representation in Angola. Special reporting requirements apply to investors based on nationality and in certain political circumstances limits may be imposed to the repatriation of capitals.

Private Foreign Investment

Investment in Angola is subject to the Private Investment Law (Lei do Investimento Privado; the "PIL").

Application

PIL applies both to domestic as well as foreign private investment. Private investment in this context is broadly defined and includes new activities as well as investments in existing enterprises or projects. PIL only applies to investments (domestic and foreign) in Angola with a value equal to or more than USD 1 million (or the equivalent in another currency).

PIL provisions do not apply to investments in oil exploration, diamond mining, financial institutions not to other sectors which are subject to a specific legal regime and to the extent that the legislation regarding these sectors provides for different rules than those set out in the PIL.

General principles

PIL defines the regime to which investments are subject as well as the type of incentives that can be granted in connection with such investments. It contains a list of general principles and guarantees that are intended to safeguard and promote investments in Angola. More specifically, PIL requires that the investment must contribute to the economic development of Angola, and must comply with the principles and objectives of the Angolan national economic policy and applicable law.

Responsible bodies

The Angolan National Private Investment Agency (Agência Nacional para o Investimento Privado; "ANIP") is the designated body responsible for the execution of national policy in relation to investments. The Angolan Government (i.e., the Angolan President) defines and promotes this policy and may support certain investments in particular sectors or economic zones.

Legal basis of investment

Investments to which PIL applies are subject to a contract between ANIP (representing the Angolan State) and the investor, which sets out the conditions for the investment as well as the incentives (if any) granted to the investor in connection with the investment.

Repatriation of funds

In the case of foreign investments, it is permitted to export and repatriate:

-               dividends and other profit distributions;

-               liquidation proceeds;

-               indebtedness;

-               indemnities (resulting from expropriation); and

-               royalties.

The repatriation of the above funds has to be made in accordance with the applicable foreign exchange laws and after payment of taxes due in Angola.

PIL provides that repatriation of dividends needs to be carried out gradually and proportionally, taking into account the size of the investment and other criteria. The precise terms of the proportion and percentages of the profit and dividend distribution that can be repatriated are to be agreed as part of the investment contract between ANIP and the investor. However, according to PIL, repatriation of dividends will not be allowed if, as a result of such repatriation, the amount invested per investor is reduced to less than USD 1 million. The repatriation of profits is further restricted in time. Depending on the value of the investment and the region in which the investment is made, profits may not be repatriated earlier than two or three years after completion of the project.

Tax and customs benefits and incentives

PIL provides the legal basis for the allocation of tax and customs benefits and incentives to investors. These benefits and incentives consist of, inter alia:

  • tax deductions;
  • tax payment deductions;
  • accelerated amortisation and depreciation;
  • tax credits;
  • reduction or exemption of taxes, contributions and duties; and
  • extension of tax payment deadlines.

PIL contains detailed provisions regarding the conditions for allocating tax and customs incentives and the terms under which they may be granted. These conditions take into account, inter alia, the sector of activity, the regional zone in which the investment is made and the value of the investment. The economic and social impact of the investment should also be taken into account when determining whether incentives are granted and their scope.

The allocation of tax and customs incentives is not automatic. They depend on a case by case assessment by the competent body for approval (as further described below), taking into account the matters mentioned in the previous paragraph.

Procedure

Investment arrangements are subject to a contract between the Angolan State, represented by ANIP, and the investor. PIL governs the matters which the contract should address and provides that disputes are resolved through arbitration in Angola. The contract must be governed by Angolan law.

Part of the procedure is conducted by the Commissão de Negociação de Facilidades de Investimento ("CNFI") a commission (which there can be more than one of) established by ANIP that negotiates the terms of the incentives granted in connection with the investment. The CNFI is composed of representatives from the tax and customs authorities, as well as from the Angolan Central Bank (Banco Nacional de Angola or "BNA"). For projects that exceed USD 50 million, the Angolan Government can require the establishment of an ad hoc CNFI.

The procedure for approval of a proposed project can be summarised as follows:

  • The completed proposal is filed before ANIP (with all required documents).
  • If the file is incomplete or deficient, ANIP must inform the investor and the investor has a period of 15 days to complete or correct the proposal.
  • Once ANIP has received and accepted the proposal, it has 45 days to (i) consider the proposal, (ii) negotiate the terms of the investment contract and (iii) submit the file for approval to the competent authorities.
  • Simultaneously, the CNFI has 30 days to analyse and assess the proposal and negotiate with the investor the incentives and benefits that are being requested.
  • 10 days after the deadline mentioned in 4 above, the CNFI must issue its final opinion regarding the project.
  • After finalisation of the negotiations with the investor, ANIP has 5 days (but still within the 45 day term referred to in 1 above) to issue its detailed opinion to the CNFI.
  • If the negotiations cannot be concluded within the 45 day period referred to in 1 above, the proposal will be rejected.
  • If the negotiations are successfully concluded, the proposal (together with the investment contract and the opinions from ANIP and the CNFI) will be submitted for approval to the competent body. For investments of USD 10 million or less, the competent body is ANIP, and for investments of more than USD 10 million, the competent body is the Angolan Government. The decision whether to grant approval has to be made by ANIP within 15 days, and by the Angolan Government within 30 days, after receipt of the relevant documents by the board of ANIP or the Angolan Government, respectively.
  • After the approval is granted, ANIP will sign the contract and issue a certificate that confirms the approved status of the investment (Certificado de Registo de Investimento Privado; "CRIP"). The contract will be published in the official gazette (Diário da República).
  • . If the proposal is rejected, ANIP will inform the investor, providing the grounds for its rejection.

Implementation of the Project

The project for which the investment is made must be implemented within the term set out in the investment contract and the CRIP. The term can be extended in exceptional circumstances. ANIP monitors the implementation and development of the project on a regular basis. The companies that are established to implement the project are required to employ Angolan nationals and ensure that they have proper employment conditions. It is possible to employ qualified foreign nationals but an education and capacity building programme for Angolan nationals must be put in place so that they can progressively replace the foreign nationals.

Companies

The companies that are used for the implementation of the project are also subject to the PIL. They should in principle be special purpose companies. There are specific formalities to be observed in the context of their establishment and there restrictions to the scope of their objects, and any change in shareholders is subject to approval requirements.

Regulated Activities

There are certain activities that are regulated and need to meet specific conditions in order to be carried out by investors. Regulated activities include among others oil-related activities, banking, basic sanitation, energy, water, ports and airports, railroad transportation and commercial aviation. Additionally, there are certain areas in which private investment is limited, such as regular passenger and cargo aviation, mail services and navigation.

  1. Procedures and Formalities for the Incorporation of Companies in Angola

Competent Authority

In 2000 a one stop public service (Guichet Único da Empresa) was created, in order to combine all the relevant institutions with responsibility for the company’s incorporation process in one place. It is worth mentioning that the one stop public service is not yet fully operational but is currently able to perform the following acts in a short period of time:

  • Issuance of the corporate name certificate;
  • Execution of the public deed of incorporation of the company;
  • Statistic registration before the National Institute of Statistics;
  • Registration of the company before the commercial registration office;
  • Publication of the company by-laws in the Official Gazette (Diário da República);
  • Tax registration before the Finance Ministry;
  • Registration of the legal representatives of the company before the social security and tax authorities;
  • Obtaining a commercial license to operate (issued by the Commerce Ministry);
  • Obtaining an import license (issued by the Commerce Ministry).

Formalities

The formalities required to establish a company in Angola include:

(i)            Obtaining the approval of the company name and scope of activity (subsequent to the submission and approval by the Central Office for Corporate Names (Ficheiro Central para Denominações Sociais or “DNRN”);

(ii)            Registration with the Foreign Investment National Agency (ANIP) and obtaining approval by the ANIP if the establishment involves an investment below US$ 5M or obtaining authorisation by the Council of Ministers if the investment is in excess of US$ 5M;

(iii)           Obtaining the certificate of registration for private investment;

(iv)          Obtaining a capital import licence from the Angolan National Bank (Banco Nacional de Angola);

(v)           Notarisation of incorporation documents, i.e.:

(a)           Full identification of the shareholders and shareholder representatives (including copies of ID cards or passports), and for corporate shareholders, legalised copies of the certificate of incorporation of the shareholder, power of attorney or copy of minutes deciding on the incorporation of the company;

(b) By-laws which may include transitory rules – for appointment of the corporate bodies; and,

(c) Proof of deposit of the share capital to be filed with the registry procedure or up to 5 days following the incorporation of the company;

It must also be noted that the documents must be translated into the Portuguese language (together with a certificate attesting the capacity of the translator) and duly legalised at an Angolan Consulate.

(vi)          Execution of the public deed of incorporation before a local Public Notary;

(vii)         Registration before the Commercial Registry Office (Conservatória do Registo Comercial);

(viii)         Publication of the by laws of the company in the Official Gazette (Diário da República);

(ix)           Statistic registration before the National Institute of Statistics;

(x)            Tax registration before the Finance Ministry;

(xi)           Obtaining a commercial license to operate (issued by the Commerce Ministry);

(xii)          Obtaining an import license (issued by the Commerce Ministry).

Timeframe

It is difficult to estimate a timeframe for the incorporation of a company in Angola. However, since the creation of the Guichet Único da Empresa, this process can take from 1 to 2 weeks.

Legal expenses

Legal expenses for incorporation of a company will vary according to the amount of the share capital. The costs for a minimum attributed capital of US$ 100,000 will be approximately 207.000,00 Kz or US$ 2,223

III. Business structure

In order to conduct business in Angola, a foreign investor may decide on the establishment of a branch or the incorporation of a subsidiary (company) in Angola.

When take the decision which structure to use the investor should bear in mind the type of operation and investment as well as the level of independence from the parent company.

  1. Branch (Sucursal)

A branch is not a separate legal entity. Thus, the foreign owner company itself is held responsible for all the assets and liabilities of a branch, being also responsible for its debts.

In order to establish a branch in Angola, it is necessary to obtain the approval of the name and register the branch at the Commercial Registry Office.

The following documents will be necessary:

  • Proof of legal existence of the company (certificate of incorporation or certificate of good standing);
  • By-laws of the company;
  • Resolution in respect of the creation of the branch and information concerning the branch’s representative;
  • Documents identifying the applicant and relevant powers (i.e. power of attorney).

The Angolan branch will be subject to taxation in Angola and will be treated as a permanent establishment (which has several taxation implications) and must comply with accounting and tax obligations in Angola.

  1. Subsidiary – the Angolan Companies

Commercial companies in Angola generally assume the form of either a public limited company (“S.A.” or “Sociedade Anónima”) or a private limited company (“Lda.” or “Sociedade por Quotas”).

A- Private Limited Companies

  1. General requirements:
  • Share capital represented by quotas;
  • Shareholder identification registered at the Commercial Registry Office;
  • Quotas may have different nominal values but cannot be lower than the equivalent, in national currency (kwanzas), to USD 100.00;
  • The minimum capital for a private limited company is the equivalent, in national currency (kwanzas) to USD 1.000,00. At no time may the capital of a private limited company be reduced to a lower value
  • A maximum of fifty percent of the cash contribution can be deferred, but the total sum of the cash payments made on creation and the sum of the par value of the shares corresponding to payments in kind shall not be lower than the statutory minimum share capital.
  • The sum of initial capital contributions in cash which are already paid-up must be deposited with a credit institution, in an account opened in the name of the future company, prior to the company’s incorporation public deed, and the supporting document must be exhibited to the Public Notary;
  • The share capital not paid-up with the incorporation must be paid within a maximum period of 3 years;
  • Minimum number of shareholders: 2;
  • Shareholders' liability: partners are jointly liable for putting up all of the capital agreed in the articles of association. Shareholders shall only be obligated to pay the additional capital contributions if the articles of association or applicable legislation so require. Unless otherwise provided for, only corporate assets may be used to pay creditors ; and
  • Limitations to the transfer of quotas and pre-emption rights provisions are allowed.
  1. Corporate governance/management
  • One or more managers (Gerentes) appointed by shareholder resolution;
  • The management powers remain with the managers;
    • The articles of association may determine that the company have a supervisory board;
  • Two types of shareholder general meetings: the ordinary general meetings (i.e. those foreseen by Law and in the by-laws, namely the general meeting to approve the annual report and financial statements) and extraordinary general meetings (which are general meetings convened for a specific purpose);
  • general meetings are convened by any manager, with at least 30 days’ notice in advance and must be published in the most widely read newspaper in the locality of the company’s head office ; and,
  • The chairman of the general meeting must be the shareholder who possesses or represents the largest fraction of the capital.
  1. Taxation of the company income:

Private Limited Companies are subject to corporate income tax, as described below.

  1. Pros and cons:
  • Pros: Simpler structure and less complex management system; ideal for smaller companies / family owned companies.
  • Cons: Cannot be listed in stock exchange markets; shareholders can be easily identified; prescribed corporate governance.

B- Public limited companies

  1. General requirements:
  • Share capital represented by shares, material, which may be nominative or bearer, registered in the company shares register.
  • Mandatory share minimum value: the equivalent, in national currency (kwanzas), to USD 5.00;
  • Shares can be transferred by means of private agreements, and if not subject to deposit regime, there are no formalities to fulfil;
  • Mandatory share capital in the amount of the equivalent, in national currency, to USD 20,000.00.
  • The company may be incorporated if, at least 30% of the share capital is paid up –the share capital deposit (or minimum cash pay up) must be made prior to incorporation. The share capital not paid with the incorporation must be paid within a period of 3 years;
  • Minimum number of shareholders at incorporation: 5;
  • Liability of the shareholders: Limited to the shares subscribed;
  • The transfer of shares and pre-emption rights provisions are allowed; however, in this case, the shares must be nominative;
  • The company may be listed in the Stock Exchange.
  1. Corporate governance/management:
  • Sole board member (Administrador Único) (if, among other criteria, the share capital is lower than the equivalent in national currency, to USD 50,000.00) or board of directors (Conselho de Administração) with the number of directors defined in the by-laws (must be an odd number);
  • One supervisory officer (Fiscal Único) and a substitute, both expert accountants (if, among other criteria, the share capital is lower than the equivalent in national currency, to USD 50,000.00), or a supervisory board (Conselho Fiscal) with three or five members and two substitutes.
  • One of the members of the supervisory board and one of its substitutes must be expert accountants.
  • Only one management structure, comprised of a shareholders’ general meeting, board of directors and supervisory board;
  • Two types of shareholders general meetings: the ordinary general meeting (i.e. those foreseen by Law and in the by-laws, namely the general meeting to approve the annual report and financial statements) and extraordinary general meeting (which are general meetings convened for a specific purpose);
  • The chairman of the shareholders convenes the general meeting by at least 30 days’ notice in advance, which must be published; and,
  • The chairman of the shareholders general meeting is appointed initially by virtue of the initial by-laws and subsequently by shareholders’ resolutions.
  1. Taxation of the company income:

Public limited companies are subject to corporate income tax, as described below.

  1. Pros and cons:
  • Pros: Allows a complex corporate governance structure; public limited companies may be listed in stock exchange markets.
  • Cons: Heavier and burdensome structure may be inadequate for small businesses.
  1. Other types of companies:

Apart from the types of companies described above, there are also other types. However, it is fairly uncommon for Angolan or foreign investors to use any other company type.

The general partnership (Sociedade em nome colectivo) is a corporate vehicle with unlimited liability and in which all partners are jointly liable for the entity’s debts. The private assets of the partners can be used to pay the debts of the entity. The management consists of the partners, each of whom has the powers to bind and represent the entity.

Another type of corporate entity is the limited partnership (Sociedade em comandita), in which there are two types of partners: the dormant partners, whose liability is limited to the amount of their capital and full partners who are liable without limits for the entity’s debts. The limited partnership may have shares or not.

  1. IV. Foreign Exchange

Angola has foreign exchange restrictions which are based on the Exchange Law which is supplemented by further regulations that provide for detailed rules in respect of specific transaction types. Angolan banking institutions play a key role in the settlement of transactions between residents and non-residents.

The settlement of transactions involving goods may generally only be processed by purchasing currency from a bank domiciled in Angola and providing proof of import or dispatch of goods to the bank. The settlement of export and re-export of goods requires as a rule the intermediation of a bank authorised to engage in foreign exchange operations in Angola.

Capital and current account transactions between Angolan residents and non-residents are generally subject to the authorisation of the BNA. Current account transactions include, for example, expenses associated with transport, insurance, travel, trade commissions, patents and trademark rights, salaries and similar transactions. No authorisation of the BNA is generally required for transfers of USD 300,000 or less in connection with current account transactions.

  1. Relevant tax aspects related to corporate law

General considerations

Companies carrying out industrial and commercial activities in Angola are subject to the following taxes:

  • industrial tax (corporate income tax);
  • taxation on construction and services contracts;
  • capital tax;
  • personal income tax;
  • consumption tax;
  • custom duties;
  • social security contributions;
  • stamp duties;
  • property tax.

The Angolan tax regime is currently subject to reform and the applicable tax regime is expected to change in the short to medium term.

Taxes

The table below sets out the various taxes based on the current regime.

Industrial tax (corporate income tax) Due for profits derived from commercial and industrial activities carried out in Angola by companies or branches.The ordinary tax rate is 35%; agricultural, forestry and cattle raising activities are subject to industrial tax at a 20% rate.
Taxation on construction and services contracts Withholding tax on payments made to persons and companies, carrying out, occasionally or permanently, activities in Angola.Construction, improvements, reconstruction, repairs or maintenance of fixed assets: 3.5% of the value of the contract; all other services: 5.25%.
Capital tax Income derived from interest under loans and income derived from credit agreements are subject to tax if it is received in Angola or if it is paid to persons who are deemed resident in Angola. If the payer has its head office in Angola, the income is deemed to be received in Angola (and therefore taxable).Income derived from dividends, interest on debentures, shareholder loans, current account and royalties are subject to cassation if they are payable by an entity which is deemed to be resident in Angola.Applicable rates are 10% or 15% depending on the type of income.
Personal income tax Payable by all resident and non-resident individuals in Angola over all income received from an activity carried out in Angola.The tax rates are progressive.
Consumption tax Applies to production and import of goods, consumption of water, energy, telecommunication services, hotel and restaurant services or similar services.Tax rates vary from 2% to 30%.
Custom duties Rates depend on the products to be imported and vary between 2% and 35%.
Social security contributions The contribution is assessed at a rate of 8% for employers and 3% for employees on salaries and additional remuneration
Stamp duties Due in respect of contacts, title instruments and similar documents.Applicable rate varies between 0.30% and 10% and the most common rate is 1%.
Urban property tax Due on income generated by lease contracts or by reference to the property value.Tax rate of 15% to be withheld by the tenant on all lease payments to the landlord.Property owners must pay annually approx. 0.5% of the property value by way of tax.Current property values will be updated by the Ministry of Finance (due to outdated values).

Tax Enforcement

Recently two new regulations have been introduced in Angola intended to reinforce compliance with applicable taxation rules.

Law No. 2/11 of 8 June 2011 contains the simplified fiscal execution regulation and deals with the measures that can be taken by the tax authorities to collect tax claims through enforcement procedures. The regulations set out the conditions and procedures for confiscation and seizure of assets and appeal procedures. The regulations apply to all persons who are obliged to pay taxes in Angola, and have retro-active effect (i.e., they also apply to pending cases). In addition to enforcement measures, the regulations permit the tax authorities to apply additional punitive measures, such as the publication of a list of persons with tax arrears and a prohibition to participate in public tenders.

Presidential Decree No. 66/11 of 18 April 2011 sets out further sanctions that can be taken against tax payers who fail to comply with their tax obligations. These sanctions include a prohibition on carrying out customs and exchange operations as well as a suspension of the issue or renewal of work permits.

International Taxation

Angola has no double taxation treaties. No relief is granted for foreign taxes paid by an Angolan taxpayer.

Groups of Companies

There is no special regime regarding the taxation of groups of companies.

Abreu Advogados



Corporate Law in Argentina

  1. Compliance with regulations concerning foreign investments in Argentina

General:

Although it is possible to conduct business in Argentina through several legal structures, including a sole personal trader, most of the regular and legally organized businesses operate under the legal structure of a commercial company.

Commercial companies are mainly regulated by Commercial Companies Law No. 19,550, enacted in April 1972, as amended. Executive Decree No. 841/84 provides a restated version of Law No. 19,550 (Company Law or CL).

Non-commercial companies (basically small professional organizations) are mainly regulated by the provisions of the Civil Code, Sections 1648 to 1788 bis.

The legal Framework for commercial companies is supplemented by the regulations enacted by the National Inspection Department of Corporations (National Law No. 22,315) and similar provincial commercial bodies that control the commercial companies. In the city of Buenos Aires and in many provinces, these governmental bodies (Inspection Department of Corporations) are also in charge of the Public Registry of Commerce, where the companies’ incorporation documents and other commercial documents are registered in order for the commercial companies to operate in Argentina as a regular company. In certain provinces, the two functions, control and registration, are allocated to different governmental bodies.

In turn, Law No. 17,811 enacted in July, 1968, regulates public offerings on the Argentine market and creates the Comisión Nacional de valores (the Argentine equivalent of the U.S. Securities and Exchange Commission) which, among other functions, exclusively controls commercial companies nationwide that make public offers of shares and/or financial instruments intended to be offered to the public (National Law No. 22,169).

It should also be mentioned that other governmental bodies, like the Argentine Central Bank and the Superintendencia de Seguros de la Nación (Superintendency of Insurance) are entitled to regulate and control all the commercial companies nationwide that correspond to their specific areas, i.e. financial entities and insurance/reinsurance companies (Law No. 17,811, 21,526 and 24,144).

  1. Commercial Companies

The Company Law expressly defines that a commercial company is formed “when two or more persons in an organized manner, adopting one of the company types provided for in this law, undertake to produce or exchange goods or services, sharing the profits and bearing the losses” (CL. Section 1)

The Company Law also provides that a commercial company shall only be deemed to have been appropriately organized upon its registration with the competent Public Registry of Commerce (CL. Section 7).

  1. Basic Requirements

The above comprises the initial basic regulations for commercial companies in Argentina. In order to exist, a regular commercial company:

  • should be composed at least of two partners;
  • must be organized under one of the authorized forms;
  • should be registered with the corresponding Public Registry of Commerce

Existence of Two Partners

The existence of a least two partners is a requisite not only for the formation of the company but throughout its existence. Section 94 of the Company Law provides that one cause for dissolving a company is the existence of only one partner, if no new partner joins the company within a three (3) month period. Section 94 also provides that during this period, the sole partner shall have unlimited liability, joint and severally with the company, for the obligations assumed by the company.

In the application of this provision:

  • The Argentine courts and authorities have accepted that a company exists even if its partners are different companies belonging to the same economic group.
  • The National Inspection Department of Corporations and other similar provincial governmental bodies have recently established the practice of making an “administrative objection” when a corporation or a limited liability company intends to be organized by only one or two partners and, in addition, the minority partners represent less than 5-10% of the capital of the company. In such cases, the governmental bodies consider that such participation does not fulfill the legal requirement of at least two partners. Similar objections may be made if the same situation occurs at any point during the company’s existence. In both cases, it is possible to argue against the administrative objections explaining the de facto and/or temporary circumstances that make such minority participations reasonable.

Authorized Forms

Company Law provides for the following types of authorized companies:

  • Sociedad Colectiva (Partnership)
  • Sociedad Encomandita Simple (Limited Partner Partnership)
  • Sociedad Capital e Industria (Capital and Industrial Partnership)
  • Sociedad de Responsabilidad Limitada (Limited Liability Company)
  • Sociedad Anónima (Corporation)
  • Sociedad Encomandita por Acciones (Partnership Limited by Shares)

There are other types of companies created by special laws like the Sociedades Cooperativas (Law No. 20,337); Sociedades de Economía Mixta (Decree Law No. 15,349/46) and Sociedades del Estado (Law No. 20,705), which are only used by specific business sectors.

Registration with the Public Registry of Commerce

To be considered regularly formed, commercial companies must also be registered with the Public Registry of Commerce of the jurisdiction corresponding to their legal domicile (Argentine Commercial Code, Section 34 provides that each jurisdiction should establish a Public Registry of Commerce in charge of registering certain commercial contracts and documents like the Articles of Incorporation and the by-laws of commercial companies).

  1. Irregularly Organized Companies

Commercial companies not organized as one of the authorized forms or not regularly registered with the corresponding Public Registry of Commerce are considered irregularly formed companies (CL Sections 21 and 23). In these cases:

  • The partners and their representatives who enter into contracts in the name of the irregularly formed company shall be jointly and severally bound by the company obligations, not being authorized to invoke any limitation of liability or the right of requesting the preliminary exclusion of the company assets.
  • Any of the partners may represent the irregularly formed company vis-à-vis third parties.
  • Any of the partners may at any time request the dissolution of the irregularly formed company.

Company Law also provides that upon the decision of the majority of the partners, the irregularly formed company may be regularly reorganized, in which case the resulting regularly formed company continues to be vested with rights and obligations of the former company. However, the partners remain liable for the acts carried out before the regularization (CL Section 22).

  1. Business Structures Most Commonly Used By Foreign Investors In Argentina

For different legal and practical reasons, most foreign investors doing business in Argentina carry on business through a corporation, a limited company or a branch.

  1. “Sociedad Anónima” (Or S.A.). (Cl Chapter V)

General

The company known as sociedad anónima is the one most commonly used by foreigners doing business in Argentina, including the local subsidiaries of foreign companies as well as local and/or family owned enterprises. Sociedad anónima is also the only type of commercial company authorized for public quoted companies, financial, insurance and risks rating companies, among others (in certain cases cooperativas and foreign company branches are also authorized).

A sociedad anónima permits the shareholders to limit their liability to the par value of the shares to which they have agreed to subscribe. An S.A. may be considered the equivalent of a U.S. Corporation.

Incorporation

The incorporation of an S.A. requires the prior authorization of the local Inspection Department of Corporations which will control the legal and tax requirements of the incorporation. (CL Section 167).

Basic Characteristics

  • Stockholders: As in all companies, a minimum of two is required; they may be residents or non-residents. However, as with all locally created companies, if the stockholders are foreign companies, they shall first comply with local regulations requiring the registration of their Articles of Incorporation, by-laws and other company documents.
  • The capital must be represented by shares and the stockholders limit their liability to the value of the shares to which they have subscribed. The Company Law stipulates that the initial minimum capital required is AR$12,000 (approx. U$S 3000) of which only 25% must be paid-up at the time of the formation and the balance within a maximum period of two years. In this respect, in most of the jurisdictions, the competent Inspection Department of Corporations requires that the initial corporate capital bears a reasonable relationship with the company’s purpose.

In addition, in order to register a commercial company as an importer/exporter, the company must have a net worth of at least AR$300,000 (approx. U$S 75,000) or gross annual sales totaling this amount. Otherwise, the company will have to furnish an adequate guarantee to obtain registration.

These amounts are regularly adjusted by the competent authorities.

  • The S.A. capital must be represented by shares. . All shares must have the same par value expressed in Argentine currency. However the by-laws may provide for different classes of shares with different political and economic rights. Shares without par value are not authorized. Bearer shares are not authorized: all shares must be nominative and non-endorsable.

Every corporation must keep an updated share register. The issuing corporation must be notified of the transfer of the shares and/or the constitution of pledges, usufructs and/or other real rights over them in order to record them in the company’s ledgers. Such transfer and rights shall only be enforceable against the corporation and third parties as from the time of such registration.

Company Law provides that the right to transfer the shares be unrestricted; only limitations that do not involve a full restriction on transferability are permitted. These limitations must be contemplated in the by-laws and recorded on the stock certificates.

  • Board of Directors. (CL Chapter V. 6). The Board of Directors is in charge of the administration and representation of the company. Its members must be elected by the stockholders’ meeting. The by-laws cannot restrict the power of the stockholders’ meeting to remove directors from office. Members do not need to be stockholders or Argentine citizens; however, the majority of the directors needs to be domiciled in Argentina and all directors must establish a legal domicile in Argentina for the purpose of notifications in connections with their duties. The person who will be appointed as director must post a bond or a guaranty insurance in favor of the S.A.

Company Law requires that the Board of Directors meet at least quarterly. The statutory quorum and voting requirement is the majority of the designated board members and the majority of board members present and entitled to vote, respectively. The by-laws may provide for a higher quorum and/or general or special voting majorities.

If the corporate capital is under AR$10,000,000 (approx US $ 2,500,000), the number of board members may vary from one to any other number so provided in the by-laws of the company; however, if the corporate capital is over that amount, the by-laws must provide for at least three directors.

Business and affairs must be managed by the board of directors. Company Law does not discriminate between directors and officers. Officers can only be appointed from among the members of the board. Alternate directors are those elected by the stockholders to replace directors who are absent from meeting or who are unable to exercise their duties. Alternates have the responsibilities, duties and powers of directors only if and to the extent they are called upon to attend board meeting and as long as they perform the duties of a director.

Directors shall hold office from one to three years, as determined by the by-laws. However they may be indefinitely re-elected without restrictions. The director’s post must be remunerated.

The president of the board of directors must be elected by the board from among its members.

Acting individually, the president of the board of directors legally represents the company. The by-laws may provide that a vice-president and/or a replacing director may be elected to act in case of the president’s absence. Usually, and in addition to or notwithstanding the above, the company’s representation is handled through one or more powers of attorney granted to one or more of the company’s managers (even if they are not directors) and employees.

The board of directors may appoint a general manager and/or special managers (regardless of whether they are directors), delegating all or part of the executive administrative duties to them. By-laws may in turn provide for the organization of an executives committee (consisting only of directors) in charge of overseeing the ordinary course of business of the company. Their appointment does not exclude the general liability of the other members of the board.

As applicable to all commercial companies, directors, managers and representatives are jointly and several liable on an unlimited basis vis-à-vis the company, the stockholders and third parties for improper conduct in their posts in accordance with the loyalty and diligence of a good businessman.

  • Stockholder meetings. The corporate authority governing the S.A. and adopting resolutions is the stockholder meeting.

The powers of the ordinary stockholder meeting are limited to approving the annual balance sheet and related documents, including the approval of dividends, to appoint and/or remove directors and syndics and to deal with any other item related to the company’s ordinary course of business (CL Section 234).

The extraordinary stockholder meeting deals with all matters other than those within the competence of the ordinary meeting, particularly capital increases and amendments to the by-laws, mergers, spin off other corporate restructuring.

Ordinary and extraordinary stockholder meetings should be summoned by the board of directors by means of public notices, detailing the agenda and the date, time and place of the meeting. However, Company Law provides that notices are not necessary when all stockholders are present and the resolutions are approved by 100% of the stockholders entitled to vote.

Since all the shares are nominative and non-endorsable, stockholders need not deposit their shares in advance. However, they must state their intention to attend the stockholder meeting at least three days prior to the scheduled date (corporations whose shares are traded on the stock market have other specific rules) in writing.

Quorum and voting requirements are normally provided in the by-laws; if not, the minimum and maximum quorum and voting requirements provided in the Company Law will apply.

  • Corporations are subject to external supervision by the Inspection Department of Corporations and internal supervision by the so-called Síndicos (Syndics).

Syndics are permanent statutory auditors with no voting rights appointed by the stockholder meeting. Syndics must be lawyers or public accountants, domiciled in Argentina or a local simple partnership integrated exclusively by such professionals. The syndic’s post must be remunerated.

Corporations that make public offers or whose corporate purpose or activity receives special consideration under the Company Law and other regulations shall have at least three syndics (and same number of alternates). Other corporation with a capital excess of a certain amount must have at least one (and alternate) syndic or, if so provided in the by-laws, and if the corporate capital is lower than the amount specified, they may choose not to have syndics. In this case, the stockholders will be expressly entitled to exercise direct control; to inspect the books and records of the company and to obtain information directly from the board of directors.

Formation

Normally, the time needed to create a sociedad anónima is approximately one month (two weeks in the city of Buenos Aires).

In addition, as part of the formation procedures, all of the directors, regardless of where they reside, should be registered to pay taxes and contribute to the national social security system, as independent workers, even if they do not receive any remuneration, profit or income whatsoever for holding such office.

  1. “Sociedad De Responsabilidad Limitada” (S.R.L.).(Cl Chapter VII)

General

An S.R.L. is a limited liability company in which the capital is represented by “registered quotas” instead of shares. The S.R.L. permits the quota-holders to limit their liability to the par value of the quotas to which they have agreed to subscribe. However, the partners assume joint and several unlimited liability for the full payment by the other partners of the quotas they have agreed to integrate.

The number of partners shall not exceed 50.

Basic Characteristics

  • No minimum capital is required for an S.R.L. Nevertheless, as in the case of the S.A., the competent Inspection Department of Corporations would request that the corporate capital bears reasonable relation to the purpose of the company. All quotas shall be denominated in pesos and have the same value of AR $10 (APPROX. us$2.50) each or multiples thereof.
  • Assignment of quotas. Third parties may only be assigned quotas after the transfer is registered with the Public Registry of Commerce. However, it will be effective between the assignor or assignee as from its execution and vis-a vis the S.R.L. as from the moment a certified copy of the assignment documents and agreements are formally delivered to the management of the S.R.L..

The partnership agreements may limit but not fully prohibit the transfer of quotas. The Company Law establishes that provisions requiring the unanimity of the partners are lawful. Partnership agreement may also provide for the incorporation of a partner’s heirs, though in this case, there shall be no restrictions on the transfer of quotas made by the heirs within three months following their incorporation.

  • The management and representation of the S.R.L. correspond to one or more managers designated for a fixed or indefinite term. Managers need not be partners.

If more than one manager is designated and no special provisions are made in the partnership agreement, any of the designated managers may execute any management tasks without consulting or obtaining the approval of the other managers. Some of the considerations related to the directors of an S.A. (i.e. liability, quorum and majorities, as detailed above) also apply to the directors of an S.R.L.

  • Partner Meetings. The corporate authority governing the S.R.L. and the adoption of resolutions is the quota-holder meeting. (CL 159). The quota-holders meeting is entrusted with approving the annual balance sheet, declaring dividends, appointing and/or removing managers, amending the partnership agreement, making decisions on capital increases and dealing with any other item related to the company’s ordinary course of business.

The procedures by which an S.R.L. deliberates and adopts corporate decisions are simple and flexible and they may be expressly established in the partnership agreement. If the partnership agreement makes no specific provision as to how partners shall adopt corporate resolutions, decision may be implemented via a consultation sent by the management to the partners or though a vote by all partners.

Insofar as concerns the majorities set for an S.R.L., when one single partner represents the majority vote, another partner’s vote shall always be required.

  • Supervision/organization. The same considerations regarding the organization and appointment of syndics in an S.A. mentioned above also apply to an S.R.L.
  1. Differences between an S.A. and a S.R.L

In short, the following are the main differences between an S.R.L. and an S.A. :

Incorporation Documents

In accordance with the provisions of the Company Law, an S.A. can only be incorporated by a public instrument (i.e. a public deed issued and subscribed with the intervention of a public notary) while the S.R.L. can be formed by private or public instrument (although, when opting for the latter procedure, the partners´ signatures must be certified by a notary public).

Number of Stockholders/Partners

Company Law does not establish a maximum number of stockholders which may participate in an S.A., and therefore it may have an unlimited number, while in the case of an S.R.L., Company Law establishes that the number of partners may not exceed fifty.

Liability

The system of liability is similar for both an S.A. and an S.R.L., since it is respectively limited to the payment of the corporate capital shares or quotas.

However in an S.R.L., the partners assume joint, several, and unlimited liability to guarantee that third parties receive full payment of the capital contributions promised by the other partners.

Administration

While the administration of an S.A. is entrusted to the board of directors, composed of one or more regular and alternate directors, the administration of an S.R.L. is entrusted to its management, comprised of one or more managers, who may or may not be partners.

Corporate Resolutions

The form in which an S.R.L. adopts corporate decisions is simpler than that required for an S.A. and it may be provided for in the partnership agreement.

Company Law only requires that an S.R.L. should hold general meetings to approve balance sheets when its capital exceeds AR $10,000,000 (approx. US$ 2,500,000). Furthermore, the general partner meetings held by an S.R.L. are subject to the regulations applying to the S.A., except with regard to the convocation; an S.A. must convene its meeting via published notices, while an S.R.L. sends written notices to its partners via post.

Financial Statements

Each year, an S.A. must submit its financial statements to the competent controlling agency for commercial companies, regardless of its corporate capital. In contrast, the S.R.L. is under no obligation to do so unless its capital exceeds AR$10,000,000 (approx. US$2,325,580).

Tax Treatment

An S.R.L. and an S.A. have the same tax treatment. Both are subject to a 35% income tax rate. Dividends paid by local companies (S.A. or S.R.L) either to residents or non-residents are not subject to income tax. However, an equalization tax applies if dividends are paid in excess of taxable income of the fiscal year in question, minus any income tax paid plus any dividends received (“equalization tax”). The equalization tax is applied by means of a withholding tax of 35% paid by the company distributing the dividend.

Any income stemming from the sale of shares of an S.A by non-resident stockholders (either companies or individuals) is not subject to income tax. On the contrary, the income stemming from the sale of quotas of an S.R.L. by non-resident quota holders (either companies or individuals) is subjects to income tax. Nevertheless, if the transaction is between two non-resident quota holders, local tax authorities have no way to ensure the collection of the income tax. If one of the parties is local, this party should withhold the appropriate income tax.

Transfer and Pledge of Shares (S.A.) and Quotas (S.R.L)

The transfer and/or pledge of shares of an S.A. must be registered in the company stock ledger and is valid vis-á-vis third parties upon registration with the company stock ledger. On the contrary, the transfer and/or pledge of quotas of a SRL must be registered and is valid vis-à-vis third parties upon registration with the Public Registry of Commerce.

  1. Qualifying Documents

In order to participate in a company in Argentina, The Company Law provides that foreign companies must first produce evidence before the court of record that they have been formed in accordance with the laws of their respective countries and then register their legal representatives with the Public Registry of Commerce and the National Registry of Stock Companies, if appropriate.

Consequently, in order to become stockholder or partner in a local company, the foreign company must register the following documents:

  • Certificate of Good Standing: This certificate must state that the foreign company has been formed according to the laws of the respective jurisdiction of incorporation and that it has legal status under the laws of jurisdiction, being authorized to do business, and that it is not subject to liquidation proceedings or under any other legal proceedings that limit its activities or assets.
  • Certified copy of the foreign company’s Articles of Incorporation, by-laws and amendments, if any.
  • Powers of attorney to represent the foreign company stating clearly the scope of authority to perform acts in Argentina, and to register the above enumerated documents.
  • A certificate issued by an officer of the foreign company that lists the names of all shareholders.
  • Additional requirements. In addition to the above-mentioned documents, a new set of regulations, containing new and more specific requirements to be met by foreign corporations, was issued in 2003 by the competent controlling authority. The new requirements are mainly the following:
  • The foreign company must declare whether or not it is subject to legal restrictions that prevent it from engaging in any or all of its main activities in its place of incorporation (offshore entity).

This information shall be clearly stated in the certified copies of the Articles of Incorporation and by-laws of the foreign company.

However, if the Articles of Incorporation and by-laws are not explicit on this matter, the determination shall be made by a lawyer or notary public authorized to practice in the jurisdiction where the foreign company is incorporated.

The foreign company must provide evidence of compliance with regard to at least one of the following requirements:

  • Existence of one or more agencies, branches or permanent representative offices in countries other than Argentina. The existence of branches or other permanent representative offices must be evidenced through a certificate of registration issued by the permanent authority of the country where the branch or the permanent representative office is registered;
  • Interests in other companies, held as non-current assets;
  • Ownership of fixed assets in the jurisdiction of origin.

The ownership of interests in other companies, their valuation and the percentage they represent in the capital stock of the relevant company, as well as the ownership and valuation of the fixed assets, must be evidenced through:

  • The financial statements of the foreign company, and,
  • Certification of the accounting records issued by an officer of the foreign company.

If the said company constitutes what is qualified as a ´vehicle’, that is to say, an intermediate holding company with no other relevant assets apart from the ones held in Argentina, the foreign company owner/controller will have to register with the Inspection Department of Corporations, complying with all the same requirements described above.

In addition, the foreign company controller should file a sworn statement signed by the representative of the controlling company, with the following information:

  • Organization chart of the corporate group;
  • Identification of the members of the ‘vehicle’ company and of those of its direct or indirect controlling companies, which shall include: the full name or corporate name, as the case may be; the identity document or passport number, in the case of natural persons, and authorization, registration or incorporation data, in the case of legal entities; the actual domicile, in the case of natural persons, and special domiciles and actual administrative offices, in the case of legal entities; and the percentage of interests in the corporate capital and number of votes held.
  • Additionally, once qualified in Argentina, the foreign company must present the Inspection Department of Corporation with evidence of its ownership of assets outside Argentina on an annual basis. Changes in the shareholder data must also be reported to the Inspection Department of Corporations.

Branches

General

A branch of a foreign company may own property (including real estate) and carry out business transactions within the scope and limitations determined by the foreign company.

Company Law provides that the existence and form of a company set up abroad is governed by the laws of the place where it was formed. It is qualified to perform isolated acts and be party to litigation in Argentina. In order to engage regularly in the activities upon which its corporate purpose is based and to establish branches, offices or any other kind of permanent representation, it must:

1) provide evidence of its existence in accordance with the laws of its country of origin;

2) establish a domicile within Argentina and comply with the publication of notice and registrations required by the law for companies organized in Argentina; and

3) present evidence of its decision to create such representation and appoint the person who shall be in charge. When a branch is set up, the capital assigned to it shall be stated when so required by special laws.

Incorporation

To be authorized to carry out regular business in Argentina, a branch must be registered with the competent Inspection Department of Corporations/Public Registry of Commerce. For this purpose, the foreign parent company basically would have to submit evidence of its existence and good standing as described above, its Articles of Incorporation and by-laws and also register the designated branch representative detailing the powers of attorney granted in its favor.

Basic Characteristics

  • Limitation of liabilities. Transactions performed by the branch do not benefit from limited liability. Thus the foreign parent company becomes fully liable for all transaction carried out by the branch.
  • The branch has no board of directors. The branch’s operations are handled by its duly appointed representative/s (there may be more than one). The branch representative must establish a legal domicile in Argentina for service of legal notices in connection with his/her duties.
  • The same considerations regarding the joint and several liability of the board of directors and members mentioned referred to above are applicable to a branch.
  • The foreign parent company may or may not assign capital to it. The same considerations regarding the net worth/minimum capital needed to be registered as an authorized exporter/importer mentioned above are applicable to a branch.

Organization

The branch must keep accounting books, separate from those of the foreign parent company, and record all transaction carried out locally.

Branches are subject to the permanent control of the Inspection Department of Corporations and have to meet the same control requirements as applicable to the local S.A.. The branch must also file certain corporate information and documentation relating to its foreign parent company and register with the competent Public Registry of Commerce any modifications in the parent company’s Articles of Incorporation and by-laws.

Taxes

Tax-wise, a branch is subject to the same taxes as apply to an S.A. and S.R.L..

  1. Collaboration Agreements Among Enterprises

Company Law expressly contemplates and allows regular commercial companies and/or sole personal traders to enter into collaboration agreements. To participate in this kind of collaboration agreements, a foreign company must first register a branch in Argentina.

Company Law distinguishes between two types of collaboration agreements, the Cooperating Groups (Agrupaciones de Colaboración) and the Temporary Enterprise Associations (Unión transitoria de Empresas).

In both cases, Company Law provides that none of them results in the creation of a company or any kind of legal person and that the rights and obligations of the parties are those that result from the agreed contractual provisions.

Collaboration agreements must be registered with the competent Public Registry of Commerce.

  1. Cooperating Groups (“Agrupaciones de Colaboración)

The purpose of the cooperating groups should be aimed at helping the participants develop certain specific fields within their business, activities or results. The cooperating group may not engage in any profit-making activity; the participants are entitled to receive the economic benefits.

Basic Characteristics

  • The direction and the administration of the cooperating group must be vested in one or more physical person/s designated by the participants. .
  • The Participants’ contributions and the assets purchased with such contributions shall integrate the working fund of the cooperating groups. These assets may not be distributed during the life of the cooperating group and the creditors of the participants may not file claims in relation to such assets.
  • Participants assume joint and several unlimited liability for the obligations assumed by the cooperating group’s representative.
  • The duration of the cooperating groups shall not exceed ten years although it may be extended by the unanimous resolution of all the participants.
  • Financial Statements. The cooperating group must maintain appropriate accounting books and records and prepare and file annual financial statements with the competent Inspection Department of Corporations.
  • Preservation of Fair of Competition. A copy of the respective cooperating group agreement shall be filed with the National Antitrust Department.
    1. Temporary Enterprise Associations (“Unión Transitoria de Empresas/UTE”).

The purpose of the UTE shall be to execute specific works, service or supplies within Argentina or abroad.

Basic Characteristics

  • Unless expressly provided in the UTE Agreement, the participants shall not be liable for the acts and operations that the UTE may perform or for the obligations undertaken vis-à-vis third parties by the UTE or the other participants.
  • The participants shall designate a representative (which may be a commercial company) and grant in its favour adequate and sufficient powers of attorney. The designated representative may not be revoked without cause except by the unanimous decision of the participants.
  • The duration of the UTE shall be the same as that of the work, services or supplies contemplated in the UTE statement of purpose.
  • Financial Statements. The UTE must maintain appropriate accounting books and records and prepare and file annual financial statements with the component Inspection department of Corporations.

 

Estudio Chehtman Abogados



Corporate Law in Australia

I     CORPORATE LAW IN AUSTRALIA

  1. Compliance with regulations concerning foreign investments in Australia

GENERAL

The Australian Government welcomes foreign investment in Australia as it provides access to new technology, management skills and overseas markets, and creates economic growth and employment within Australia.

In certain sectors where foreign investment is contrary to the national interest, it is heavily regulated and or restricted (i.e. investment in media or residential real estate). In determining whether a company is the right vehicle to conduct business and invest in Australia, it is important to ascertain whether the company structure best suits your business needs. If so, foreign investors must comply with a range of legislative requirements, including registration of companies, structure of shares, taxation and foreign investment regulation.

REGULATION

The Foreign Acquisitions and Takeovers Act 1975 (Cth) (“FATA”) regulates certain types of foreign investment in Australia. The Foreign Investment Review Board (“FIRB”) must be notified of proposed foreign investments, including:

  • Acquisition of a substantial and controlling interest of an Australian business or company which is valued at more than AUD$244 million (US investors must notify if the investment is above AUD$1062 million). Substantially or controlling interest constitutes 15% or more of voting power or issued shares by a single foreigner, or 40% or more in aggregate where there are several foreigners;
  • Acquisition of a substantial and controlling interest (15% or more) by a foreign person/s in a company whose Australian subsidiaries or gross assets exceed AUD$244 million (AUD$1062 million for US investors);
  • Investment(s) by foreign governments and their agencies irrespective of percentage of voting power or issued shares;
  • Acquisition of interests in Australian urban land (as vendor, lessee or licensee of any land not associated with commercial farming or forestry);
  • Portfolio investment(s) in the media sector comprising 5% or more interest.

Additional foreign investments requirements apply to certain sectors such as:

  • Civil aviation (international and domestic).
  • Urban real estate.
  • Military equipment and technology.
  • Extraction of uranium and plutonium.
  • Operation of nuclear facilities.
  1.                 PROCEDURES AND FORMALITIES

REGISTRATION OF A NEW COMPANY (CORPORATION INCORPORATED) WITHIN AUSTRALIA

Competent authority:

In Australia companies are regulated pursuant to the Corporations Act 2001 (Cth) (“CA”). The Australian Securities and Investments Commission (“ASIC”) administers the CA and is Australia’s corporate, markets and financial services regulator.

A new company registered under the CA is automatically registered as an Australian company. This means that it can conduct business throughout Australia without the need to register in individual State and Territory jurisdictions.

The following types of companies can be registered in Australia:

  • Proprietary company – Limited by shares (the most common type of company in Australia).
  • Proprietary company – Unlimited with share capital.
  • Public company – Limited by shares.
  • Public company – Limited by guarantee.
  • Public company – Unlimited with share capital.
  • Public company – No liability company (solely for mining purposes).

A company comes into existence as a body corporate at the beginning of the day on which it is registered.

Legal Expenses

The costs of incorporating / registering a company are relatively low. As of 1 July 2011, the lodging fee for registering a ‘company limited by shares’ is $426.00 and $351.00 for a ‘company limited by guarantee’.

Documents Required

  1. There are no ‘Minimum Capital Requirements’.
  2. There are no ‘Minimum Educational Requirements’ for company directors.

A company may choose to adopt a constitution, which defines legal rights, duties and restrictions of the company, as a substitute for or in addition to the ‘replaceable rules’ under the CA, which are the basic rules for internally managing a company.

If a proprietary company adopts a constitution (or a combination of replaceable rules and a constitution) it need not lodge its constitution when applying for registration. However its constitution must be kept with the company's records so it is available if required.

If a public company adopts a constitution (or a combination of replaceable rules and a constitution) the company’s constitution must be lodged with ASIC when applying for registration.

For a company limited by shares or unlimited with share capital, the following information must also be lodged with ASIC:

  • the number and class of shares each member agrees in writing to take up;
  • the amount (if any) each member agrees in writing to pay for each share;
  • whether the shares each member agrees in writing to take up will be fully paid on registration; and
  • whether or not the shares each member agrees in writing to take up will be beneficially owned by the member on registration.

The CA does not proscribe the minimum amount of share capital that a new company should have.

ASIC will then give the company an Australian Company Number (“A.C.N."), register the company and issue a certificate that states:

  • the company’s name;
  • the company’s A.C.N.;
  • the company’s type;
  • that the company is registered as a company under the CA;
  • the jurisdiction (i.e. State or Territory) in which the company is taken to be registered; and
  • the date of registration.

A company must keep written financial records that:

  • correctly record and explain its transactions, financial position and performance; and
  • enable true and fair financial statements to be prepared and audited.

The financial records must be retained for seven (7) years after the transactions covered by the records are completed.

III.            BUSINESS STRUCTURES

REGISTRATION OF A FOREIGN COMPANY (BRANCH)

A foreign company that intends to operate a business in Australia must notify ASIC.

Registration of a foreign company involves the following process:

  1. Before registering a company name, a name search must be conducted using ASIC’s Identical Names Check register to ensure that the company name is not identical to another name already registered under the CA.
  2. The foreign company must either reserve the company’s name with ASIC for a fee (for a period of up to two (2) months), or it can apply to have the name registered once the Identical Names Check has been conducted.
  3. To register a company, a person must lodge an ‘application for registration of a foreign company’ with ASIC detailing, among other things:
  • the company contact;
  • the company’s current registration;
  • the foreign company;
  • the company’s local agents;
  • the directors and equivalent office holders;
  • a current Certificate of Registration (or similar document);
  • a certified copy of the company’s current Constitution (with certified   translation into English where necessary);
  • any change in property in Australia; and
  • a memorandum of appointment or power of attorney in favour of the local agent.

Once ASIC has received the necessary application form and supporting documents, registration generally occurs within two (2) weeks.

ASIC will issue the company with an Australian Registered Body Number (ARBN) which must be displayed on all public documents, documents submitted to ASIC and all negotiable instruments.

The company must continue to notify ASIC of any change to the company or to the foreign company (forms listed below). Financial statements must be lodged at least once every calendar year.

REGISTRATION FEE

As of 1 July 2011, the following fees are applicable (subject to change on an annual basis):

Type Fee
Applying for registration as a foreign company AUD $426.00

SUBSIDIARY OF A FOREIGN CORPORATION IN AUSTRALIA

Foreign investors may conduct business in Australia through a wholly-owned or partially-owned subsidiary company in Australia. The resident subsidiary must be financially independent from its foreign parent company.

The most common type of company used for subsidiaries of a foreign company is the proprietary company limited by shares. The company must include the word ‘Proprietary’ or ‘Pty’ in its name, and the company must have a registered office in Australia. A proprietary company must have no more than 50 non-employee shareholders and at least one member.

FOREIGNER ACQUIRING SHARES IN AN AUSTRALIAN COMPANY

As an alternative, a foreign company or persons may wish to acquire shares in (or assets of) an existing Australian company. The takeover provisions pursuant to the CA prohibit foreigners from acquiring an interest in issued voting shares in an Australian company if their voting power in that company would increase to more than 20%. The provisions apply to acquisitions of securities in any Australian company with more than 50 members.

CORPORATIONS INCORPORATED

SHAREHOLDERS AND SHARES

GENERAL

Each company incorporated / registered under the CA is required to have at least one (1) member. A person is a member of a company if he or she is a member of the company on its registration, agrees to become a member of the company after its registration and his or her name is entered on its register of members or becomes a member pursuant to the CA.

A proprietary company must have no more than 50 non-employee shareholders.

A company may determine the terms on which its shares are issued and the rights and restrictions attaching to the shares.

CLASSES OF SHARES

A class of shares is a category of shares which differs sufficiently in respect of rights, benefits, disabilities or other incidents as to make it distinguishable from any other category of shares (a company has the power to issue different classes of shares).

A company can use the standard class titles (i.e. ordinary, A class or B class) or a company may choose their own title for each class of share.

GENERAL MEETINGS

QUORUM

Unless specified otherwise in a company’s constitution, the quorum for a meeting of a company’s members is two (2) members. The quorum must be present at all times during the meeting.

In determining whether a quorum is present, individuals attending as proxies or body corporate representatives are to be counted.

A company that has only one (1) member may pass a resolution by the member recording it and signing the record.

VOTING AND CASTING VOTE

Unless specified otherwise in a company’s constitution:

  • During a meeting of shareholders:

(a) each member has one (1) vote on a show of hands;

(b) each member has one (1) vote for each share they hold, on a poll.

  • A body corporate representative has all the powers that a body corporate has as a member (including the power to vote on a show of hands).
  • Each member of a company that does not have a share capital (i.e. a company without share capital) has one (1) vote, both on a show of hands and a poll.

The chair person of the company has a casting vote, and also, if they are a member, any vote they have in their capacity as a member.

DIRECTORS

GENERAL

Australian company law emphasises a separation between the ownership and management of the company. The CA contemplates that management of the company, in the absence of contrary provisions in the company’s constitution, will be vested in a board of directors consisting of natural persons.

THE PERSONNEL OF COMPANY MANAGEMENT

The CA stipulates a minimum number of directors, namely at least:

  • Three (3) for public companies (two (2) of whom must be Australian residents).
  • One (1) for proprietary companies (at least one (1) director must be an Australian resident).

Company constitutions frequently make provision for the size of the board of directors. The directors may appoint one (1) or more of their number to the office of managing director and confer any of their powers upon the appointee.

In most companies the day to day administration of company affairs is left to one (1) or more managing directors and to the staff appointed by them. Such directors are also called executive directors since they serve the company both as employees, usually under a formal contract of employment and by virtue of their office of director.

The CA requires a public company to have at least one (1) secretary ordinarily resident in Australia. A proprietary company may elect to have a secretary who is resident in Australia (A proprietary company is not required to have a secretary). The secretary is appointed by the directors and must be an individual aged at least 18 years. Generally a company will appoint only one (1) secretary.

APPOINTMENT OF DIRECTORS

An application to ASIC to register a company must contain details of each person who consents in writing to become a director of the company. The details required include, the present given and family name, all former given and family names, date and place of birth and address.

The method in which directors are appointed after registration will depend upon whether the company relies on replaceable rules for its governance or the terms of its constitution.

Under a constitution, there is considerable variety in the arrangements for appointing directors. For example the constitution may appoint a person to be a director for life or during her or his pleasure and vest wide powers in the director.

For stock exchange listed companies, ASX Listing Rules mandate regular elections of directors by the general meeting.

RESTRICTIONS UPON APPOINTMENT AS DIRECTOR

Pursuant to the CA, Directors of a company must be persons who have attained the age of 18 years.

The CA does not impose any shareholding requirements upon directors although a company’s constitution may do so. Further, there are no ‘Minimum Educational Requirements’ for directors of companies.

Minutes of proceedings of directors’ meetings must be recorded in a book kept for the purpose, within one (1) month of each meeting and signed by the chair person of the meeting or the chair person of the next succeeding meeting of directors. The directors’ minute book must be kept at the company’s registered office, its principal place of business or such other place as ASIC approves.

BENEFITS OF A COMPANY

  • SEPARATE LEGAL ENTITY

Registration of a company creates a new legal entity (separate legal personality) which is separate from its members (i.e. shareholders, employees). The company is capable of having its own legal rights and obligations separate from its members and can therefore own property in its own right, owe money and be owed money, sue and be sued.

  • PERPETUAL SUCCESSION

Unlike a partnership, irrespective of changes to its members, a company has perpetual succession without anything more being done. Perpetual succession is a form of legal immortality as the company will continue to operate presumably forever, provided that it is not wound up or deregistered.

  • LIMITED LIABILITY OF THE COMPANY’S MEMBERS

Limited liability enables a company to conduct its affairs in such a way that the company’s members have only limited exposure to the liabilities of the company.

A ‘company limited by guarantee’ means the liability of a company’s members is limited to the respective amounts (guarantee) that the members undertake to contribute to the property of the company if it is wound up.

A ‘company limited by shares’ means the liability of a company’s members is limited to the amount (if any) unpaid on the shares held respectively by them.

OTHER BUSINESS STRUCTURES

PARTNERSHIPS

A partnership is the relationship which subsists between persons carrying on a business in common with a view to profit. Broadly, a partnership is a type of association that may be established when two or more persons set-up a commercial enterprise and is governed by State and Territory legislation.

Unlike a company, a partnership can only be for commercial purposes and is not a separate legal entity as it has no legal existence apart from the partners in the partnership. Each partner in the partnership is both collectively and individually liable for the debts and obligations of the partnership.

A partnership is contractual in nature and generally involves an agreement (mutual partnership agreement) between two or more persons that will carry on the business in common (partnership) on the terms stated in the agreement. A partnership agreement generally sets out each partner’s responsibilities to reduce the likelihood of disputes.

There are two types of partnerships that can be formed:

  1. General Partnership- this is a partnership where no partner has limited liability in respect of the partnership liabilities: any member could be liable to his or her last cent.
  2. Limited Partnership- there are two categories of partners under a Limited Partnership, general partners who manage the business and limited partners who do not participate in management of the business in partnership. General partners are subject to unlimited liability whereas the liability of limited partners is limited to the extent of capital they contribute to the partnership. If the limited partner participates in the management of the enterprise which is the subject of the partnership then the limited partner will lose the benefit of limited liability.

Limited Partnerships need to be registered whereas General Partnerships may be formed without any need for registration. The limited liability partnership was created to encourage foreign investment in Australia.

Other essential features of a partnership to consider when determining whether a partnership is the right vehicle to conduct business and invest in Australia include:

  • The partners personally own property of the partnership unlike members of the company who do not own the property of the company.
  • Unlike with a company, generally, if the partners of a partnership change then a transfer of assets is required.
  • The creditors of a partnership are creditors of a partner personally and therefore if a creditor obtains judgment against a partnership it can enforce the judgment against the partners personally.
  • Each partner in a partnership is an agent of the other partners in the partnership and can therefore enter into contracts on behalf of all the partners of the partnership for the purpose of the business of the partnership.
  • Each partner in the partnership is jointly and severally liable for the torts committed by the other partners or employees of the partnership.
  • Generally speaking, a partnership is limited to between 2 and 20 partners, unless the partners are:
  • Actuaries, medical practitioners, sharebrokers, stockbrokers, patent attorneys or trade mark attorneys in which case the maximum is 50 partners.
  • Architects, pharmaceutical chemists or veterinary surgeons in which case the maximum is 100 partners.
  • Legal practitioners in which case the maximum is 400 partners.
  • Accountants in which case the maximum is 1000 partners.

Trusts

A trust is a business structure whereby the trustee holds property, incurs liabilities, and earns and distributes income on behalf of the beneficiaries.

While the trustee holds the legal estate on behalf of the beneficiaries. The beneficiaries hold the equitable beneficial estate. The trust deed normally provides for the trustee to be indemnified by the assets of the trust but not by the beneficiaries personally.

Establishing a Trust

The trust may be declared, usually in writing in the form of a trust deed, by the trustee but is usually set up by the gift of a small sum of money, usually one dollar, by a settlor to the trustee for the benefit of the beneficiaries.

That initial gift is then increased by the investment and other activities of the trustee.

The Trustee

The trustee holds the property as the legal owner but for the ultimate benefit of the beneficiaries. The trustee can be a natural person or a company and may be one of the beneficiaries of the trust. For asset protection purposes and because a company does not die, it is common for the trustee to be a company. If a company is a trustee, care must be taken in appointing the directors who in turn exercise the trustee powers.

The beneficiaries

Beneficiaries do not hold legal title in the property held in trust, but they receive the benefit of the legal title that is held by the trustee. A beneficiary can be a body corporate – for example, a company - thus providing further taxation benefits.

Types of Trusts

Discretionary Trust refers to a trust where the trustee has discretion as to whether to pay the capital and income of the trust to any one or more of the beneficiaries.

Unit Trusts are trusts where the beneficiaries are entitled to a fixed share of the capital and income of the trust with no trustee discretion as to distribution of capital and income of the trust.

Hybrid Trusts come in many shapes and combine the features of discretionary and unit trusts as may be required.

SOLE TRADER

Generally, being a sole trader is a simple and inexpensive form of business structure as it involves a person trading alone without the use of a company structure or partnership.

A sole trader can trade under his or her own name or a business name. If the sole trader includes words in the title of the business name other than the sole trader’s name then the sole trader must register the business name.

Although the sole trader may be required to register a business, the sole trader is not a separate legal entity. The sole trader bears alone the full responsibility for the activities of the business and will therefore be responsible for any actions of the business and personally liable for all business debts (there is no limited liability).

If a sole trader is unable to pay his or her debt as and when they fall due then the sole trader will become insolvent and may be declared bankrupt.

III.                TAX IN AUSTRALIA

CORPORATE INCOME TAX

Income tax is a federal government tax that is imposed on entities including individuals and companies. The core income tax provisions are contained in the Income Tax Assessment Act 1997 (Cth) (“ITAA97”).

Companies must pay income tax on their “taxable income” (assessable income – deductions) for each income (financial) year. An income year is generally the period from 1 July to 30 June. However, the Federal Commissioner of Taxation (“Commissioner”) may allow an entity with a foreign parent to adopt an income year that is synchronised with its parent.

Assessable income includes salary, interest received from a bank deposit, dividends from shares, a net capital gain (“NCG”) made pursuant to the Capital Gains Tax (“CGT”) regime (see below).

Deductions include losses or outgoings which relate to an entity’s income-producing activity (revenue). However, certain losses or outgoings, such as a net capital loss (“NCL”) cannot be set-off against an entity’s assessable income to reduce the entity’s taxable income.

Generally,

  1. A NCG is more tax effective than a revenue gain because a NCG is subject to a discount under the CGT regime (see below “Discount Capital Gain”).
  2. A revenue loss is more tax effective than a NCL because it is a deduction that can be set off against any form of assessable income. A NCL can only be set-off against a future capital gain(s).

Companies generally pay tax on their taxable income at a flat rate of 30% (general corporate tax rate). The general corporate tax rate will be reduced to 29% for the 2013-14 income year and from 2014 the general corporate tax rate will be 28%.

 

JURISDICTIONAL RULES

Pursuant to the general jurisdictional rules:

  1. An Australian resident company is required to include in its assessable income, all income derived directly or indirectly from all sources, whether in or out of Australia, during the income year. An Australian resident company is a company which is incorporated in Australia, or which, not being incorporated in Australia, carries on business in Australia, and has either its central management and control in Australia, or its voting power controlled by shareholders who are residents of Australia.
  2. Conversely, a foreign company (i.e. an entity that is not an Australian resident) is generally only required to include in its assessable income, all income derived directly or indirectly from all Australian sources during the income year.

IMPUTATION SYSTEM AND TAXATION OF DIVIDENDS

The imputation system is designed to prevent double taxation of company profits by imputing tax paid at the company level to its individual shareholders. A company can issue a “franked distribution” (i.e. franked dividend) to its shareholders which means that the company has already paid tax on the underlying profits (i.e. the dividends are paid out of profits which have already been subject to tax at the corporate tax rate).

Eligible shareholders are entitled to a credit (“franking credit”) for the tax paid by the company (i.e. the shareholder receives a tax offset for the franking credits).

The taxation of dividends and the application of the imputation system with respect to dividends generally depend on whether the company paying the dividend and the shareholder receiving the dividend is a resident or non-resident.

Generally, shareholders are entitled to a credit (franking credit) for the tax paid by the company when:

  1. A resident company pays dividends from Australian or foreign source profits to a resident shareholder.
  2. A resident company pays dividends from Australian or foreign source profits to a non-resident shareholder and the shareholder carries on business in Australia at or through a permanent establishment in Australia.

Generally, shareholders are not entitled to a credit (franking credit) for the tax paid by the company when:

  1. A resident company pays dividends from Australian or foreign source profits to a non-resident shareholder and the shareholder does not carry on business in Australia at or through a permanent establishment in Australia.
  2. non-resident companypays dividends from Australian or foreign source profits to a resident or non-resident shareholder.

CAPITAL GAINS TAX (“CGT”)

CGT was introduced in Australia on 20 September 1985 and requires a taxpayer to include any net capital gains (“NCG”) made during an income year in the taxpayer’s assessable income. A taxpayer is unable to claim a deduction for any net capital losses (“NCL”) made during an income year but can carry forward any NCL to reduce capital gains in future years (i.e. offset NCL against capital gains).

A capital gain or capital loss is triggered by the occurrence of a CGT event, such as a disposal of a CGT Asset (i.e. sale or gift of land or shares). If the CGT Asset was acquired at least 12 months before the CGT event occurred then any capital gain is discounted by 50% (“Discount Capital Gain”). A Discount Capital Gain is not available to companies.

CGT generally only applies to non-residents if a CGT event occurs in relation to a CGT Asset that is taxable Australian property, such as

  1. Taxable Australian real property i.e. real property situated in Australia (including a lease of land, if the land is situated in Australia).
  2. A CGT Asset used at any time in carrying on a business through a permanent establishment in Australia.

If a non-resident company becomes a resident of Australia, it will be deemed to have acquired all its existing CGT Assets at their market value at that time (provided that the CGT Asset was acquired after 1985 and the asset is not taxable Australian real property).

If a resident company ceases to be a resident of Australia, it will be deemed to have disposed of all its CGT Assets at their market value at that time (provided that the CGT Asset was acquired after 1985 or the asset is not taxable Australian real property).

WITHHOLDING TAX REGIME AND DIVIDEND WITHHOLDING TAX

The withholding tax regime is designed to ensure that tax is collected from the payer of certain forms of income rather than the recipient of the payment. The payer is therefore required to withhold and remit a portion of a payment to the Australian Tax Office (“ATO”) before the payment is made to the recipient.

DIVIDEND WITHHOLDING TAX

Withholding tax applies when a resident company pays a dividend to a non-resident shareholder and franking credits are not available (i.e. shareholder does not carry on business in Australia at or through a permanent establishment in Australia). The withholding tax applies to the unfranked portion of the dividend as the franked portion of the dividend has been paid out of profits which have already been subject to corporate tax in Australia.

The withholding tax rate is either:

  1. 30% if the recipient shareholder is not a resident of a country with a double taxation agreement (“DTA”) with Australia.
  2. 15% if the recipient shareholder is a resident of a country with DTA with Australia.

CONSOLIDATED GROUPS

Special taxation rules apply to companies that are members of a consolidated group. A resident head company and its wholly owned resident subsidiaries can form a consolidated group and be treated as a single entity for income tax purposes.

GOODS AND SERVICES TAX (“GST”)

Goods and Services Tax (“GST”) was introduced in 2001. GST is a federal tax on consumption in Australia, which is payable at a flat rate of 10%.

A taxable supply is a:

  1. A supply (i.e. supply of goods or services).
  2. Made for consideration.
  3. In the course or furtherance of an enterprise that the entity carries on.
  4. Connected with Australia (i.e. goods delivered or made available to the recipient in Australia or property located in Australia).

GST free supplies (i.e. certain foods, water, health care, education) and input tax supplies (i.e. financial supplies, sales of residential premises, businesses acquired as a going concern) are not taxable supplies and therefore no GST is charged on the supply. Provided that certain requirements are met, supplies made for consumption outside of Australia will generally be GST free.

TAXABLE IMPORTATION

A taxable importation is an importation of goods for home consumption. The entity (i.e. importer) must charge 10% of the value of the taxable importation irrespective of whether the entity is registered for GST.

An importation is not a taxable importation if, assuming that the importation is a supply, it is a GST free supply or input tax supply and therefore no tax is charged on the importation. Moreover, an importation of goods is a non-taxable importation if the goods are covered in Schedule 4 to the Customs Tariff Act 1995.

INPUT TAX CREDITS

GST is a neutral tax for registered entities (i.e. business to business dealings). Entities registered or required to be registered for GST can claim an input tax credit (“ITC”) for GST charged when the entity acquires goods or services (makes a creditable acquisition) or imports goods (makes a creditable importation). The ITC amount is equal to the GST charged on the supply or importation.

ITC is unavailable to unregistered entities such as consumers who ultimately bear the cost of GST when they acquire goods or services or import goods.

STAMP DUTY

Stamp Duty is a tax imposed by each Australian State and Territory. Stamp Duty varies from State to State however, it is generally charged at either a fixed rate or scale rate, based on the greater of the GST inclusive value or price of the dutiable property (i.e. the greater of the value of the dutiable property or consideration paid).

Stamp Duty is generally payable by the transferee and depending on the State or Territory where the transaction took place or the asset is based, applies to a variety of “dutiable transactions” in respect of “dutiable property”, such as the transfer of:

  1. Motor vehicle registration.

PAYROLL TAX

Pay-roll is a tax imposed by each Australian State and Territory levied on wages paid by employers.

Payroll Tax must be paid if an employer or a group of employers pay wages to employees exceeding a threshold which is determined by each state and territory (“Exemption Threshold”). The Exemption Thresholds vary between the States and Territories of Australia.

In general for the purpose of Payroll Tax wages include any remuneration attributed to employees such as wages, salaries, commissions, bonuses, allowances, director’s fees, fringe benefits, eligible termination payments and superannuation contributions.

The Exemption Thresholds and rates of payroll tax vary between the States and Territories. For the financial year commencing July 2011 the Exemption Thresholds range between annual wages of $550,000.00 to $1.5 million, whilst payroll tax rates range from 4.9% and 6.85%.

Rotstein Commercial Lawyers



Corporate Law in Austria

  1. Compliance with regulations concerning foreign investment in Austria:

General:

Foreign Investments in Austria are free from any administrative restrictions although mandatory declarations, mandatory procedure or permits are required in special cases. Generally investors are able to acquire Austrian companies without the requirement of a minimum investment amount or the need to create a minimum number of jobs. Investors have to consider minimum amounts of nominal capital or partnership capital for the creation of their own corporate vehicles according to regulations of corporate law. In general investors are able to buy or rent property unless regional law is prescribing certain limits depending on the quality of estate property. Furthermore they do not have to comply with specific undertakings. The repatriation of capital is free too, subject in some cases to some information to be declared to Central Bank.

Regulated activity:

  • Certain activities – such as lawyers, notaries, accountants, real estate agents, doctors, civil engineers etc. – are regulated and the investor must check whether required conditions are satisfied

Prior authorizations:

  • Except for certain less important activities carrying on business in Austria requires a trading certificate. All business entities whether or not incorporated have to apply to the competent authority for obtaining the respective permit. In certain business sectors such as gambling, private security services, trade in weapons, other military equipments, running hospitals etc. an authorization is required before incorporation. Otherwise creating the legal entity itself doesn’t require prior authorization but the necessary certificate is required before trading commences. Provided a company is already holding such authorization the acquisition of all or part of a business or the acquisition of a direct or indirect controlling interest doesn’t require special authorization. The ongoing validity of the permit depends on continuing compliance with regulations.
  1. Procedures and formalities:

Competent authority:

The incorporation of companies or the establishment of a legal existence as a consequence of a civil legal transaction requires the filing of an application at the commercial court registry (“Firmenbuch”). The entity is registered subject to compliance with respective regulations concerning the type of company. In respect of certain business sectors authorizations by public authorities or by the chamber of commerce have to be submitted. Otherwise the business certificate may be obtained from the public authority after incorporation of the company.

Time frame:

The company will officially come into existence when it has been duly registered with the commercial court registry (usually one to two weeks from completion of filing). A registration certification can be issued on the day of registration. Some registration formalities can be performed online. For certain special cases “on the shelf” companies can be used in Austria.

Legal expenses:

The expenses for setting up the company depends on the complexity of the requested solution and the required legalities. Legal expenses for publishing and registration of a company start at approx. € 150 and go up to approx. € 1,500 depending on the founding capital and other financials.

Required documents to be registered:

Whatever the format of the entity generally the following documents have to be prepared in German and registered with the commercial court registry:

  • The application form usually prepared by a lawyer or notary;
  • The articles of association (drafted by a lawyer or a notary);
  • Resolution of the director’s appointment, copies of their passport or identity card (for stock companies);
  • Resolution of the auditor’s appointment (if needed);
  • Indication of the office business address;
  • All documents in a foreign language must be translated into German through a sworn translation;
  • Choice of a company name (in order to ensure that it is available searches can be carried out at the chamber of commerce.

As set out below not all of these documents are always necessary, but in certain cases further documents may be required.

The preparation of the articles of association is an important step which may have legal and tax consequences. Therefore it is recommended that an Austrian lawyer competent in legal and tax matters is instructed.

III. Business structures:

The business structure depends on the type of the business, the investor’s strategy and the degree of independence that the Austrian operation is to have from the parent company abroad.

Foreign companies may choose between establishing a branch or a subsidiary to conduct business in Austria.

  1. Branches:

The foreign company can perform business in Austria directly under its own name.

The branch does not have its own legal personality; hence the head office abroad is responsible and has unlimited liability for the branch’s debts.

Nevertheless the branch must be registered with the Austrian commercial court registry as any legal entity conducting business in Austria. In addition to the documents aforementioned, the following documents have to be translated in German (sworn translation) and filed:

  • A copy of the certificate of registration of the foreign company;
  • A copy of the articles of association of the foreign company;
  • Resolution of the representative’s nomination in Austria and of the decision to open the branch in Austria.

From a tax point of view the branch constitutes a permanent establishment and is subject to corporate income tax and VAT and maybe subject to withholding tax on the branch’s profits (depending on the residence of the parent company and the relevant tax treaty, if any; no branch withholding tax applies to branches of EU companies).

Branches which only conduct a preparatory activity (e.g. representation, liaison offices) and/or an auxiliary activity (for instance storage) are not regarded as constituting a permanent establishment and are not subject to corporate tax. It is also possible to merge an Austrian company into its EU parent, thus transforming the subsidiary into a branch:.

  • Pros: One legal entity
  • Contras: Reporting and administrative requirements (for tax, social, accounting, commercial and corporate purposes similar to a subsidiary)
  • Unlimited liability for the foreign parent company of the Austrian branch
  • Various VAT- aspects can be of relevance
  • By way of exception, restrictions to the corporate tax deductibility of interest paid by the branch to the head office may in certain circumstance be of relevance
  1. Subsidiary – Creation of an Austrian Company:

2.1. Joint stock company (“Aktiengesellschaft” – AG):

  1. General requirements:
  • Minimum capital stock EUR 70.000,00
  • Minimum number of shareholders: 1

Liability of the shareholders: Limited to shareholder’s participation in the company (limit represented by the shares)

Statutory auditors: In case of investments in kind or subscriptions in kind or in case of any reimbursement for establishing the company to the benefit of members of the board of directors or to members of the supervisory board it is mandatory to have external supervision of the formation of the company by an auditor appointed by the court. Further a statutory auditor has to be appointed by the company in order to attest the correctness of the annual statement of accounts.

  1. Corporate governance/management:

Every joint stock company (Aktiengesellschaft – AG) has three obligatory institutions.

  • Management board: Consisting of one or several physical persons. It manages all operations of the company and has the power to direct and represent the company in all matters.
  • Supervisory board: It appoints, dismisses and supervises the management board.
  • General meetings: The meeting appoints and dismisses the supervisory board and the auditor. Furthermore the general meetings has the power to modify the articles of association and decides on the distributing of profits.
  1. Taxation of the company’s income: Joint stock companies are subject to corporate income tax.
  1. Pros and Contras:

Pros: Joint stock companies are adequate for large companies. This type of company is mandatory for listings and in order to trade in the banking insurance and similar business.

Contras: The joint stock companies’ rules are less flexible and more cumbersome for medium sized and smaller companies. They always require the appointment of statutory auditors. Wherever possible these entities are increasingly transformed into limited liability companies.

2.2. Limited liability company („Gesellschaft mit beschränkter Haftung“ – Ges mbH):

  1. General requirements:
  • Minimum capital stock: EUR 35,000
  • Minimum number of shareholders: 1
  • Maximum number of shareholders: unlimited

Liability of the shareholders: Limited to shareholder’s participation on the company

Statutory auditors: A statutory auditor has to be appointed only if the whole capital stock is provided as a subscription in kind. In this case an external audit checking the correctness and completeness of the founder’s report has to be carried out, including verification that the value of the investment in kind corresponds to the value of the quotes being granted. A statutory auditor has to be appointed by a general meeting for the preparation of the annual accounts and the business report by the management unless the company falls under the legal category of a small company.

  1. Corporate governance / management:

The company is run by one or more managers. The managers cannot be a company, they must be individuals.

General meetings:

b.1.         An extraordinary general meeting is required when 10 % of the shareholders (representing 10 % of the capital) call it.

b.2.         An ordinary general meeting is required:

  • When the shareholders have to approve (by a majority vote) the annual accounts;
  • When they want to appoint or dismiss the managers or members of the supervisory board or appoint the statutory auditors (if required);
  • When they request payment on the original capital shares;
  • When additional contributions should be reimbursed;
  • For the institution of a general commercial power of attorney;
  • For investments in excess of 20% of the capital;
  • When articles of association have to be modified
  1. Taxation of the company’s income:

GmbHs are generally subject to corporate income tax (which stands currently at 25%)

  1. Pros and Contras:

Pros: GmbHs are simple to set up and to run. Managers owning the majority of the capital enjoy a cost effective social security regime.

Contras: There is very little flexibility to adopt the corporate governance through the drafting of the by-laws in this “unrefined” type of structure. Higher tax cost for the transfer of shares.

Other types of companies are also available in Austria.

2.3. Civil – Law Partnership (Gesellschaft Bürgerlichen Rechts “GbR”):

Civil – Law Partnership or non trading partnership are defined as being established by agreement by which 2 or several persons take the responsibility to reunite their activities and/or their fortune to their common benefit. The civil – law partnership doesn’t have its own legal personality nor a commercial name nor can it be business owner.

Qualities:

  • used for non trading activities such as holding of real estate, construction, portfolio management etc
  • unlimited personal liability of the partners
  • taxation of the companies income:

Pros and Contras:

Pros: Good vehicle for holding real estate and for portfolio holding. No need to file annual accounts with the commercial court.

Contras: Restricted scope of activities; risk of requalification to corporate tax. Personal unlimited liability of the partners – higher tax cost for the transfer of the shares.

2.4. Mercantile partnership (Offene Handelsgesellschaft “OHG)”:

  • Is the business owner if it is trading
  • Has a commercial name
  • Is a company with unlimited individual plus joint liability of the partners for all debts of the company
  • Has legal capacity.
  • The partners are jointly and severally liable

Taxation

The Mercantile partnership (“OHG”) is not subject to corporate tax. Its partners are under the general regime of individual income tax.

Pros and Contras:

Pros: Adequate structure for joint ventures and for any legal activity including free lance activities and agricultural businesses.

Contras: Risky structure when the partners are not entities subjected to limited liability due to the joint unlimited liability.

2.5. Limited partnership (Kommanditgesellschaft “KG”):

  • Is a company acting with a proper commercial name
  • has legal capacity
  • The partners are jointly and severally liable
  • It has at least 2 partners, thus at least one personally liable partner and at least one limited liable partner
  • Is business owner only if it trades
  • Unlimited individual and joint liability of one part of the partners, limited to partners participation on the entity of the other partner

Pros and Contras:

Pros: One or all partners with unlimited joint liability can be stock companies.

Contras: Risky structures for those partners who are not entities subject to limited liability due to the joint unlimited liability.

2.6. Undisclosed participation (Stille Gesellschaft):

This is an equity interest of a dormant partner in the enterprise of somebody else. The contribution becomes part of the property of the business owner in exchange for a profit share for the dormant partner. This company needs 2 partners, one owner of the business and a dormant partner.

Dormant partners can be physical persons or legal entities.

The dormant partner doesn’t have proper legal capacity to act on behalf of the entity.

There is no liability of the dormant partner for any debts of the company.

2.7. Private foundation (“Privatstiftung”):

This structure is well established in Austria. A private foundation is a legal entity to which founders have endowed assets for the benefit of a certain aim that is determined by the founder.

The private foundation is a legal entity without owners nor partners nor members. The assets become property of the private foundation but the latter does not have a proprietor.

The private foundation can be established only for permitted purposes. The founder is entitled to nominate himself as the beneficiary of the foundation. Having an end in itself means that the private foundation cannot carry out merely the administration of its proper assets, so it cannot only accumulate fortune; it has to have a beneficiary to receive its bestowals.

Founding a private foundation requires:

  • the articles of foundation in order to allow establishment as legal entity
  • Appointment of the first management by the founder
  • Notification of the private foundation to be registered in the commercial court registry
  • Duly registration of the private foundation at the commercial court registry

Corporate governance / management:

The organs are:

  • The management board (mandatory)
  • The auditor of the foundation (mandatory)
  • Supervisory board (under certain conditions)
  • Advisory board (voluntary)

Since the assets of the private foundation are independently owned, it offers a solution to protect property over generations, and to maintain and prevent it from being divided in case of hereditary succession, especially when it concerns businesses. Creating a private foundation may have further tax advantages.

  1. Relevant tax aspects linked to corporate law:

The standard corporate tax rate is 25% for a capital / joint stock company / private foundation.

  1. Ongoing requirements:
  • For accounting and tax purposes book keeping should be kept in German under Austrian accounting principles (Unternehmensgesetzbuch “UGB”) and following Austrian tax rules;
  • Annual financial statements in German must be prepared, and audited if a statutory auditor is required;
  • For all entities (joint stock companies and limited liability companies), the financial statements (the statutory auditor’s report when requested), the management’s (or board’s) report to general meetings, and extracts of the shareholder’s resolutions approving financial statements must be filed with the commercial court registry no later than 9 months after the closing of the financial year. Failing to do so triggers civil penalties and may incur criminal penalties. The standard cost of filing depends on several aspects such as the actual volume of the trial balance and the audit service rendered. Anyone can have access to this information, including (electronically via the internet) lawyers, public notaries and auditors.
  • The initial by-laws as well as all any subsequent changes, and changes in management of the company of the supervisory boards should be filed with the commercial court registry. This information can also be accessed by anyone, including on-line.

MAG. HUBERTUS WEBEN



Corporate Law in Belgium

  1. Compliance with regulations concerning foreign investments in Belgium

General:

1.1. Foreign investments in Belgium are not subject to any specific administrative restrictions although mandatory declarations or permits are required in special cases( e.g. banking, insurance or transport). Foreign entities in general have the same rights and obligations as Belgian identities. In general, investors are able to acquire or participate in Belgian companies or create their own legal entity, buy or rent property, without having a minimum amount to invest or to create a minimum number of jobs.

Specific investment incentives granted by both federal and regional authorities responsible are largely available. The regions (Brussels, Flanders and Wallonia) have the responsibility for creating financial incentives and are in most cases also responsible for employment incentives (e.g. reduction on social security contributions or training facilities). The level of possible incentives may vary from region to region subject to applicable European legislation on state aids. These incentives may be taken into consideration in the selection by the foreign company of the place where it wishes to locate its business activities in Belgium.

Regulated activities:

1.2. Certain activities are regulated and an investor must check whether he satisfies the required conditions in order to carry out these activities[1].

  1. Procedures and formalities for setting up a business:

Crossroads Bank for Undertakings (“Kruispuntbank van Ondernemingen/”Carrefour des Entreprises”):

2.1. The Commercial Register as such has been abolished some years ago. Anyone who starts a new business either as a sole trader, though a branch office or in the form of a legal entity, should register with the rossroads Bank for Undertakings. Registration in the various registers ( Register for Legal Entities, VAT-Register and Social Security Register) has been centralized in the Crossroads Bank for Undertakings. After registration of a company[2],in the Register for legal entities with the Commercial Court Register a specific company identification number (“ondernemingsnummer” or “numéro d’entreprise”) will automatically be given to the undertaking.

Activation of registration number of the Crossroads Bank for Undertakings:

2.2. The undertaking has to activate this number either itself or through a recognized one-stop-shop (“guichets d’entreprise” or “ondernemingsloketten”). This must be done before the start by the undertaking of its commercial activities. In this way the undertaking acquires its commercial status. Based on the number of employees, the projected turnover and the shareholder class (e.g. private individuals) the company will qualify as a small or medium sized undertaking.

VAT-Status:

2.3. The undertaking can activate its VAT-status itself or through a recognized one-stop-shop with the Crossroads Bank. It may also directly register with the VAT-authorities.

Registration for Social Security:

2.4. The undertaking should also register with the social insurance fund for self-employed persons within 3 months after incorporation. This may also be done with the Crossroads Bank by the company itself or through a recognized one-stop-shop. The company must pay into this fund a yearly contribution (2010: max: € 868.00); If the undertaking has employees in Belgium it should register also with the Belgian social security administration for salaried workers and employees.

Certificate on required qualifications on business management and professional qualifications (for regulated activities):

2.5. For small or medium size enterprises, activation of the company’s registration with the Crossroads Bank for Undertakings will be possible only once a certificate on required qualifications on business management and professional qualifications (for regulated activities) has been obtained. The person responsible for daily management of the undertaking must show his/her knowledge of business management with documentary proof of education or practical experience. Managers must prove basic knowledge of corporate management under penalty of refusal of the Company’s registration with the Crossroads Bank for Undertakings. Such proof can be given by presenting a copy of a college or university degree or of professional experience of 3-5 years. However, due to equivalency rules, this formality may sometimes reveal itself as cumbersome for foreigners. It can be bypassed if the company can prove that its parent company does not qualify as a small or medium sized company (i.e. more than 50 employees, turnover above EUR 7,000,000 and balance sheet exceeding EUR 5,000,000).

Timeframe:

2.6. A company will officially come into – legal - existence when it has been duly registered in the Register for Legal Entities administered by the Commercial Court. It can only start its commercial activities if its business has been registered with the Crossroads Bank of Undertakings. Provided that all documents have been duly prepared and the initial share capital has been made available to the company, it is possible to start up a business in Belgium within 3 days. Taking into account the preparation of these documents and in case of foreign investment the fact that sworn translations into one of the official languages may be necessary it is more realistic to expect a time frame of 3-4 weeks for setting up a business in Belgium.

Expenses:

2.7. The expenses for setting up a public or private limited company[3] consist of:

  • Preparation of financial plan by accountant;
  • Notary fees to be calculated as a percentage on the amount of the share capital of the company;
  • A minimal fixed registration fee with the Commercial Court;
  • Costs of publication in the Belgian Official Journal;
  • Registration with the Crossroads Bank of Undertakings;

Required documents to be registered:

2.8. Whatever the form of the company which the investor has chosen, the following documents have to be prepared in Dutch, French or German[4], depending on the seat of the company and registered with the Commercial Court Registry where the company has its seat[5].

  • An excerpt of the deed of incorporation and articles of association including the legal form, the names of the founding shareholders, the company name, its corporate object, the authorized, issued and paid up capital, any contribution in kind together with a valuation report by chartered accountants, the directors and their powers, the financial year, details proxyholders, appointment of auditors, (if applicable), evidence of payment of capital;
  • Resolution of the directors’ appointment, copies of their passports or identity cards. All documents in a foreign language must be translated through a sworn translator into Dutch, French or German depending on the applicable language;
  • Business structures

The business structure will depend on the kind of the business, the investor’s strategy and the degree of independence that the Belgian operations are to have from the parent company. For their activities in Belgium foreign companies normally use the structure of either a branch, a public limited company (“NV”/”SA”) or a private limited liability company (“ BVBA”/”SPRL”). For this reason we will mainly focus on these forms of structures and will only briefly mention other available structures with their main characteristics.

Branches (“succursales” or “bijkantoren”)

3.1. A foreign company may carry out business activities in Belgium by establishing a branch office in Belgium. A branch operates on behalf of and under the management of a foreign parent company.

No separate legal entity:

The branch does not have its own legal personality. It is a part of its “parent company”. Therefore, the foreign company is directly liable for any engagements incurred by the branch.

Registration formalities and required documents:

Any foreign company governed by the laws of one of the member states[6] of the European Union and which establishes a branch office in Belgium shall register the following information and documents with the Belgian Commercial Court Registry (“Dienst Akten van Vennootschappen/Service Actes de Société”). An apostille[7] should be affixed to all of these documents. All documents should be accompanied by a sworn translation in Dutch, French or German, depending on the address of the branch:

  • A copy of the deed of incorporation and articles of association of the foreign company;
  • The name and the legal form of the foreign company;
  • The foreign register as referred to in art. 3 of Council Directive 68/151/EEC and the registration number;
  • A recent certificate of registration in the foreign register;
  • The address and the activities of the branch as well as the name under which the branch will operate, if different from the name of the foreign company;
  • The appointment and the identity of the persons[8] who have the powers to represent the foreign company towards third parties and to represent the company in law:
  1. As body of the foreign company or as member thereof;
  2. As special representative of the company for the activities of the branch with indication of powers;
  • Most recent published accounts of the foreign company, if the foreign company has to publish such accounts under its domestic legislation[9];
  • Resolution of the decision by the foreign company to open the branch in Belgium, the permissible scope of the activities of the branch, the name(s) and powers of the legal representative(s) of the branch and the chosen name, if different from the name of the “parent company”;

Crossroads Bank for Undertakings:

The branch should also be registered with the Crossroads Bank for Undertakings through a Business One Stop Shop, where specific information concerning the foreign company, the branch and the legal representative(s) should be registered.

Publication in the Belgian Official Gazette:

An extract of the decision by the foreign company to establish the Belgian branch will be published in the Annexes to the Belgian Official Gazette (“Moniteur Belge”/“Belgisch Staatsblad”).

VAT-Status:

If the activities of the branch are subject to VAT a so called declaration of the start of economic activities should be filed either directly with the VAT authorities or through one of the Business One-Stop Shop’s, after which the VAT authorities will activate the VAT status within a couple of days.

Bookkeeping requirements:

A Belgian branch of a foreign company is required to keep separate books for its operations in accordance with Belgian accounting standards. This requirement applies also if the “parent company” is not required to publish its annual accounts under its domestic law.

Representative Office:

3.2. A foreign company may set up a representative company if its activities are strictly auxiliary. The representatives of a representative office cannot have the power to conclude agreements on behalf and in the name of the foreign company. A representative office is not subject to registration, publication and accounting requirements like a branch office or a subsidiary company. A representative office does not have an officially recognized status under Belgian law and is not registered with the Crossroads Bank of Undertakings. Because of the limited scope of the activities which can be carried out by a representative office, a representative office is not often of practical use.

Subsidiary companies:

Public Company (“Société Anonyme”(“SA”)/“Naamloze Vennootschap”(“NV”);

3.3. Since the public company (“Société Anonyme”–“SA”/“Naamloze Vennootschap”–“NV) is the form of company which is most commonly used by foreign investors for their activities in Belgium, particular attention will be given to this form of company.

The company is incorporated under a notarial deed and acquires legal personality as from the moment of registration with the Commercial Court.

  1. Requirements before incorporation:
  • Draft articles of association (for minimum provisions see below under b);[10]
  • Proxies by founding shareholders are possible (in some cases in notarial form);
  • Submission of a financial plan to the notary, preferably to be prepared by an accountant or statutory auditor, indicating that the company’s share capital will be sufficient to conduct the business of the company for at least the first 2 years of its existence[11]
  • Bank certificates confirming the cash contributions on share capital by founding shareholders on a bank account opened with a financial institution in Belgium;
  • Two special reports to be deposited with the Commercial Court Registry on the valuation and use of investments in case of contribution in kind by founding shareholders on share capital. Clear overvaluation of contributions in kind may lead to joint and several liability of the founding shareholders;
  1. Requirements and provisions in the notarial deed of incorporation and articles of association:

Corporate object:

Detailed description of the authorized activities of the company to be supplemented by a more general provision covering ancillary activities and powers related to the company’s corporate object.

Corporate name:

Corporate name, which may be any name except that it should differ from already existing company names and should not infringe upon any trademark rights hold by third parties.[12]

Registered office:

The seat of the company should be mentioned in the articles of association. The seat should correspond to the place that serves as the principal place of business for the company’s management.

Capital and shares:

  • Minimum share capital: € 61.500.00 to be entirely subscribed and to be entirely paid up at incorporation .In addition 25% of each share should be paid up. Share capital corresponding fully or partly with an investment in kind must be paid up within 5 years as from the date of incorporation.[13]
  • Minimum number of shareholders (natural or legal persons): 2.[14]
  • Nature of shares: registered (name) shares or shares in dematerialized form.[15] The liability of the shareholders is limited to shareholder’s participation in the company, except in specific circumstances.
  • Except in special cases (e.g. amendment of articles of association), decisions by the shareholders meeting are taken by a simple majority
  • Capital increases: to be approved at a shareholders’ meeting by a majority as required for an amendment of the articles of association of the company: a majority of the shareholders should be present but subject to approval of at least ¾ of the votes cast. The company’s articles may be provide that the board of directors for a period of maximum 5 years has the powers to increase the share capital of the company up to the authorized capital as established in the articles. The powers may be subject to certain limitations as stated in the articles. The decision by directors to increase the share capital should be enacted before the notary.

Transfer of shares:

  • Transfer of shares: unless the articles of the company provide otherwise, registered and dematerialized shares of a public company may be freely transferred. The transfer of shares may be restricted in the articles or even in agreements with third parties (e.g. approval and/or preemption clauses). These restrictions should always be limited in time.[16)

General Meeting of shareholders:

  • A general meeting of shareholders should be called at least once a year to
  • approve the annual accounts, the auditor’s report, the board of director’s annual report;
  • to decide upon the profit distribution;
  • to fix the remuneration of the directors and to evaluate their performance;
  • An extraordinary meeting of shareholders may be called by the board of directors, the statutory auditor or by a shareholder holding at least 1/5 of the share capital;
  • Since 2002 it is possible to hold shareholders meetings in writing, provided that the decisions are taken unanimously and do not require authentification;
  • Shareholders’ decisions are normally taken by a simple majority of votes cast. However special majority and quorum requirements may be applicable under company law or may be included in the articles of the company.[17]

Management of the company:

Board of Directors:

  • Directors: the company is managed by at least 3 directors (2 directors in case of only 2 shareholders). There are no requirements on nationality or residence. Directors can be natural persons or legal persons. If a legal entity serves as a director, it shall appoint a natural person as its permanent representative, who will have the same liabilities as if he or she was a member of the board. The maximum term of office is 6 years. However the term of appointment is renewable. A director may be removed from the board at any moment. The Board of Directors will normally appoint a President and a Secretary amongst its members.

Appointments and dismissals of directors have to be published in the Belgian Official Gazette.

Representation:

  • The Board of Directors as a collective body represents the company towards third parties. The articles may provide that one or more directors either acting individually or acting jointly may represent the company.

Duties and liabilities of directors:

  • Duties and liabilities of directors: the directors have the powers and responsibility to manage all of the activities of the company, except for those activities which are entrusted under the Companies Act to the shareholders. Should they have any conflict of interest of a financial nature in case of decisions to be taken by the Board of directors, a special procedure applies. Company directors are liable for the fulfillment of the tasks entrusted to them on the basis of general principles of law. Towards the company and third parties they are jointly and severally liable, for losses which are the result of infringement of the Companies Act and/or the company’s articles of association. Directors are released from this liability if they prove that they are not at fault and that they have informed the first coming general meeting of shareholders or the first meeting of the Board of Directors. Also in the event of bankruptcy, directors may be held personally liable and sometimes both personally and jointly and severally liable under certain conditions by both either the Receiver or creditors for the losses incurred in case of apparent gross shortcomings or gross negligence. The same principles apply as to liability of members of management committees and members of the daily management.

Management Committees:

The articles may provide that the board of directors delegates one or more powers in specific areas to one or more management committees. However this delegation may not concern the general policy of the company. The management committee consists of more persons, who are directors or non-directors. The members of the management committee may be given individual or joint powers of representation of the company. The special procedure on conflict of interest also applies here. Companies listed on the stock exchange in general must have an audit committee, composed of at least 1 independent director.

Day to day management:

The daily management of the company may be delegated to one or more persons, who can, but need not be shareholders.

Accounting:

The Board of Directors shall submit each year in any case within 6 months after the end of the financial year draft accounts and a explanatory report to the general meeting for approval. After approval the accounts shall be deposited with the National Bank. Each company which does not qualify as a small non-listed company is subject to periodic (usually annual) audit of its accounts by statutory auditors appointed by an ordinary shareholders meeting.

Statutory auditors:

A statutory auditor has to be appointed only if the company exceeds two of the three following thresholds:

  • € 3.650.000.00 of the total assets in the balance sheet
  • € 7.300.000.00 of turnover
  • 50 employees

Private Limited Liability Company (« Besloten Vennootschap met Beperkte Aansprakelijkheid“ (« BVBA »)/ »Société à Responsabilité Limitée  (« SPRL »)

3.4. A private limited company is set up mostly for smaller and medium sized business. The main difference with the public company is that its shares cannot be freely transferred, except to existing shareholders and certain categories of persons (e.g.close relatives). This company is therefore not suitable if the company wishes to acquire capital from the general public or wants to be listed on a stock exchange.

The incorporation process and subsequent registration with the Commercial Court and the Crossroads Bank of Undertakings is essentially the same as for the public company (“S.A.” or “N.V.”) (see above).

Main characteristics BVBA/SPRL:

Share capital:

  • Minimum capital stock: € 18.550.00, of which € 6.200.00 has to be paid up at incorporation[18], with the understanding that each share representing contributions in cash should be paid up to at least 1/5 of its par value. Shares representing contributions in kind should be fully paid up. As for public companies valuation reports should be submitted. Capital to be divided into equal shares, all to be registered in a shareholders register to be kept at the seat of the company;
  • Minimum number of shareholders: 2 either natural or legal persons as in the case of one-person private limited company;
  • Liability of the shareholders: in principle limited to shareholder’s participation on the company;

Transfer of shares:

  • Transfer of shares subject to limitations required by law: transfer of shares should be approved at ordinary or special meeting of shareholders by at least 1/2 of the shareholders and at least 2/3 of the votes cast. The articles of the company may provide for even stricter rules. Unless otherwise provided in the company’s articles these limitations of transfer of shares do not apply to transfers between existing shareholders, between a shareholder and his or her spouse or certain ascendants or descendants. Also transfers to other categories may be exempted from these limitations.

Management:

  • The management of the company can be entrusted to one or more paid or unpaid persons (“zaakvoerders”/”gérants”) for a limited or an unlimited duration. Managers can also be appointed in the deed of incorporation as “statutaire zaakvoerders”/gérants statutaires”. Unless provided otherwise they are then appointed for the duration of the company and may only be dismissed by unanimous decision of the general, meeting of shareholders.
  1. Other types of companies available in Belgium:

A foreign company may consider also the following structures, some with incomplete legal personality and some with full legal personality:

With incomplete legal personality:

  • A general partnership (“vennootschap onder firma” (“VOF”/société en nom collectif” (“SNC”);

A general partnership is a partnership formed by 2 or more partners, which can be either natural persons or legal entities, in order to carry out commercial activities under a common name. Although it has legal personality to act as such before the courts, its partners are –without limitation- jointly and severally liable for the debts of the partnership.

4.2. A limited partnership (“gewone commanditaire vennootschap” (“Comm. V”)/société commune en commandite par actions (“SCA”);

A limited partnership is formed by 2 categories of partners : one or more general or managing partners and one or more so called silent partners. Whilst the general or managing partners are jointly and severally liable without limitation the liability of the silent partners is limited to their contribution to the partnership.

4.3 A Partnership limited by shares (“commanditaire vennootschap op aandelen” (CommVA”/”société en commandite par actions” (“SCA”):

A partnership limited by shares is a partnership formed by one or more partners, who are jointly and severally liable) and one or more shareholders whose liability is limited to their contribution. The difference with the limited partnership is that the shareholders may freely transfer their shares.

4.4. A cooperative company with unlimited liability (“cooperatieve vennootschap met onbeperkte aansprakelijkheid” (“CVOA”)/ “société cooperative à responsabilité illimitée (“SCRI”);

A cooperative company is a formed by at least 3 shareholders who invest or contribute varying amounts. There are 2 forms of cooperative companies: one with limited and one with unlimited liability.

4.5. An economic interest grouping (“ecomomisch samenwerkingsverband” (“ESV”)/”groupement d’intérêt économique”(“GIE”);

An economic interest grouping is set up by contract between 2 or more parties (natural persons or legal persons) for a definite or undefinte period. The aim may be to promote the economic activities of its members or to increase the profits generated by their activities. The economic interest grouping may not have as a purpose the making of profits for itself. It does not have legal personality and its members are joinly and severally liable for the debts of the grouping.

4.6. A European Economic Interest Grouping “Europees Economisch Samenwerkingsverband” (“ESV”)/Groupement Européen d’Intérêt Economique (“GEIE”);[19]

The same principles which apply to the economic interest grouping apply to the European economic interest grouping, which consist of members established in at least 2 of the states of the EU.

With Legal personality:

4.7. A cooperative company with limited liability (“coöperatieve vennootschap met beperkte aansprakelijkheid” (“CVBA”)/”société               cooperative à responsabilité limitée” (“SCRL”);

4.8. A European company (“europese vennootschap” (“EV”)/ »société européenne”(“SE”);

The European Company was introduced in Belgian legislation in 2004 in the basis of Council Regulation (EC) No 2157/2001 of 8 October 2001.[20]

  1. Relevant tax aspects linked to company law

Corporate tax

Capital contribution tax:

5.1. The 0.5% registration duty on capital contributions has been abolished (as from1 January 2006).

Corporate Income Tax:

5.2. Taxable income of a resident company is comprised of annual worldwide income less allowable deductions. The corporate tax rates (2012) in Belgium are :

  • Taxable income less than EUR 25,000 : 24.25%
  • Taxable income from EUR 25,000 to EUR 90,000 : 31%
  • Taxable income from EUR 90,000 to EUR 322,500: 34.50%
  • Taxable income EUR 322,500 and up: 33%

In addition to the above rates, a 3 % surtax is imposed on the corporate income tax. The surtax is a temporary measure. Thus, the corporate rate for taxable income from EUR 322,500 and up is 33.99% (33 + 3% of 33).

Capital losses are in principle deductible. As an exception, capital losses on shares are not tax deductible. Capital gains are in principle taxable upon their realization. As an exception, capital gains on shares are in principle free of taxes.

Withholding Taxes:

5.3. Dividends distributed by a Belgian company are in principle subject to a Belgian domestic withholding tax of 25%. Under the EC Parent-Subsidiary Directive no tax is withheld on dividends paid to a company established in Belgium or another EU member state which holds at least for an uninterrupted period of one year 10% of the shares.

No tax is withheld on the remittance of branch profits.

Interest payments are in principle subject to a Belgian domestic withholding tax of 15%.

‘Royalties’ understood as incomes derived from letting, use or concession of movable goods is in principle subject to a 15% withholding tax unless an exemption applies.

These withholding taxes are often reduced under the double taxation treaties which Belgium has concluded as part of a broad tax treaty network.

Notional Interest deduction:

5.4. The so-called «notional interest deduction» is a new, innovative and powerful measure in international tax law enabling all companies subject to Belgian corporate tax to deduct from their taxable income a fictitious interest calculated on the basis of their shareholder’s equity (net assets). The amount that can be deducted from the taxable base equals the fictitious interest cost on the adjusted equity capital.

As from 2012 the is 3,425% for large companies and 3.925% for small and medium sized companies.

The notional interest deduction combines with the extensive treaty network concluded by Belgium, the tax regime for expatriates, the access to European Directives and the Belgian ruling practice. This large set of measures makes Belgium an attractive location for capital-intensive companies, equity funded, headquarters and treasury centres.

Special expatriate tax regime:

5.5. Executives posted in Belgium may qualify for a special expatriate tax regime.

[1] These activities may be regulated by federal or regional law. For example the performance of intermediary recruitment services in relation to mployment or the performance of services in the tourism sector are subject to regional regulations (Brussels, Wallonia or Flanders) and are subject to a specific license.

[2] The notary may register the deed of incorporation electronically with the Commercial Court after which a unique company registration number will be granted.

[3] In case of a public company with the minimum required share capital the total costs for incorporation, registration and publication will start at around   € 2500.00.

[4] If the company seat is in Flanders, the language is Dutch, in the Walloon Region French and in Brussels either Dutch or French.

[5] Belgium applies the system of the “siège réel”, which means that the seat of a company is the place which serves as the principal place of business for the company’s management (cf. the concept of the “registered seat”, which is the seat mentioned in the deed of incorporation and articles of association, but which should not necessarily coincide with the place that serves as the principal place of business for the company’s management).

[6] The registration formalities for non-EU foreign companies are essentially the same.

[7] If the parent company is governed by the law of a country which is not a party to the The Hague Treaty for the Abolition of the Requirements of Legalization of Foreign Documents (5 October 1961) and no bilateral treaty exist between that country and Belgium, all rules concerning legalization of documents should be respected.

[8] A branch office should be staffed by at least one person in Belgium who has the authority to enter into legal obligations towards third parties on behalf of the foreign company.

[9] Annual accounts shall be deposited with the Belgian National Bank;

[10] In Dutch in Flanders, in French in the Wallonia, in either Dutch or French in Brussels and in German in the German speaking region.

[11] The notary will keep the financial plan confidential in his file. In case of bankruptcy of the company within 3 years as from the date of incorporation, the Court may review this plan. If the Court concluded that the capital at incorporation was clearly insufficient to cover the activities of the company during the first 2 years of its existence, it may hold the founder shareholders personally and severally liable for the debts of the bankrupt company.

[12] A previous search on existing company names and trademarks is not compulsory, but certainly advisable. However there is no formal registration system for company names in Belgium.

[13] If the net assets of the company fall below 50% of the Company’s capital the meeting of shareholders shall decide on liquidation or take measures which should safeguard the continuation of the company. The Board of directors should propose such measures, unless the company is liquidated. A majority vote as in the event of amendment of the articles of association is required. The same applies if the net value falls below ¼ of the capital, provided that liquidation takes place in the event of a majority of ¼ of the shareholders’ votes cast.

[14] If after incorporation the number of shareholders falls below the number of 2 for any period longer than 12 months, the sole remaining shareholder shall become jointly and severally liable for the debts of the company.

[15] As from 1 January 2008 companies were no longer allowed to issue bearer shares. Existing bearer shares should be converted in registered shares or shares in dematerialized form before 1 January 2014. If no conversion takes place bearer shares will automatically be deemed to have been converted in dematerialized form or, if the articles do not provide for these , in registered shares.

[16] In the event of disputes between one or more shareholders holding at least 30% of the voting rights (20% if the company has issued non-equity securities) or at least 30% of the share capital, can, if they have valid reasons, request the Commercial Court for an order against the other shareholder to transfer his or her shares to them.

[17] Decision Voting agreements in for instance shareholders agreements are valid and enforceable. These agreements shall always be limited in time.

[18] Incorporation by one sole shareholder (one-person private limited company) is possible provided that this is a natural person and a minimum of € 12.400.00 is paid up at incorporation. If the sole shareholder is also sole shareholder in another company or if and as long as the required minimum capital (€ 12.400.00) is not paid, he remains personally and jointly liable for the debts of the one-person company.

[19] Regulation 2137/85 of 25 July 1985

[20] OJ. L 294 OF 10 November 2008

Vanden Eynde Legal



Corporate Law in Brazil

  1. Main Directives Concerning Foreign Investments in Brazil

General

Foreign investment in Brazil is encouraged as it represents a significant contribution to economic development in all main areas of the economy (infra-structure, raw materials production, industry, commerce/trade, services).

Exchange control and foreign investments policies are established by the National Monetary Council and the control, supervision and implementation of such policies are executed by the Brazilian Central Bank.

Foreign investments are regulated by Law 4.131 of 1962 and its subsequent amendments.

There are some restrictions on foreign investments in specific sectors (such as banks, press, national airlines, etc.).Direct foreign ownership of rural land is regulated and subject to limitations as to total area as well as the direct foreign ownership of properties on frontier and ocean borders. There are no restrictions on foreign ownership of urban properties.

Applicable Regime to Foreign Investments

All foreign investments must be registered at the Brazilian Central Bank, to ensure ultimate repatriation rights of the investment itself and/or of any earnings (interests, dividends, profits, capital gains) they might generate.

The remittance of earnings, the repatriation of capital and the registration of the reinvestment of local earnings are all based on the amounts originally registered as foreign investment at the Brazilian Central Bank. Foreign capital investments may be repatriated without payment of any tax, up to the amount registered as foreign currency investment at the Central Bank. Any excess over and above the amount registered is considered to be a capital gain and, therefore, is subject to a withholding tax of 15 percent (25 percent if the beneficiaries are domiciled in jurisdictions considered as tax havens).

Profits may be remitted abroad without any limit or local taxation, to the extent they are derived from stock participation (duly registered as foreign investments at the Central Bank) in local legal entities that have already declared their gross profits for the purpose of local taxation.

  1. Operating a Business in Brazil

In principle, any individual or legal entity (regardless of their nationality) can undertake any economic activity in Brazil, whenever (i) there is no legal prohibition and (ii) all regulatory and formal requirements have been accomplished.

Some activities performed by private entities are supervised by the State through regulatory agencies, such as telecommunications, power, water supply, oil and gas, health care and health products, ship transportation, air transportation, insurances, banks, etc.

III. Procedures and Formalities to Incorporate a Legal Entity in Brazil

The following are the basic requirements to incorporate a company in Brazil:

Corporate Name

The company may be incorporated using any corporate name provided it is not identical or similar to the corporate name of any other company previously incorporated and existing in the same Brazilian State. The corporate name must refer to the corporate objective of the company and be followed by the expressions “Limitada” (limited liability company) or “Empresa Individual de Responsabilidade Limitada” (individual limited liability company) or “Sociedade Anônima” (corporation), or their abbreviations “Ltda.” or “Eireli”or “S/A”.

Address

All companies must have a fixed address. Proof of domiciliation must be produced for incorporation (e.g. ownership of the real estate or the lease agreement).

Corporate Object

The proper definition of the corporate object is of critical importance for institutional, regulatory and tax purposes, and should be classified according to the general classification of economic activities adopted by governmental and tax authorities.

Management and Administration

The stockholders must nominate one or more Brazilian residents, either Brazilian citizens or foreigners (in this latter case, with a permanent resident’s visa in Brazil), to be the managers/officers and legal representatives of the company (in case of a “S/A” it is required a minimum of two Directors). Board of Directors (“Conselho de Administração) members of corporations (“S/A”), whenever created by the By-Laws of the company, do not have to be Brazilian residents.

Foreign Stockholders’ Representation

Foreign stockholders shall (i) nominate an attorney resident in Brazil (or another stockholder of the company who should be resident in Brazil) to receive summons and represent them before the Brazilian Courts, authorities and third parties for any corporate purposes related to the company and (ii) must be previously enrolled at the Brazilian IRS’ register, nominating a Brazilian permanent resident as attorney with specific powers to administrate the equity and other goods held in Brazil by the appointer.

Competent Authorities

Any Brazilian company, before starting its regular operations, should:

a- register its incorporation documents with the State Board of Commerce (whenever the company has a commercial nature) or with the local Civil Registry of Companies (whenever the company has a non-commercial nature, e.g. intellectual, scientific, artistic, and/or similar activities);

b- enroll the company as taxpayer before Federal, State and /or Municipal tax authorities, as the case may be;

c- obtain the competent licenses and authorizations form Federal, State and/or Municipal authorities, as the case may be, to occupy and develop its activities at its premises, and

d- comply with the required inscriptions, licenses and authorizations issued by Public Ministries, Agencies, Departments and/or Bodies that may be applicable to the company and/or its activities and/or products, as the case may be.

Documents to be Presented to the Board of Commerce or Civil Registry

The following documents are required for the registration of a Brazilian incorporated company:

- The incorporation documents (Articles of Incorporation or Minutes of the Shareholders Meeting for Incorporation and respective By-Laws, as the case may be, duly signed by the parties and appointing the officers of the company in both cases);

- Identification documents of the stockholders and of the company’s officers (identity card or passport of individuals, and/or copy of the incorporation documents and of the corporate documents appointing its current officers, in case of foreign legal entities, both duly registered at the local foreign Companies’ Register), and

- Power of Attorney for representation of foreign stockholders.

Observation: All documents executed abroad must be legalized by a local Public Notary and at the nearest Brazilian consulate (or bear an Apostille), and, locally in Brazil, must also be officially translated and registered by a local Public Notary.

Timeframe

It takes approximately seven days to obtain the registration of the company at the State Board of Commerce or Civil Registry.

After the incorporation documents have been registered at the Board of Commerce or Civil Registry, it takes another twenty days to obtain the registration of the company with the Tax Authorities.

Accounting

The company should hire a local accountant (or accounting firm), who will also complete the monthly returns required by the administrative, labor and tax authorities.

Legal Expenses

The legal expenses related to the incorporation of a company in Brazil are not significant and are mainly comprised of charges due for public notarization and registration of the incorporation deeds and related documents, translation into Portuguese of foreign language documents and other minor charges and expenses.

IV.Types of Legal Entities

IV.1. General Overview

The most common forms of business legal entities in Brazil are (i) the limited liability business company (the “Ltda.”) and (ii) the corporation (the “S/A”).

As of January 2012 a new kind of legal entity – the Individual Limited Liability Company (the so called “empresa individual de responsabilidade limitada” or the “Eireli”) has been created, but it is restricted (according to the current regulation) to individuals.

These types of legal entities can be used for small, medium and large-sized businesses.

Business activities may also be performed in other ways, for example, by creating a local Brazilian branch of a foreign company, or setting up a general partnership (“sociedade em nome coletivo”), a limited partnership (“sociedade em comandita simples”) or an incorporated partnership (“sociedade em comandita por ações”).

The Brazilian Civil Code also provides, as private legal entities, with no “commercial” character, (i) the simple partnership (“sociedade simples”), (ii) associations (“associações”) and (iii) foundations (“fundações).

The Brazilian Civil Code and the Corporation Law set forth the main principles of corporate governance.

The large-sized Ltda. companies (holding total assets of more than R$ 240 million or booking an annual gross income higher than R$ 300 million) are obliged to audit and publish their financial records.

IV.2. Limited Liability Commercial Company (“Ltda.”)

This type of company is regulated by the Brazilian Civil Code and by Law No. 6.404/1976 (Corporation Law).

Stockholders

The “Ltda.” requires a minimum of two (02) stockholders, either individuals or legal entities, foreigners or Brazilians, domiciled in Brazil or abroad.

Capital Stock

There is no minimum capital stock to be subscribed or paid up for the incorporation of a “Ltda.”.

The capital stock of a “Ltda.” is divided into quotas.

Each stockholder´s liability is restricted to the value of the subscribed stock not fully paid up.

The increase of the company’s capital stock is admitted as soon as all the existing subscribed stock has been totally paid up.

In order to avoid a dilution of the stockholders’ participation in the capital stock, in the event of an increase in capital, the Civil Code has provided existing stockholders with preferential rights of subscription in proportion to their existing stockholding.

The reduction of capital stock can occur only when (i) there are irreparable losses or (ii) the capital stock is excessive when compared with the company´s corporate object.

Stockholders´ Meetings and Resolutions

The following decisions must be approved by stockholders representing a minimum of 3/4 of the capital stock: amendments to the “Ltda.’s” Articles of Incorporation, its merger, dissolution or liquidation.

The resolutions are taken during stockholders’ general meetings, pursuant to the provisions set forth in the company’s Articles of Incorporation, usually by the stockholders representing the majority of the Company’s capital stock.

There is no need to publish a notice convening the meeting when all the stockholders attend the meeting or declare, in writing, that they are aware of the place, date, time and agenda of the meeting.

Management and Administration

The stockholders must nominate one or more Brazilian resident individuals, either Brazilian citizens or foreigners (in this last case, with a permanent resident’s visa in Brazil), to be the managers/officers and legal representatives of the company.

IV.3. Individual Limited Liability Company (“Eireli”)

This type of company is regulated by the Brazilian Civil Code.

Stockholders

The “Eireli” requires one exclusive stockholder, obligatorily an individual, foreigner or Brazilian, domiciled in Brazil or abroad.

The individual who incorporates an Individual Limited Liability Company is not allowed to participate as stockholder of another company incorporated under the same type of legal entity.

Capital Stock

It is required a minimum subscribed and paid up capital stock equivalent to 100 times the minimum salary in force at the incorporation date of the company.

The capital stock of a “Eireli” may not be divided into quotas.

Management and Administration

The stockholder must nominate one or more Brazilian resident individuals, either Brazilian citizens or foreigners (in this last case, with a permanent resident’s visa in Brazil), to be the managers/officers and legal representatives of the company.

IV.4. Corporation (“S/A”)

The S/A” is regulated by Law No. 6.404/1976 (Corporation Law).

The “S/A” may trade its stock on a stock market.

An “S/A” which trades publicly is subject to the surveillance of the CVM (Brazilian Securities Exchange Commission).

An “S/A” which does not trade publicly has more freedom to establish its corporate and operating rules.

Shareholders

The “S/A requires a minimum of two shareholders, either individuals or legal entities, foreigners or Brazilians, domiciled in Brazil or abroad. An exception to this rule is the 100% owned subsidiary “Subsidiária Integral”.

Capital Stock

No minimum capital stock is required. However, the shareholders must subscribe and pay up at least 10% of the issuance price of the original shares at (or before) the formal incorporation of the company. The funds are held in a bank deposit account until the company’s incorporation documents have been registered by the State Board of Commerce.

The capital stock of the corporation is divided into shares. Each shareholder’s liability is limited to the full paid up value of the shares which have been subscribed to.

Usually, a capital increase is performed via the amendment of the By-Laws, convening an Extraordinary General Meeting and complying with the rights of presence and preferential subscription rights.

A capital stock reduction is admitted whenever justified due to losses or when the amount of the capital is excessive when compared with what is required to perform the company’s regular business.

Securities

The corporation can issue common and preferred shares, as well as fruition shares (“partes beneficiárias”), all of them with or without nominal value. Should the shares have a nominal value, the price of any new shares cannot be less than the original nominal value of the existing shares in order to assure that there is no dilution of the participation of the current shareholders.

The number of non-voting preferred shares, or shares subject to voting restrictions, cannot exceed 50% of the total number of the shares issued by the corporation.

In the private corporation, the ownership of the shares is certified by an entry in the share register, while in the publicly-held company ownership may be certified by a custody agent.

Apart from the aforementioned shares, the corporation can issue other securities, such as debentures, subscription warrants, participation certificates and commercial paper Debentures are a form of commercial paper widely used in Brazil by large sized corporations, as they adequately fulfill financial investment needs. Due to its flexibility, debentures have become the most important instrument of securities investment in corporations, both publicly-held and privately-held, granting the issuing corporation with the possibility to determine the amortization flow and their form of compensation. Debentures can eventually be converted into shares of the issuing corporation, in compliance with the conditions described in the respective indenture.

Dividends

The corporation’s By-Laws should establish the minimum dividends to be paid to shareholders as a percentage of the annual profit. 50% of the net profit must be distributed to shareholders if no minimum dividend is specified. The By-Laws of the corporation may freely establish other profit distribution criteria applied either to preferred shares or ordinary shares.

Shareholders´ Resolutions

According to the law, the resolutions of the shareholders of a Corporation are taken by the absolute majority of the valid votes of stockholders who are present at the meeting, with the exception of some specific issues listed in Article 136 of Law 6404, such as amending the corporation’s By-Laws and reducing the minimum compulsory dividend, all of which require the approval of at least half of the corporate stock with the right to vote.

Notwithstanding the provisions referred to in the previous paragraph, the By-Laws of the corporation can establish a higher “quorum” for any specific matter to be resolved.

Shareholders´ resolutions are voted at the General Meetings, of which there are three types: (i) Incorporation General Meeting; (ii) Annual Ordinary General Meeting; (iii) Extraordinary General Meeting.

By April 30 of each year, corporations should convene an Annual Ordinary General Meeting where the following issues are voted: (i) approval of the financial statements; (ii) deliberations regarding the allocation of the annual net profit and the payment of dividends; (iii) the election of the administrators and the members of the Fiscal Board, when applicable.

The Extraordinary General Meetings are convened for the deliberation of any matter which cannot be dealt with by the Annual General Meeting.

The shareholders may enter into agreements regulating the ways that they exercise their voting rights, the purchase and sale of shares and related preferred rights, tag along and drag along rights, etc.

Corporate Governance

The Board of Directors (“Conselho de Administração”) is a non obligatory corporate body and, when established by the corporation’s By-Laws, it should be elected by the Shareholders’ General Meeting.

The Executive Office (“Diretoria”) is elected by the Board of Directors or by the Shareholders´ General Meeting if the Corporation has no Board of Directors.

The Board of Directors is a collegiate body which is mandatory in publicly-held corporations and optional in private Corporations. It must consist of at least three shareholders, individuals who are not required to be residents of Brazil.

The Executive Office is an executive body, responsible for representing the corporation and performing all the appropriate management tasks. It consists of at least two members, who are not required to be shareholders but who must reside in Brazil (foreigners or nationals). The Executive Office’s mandate is a maximum of three years.

The Corporation must have a Fiscal Board which may or may not be a permanent board, depending on the shareholders’ vote, except in the case of publicly-held corporations, which require the Fiscal Board to be permanent.

Formalities

The financial statements of publicly-held corporations, banks, financial institutions, and insurance companies must be audited by independent auditors. . It is mandatory to publish the minutes of any shareholders’ meetings and other corporate documents which may affect third parties. This information is published in the local State´s official gazette and in another widely-circulated newspaper distributed in the location where the corporation´s head-office is based.

Publicly-held corporations are subject to the regulatory power of the CVM – Brazilian Securities Exchange Commission – and, therefore, must comply with certain additional legal and regulatory requirements and formalities, such as prior registration of the issuance of securities stock and the filing of periodical reports to the CVM.

IV.5 Branch of a Foreign Legal Entity

This type of local legal entity requires prior permission from the federal Brazilian government.

Any change in the main company’s organization should be updated in Brazil regarding the branch status and, if the changes affect the branch itself, must also obtain approval from the federal government in order to be valid locally.

The branch must operate under the corporate name that the main company uses in its country of origin, to which may be added the expression “of Brazil” (“do Brasil”).

The authorization decree and other official notices are published in the federal gazette, to be subsequently filed with the Board of Commerce of the State in which the branch will be located.

No minimum capital amount is required, but a determined capital amount should be allocated specifically to the branch, for local institutional and corporate purposes. The liability for debts and claims on the branch is not limited to the capital amount allocated to it, but is extended to the main company. A branch is considered a local extension of the main foreign legal entity, which will be held liable for the local branch’s operations.

The branch’s local management should be delegated to a legal representative with a permanent residence in Brazil (a foreigner or national). No annual meeting is specifically required for the branch by Brazilian law, but all relevant corporate acts of the foreign legal entity should be registered locally in Brazil.

A branch may be closed and wound up by a decision of the main company.

The accounting books and records of the branch’s own operations are kept in the same manner as for any local Brazilian corporation. The foreign legal entity must publish its financial reports in the official gazette as it would in its country of origin, as well as the branch´s financial reports, under penalty of losing its governmental authorization.

IV.6 Partnership Companies

General Partnership (“Sociedade em Nome Coletivo”)

The general partnership is formed to carry-out economical activities.

The partners must be individuals and they will have unlimited liability towards third parties with respect to the company’s business. They may however limit their liabilities among themselves.

Only the partners can be managers of of the company.

Limited Partnership (“Sociedade em Comandita Simples”)

The limited partnership is submitted to the same corporate principles as the general partnership and comprises two or more partners of two types: unlimited (active) and limited (passive) liability stockholders.

Only unlimited liability partners can be the managers of the limited partnership.

Incorporated Partnership (“Sociedade em Comandita por Ações”)

The incorporated partnership is governed by the same corporate provisions applicable to corporations; however its officers must be shareholders of the company to whom unlimited liability for the company’s business is assigned.

Simple Partnership (“Sociedade Simples”)

The simple partnership is ruled by the same basic corporate provisions applicable to the limited liability company, except for the partners’ extended liability for the company’s business and the nature of the activities carried-out by the Company, which should not have a “commercial” purpose, but instead should relate to intellectual, scientific, literary or artistic goals.

IV.7 Other Corporate Considerations

Joint Ventures

There is no specific legal provision in Brazil granting legal status to Joint Ventures.

Specific business projects may be developed by two or more legal entities through the “Sociedade em Conta de Participação” (participation of admitted individuals) and “Consórcio” (exclusively formed by legal entities), both of which are not recognized as legal entities (with assets and liabilities separate from those of their members).

Limits on the Limitation of Liability of Legal Entities

Legal entities are, in general and according to the provisions of law, considered as distinct entities from their partners/stockholders and the sole and exclusive holder of the business and related rights and obligations. The Brazilian law enacted the principle of autonomous assets, separating the rights and obligations of the legal entity from those of the members that form it.

Nevertheless, numerous legal interpretations and judicial precedents deny a legal entity its separate personality and, consequently extend to the partners/shareholders/officers’ of the legal entity personal liability for the legal entity’s debts (mainly labor and tax-related liabilities), regardless of any evidence of fraud or abuse committed by the legal entity.

Transfer of Shares and Stock

In the case of limited liability commercial company, the transfer of stock (“quotas”) must be carried out by signing an amendment to the company’s Articles of Incorporation and registering it at the State Board of Commerce. In the case of the private corporation, the transfer of shares is carried out by recording the operation in the share register of nominal shares and by signing the terms of the share transfer in the corresponding corporate book.

The company’s Articles of Incorporation, By-Laws or separate corporate agreements entered into by stockholders/shareholders may freely determine subject to what conditions these operations may take place, or may impose restrictions in relation to the same.

Company Dissolution

The dissolution of the company may occur by a decision of the stockholders, when the company’s duration expires, in the cases foreseen in the Articles of Incorporation and By-Laws, in the case of lack of plurality of stockholders in the companies that requires a minimum of two stockholders, pursuant to a judicial decision when the company´s incorporation is annulled or when it is admitted that the company is no longer capable of fulfilling its goals.

The company’s “legal personality” expires after the termination of the respective liquidation/winding-up process following its dissolution, such process being conducted in a judicial or extrajudicial way. The company´s simple inactivity does not generate its extinction as a legal entity.

  1. Taxation

With regard to the taxation of Brazilian company’s activities and earnings and taking into account the complexity and bureaucracy of the fiscal system and related accounting and tax procedures in Brazil, it is convenient to evaluate, at the time when the company starts operating, through specific simulations to be made on a case by case basis, (i) the fiscal system and (ii) the procedures to be adopted and used in the company’s accountancy, invoicing and taxation, the object of the evalutation being to minimize, as far as Brazilian law permits, the amount of tax payable by the Brazilian company.

General Taxation

The Brazilian Tax System is extremely complex and bureaucratic, with several taxes imposed at different Governmental levels.

Generally, there are 5 different kinds of taxes (“impostos”) : public fees, betterment contributions, social contributions, economic contributions and compulsory loans.

From a foreign investor’s (non resident/based in Brazil) stand point, (i) net income (dividends/profits) distributed by Brazilian companies to its stockholders is not taxable at all (based on the principle that taxes have already been paid locally by the company generating the distributed income), (ii) income derived from any kind of compensation paid by Brazilian sources is subject to a withholding tax (15% or 25% depending on the case) and (iii) capital gains accrued in Brazil are subject to tax at 15% or 25% depending on the case.

The Brazilian Tax System is based on five (5) different categories of taxes/compulsory contributions: federal taxes, state taxes, municipal taxes, manpower compensation taxes and others.

Main Federal Taxes are: Income Tax (IR), Corporate Social Contribution Net Income Tax (CSSL), Tax on Manufactured Goods (IPI), Import Tax (II), Export Tax (IE), Financial Operations Tax (IOF), Corporate Social Contribution on Billings (COFINS), Corporate Contribution to the Social Integration Program (PIS/PASEP), Contribution to the Economic Intervention Domain (CIDE) and Rural Property Tax (ITR).

Main State Taxes are: Value Added Tax on Products and Services (ICMS), Inheritance and Donation Tax (ITCMD) and Automotive Vehicles Tax (IPVA).

Main Municipal Taxes are: Tax on Services (ISS), Property Tax (IPTU) and Tax on Disposal of Real Estate (ITBI).

Main Taxes/Obligatory Contributions on Manpower Compensation are: Social Security and related Taxes (borne by Employer and Employee) – INSS and Sistema S/INCRA and Employees’ Severance Fund (FGTS).

Other main Taxes/Obligatory Contributions are: Union Contributions (Contribuição Sindical), Special Fees on specific activities (such as telecom, power, etc), environmental fees, securities market fees, etc. A spread sheet issued by the Brazilian Revenue Service giving details about the taxable economic events and the distribution of the collected taxes among the Governmental Entities (Union, States and Municipalities) is given in annex 1..

Tax Incentives

The Federal Government, as well as the States and Municipalities do promote new investments, generally for all types of industries and activities, by offering to new investors/businesses financial assistance and tax exemptions/reductions/incentives.

Tax Treaties With Other Countries

Relief from double taxation is available if a tax treaty exists between Brazil and the country from which foreign source income is generated or if reciprocal treatment is applicable.

Brazil has signed double taxation agreements with various countries.

Brandi Advogados



Corporate Law in the British Virgin Islands

  1. Compliance with regulations concerning foreign investments in the British Virgin Islands (the “BVI”)

General:

The BVI is a British Overseas Territory and has a history of stable government, committed to promoting the financial services industry. BVI law is English common law, augmented by locally applicable statutory legislation. The BVI court system is well developed with an ultimate appellate court in the Privy Council in London. In addition to the High Court, the BVI is also the seat of the Commercial Division of the Eastern Caribbean Supreme Court.

As a leading offshore jurisdiction, the BVI has long been committed to implementing best international practice, and actively continues to adapt in order to comply with the requirements of the Organisation of Economic Cooperation and Development (“OECD”) and Financial Action Task Force (“FATF”). In August 2009 the BVI was put on the OECD “White List”, comprising offshore jurisdictions deemed to have substantially implemented OECD standards for transparency and exchange of information.

The CIA World Factbook recognises the BVI as one of the most stable and prosperous jurisdictions in the Caribbean, and notes that the BVI is very attractive to international business. Statements from the Premier and the Governor underline the BVI’s commitment to being at the forefront of international business while remaining a jurisdiction with a sound regulatory framework. As at 30 June 2009, there were 405,873 active BVI Business Companies incorporated, and as of 17 December 2009, a total of 1,561,000 companies had been incorporated (including companies which had been dissolved). On average there are roughly 60,000 new company incorporations each year. The BVI has creditor-friendly legislation, including its corporate insolvency legislation. Banks are familiar with, and generally willing to lend to, BVI Business Companies accordingly. The BVI has established itself as the world’s leading offshore corporate domicile, and the offshore vehicle of choice for business investment/holdings in many parts of the world.

On 17 December 2009, it was announced that the Hong Kong Stock Exchange would now allow BVI Business Companies to be listed on its main market. BVI Business Companies are already listed on major stock exchanges around the world, including the Euronext, the New York Stock Exchange, Nasdaq, the London Stock Exchange, the AIM market of the London Stock Exchange, the Toronto Stock Exchange and the Singapore Stock Exchange. As of 30 November 2009, 6% of all international companies listed on the London Stock Exchange (including AIM) were BVI Business Companies.

BVI Business Companies

The uses of BVI Business Companies are too numerous to list comprehensively, but the following may serve as indicative examples. With flexible, balanced legislation, tax neutrality and an established financial services sector, BVI Business Companies are often used for the following purposes:

  • Multi-jurisdictional joint ventures
  • Listing of securities
  • To effect business combinations for special purpose acquisition companies
  • Multi-jurisdictional mergers and acquisitions
  • Holding and financing assets (for example real estate, aircraft, ships and mega-yachts)
  • Holding companies used to structure equity and debt investments

BVI Business Companies are often used as structured finance vehicles. Usually such a company will only issue a nominal number of shares. The shares will be held by a third party, for example a charitable trust. The company then typically purchases assets and issues limited recourse notes to third party investors secured over those assets.

These transactions are normally structured on a secured liability recourse basis, so that the liability of the company in relation to any particular transaction is limited to the security provided. In addition, it is possible to set up restricted purpose companies whose objects are limited to a specific purpose and cannot be amended.

Where a company is engaged in international trading activities a BVI Business Company may be used to avoid the company being incorporated in any particular jurisdiction in which it operates. Subject to locally applicable laws, it may be possible to defer taxation on any profits earned, allowing profits to be reinvested in the enterprise. Furthermore, in contrast to many “onshore” jurisdictions, the BVI has (whilst consistent with proper supervision) a business-friendly, light-touch regulatory environment, potentially allowing businesses to ameliorate the impact of costly and troublesome local regulation in less favourable jurisdictions where they operate.

Because the BVI adopts English law concepts of corporate separateness, BVI Business Companies are widely used in group structures where it is important to mitigate the risk of the assets of one company being used to satisfy the liabilities of another company in the group: this could be, for example, useful to multinational enterprises with potential product liability or business activity exposure in one part of the group; it is also the principle underpinning the concept of “non-consolidation”, thus allowing for the existence of securitisation.

Structuring a corporate group with a BVI Business Company holding company allows loans to be provided to subsidiaries in other jurisdictions where the subsidiary may have the benefit of deductions on interest paid. As the BVI holding company is not subject to interest or corporate taxes (including capital gains, gift, corporate income taxes) and there are no dividend requirements, profits from the holding company can be used to either directly fund subsidiaries or to reinvest elsewhere.

BVI Business Companies are generally not subject to taxes (other than the annual licence fees) in the BVI, and as such make tax-efficient vehicles to use as holding companies or for establishment of investment fund vehicles so as to avoid problems of double taxation in other jurisdictions as mentioned above.

There is a requirement for BVI Business Companies to keep accounting records sufficient to show and explain the company’s transactions and enable the financial position of the company to be determined with reasonable accuracy, although in practice many BVI Business Companies also adopt other accounting/audit practices to comply with regulations in jurisdictions in which they operate, or with exchange regulations where they may be listed. There is no requirement that the accounting records be kept in the BVI. Should the directors/shareholders consider it best, accounting records may be held in any jurisdiction.

A BVI business company must have a registered office in the BVI. This must be a physical address, which may be situated at the office of the company’s registered agent (usually the case in practice). The registered office of a company is not necessarily the same as the location of a company’s business operations or headquarters.

  1. Procedures and formalities

Competent authority:

The formalities for setting up a new company are dealt with by the BVI Registrar of Corporate Affairs (the “Registry”). The Registry, amongst other things, files companies’ Memorandum and Articles of Association and registers charges (though such charge registration is optional).

Unless they are in liquidation, companies must have a licensed registered agent in the BVI. The registered agent will be familiar with the filing and ongoing corporate requirements.

Timeframe:

The company will officially come into existence when it has been duly registered on the Companies Registry maintained by the Registry; the required time from when the documents are completed to the company registration and procurement of the incorporation certificate by the Registrar at the Registry should not take longer than 48 hours save for where non-standard Memorandum and Articles of Association are required. It is possible to use ‘off-the shelf’ companies in the BVI.

Legal expenses:

  • Professional Incorporation fee – varies depending on incorporator
  • Financial Services Commission Incorporation/Annual Fee – US$350
  • Annual Registered Office and Registered Agent Fee – varies depending on incorporator

Where the company is authorized by its Memorandum of Association to issue more than 50,000 shares, the Financial Services Commission Incorporation/Annual Fee increases to $1,100.

Required documents to be registered:

The Memorandum and Articles of Association of the BVI company must be filed with the Registry.

The company can, but is not required by BVI companies law, to register charges with the Registry.

BVI Business Companies must keep the following documents at the office of their registered agent:

  • the company’s Memorandum and Articles of Association;
  • the company’s Register of Directors, or a copy of the same. If a copy is kept at the registered office, the company must notify the registered agent of the location of the original;
  • the company’s Register of Members, or a copy of the same. If a copy is kept at the registered office, the company must notify the registered agent of the location of the original;
  • an imprint of the company’s common seal; and
  • copies of all notices and documents that have been filed by the company (during the course of the previous ten years).

The preparation of the Articles of Association is an important action which may have legal and tax consequences. Therefore it is recommended to be assisted by a BVI lawyer with respect to the legal and tax matters.

  • Business structures

The business structure will depend on the kind of the business, the investor’s strategy and the degree of independence that the BVI operations are to have.

  1. Corporate Vehicles

Seven different types of company can be incorporated under the Act:

  • companies limited by shares;
  • companies limited by guarantee authorised to issue shares;
  • companies limited by guarantee not authorised to issue shares;
  • unlimited companies authorised to issue shares;
  • unlimited companies not authorised to offer shares;
  • restricted purpose companies; and
  • segregated portfolio companies.

Of the seven forms of company described above, the latter two merit further explanation.

  1. Restricted Purpose Companies

Restricted Purpose Companies (“RPCs”) are companies limited by shares that have restricted objects or purposes. These restrictions must be articulated in each RPC’s Memorandum and Articles. RPCs are a unique feature of BVI company legislation and have been designed to be used as special purpose vehicles in structured finance and securitisation transactions, or in joint venture structures.

  1. Segregated Portfolio Companies

Segregated Portfolio Companies (“SPCs”) are companies limited by shares, in which the assets and liabilities of different classes (or sometimes series) of share are separated from each other and from the general assets of the SPC.

SPCs are most commonly used in the formation of collective investment funds (as umbrella funds) and for the formation of captive insurance companies. Other uses include asset holding vehicles (typically where each portfolio holds a single asset such as a ship or an aircraft), and certain types of capital markets debt issuances.

  1. Relevant tax aspects linked to corporate law
  2. The Government of the BVI will not, under existing legislation, impose any income, corporate or capital gains tax, estate duty, inheritance tax, gift tax or withholding tax upon the company or its shareholders. The BVI is not party to any double taxation treaties.
  3. All distributions, interest and other amounts paid by the company to persons who are not persons resident in the BVI are exempt from the provisions of the Income Tax Act (see Section 242 of the BC Act (as defined below)) in the BVI and any capital gains realised with respect to any shares, debt obligations or other securities of a company by persons who are not resident in the BVI are exempt from all forms of taxation in the BVI.
  4. No estate, inheritance, succession or gift tax, rate, duty, levy or other charge is payable by persons who are not persons resident in the BVI with respect to any shares, debt obligations or other securities of a company.
  5. All instruments relating to transactions in respect of the shares, debt obligations or other securities of a company and all instruments relating to other transactions relating to the business of a company are exempt from the payment of stamp duty in the BVI.
  1. Ongoing requirements

The BVI Business Companies Act, 2004 (the “BC Act”) sets out a number of continuing obligations applicable to all BVI business companies. These are set out below:

  • Use of name (Section 26 BC Act) – All written communications sent by or on behalf of a BVI Business Company must clearly state the company’s name. The name must also be stated on documents issued or signed by the company which evidence or create legal obligations for the company;
  • Company number (Section 7 of the BC Act) – Once incorporated the Registrar of Corporate Affairs shall provide the company a number unique to that company. Whilst a company may alter its name, the Company no. shall remain constant throughout the lifetime of the company. The company number cannot be changed.
  • Directors(Section 109 of the BC Act) – The number of directors of a company may be fixed by the company’s articles of association. Whilst at all times a company is required to have at least one director there is no maximum number set under the BC Act.

The BC Act also expressly excludes a company from appointing the following as directors (Section 111 of the BC Act):

  • an individual who is under eighteen years of age;
  • a person who is a disqualified person within the meaning of section 260(4) of the Insolvency Act 2003;
  • a person who is a restricted person within the meaning of section 409 of the Insolvency Act 2003;
  • an undischarged bankrupt; and
  • a person who is disqualified by the memorandum or articles from being a director of the company.

A company may have corporate entities as directors and in respect of all directors, corporate or otherwise, a company may enter into service agreements with such directors to govern the terms of their employment as directors and such service agreements will be governed by the law specified in the agreements.

  • MembersThe BC Act provides for three types of members:
  • Guaranteed member;
  • Shareholders; and
  • Unlimited member (a member who has unlimited liability for the liabilities of the company).

Each member must be entered into the register of members (Section 78 of the BC Act). From the date of appointment of the first director, a BVI Business Company must have, at all times, one member. This member may also be a director. The BC Act imposes no maximum number of shareholders on companies (Section 78 of the BC Act).

  • Employees - There are no limitations on the number of employees a BVI Business Company may employ.
  • Registered office (Section 90 BC Act) – A registered office must be maintained in the BVI. This must be a physical address, which may be situated at the office of the company’s registered agent (usually the case in practice).

The registered office of a company is not necessarily the same as the location of a company’s business operations or headquarters. The registered office is a statutory requirement. A company, in order to be incorporated under the Act, must have a registered office in the BVI and such office is generally the address of the company’s registered agent who in turn acts as the incorporator of the company in the BVI. The registered office of the company and the registered agent may be changed by the members, and if authorised by the constitutional documents, the directors of the company to another service provider in the BVI.

The registered office constitutes the company’s location for certain statutory functions. In particular, legal documents can always be served on a company at its registered office (section 101 of the BC Act) irrespective of where the company is carrying out its business operations.

Pursuant to the principles of private international law, the registered office of a company is the connecting factor for determining by which law the internal affairs of a company are governed. In the case of a company incorporated under the Act, it is the BVI.

The BVI courts will continue to regard a company formed under the BC Act as a BVI company, as far as its internal affairs are concerned, irrespective of the fact that a BVI company may have a foreign head office or conduct its operations outside the BVI. Accordingly, as far as BVI law is concerned, a BVI company establishing a foreign office need not change its registered office unless it wishes to continue to another jurisdiction which permits such transfer of domicile.

  • Registered agent (Section 91 BC Act) – Unless in liquidation, companies must have a licensed registered agent in the BVI. This can be advantageous since the company will have an administrator within the BVI that is familiar with the filing and ongoing corporate requirements.
  • Documents to be kept at the registered agent’s office (Section 96 BC Act) – The Act requires companies to keep certain records and documents at the office of its registered agent. These include:
  • The memorandum and articles of association.
  • The company’s register of members (or a copy), containing the identities of shareholders, guarantee members or unlimited members, the dates on which they were entered on the register and the dates on which any person ceased to be a member of the company.
  • The company’s register of directors (or a copy), identifying the directors, the dates on which they became directors and the dates on which any person ceased to be a director of the company.
  • Copies of all notices and other documents filed by the company within the previous ten years
  • If copies of the registers of members and directors are kept at the office of the registered agent, the company must notify in writing the registered agent of any change in the registers within 15 days, and provide the registered agent with updated copies of the registers. If the place at which the original register of shareholders or directors is kept has changed, the company must provide the registered agent with details of the physical address of the new location within 14 days of the change of location.
  • Other documents (Section 97 BC Act) – Companies must keep other documents, including:
  • Minutes of all meetings and resolutions of the shareholders or any committee of shareholders; and
  • Minutes of all meetings and resolutions of the directors or any committees of directors.

These minutes may be kept at a location other than the registered agent’s office, at the directors’ discretion. If the directors decide to keep the minutes at a location other than the registered agent’s office, they must provide the registered agent with written notice of the alternative location, and inform the registered agent of any change in location within 14 days of the change.

  • Financial records (Section 98 BC Act) – Companies must maintain sufficiently detailed financial records, showing and explaining the company’s transactions, and enabling determination of the financial position of the company with reasonable accuracy at all times.
  • Register of charges (Section 162 BC Act) – The register must be kept at the company’s registered office, or with its registered agent. A charge which is registered with the Registrar of Companies will have priority over subsequent charges not registered. Registration at the Registrar of Companies is optional, and failure to register a charge will not affect the validity or enforceability of the charge.
  • Filing procedures – The following events must be notified to the Registrar of Corporate Affairs, and the appropriate fee paid:
  • Change of company name (Section 21 BC Act)
  • Change of registered office/registered agent (Section 92 BC Act)
  • Amendments to the memorandum or articles of association, including change of class rights attached to shares or amendments to the maximum number of shares a company is authorised to issue (Section 13 BC Act)
  • Voluntary liquidation of a company (Section 204 BC Act)
  • Company merger, consolidation or continuation (Section 171 BC Act)
  • Plan of arrangement (Section 177 BC Act)
  1. Partnerships

Partnerships

At least two persons, being one or more limited partners and one or more general partners, are required to form a limited partnership. A body corporate, with or without liability, or a partnership (including another LP) may be a general partner or a limited partner. An LP must have the words “Limited Partnership” or the abbreviation “L.P.” after its name to signify its identity. A limited partnership formed in another jurisdiction which allows continuation, may continue as an LP.

In order to form an LP in the BVI, a Memorandum of Partnership (including the names and addresses of the general partners) must be submitted to the BVI Registrar of Limited Partnerships. This Memorandum is available to the public for inspection, however the Articles of Partnership (the “Articles”), once executed, are submitted to the registered agent and are not available to the general public. It is the Articles which generally contain the mechanics of the LP and the relationship between the partners, and will govern the freedom or restriction on limited partners assigning/transferring their interests, among other things.

An LP may not carry on banking business, trust business, insurance-related business or company management business (unless it is licensed or exempt from being licensed under the Company Management Act). It may also not carry on business with persons resident in the BVI (with a few certain exceptions such as employing local professional advisers, leasing office space etc.).

LPs are exempt from all provisions of the BVI Income Tax Act. All payments by the LP to persons who are not resident in the BVI are also exempt from BVI income tax. No estate, inheritance, succession or gift tax, rate, duty, levy or other charge is payable by persons who are not resident in the Territory with respect to any interest in an LP. LPs are also generally exempt from payment of BVI stamp duty.

A limited partner is not liable for the obligations of the limited partnership unless he is also a general partner or (in some situations) where he participates in the control of the partnership business and the persons with whom he transacts business reasonably believe, based on his conduct, that he is a general partner. The general partners are jointly liable for all debts and obligations of the limited partnership.

Bearer Shares

Under the “BC Act”, BVI Business Companies must either (1) issue registered shares or (2) comply with the BC Act’s immobilisation regime placing all bearer shares with an authorised custodian, licensed by the FSC. The custodian will be required to know the details of the ultimate beneficial owners of the bearer shares. In addition, the custodian will charge an annual fee. Given the requirement to lodge shares with an authorised custodian the main benefit of bearer shares, unanimity, seems to have been lost.

Money Laundering/

The BVI’s anti-money laundering (AML) regime was comprehensively overhauled at the beginning of 2008 with the introduction of the Anti-Money Laundering Regulations and the Anti-Money Laundering and Terrorist Financing Code of Practice (the ‘Code’). The new legislation substantially reflects Financial Action Task Force’s (the “FATF”) internationally recognised 40+9 Recommendations and is in many ways similar to the benchmark EC Third Money Laundering Directive of 2007.

Compliance

The BVI has adopted a risk-based approach to compliance. The BVI Anti Money Laundering Regime requires that a Relevant Person conducts a risk based assessment in relation to each client.

The results of that assessment exercise will determine:

  • the suitability of entering into a business relationship with that person (having regard to money laundering and terrorist financing risks);
  • the degree of customer due diligence ("CDD") required (it may afford either a streamlined customer due diligence process or a normal process or an enhanced process). The Code provides guidance in this respect; and
  • the extent to which CDD should be updated and reviewed.

Risk assessment will result in the applicant for business or customer being given one of three possible risk profiles (low/ordinary/high) and in each case the Code sets a minimum standard that must be complied with.

The Relevant Person will ascertain the identity of the controlling elements or owners in relation to any legal person with which it establishes a business relationship. In each case, an incorporation checklist is material to the risk assessment. A completed incorporation checklist allows, on a case-by-case basis, for precise legal advice to be provided as regards the requirements to be satisfied for CDD.

Forbes Hare



Corporate Law in Bulgaria

Compliance with Regulations concerning Foreign Investments in Bulgaria

Bulgaria has adopted a liberal investment regime and Bulgarian legislation does not impose any specific restrictions in relation to starting up a business or making investments in Bulgaria. The Investments Promotion Act lays down principles and procedures aimed at promoting investments in scientific research, innovations and technological development in production and services. The basic principle is that foreign investors have the right to carry out economic activity in the country under the same conditions that apply to Bulgarian investors.

There are no restrictions on creating a Bulgarian company associated with the capacity of the owner - foreign or local legal entity or natural person. Of course specific requirements have to be met for certain sectors of activity, e.g. insurance, banking, gambling, etc. According to the Bulgarian Ownership Act foreign natural persons or legal entities may freely acquire property rights over real estate and buildings. Natural persons or legal entities from EU member states or other states that are party to the Agreement on the European Economic Area, may acquire property rights over land in compliance with the conditions of the Treaty for accession of Bulgaria to the EU.

Anti-money laundering and anti-terrorist financing legislation exists in Bulgaria, according to which given transactions and their effective beneficiaries must be investigated and checked by banks, insurance companies, financial institutions, etc. and by professionals such as accountants, notaries, lawyers, insurance brokers, real estate agents, etc, who all have a disclosure obligation.

Bulgarian legislation establishes liberal arrangements for repatriation of capital and of profit after payment of the taxes due. Foreign investors are free to purchase foreign exchange and to transfer it abroad observing certain restrictions.

Business Structures

The Bulgarian Commerce Act provides the following types of commercial corporations:

  • Limited liability company (OOD), including Single-member limited liability company (EOOD);
  • Joint-stock company (AD), including Single-member Joint-stock company (EAD);
  • General partnership (SD) – rarely used nowadays;
  • Limited partnership (KD) - rarely used nowadays;
  • Partnership limited by shares (KDA) - – rarely used nowadays.

Other types of business organisations according to Bulgarian law are:

  • Sole trader;
  • Branch;
  • Trade representation office;
  • Co-operative.

Among the forms of organisations listed above, the most widespread in practice are limited liability companies and joint-stock companies, in which the members or the shareholders, as the case may be, incur limited liability with regard to the obligations of the company.

Limited Liability Company (OOD)

A limited liability company may be formed by one or more natural persons or legal entities, and in case the capital is owned by a single person, a single-member limited liability company (EOOD) can be formed. The capital of the company may not be less than BGN 2, and the value of a single stake may not be less than BGN 1. Members are liable to third parties for the liabilities of the company up to the amount of the stakes they hold in the corporate capital. Unlike a joint-stock stock company, the capital of a limited liability company is not divided into shares, existing in a physical form as securities. A limited liability company does not have a collective management body (Board of Directors), but is managed single-handedly by one or more managing directors. A General Meeting shall be held at least once a year. Limited liability companies are subject to corporate income tax.

Joint-Stock Company (AD)

The capital of a joint-stock company is divided into shares. Shares may be registered or bearer shares, materialized or dematerialized. The company is liable to its creditors up to the extent of its property and the liability of shareholders for the obligations of the company is limited to the extent of their shares. The structure and organisation of the joint-stock company are regulated in the Commerce Act, but members are free to agree on such clauses in the Articles of Association of the company as best suits their specific needs. A joint-stock company may be incorporated by one or more natural persons or legal entities, and if the capital is owned by a single person, a single-shareholder joint-stock company (EAD) is formed. The minimum value of the capital of AD is BGN 50,000. The minimum amount of the capital required for banks, insurance or voluntary health insurance are regulated by special laws.

The joint-stock company’s bodies are: 1) the General Meeting of shareholders, and 2) the Board of Directors (one-tier system) or the Supervisory Board and the Management Board (two-tier system).

A General Meeting shall be held at least once a year. Registered auditors have to be appointed by the General Meeting of the company. AD-companies are subject to corporate income tax.

General Partnership (SD):

A General partnership is formed by two or more persons to carry out commercial transactions. The partners are jointly and severally liable and their liability is unlimited. A characteristic of this type of company is the strong personal bond between the partners. Each partner is entitled to manage and represent the company, unless agreed otherwise in the Memorandum of Incorporation. There is no requirement for a minimum capital, which, in light of the recently amended regulation on the minimum capital of limited liability companies, no longer confers any significant practical advantage to General Partnerships. General Partnerships are subject to corporate income tax.

Limited Partnership (KD):

A Limited partnership is formed by the signing of a memorandum by two or more persons for carrying out commercial activities, whereby one or more of the partners shall be jointly and severally liable and their liability shall be unlimited and the rest of the partners shall be liable up to the amount of their agreed contribution. Again the strong personal bond between the partners is a characteristic of such a partnership combined with the possibility of limited liability of some of the partners. There is no requirement for minimum capital, which, in the light of the recently amended regulation on the minimum capital of limited liability companies, no longer confers any significant practical advantage to the Limited Partnership. Limited Partnerships are subject to corporate income tax.

Partnership Limited by Shares (KDA):

The partnership limited by shares is formed by a memorandum, which provides for shares to be issued to the limited liability partners. There should be at least three limited liability partners. Partnerships limited by shares are subject to corporate income tax.

Branches

Each trader may open a branch office. A branch shall be recorded on the Commercial register. The same obligation is applicable to a branch office of a non-resident person, registered with the right to engage in commercial activity in accordance with its national law. The branch shall keep business books as a trader without the need to prepare a separate balance sheet. The branches of legal entities which are not traders and the branches of non-resident persons shall prepare a balance sheet. According to Bulgarian tax legislation, the branch is treated as a permanent establishment and therefore is subject to corporate income tax.

Trade Representation Office

Non-resident persons, who or which have the right to carry on commercial business under their national legislation, may establish trade representation offices in Bulgaria, which must be registered at the Bulgarian Chamber of Commerce and Industry. Such representation offices are not legal entities and may not carry out economic activity. The non-resident person may conclude transactions with resident persons solely for the needs of a representation office registered by the non-resident, and the provisions of Bulgarian law apply to any such transactions.

EU business structures are also available in Bulgaria:

European Economic Interest Grouping (EEIG): its purpose is to facilitate or develop the economic activities of its members and to improve or increase the results of those activities; its purpose is not to make profits for itself. Its activity shall be related to the economic activities of its members and must not be more than ancillary to those activities. When the EEIG has its official address in Bulgaria, it has to be registered with the Commercial Register. It comprises a legal entity (has legal personality) and starts its existence as from the date of its registration. The European Economic Interest Grouping is a tax transparent entity.

European Company - SE: The European Company under the meaning of Regulation (EC) № 2157/2001 with a registered seat in Bulgaria shall be entered on the Commercial register and is subject to corporate income tax.

Procedures and Formalities

Competent Authority:

The Bulgarian Commercial Register is a unified, centralized, electronic information system and companies must register with it. Certain self-employed businesses must also register with the BULSTAT register and the social security authorities. The Commercial Register and the BULSTAT register are managed by the Registration Agency which has offices countrywide.

Timeframe:

Company registration can be completed between 1 and 7 days depending on the manner of submitting the application – electronically or at the offices of the Commercial register. Almost all registration formalities can be performed on-line. Upon authorization, lawyers can submit the relevant documents via electronic signature.

Expenses:

  • The registration expenses are approximately 35 to 2,000 BGN, depending on the type of company and business line. If registration is made on-line, a discount of 35 % is made.
  • In addition, translation, consultancy and legal fees may be incurred along with other expenses.

Required Documents:

The following general documents have to be prepared in Bulgarian or any of the official languages of the European Union (in the latter case they must be accompanied by a certified translation in Bulgarian) and registered with the Commercial Register:

  • the application form provided by the Commercial Register,
  • a declaration of truthfulness regarding the registered data and/or the announced acts,
  • the Articles of Association;
  • minutes of meetings of the respective company body;
  • declarations from the members of the boards, etc.
  • bank document showing share capital has been deposited;
  • certificate for actual status of shareholders – legal person;
  • decision of the General Meeting or sole owner concerning the appointment of a manager/managers of the company;
  • the respective license or permit required by virtue of special laws for the performance of a specific activity.

The Company’s name must be unique within Bulgaria. For this purpose, a preliminary check with the Commercial Register must be made. A company’s name may be reserved before registration. The prior reservation is valid for a period of 6 months.

Relevant Tax Aspects Linked to Corporate Law

  1. Corporate Tax

Corporate Tax on the Annual Tax Profit under the Bulgarian Corporate Income Tax Act:

Corporate tax on the annual tax profit is levied on:

- the profit of local legal entities;

- the profit of local legal entities, which are not traders, including religious organisations, profit generated by transactions under Article 1 of the Commercial Act, as well as by the lease of movable and immovable property;

- the profit of foreign legal entities from a permanent establishment in Bulgaria.

Tax Base:

The tax base for the calculation of corporate tax is the taxable profit.

Tax Rate:

The tax rate for corporate tax is 10%.

The annual tax return must be filed by 31 March of the following calendar year. Payment of corporate tax, after deduction of the advance payments, should be made by 31 March of the following calendar year.

Advance Corporate Tax Payments

Advance payment is not made by:

-               taxable entities whose net sales income for the previous year does not exceed BGN 200 000;

  • newly incorporated taxable entities for the year of their incorporation, except for those that are newly established as a result of a transformation as per the Commercial Act.

The advance payments for corporate tax are monthly and quarterly.

  1. Withholding Taxes

Withholding tax levied pursuant to the Bulgarian Corporate Income Tax Act

Dividends and liquidation surpluses are subject to a withholding tax when they are distributed by local legal entities to the following :

- foreign legal entities, except for the cases when the dividends are generated by a foreign legal entity through a permanent establishment in Bulgaria;

- local legal entities that are not traders.

No withholding tax is levied on dividends and liquidation surpluses when they are distributed to:

- a local legal entity that participates in the company’s capital as state representative;

- a mutual fund;

- a foreign legal entity, which is treated as a local entity for taxation purposes because it is an EU member state or party to the Agreement on the European Economic Area. (EEA)

Along with the withholding tax, other income generated by foreign legal entities is also taxed if this income is not made through a permanent establishment in Bulgaria, in particular:

- income from financial assets and transactions with financial assets issued by local legal entities, state and municipalities;

- interest, including interest that is contained in financial leasing instalments;

- income from rent or other consignments relating to the use of movables;

- author and license fees;

- remuneration for technical services;

- remuneration under franchising and factoring contracts;

- remuneration for managing and controlling a Bulgarian legal entity;

- income from real estate or transactions with real estate.

No withholding tax is levied on the income from the disposal of financial instruments according to § 1, Item 21 of Corporate Income Tax Act Additional Provisions.

Fiscal Base for the Withholding Tax:

- The fiscal base for the tax assessment of income from dividends is the gross amount of the dividends distributed.

- The fiscal base for assessing the tax on the income from a liquidation surplus is the difference between the market price of the sum that the respective shareholder or partner must receive, and the price paid for acquiring the stocks or shares.

- The fiscal base for assessing the withholding tax on income from interest under financial leasing contracts is the market interest if the contract does not stipulate the amount of interest,

- The fiscal base for assessing the withholding tax on income made by foreign entities from the disposal of financial assets is the positive difference between the asset sale price and price paid for that asset on purchase.

- The fiscal base for assessing the withholding tax on income made by foreign entities from the disposal of real estate is the positive difference between the sale price and the price of purchasing the real estate.

- The fiscal base for assessing the withholding tax on income made by foreign entities in all other cases is the gross amount of the income.

Tax Rates:

The income tax rate for dividends and liquidation surpluses) is 5 per cent.

The income tax rate for other sources of income is 10 per cent.

Bulgarian Personal Income Tax Act

Income from dividends and a liquidation surplus paid to local or foreign natural persons from sources inside Bulgaria and local natural persons from sources outside Bulgaria are also subject to tax. The tax rate is 5 per cent.

Personal Income Tax

According to the Bulgarian Personal Income Tax Act the relevant criterion for establishing the place of taxation is the tax resident status of the individual. This status is determined by reference to the periods of physical presence in the territory of the country or center of vital interests of the individual (availability of permanent home, family, economic and social interests and other facts).

If a foreign citizen qualifies as a Bulgarian taw resident then he or she will be taxed in accordance with Bulgarian tax law.

The annual taxable income is defined as an aggregate of the total income received by the individual during the calendar year with the exception of the income which is non-taxable by virtue of law and the income specifically excluded from the annual income which is taxed separately under specific rules.

A significant amendment in income taxation of individuals is that the progressive tax rate which depended on the amount of the annual taxable income and was within the range of 20% to 24% has been replaced with a flat rate of 10% regardless of the amount of tax­able income. Thus, in general the amount of tax on the aggregate annual taxable amount is determined by multiplying the aggregate annual taxable amount by a tax rate of 10%.

VAT

Pursuant to Bulgarian legislation, the following transactions are VAT taxable:

- any taxable supply of goods or services for consideration;

- any intra-Community (EU) acquisition for consideration, where the place of transaction is within the territory of the country, by a person registered under VAT or by a person who has an obligation to register;

- any intra-Community acquisition of new means of transportation for consideration, where the place of transaction is within the territory of the country;

- the importation of goods.

The standard VAT rate is 20% and is applicable to:

- any taxable supplies, except for those explicitly specified as being subject to zero tax rate;

- any importation of goods into the territory of the country;

- any taxable intra-Community acquisitions;

The rate of intra–Community supplies, exports and other supplies explicitly listed in the law is 0%.

VAT Registration

Bulgarian and foreign businesses which carry out taxable transactions with a place of supply in Bulgaria and have a taxable turnover of at least BGN 50,000 during the preceding twelve months are obliged to register for VAT purposes. The same is valid for taxable persons or non-taxable legal entities which (1) are not registered on other grounds, and (2) are performing intra-Community acquisitions, the total amount of which exceeds BGN 20,000 during a calendar year.

Any taxable and non-taxable legal person, which does not satisfy the compulsory registra­tion conditions, has the right to register under the VAT Act for intra-Community acquisi­tions. The intra-Community acquisition of goods is defined in detail in the Value Added Tax Act.

Investment Encouragement

The revision of the Investment Promotion Act, effective as of 2 June 2009, introduced a system of incentives for initial investments in tangible and intangible fixed assets and new employment linked thereto, according to Commission Regulation (EC) No 1628/2006 on the application of Articles 87 and 88 of the Treaty to national regional investment aid. The incentives are subject to various conditions.

Bulgaria



Corporate Law in Cameroon

  1. Compliance with Regulations concerning Foreign Investments In Cameroon

1.1 General

Since the revision of the investment code in 1990 foreign investors enjoy the same rights as nationals doing business in Cameroon.

In effect foreign investments in Cameroon are free of any administrative restrictions. Mandatory declarations or permits are only required in special cases. In general, foreign investors are able to acquire Cameroonian companies or create their own legal entity, or rent property, without having to comply with any specific undertakings, including minimum investment or job creation levels. It is only the buying of property that requires an administrative visa from the Minister of State Property and Land Tenure. The repatriation of capital or transfer of profit is also free of any restrictions, with the exception of some specific cases where there are declaratory requirements by the Ministry of Finance.

1.2 Declarations

For taxation purposes, foreign investors must not leave the Cameroonian territory without first making a return on income earned up to the departure date. Such return has to be made not later than thirty (30) days before the application for a passport or exit visa and will in principle, be immediately assessed. In addition monthly tax declarations and yearly balance sheets have to be filed.

1.3 Prior authorization

For certain business sectors such as gambling, private security services, trade in weapons, other military equipment, etc, an authorization is required in order to acquire a controlling interest or for the direct or indirect acquisition of all or part of a business.

1.4 Regulated activity

Certain professions and activities such as lawyers, real estate agents, architects, doctors, insurance, etc, are regulated by their respective administrative bodies and the investor must check whether the regulatory requirements have been satisfied before commencing any such activity.

  1. PROCEDURES AND FORMALITIES

2.1 Competent Authority

All legal formalities must be carried out by a notary public in French speaking Cameroon or a solicitor in English speaking Cameroon. Thereafter the administrative formalities are carried out by the Registrar of Companies (the Registrar-in-Chief of the Court of First Instance of the headquarters of the company) who liaises with the taxation center and National Social Insurance Fund for the tax and social formalities.

2.2 Timeframe

The company will officially come into existence when it has been duly registered in the Commercial Court Registry, i.e. the Trade and Personal Property Credit Register. This usually takes between 2 to 15 days after the notary public or solicitor has been properly instructed. A commerce registry certificate (which also serves as certificate of incorporation) will be issued upon incorporation. Thereafter the promoter of the company has 15 day to publicise the incorporation.

2.3 Legal expenses

A Notary Public or Solicitor in Cameroon will charge about 426,000 F.CFA (650 Euros) to cover all the expenses for the incorporation and legal publication of a private company with a minimum share capital of 1,000,000 F.CFA (1,525 Euros) and two shareholders.

2.4 Documents required for registration

For the most common corporate forms, the following documents have to be prepared in either English or French and filed with the Commercial Court Registry:

  • Attestation of deposit of share capital in a bank account or with a notary public;
  • Certificate of non conviction of director(s);
  • Certified copies of passport of shareholders (birth certificate for minors and a copy of a memorandum and articles of association for moral persons);
  • Localization plan issued by the Divisional Chief for Taxation;
  • Notarized copy of passport of managing director or majority shareholder;
  • Contract of lease of business premises (registered and duty stamped) or proof of ownership of business premises;
  • Memorandum and articles of association duly drafted per the OHADA Uniform Act and notarized;
  • Declaration of share capital;
  • Shareholders’ resolution appointing the directors with copies of their passport or identity cards;
  • Shareholders resolution appointing auditors (if necessary);
  • Choice of the company name;
  • Object(s);
  • Name of shareholder(s);
  • Distribution of shares;
  • Headquarters (Post office box, street, neighbourhood)

All documents in a foreign language must be translated into English or French;

The choice of corporate structure and the preparation of the articles of association will give rise to important legal and tax considerations. It is therefore strongly recommended that one seeks the assistance of a Cameroonian lawyer when forming a new company and drafting the necessary documents.

  1. BUSINESS STRUCTURES

The business structure will depend on the kind of the business, the investor’s strategy, tax considerations and the degree of independence that the Cameroon operators are to have from the parent company.

A foreign company may choose between establishing a branch or a subsidiary to conduct its business in Cameroon.

3.1 Branches

A foreign company can trade in Cameroon directly in its own name.

The branch does not have its own legal personality. Therefore, the foreign company forming the branch is responsible for the activities of the branch. If the branch encounters financial problems, the foreign company has unlimited liability for its debts. Nevertheless, the branch must be registered with the Trade and Personal Property Credit Register as any other legal entity conducting business in Cameroon, the registration relating essentially to the foreign company and the legal representative of the branch.

If the branch is recognized as being a permanent establishment, it must file its own accounts with the competent taxation office on a monthly and an annual basis.

From a tax point of view, a branch which actively conducts business constitutes a permanent establishment and is subject to Corporate Income Tax and Value Added Tax.

There are provisions in General Tax Code and the OHADA Uniform Act Relating to Commercial Companies and Economic Interest Groups that enable branches to be subsequently transformed into Cameroonian companies; such a transformation can benefit from a favourable tax regime, provided that certain conditions are met (sometimes including formal approval from the tax office). There is also the industrial free trade zone with tax benefits available.

It is further possible to merge a Cameroonian company with a foreign parent, thus transforming the subsidiary into a branch.

3.2 Subsidiary - Creation of a Cameroonian company

3.2.1 Joint Stock Company

  1. General requirements
  • Minimum capital stock: 10,000,000 F.CFA (approximately 15,250 Euros). The capital of all Cameroonian companies must be denominated in F.CFA
  • Minimum number of shareholders: 1
  • Liability of the shareholders: Limited to shareholders participation in the company
  • Statutory auditors. One or more statutory auditors and alternate auditors have to be appointed as the case may be. The first auditor and his alternate shall be designated in the articles of association or appointed by the constituent general meeting.

During the existence of the company, the auditor and his alternative shall be appointed by ordinary general meeting.

  1. b) Corporate Governance/Management.

b.1 There are two types of Joint Stock Company:

  • A Joint Stock Company with a board of directors. The company calling for public capital in order to sell their shares or whose shares are listed on the stock exchange shall be bound to have a board of directors. The board of directors must comprise at least 3 (three) members and at most 15 (fifteen) members where its shares are listed on the stock exchange.

However, in case of a merger involving one or more companies whose shares are quoted on the stock exchange, the number fifteen may be exceeded to include the total number of directors in office for more than six months in the merged companies, but without exceeding twenty four.

Where a company quoted on the stock exchange is delisted, the number of directors shall be reduced to 12 (twelve) as soon as possible.

Within the above limits, the number of directors can be freely determined by the articles of association or where necessary by the constituent general meeting.

A Public Limited Company with a board of directors shall be managed either by a chairman and managing director or by a chairman of the board of directors and a general manager.

Not more than one third of the members of the board shall be non shareholders of the company.

During the continued existence of the company, the directors shall be appointed by the ordinary general meeting. However, in case of a merger, an extraordinary general meeting may appoint new directors.

Public Limited Liability Companies with not more than three shareholders may not form a board of directors but may appoint a managing director who shall be responsible for administration and management of the company.

The first managing director shall be appointed by the articles of association or the constituent general meeting. During the continued existence of the company, the managing director can be appointed by the ordinary general meeting. He can but does not have to be chosen from among the shareholders.

The term of office of the managing director can be freely determined by the articles of association. The terms is limited to six years in the case of appointment during the continued existence of the company and two years in the case of designation by the articles of association or appointment by the constituent general meeting. The mandate is renewable.

b.2 General meetings

There are three types of general meetings:

  • An ordinary general meeting of shareholders takes all decisions apart from those that are expressly reserved for extraordinary general meetings of shareholders.
  • It shall in particular be empowered to:
  • Adjudicate on summary financial statements of the fiscal year;
  • Decide on the allocation of income; an allowance equal to at least one tenth of the fiscal years profits after deduction, where necessary, of previous losses, shall be allocated for the formation of a reserve fund referred to as “legal reserve”. Any decision to the contrary will be declared null and void. Such allowance is no longer compulsory where the reserve fund amounts to one-fifth of the company’s registered capital;
  • Appoint the members of the board of directors or the managing director and, where necessary, the assistant managing director, as well as the auditor;
  • Approve or refuse to approve agreements concluded between the company’s managers and the company;
  • Issue bonds;
  • Approve the auditor’s report
  • An extraordinary general meeting is necessary to amend the provisions of the articles of association of the company. It is further required to:
  • Authorise mergers, scissions, transformations and partial contributions of assets;
  • Transfer the registered office to any other town;
  • Winding up of the company prematurely or extend the duration of its life.
  • Special meeting are called to bring together holders of shares of a given class.

Special meetings are called to approve or disapprove the decisions of general meetings where such decisions vary class rights.

The decision of a general meeting to vary class rights is only final after approval by the special meeting of shareholders of that class.

  1. c) Taxation of the Company’s Income

Joint Stock Companies are subject to corporate income tax.

  1. d) Pros and cons
  • Pros: The joint stock company (PLC) is suitable for large companies; they are mandatory in order to be quoted and to operate in the banking and insurance business.
  • Cons: The PLC’s rules are less flexible and more cumbersome for medium size and smaller companies; they always require the appointment of statutory auditors.

3.2.2 Private companies (la Société en Nom Collectif) SNC)

  1. General requirements

Minimum capital stock: no specific requirement but cannot be created with zero capital stock;

Minimum number of shareholders: There is no maximum nor minimum but it shall be a company in which all the shareholders are traders and have unlimited liability for the company’s debts.

Liability of shareholders: The shareholders have unlimited liability for the company’s debts.

Statutory auditors: There are no provisions for statutory auditors in private companies.

  1. b) Corporate governance/Management

The members have the right to consult at the registered office, twice a year, all books and accounting documents as well as the minutes of meetings and collective decisions.

  • The articles of association organize the management of the company. They may provide for the appointment of one or more managers who may or may not be shareholders, natural persons or corporate bodies, or provide for such appointment in a subsequent instrument.

Where the manager is a corporate body, its officials shall be subject to the same conditions and obligations and shall incur the same civil and criminal liability as if they were managers on their own account, not withstanding the joint and several liability of the corporate body they are managing.

Where the management is not organized by the articles of association, all the shareholders shall be deemed to be managers.

  • Annual General Meetings
  • Each year within a period of six months following the close of the fiscal year, an annual general meeting shall be held during which the management report, the inventory and the summary financial statements drawn up by the managers are submitted for approval.
  • To this end, the proposed draft resolutions and, where necessary, the auditors report shall be sent to the shareholders at least fifteen days before the date of the meeting. Any decision taken in violation of these provisions may be annulled.
  • The annual general meeting cannot be validly held unless a majority of the shareholders representing more than half of the registered capital are present. It shall be presided over by the shareholder who himself has or represents the greatest number of shares.
  1. c) Taxation of the company’s income

Private companies “PC” are subject to corporate income tax

  • Pros: Private companies are more flexible because all the members are traders and have unlimited liability for the company’s debts. Registered capital is broken down into shares of the same par value to reflect the investor’s requirements.
  • Cons: A statutory auditor is not required for private companies.

3.2.3 Sleeping partnership (la société en commandité simple-SCS)

  1. a) General requirements
  • Minimum capital stock-no specific requirement but cannot be created with zero capital.
  • Minimum number of partners-no specific requirement.
  • Liability of the shareholders: One or more partners referred to as “active partners” are indefinitely, jointly and severally liable for the company’s debts. They coexist with one or more partners liable for the company’s debts up to the limit of their shares, referred to as “sleeping partners” and their capital is broken down into partnership shares.
  • Statutory auditors: no specific requirement.
  1. b) Corporate Governance/Management
  • The sleeping partnership shall be managed by all the active partners unless otherwise provided by the articles of association which may appoint one or more managers from among the active partners, or provide for the appointment of such manager(s) by a subsequent instrument, under the same conditions and with the same powers as in a partnership.
  • A sleeping partner may not perform any act of external management, even by virtue of a power of attorney.
  • General meetings.

Each year, within six months following the close of the fiscal year, an annual general meeting shall be held during which the management report, the inventory and the summary financial statements drawn up by the managers are submitted to the meeting of partners for approval.

The annual general meeting can only be validly held where it is attended by a majority of the partners representing half of the registered capital. The said meeting shall be presided over by the partner representing, in his own capacity or as proxy, the majority of shares.

  1. c) Taxation of the company’s income

No specific requirement but a sleeping partnership is generally subject to corporate income tax.

d)Pros and Cons

  • Pros: A sleeping partnership is simple to set up and to run. All decisions beyond the powers of the managers shall be taken collectively by the partners.
  • Cons: Restricted scope of activity as regards the sleeping partners because it is managed by active partners unless otherwise provided for in the articles of association.

3.2.4 Private Limited Company (Société à Responsabilité Limitée “SARL”)

  1. a) General requirements.
  • Minimum capital stock: The registered capital of a private limited liability company must be at least one million (1,000,000) F.CFA (1,525 Euros). It must be divided into equal shares whose par value may not be less than 5,000 (five thousand) francs CFA.
  • Minimum number of shareholders: 1- maximum-no specific requirement
  • Liability of shareholders: shareholders shall be liable for the company’s debts up to the limit of their contributions and their rights are represented by company’s shares.
  • Statutory auditors: A statutory auditor has to be appointed only if the company exceeds the following thresholds:
  • The registered capital exceeds ten million francs CFA or;
  • The annual turnover exceeds two hundred and fifty million francs CFA or;
  • The permanent staff exceeds 50 persons.
  • For private limited companies which do not meet any of these criteria, the appointment of an auditor is optional.

However, the appointment of an auditor may be requested in court by one or more shareholders controlling at least one tenth (1/10) of the registered capital.

  1. b) Corporate Governance/Management
  • A private limited liability company shall be managed by one or more natural persons whether or not they are shareholders of the company. The managers can not be a legal entity.
  • General meetings
  • An annual ordinary general meeting must be held within six months of the close of the fiscal year. The manager(s) may apply to the president of the competent court for this period to be extended.

Decisions are taken by one or more shareholders by simple majority of the shares.

  • Extraordinary collective decisions are required in order to amend the articles of association.

Where the company is in sole proprietorship, the decisions to be taken at a meeting, be they decisions falling within the jurisdiction of the extraordinary general meeting or those falling within the jurisdiction of the ordinary meeting, are taken by that shareholder.

Decision taken by the single shareholder must be in the form of minutes which have to be filed with the records of the company.

  1. c) Taxation of the company’s income

No specific requirement but they are generally subject to corporate income tax.

  1. d) Pros and Cons
  • Pros: A private limited liability company is simple to create and manage. It can be managed by one or more natural persons, whether or not they are shareholders of the company.
  • Cons: The manager(s) may freely resign. However, where such resignation is not justified, the company may bring legal action for any loss suffered by it.

3.3 Relevant Tax Aspects Linked to Corporate Law.

3.3.1 Corporate Tax (Impôts sur les societies-IS)

The taxation of Cameroonian companies is based on a territorial principle, therefore, Cameroonian companies carrying on their business outside Cameroon will not be taxed in Cameroon on their foreign source of income, subject to the provisions of international conventions.

The standard corporate tax rate is 35% of net profit.

In calculating the corporate tax, any fraction of the taxable profit of less than 1,000 F.CFA shall be disregarded.

3.4. Ongoing requirements.

For accounting and tax purposes, the book keeping should be kept in either French or English following the bilingual culture of Cameroon. Monthly tax declarations and annual financial statements in either English or French derived from the accounts must be prepared and filed.

  1. Mergers and acquisitions.

Mergers occur where one company completely absorbs another. In the absence of any agreement, mergers between companies of different nationalities can give rise to a number of issues, in particular, the applicable law. Scissions and partial transfer of assets are also possible under the OHADA Uniform Act.

Merging companies can benefit from a favourable tax regime, where capital gains tax on the absorbing company are held over until the sale of the assets.

Henry, Samuelson & Co.



Corporate Law in Nigeria

  1. COMPLIANCE WITH REGULATIONS CONCERNING FOREIGN INVESTMENTS IN NIGERIA
  2. General:

The principal legislation regulating company formation in Nigeria is the Companies and Allied Matters Act (CAMA) 1990. Companies may be private or public, limited or unlimited. Companies limited by guarantee may also be registered for charitable purposes.

Although there are no restrictions on foreign ownership of companies or foreign directorships, there is a negative list of businesses in which foreigners cannot participate or establish in Nigeria. These include (1) production of arms and ammunition (2) production of and dealing in narcotic drugs and psychotropic substances (3) production of military and paramilitary wears and accoutrements.

  1. Declarations and Prior Authorisations

The declarations to be made would depend on the nature of investment proposed.

Portfolio investments - foreigners acquiring interests in securities traded on the primary and secondary markets or through private placements must be registered by the Securities and Exchanges Commission.

New Ventures - Foreign investors setting up new ventures or subsidiaries of their parent company in Nigeria would have to register with the Nigeria Investment Promotion Council to benefit from a choice of regulations superintending expatriate companies. In addition a ‘Business Permit’ must be obtained from the Minister of the Interior before commencement of business. Economic sectors such as oil and gas, electricity and aviation may also require certifications of sector regulators post-incorporation but prior to commencement of business.

  1. PROCEDURES AND FORMALITIES

Competent authority

All the legal and administrative formalities for setting up a new company are dealt with by the Corporate Affairs Commission (CAC). All tax formalities, such as companies’ income tax and registering for value added tax (“VAT”) are dealt with by the Federal Board of Inland Revenue (FBIR).

Timeframe

A company will officially come into existence when it has been duly registered with the Corporate Affairs Commission. Theoretically, businesses can be registered on the same day. In practice however, 2 day registrations are more practical and in reality –because of the need to meet stamp duty requirements –a minimum of 24 hours is the norm. A Certificate of Incorporation is issued upon completion of the registration formalities bearing a unique registration number and the date on which it is issued. A certified true copy of the approved Memorandum of Association (“Memorandum”) and Articles of Association (“articles”) of the company is also issued. Promoters may either adopt the model articles in the CAMA or encapsulate their internal regulations in a Shareholders’ Agreement and subsequently file a copy with the Commission. The CAMA allows for amendments of filed or adopted Memoranda and Articles of Association.

Legal expenses

Charges by law firms to incorporate a new private limited company (where Model Articles are adopted) would vary depending on the authorised share capital proposed on stature of firm instructed. In any event, professional costs will vary from USD 850 – 2000. Actual statutory costs payable at the CAC and to the FIRS would depend on the share capital proposed.

Foreign enterprises interested in a Nigeria registration must meet a minimum share capital of N20 Million equivalent (approx USD 134,000) to benefit from the choice of investment and capital repatriation incentives.

Documents required for registration

Under the CAMA, documents are required to be prepared in English, stamped where necessary and presented to the CAC for registration.

A complete set of application forms to register a company would include:

  • Memorandum and articles of association;
  • a Statement of the Authorised Share Capital of the company;
  • particulars of initial shareholdings in the company;
  • the particulars of the first directors of the company;
  • the particulars of the company secretary;
  • notice of the registered office of the company;

Post-incorporation - The CAMA stipulates filings/returns to be made to the CAC at specific periods or as changes occur. These include:

  • Annual Returns. This return is a snapshot of general information about the company's directors, secretary, registered office address, shareholders and share capital and should also include the audited annual accounts and the report of the directors thereon,
  • Changes in directors.
  • Changes to the Company Secretary.
  • Return on allotment of shares.
  • Changes in the Registered Address.

Statutory Books

A company is required to maintain a set of statutory books - which principally comprise of the following Registers:

  • Register of members
  • Index of members
  • Register of directors’ shareholdings
  • Register of directors and secretaries
  • Register of charges
  • Register of debentures, mortgages and charges.
  • BUSINESS STRUCTURES
  1. RELEVANT TAX STIPULATIONS LINKED TO CORPORATE LAW

Companies Income Tax

Taxation of incorporated entities in Nigeria is carried on under the Companies Income Tax Act (CITA). Taxation of incorporated entities is under the exclusive prerogative of Federal Law with the relevant tax authority being the Federal Board of Internal Revenue working through its operational arm - the Federal Inland Revenue Service.

Under the CITA, the profits of a Nigerian company are deemed to accrue in Nigeria wherever they have arisen and whether or not they have been brought into or received in Nigeria. In other words Nigeria companies are chargeable for corporate tax on the totality of their global income.

The CITA defines a ‘Nigerian company’ as one incorporated under the Companies and Allied Matters Act 1990.

Rate

Companies’ income tax is rated at 30% of the assessed profits of a company.

Calculation

Companies’ income tax is due on the profit income of a Nigerian company for the year preceding the year of assessment. The year of assessment is the period January 1st to December 31st.

Income Profits

Nigerian companies pay tax on the sum of assessable profits from all sources of the year of assessment less any set off for losses increased or decreased by any charges and allowances in respect of capital expenditure.

Chargeable Gains

Whilst the general rule is that a company’s income tax would accrue from its trading or business profits, tax is also chargeable on gains made from a disposal of an asset

Trading Losses

Losses incurred by a company in any trade or business during a preceding year of assessment are deductible in computing the total income of the company for income tax purposes. However, the aggregate deductions from assessable profits or income must not in any event be more than the amount of such losses. Furthermore, the amount deductible for any year of assessment in respect of a loss incurred during a preceding year is limited to the amount of assessable profits included in the total profits of that year and derived from the source in connection with which the loss was incurred.

Carrying forward losses for tax income purpose is limited to a four year period.

Loss relief is only allowable if the FBIR is satisfied that the company has indeed incurred the loss in its trade or business.

Education Tax

Every company registered in Nigeria is liable to pay Education Tax assessed at 2% of its assessable profits.

Petroleum Profits Tax

Companies engaged in the extraction and trade of crude petroleum are taxed under the regime of the Petroleum Profits Tax Act under which tax rates range from 50% to 85% depending on the type of concession or production contract.

Withholding Tax

Under this regime, payments due for certain activities and services are subject to withholding tax. The party making the payment is expected to deduct tax at the applicable rate and remit same to the relevant tax authority. Remittances are treated as a tax credit against the income of the party from whose fees the deductions were made.

Double Taxation Treaties

Nigeria has bilateral tax treaties with a number of countries. These treaties are structured to engender bilateral trade and investments such that taxes payable in Nigeria on the profits of a Nigerian company which are duly remitted to the ‘treaty country’ are reduced by the amount of ‘foreign tax’ paid abroad and vice versa. Treaty countries include: the United Kingdom, the Netherlands, Belgium, Canada, Pakistan, France, the Philippines, Romania and South Africa.

  1. Value Added Tax ( VAT)

VAT is a 5% tax on consumer expenditure. It is charged on the supply of goods and services made in Nigeria. It is also charged on imported goods at the point of entry into Nigeria.

Taxable / VATable Persons

A taxable person is defined as one (other than a public authority acting in that capacity) who independently carries out economic activity as a producer, wholesale trader, supplier of services or is a person obtaining income there from by way of trade or business. A VATable person is one that trades in VATable goods and services for a consideration. Every VATable person is obliged to register for VAT payment. Such registration covers all the business activities of the VATable person

When to register

Every VATable person must register for VAT immediately before commencing business. In the case of incorporated entities VAT registration must be effected simultaneous with registration to obtain a mandatory Tax Identification Number (TIN) from the Federal Board of Internal Revenue or at the point of registration for the PAYE (Pay –as – you – earn) for its personnel at the State Board of Internal Revenue.

When is VAT not chargeable?

Not all goods or services are liable to pay VAT. The following are exempted from paying VAT: -

  1. All exports
  2. All medical and pharmaceutical products
  • Basic food items
  1. Baby products
  2. Fertiliser, locally produced agricultural and veterinary medicine, farming machinery and farming transportation equipment.
  3. All plants, machinery or equipment purchased for utilization of gas in downstream petroleum operations
  • Plant and machinery for use in the export processing zones.

Femi Sunmonu & Associates



Corporate Law in Panama

  1. Compliance with Regulations concerning Foreign Investments in Panama

General:

The Republic of Panama is open to Foreign Investment. The government and the business community actively encourage foreign direct investment.

Foreign investment does not require prior authorization, except when an investor is going to apply for a special incentive.

In general, investors are able to acquire Panamanian companies or incorporate their own, buy or rent property, without having to invest a minimum amount of money or create a minimum number of jobs.

Panama does not restrict the transfer abroad of funds associated with or capital employed in an investment, and there are no restrictions on the outflow of capital or outward direct investment.

The Government does impose some limitations on foreign ownership, such as in the retail sector, which is reserved for Panamanian citizens. Some professions, such as medical practitioners, lawyers, and custom brokers, are also reserved for Panamanian citizens.

Prior Authorizations:

  • A prior governmental authorization is required in order to carry out certain business activities such as gambling, private security services, pharmaceutical activities, trade in weapons, other military equipment etc.

Regulated Activity:

  • Certain businesses such as banking, trust companies, insurance and reinsurance, real estate agents, brokerage firms, etc. are regulated and require a license to carry out the same.
  1. Procedures and Formalities

Company Formation

Competent Authority:

The Public Registry is the governmental office wherein all documents pertaining to the formation of a Panamanian corporation and amendments thereto should be registered.

Timeframe:

The corporation will officially come into legal existence when its Articles of Incorporation have been duly registered with the Panama Public Registry.

Notarization and registration proceedings usually take from two to three days, although most law firms maintain “shelf” companies in stock, which are available for immediate acquisition. However, these “shelf” companies are incorporated with directors/officers provided by the resident agent.

Legal Expenses:

The fees and expenses in connection with the formation of a Panamanian corporation with a standard authorized share capital are usually within the vicinity of US$975.00, and include its annual maintenance charges for the first year of existence (i.e. annual resident agent fees, annual franchise tax and the provision of directors/officers if this latter service is required).

Documents Required to be Registered:

The proper course of action is to execute the Articles of Incorporation, have them protocolled as a public deed before a Notary Public and subsequently recorded at the Mercantile Division of the Panama Public Registry. It is required to make prior payment of the applicable registration charges and annual franchise tax for the first year.

The Articles of Incorporation should be drafted in or translated into Spanish by an official or public translator authorized by the Panamanian government. If executed outside of the Republic of Panama, the Articles of Incorporation should be legalized before a Panamanian Consul or authenticated by means of the Apostille.

The preparation of the Articles of Incorporation are drafted by a Panamanian lawyer or law firm using a standard form, although they may be tailored to meet the investor’s specific needs.

Business Notice of Operation

If the company is going to carry on business within the territory of the Republic of Panama, it should obtain a Notice of Operation (“Aviso de Operacion”) through the “Panama Emprende” website (https://www.panamaemprende.gob.pa/), which is an on-line system from the Ministry of Commerce and Industries that facilitates matters. This new system replaces the requirement of obtaining a commercial or industrial license, which was more bureaucratic and time consuming.

Obtaining the Notice of Operation is the only procedure required to initiate commercial or industrial activity in Panama, except for those activities expressly stipulated by law that are exempted from this requirement (for example, individuals or legal entities engaged either in agricultural activities or in handcraft business or in homemade goods with up to five employees, or non-profit activities, or the practice of legal professions, among others), or that require a prior governmental authorization or license (i.e. banks and trust companies, insurance/reinsurance companies, securities brokers, among others), and includes the registration with the Ministry of Economy and Finance so as to obtain a Tax identification Number (or RUC as per its acronym in Spanish), which should be used for the payment of all taxes.

A Business Notice of Operation gives rise to an annual tax equivalent to 2% of the company’s capital, with a minimum of US$100.00 up to a maximum of US$60,000.00. Legal entities with an invested capital lower than US$10,000.00 are exempt from this tax.

  • Business Structure

The business structure will depend on the kind of business, the investor’s strategy and the degree of independence that the Panamanian operations are to have from the parent company.

A foreign company may choose between establishing a branch or a subsidiary to conduct business in Panama.

  1. Branches (“sucursales”)

The foreign company can perform business in Panama directly under its own name.

The Branch does not have its own legal personality. Therefore, the head-office is responsible and if the branch encounters financial problems, the head-office has unlimited liability for its debts.

Nevertheless, the branch must be registered with the Panama Public Registry, as any legal entity conducting business in Panama. For such purposes, the following documents in connection with the foreign company have to be translated into Spanish (if issued in another language), authenticated by a Panamanian Consul or by means of the Apostille, protocolled as a public deed, and recorded at the Panama Public Registry:

  • the Articles of Incorporation (or equivalent) and amendments thereof (if any);
  • a copy of the balance sheet accompanied by a declaration stating the amount of its capital engaged or to be engaged in business in the Republic of Panama;
  • a certificate setting forth that is incorporated and organized under the laws of the country of incorporation;
  • a declaration stating the names and addresses of the directors and officers (if any) of the company;
  • a corporate resolution containing the decision to register the foreign company in Panama as such.

From a tax point of view, Panama being a country that follows the territoriality principle (save for some exceptions), the branch will be subject to Panamanian corporate income tax on the income generated from operations carried out within the Republic of Panama.

For tax purposes, branches of foreign corporations established in the Republic of Panama must keep their accounting records for Panamanian operations separate from the records of the head offices or other branches.

There are no special rules to levy taxes on branches of foreign companies, meaning all general rules apply to them.

  1. Subsidiary – Creation of a Panamanian Company

The vast majority of companies incorporated in Panama (more than 99% of them) are Corporations (“Sociedad Anonima” – “S.A.”), due to the flexibility of the SA and because greater privacy is afforded to the SA at the time of formation and during use.

2.1. Corporation (“Sociedad Anónima” – S.A.)

Liability of the shareholders: limited to an amount equal to the amount not paid on their stock. However, no action can be brought against a shareholder for any debt of the corporation until judgment has been rendered against the corporation and execution thereon has been returned unsatisfied in whole or in part.

  1. General Requirements
  • Names and domiciles of each of the subscribers of the Articles of Incorporation.
  • Name of the corporation.
  • The amount of the capital stock and the number and par value of the shares (which may be specified in terms of the legal currency of any country); and, if the corporation is to issue shares without par value, the statements required as per article 11 of Panama’s Law on Corporations (Law 32 of February 26, 1932).
  • If there are to be shares of different classes, the number of shares to be included in each class and the designations, preferences, privileges and voting rights or restrictions or other qualifications of the shares of each class, or a statement that said information can be determined by resolution of the majority in the interest of the shareholders or by a resolution of the majority of the directors.
  • The number of shares that each subscriber of the Articles of Incorporation agrees to take.
  • The domicile of the corporation and the name and domicile of its resident agent, who must be a Panamanian attorney or law firm.
  • The duration of the corporation, which may be perpetual or for a stipulated period of time.
  • The number, names and addresses of the directors, which shall not be less than three.
  • The names and addresses of the president, secretary and treasurer of the corporation, who can also be directors.
  1. Corporate Governance / Management

The powers of the corporation are vested in its shareholders and in the Board of Directors. However, either of them may grant special or general powers of attorney in favour of a third person, who is not required to be a shareholder or director of the corporation, with wide and ample powers of administration, so that the business of the corporation may be carried out by such third party until its power of attorney expires or is revoked.

b.1 The Board of Directors

The Board of Directors is in charge of the administration/management of the business of the corporation and must be comprised of at least three members (individuals of legal age of any nationality or legal entities).

Subject to the Articles of Incorporation and Panama’s Law on Corporations (Law 32 of February 26, 1932), the Board of Directors shall have absolute control over and full direction of the business of the corporation. It may exercise all of the powers of the corporation that are not conferred upon or reserved to the shareholders by law, the Articles of Incorporation or by the by-laws, if any.

It is not necessary to be a shareholder in order to be a director, although said requirements may be stipulated in the Articles of Incorporation.

Directors may adopt, amend or repeal the by-laws, if any, unless otherwise provided in the Articles of Incorporation.

The members of the Board of Directors may vote by proxy if authorized by the Articles of Incorporation.

The Board of Directors may appoint an executive committee composed of at least two of their members and delegate to it all their administrative powers. In addition, the Board of Directors may grant general or special powers of attorney to one or more individuals authorizing them to act on behalf of the corporation with regards to any or all of the powers which are vested in the Board of Directors.

b.2. Shareholders’ Assembly

The Shareholders are the supreme power of the corporation. The powers that are expressively reserved by law to the shareholders are the following:

  • amendments to the Articles of Incorporation;
  • authorization for the disposition of substantially all or part of the assets of the corporation;
  • authorization for the dissolution or merger of the corporation;
  • the election of directors (however, the Board of Directors may fill vacancies).
  1. Taxation of the Corporation’s Income:

Corporations are subject to Panamanian corporate income tax on the income generated from operations carried out within the territory of the Republic of Panama.

2.2. Limited Liability Company (“Sociedad de Responsabilidad Limitada» - S. de RL.)

Liability of the partners: limited, as they participate in the profits and losses only in proportion to their stake in the capital of the company. The economic liability of each partner for the company’s obligations is limited to the amount of their participation (either made or promised).

  1. General Requirements
  • The identity of the founders, the partners and an indication of their domicile.
  • Name of the company.
  • The duration of the company, which may be perpetual or for a stipulated period of time.
  • The purposes of the company, which may be broad or limited.
  • The amount of authorized capital, which may be established in any currency, the units or quotas in which it is divided and the value of each one.
  • The name(s) of the person(s) who will be in charge of the administration and representation of the company, who may or may not be partners.
  • The names of the officers or holders of general or special powers of attorney, and the powers granted to them.
  • The name of the resident agent, who must be a Panamanian attorney or law firm.
  1. Corporate Governance / Management

Panamanian Limited Liability Companies are governed by two corporate bodies: an Assembly of Partners and the Manager(s).

b.1. The Administrator(s)

The Managers are in charge of the administration/management of the business of the company and the minimum number required by law is one, who can be an individual or a legal entity.

In order to carry out acts that fall outside the ordinary course of business of the company, the Managers shall require a special power to that effect granted by the Assembly of Partners.

b.2. General Meetings

The powers that are expressively reserved by law to the Partners are the following:

  • amendments to the Articles of Incorporation;
  • approving or disapproving the balance sheet, the management report, the profit and loss account, and a proposed distribution of profits;
  • deciding the appropriate actions against the managers, after removing them from their posts, and also against certain partners, for damages caused to the company as a result of their actions;
  • removing the managers, appointing their replacements and fixing their remuneration;
  • authorization for dissolution, merger or transformation into another type of company or for transferring the company to another jurisdiction.
  1. Taxation of the Company’s Income :

The income tax due by Limited Liability Companies used to fall upon the partners in accordance with their participation in the company, but this was recently amended and nowadays legal entities are subject to pay taxes (the advantage of pass-through treatment with respect to taxation was removed) on their income generated from operations carried out within the territory of the Republic of Panama. Income earned from operations outside of the country will not be taxable in Panama.

Other types of legal entities that may be formed, although extremely rarely used, are the following:

Partnerships

  • General Partnerships (sociedades colectivas”): Partners’ liabilities are unlimited, unless the partnership instrument provides that a partner will be liable only for a limited sum (which cannot be less than her/his contribution to the partnership).
  • Simple Limited Partnerships (sociedades en comandita simples”): Limited partnerships with general and limited partners. General partners share management responsibilities and are jointly and severally liable for partnership debts. Limited partners are liable only up to the amount of capital that they have invested.
  • Joint-Stock Partnerships (sociedades en comandita por acciones”): Limited partnerships, similar to Simple Limited Partnerships, but with the partners' capital represented by shares.

Finally, there are also

  • Joint Ventures (“asociaciones accidentales o cuentas en participación”): This type of partnership is utilized for a temporary association for commercial purposes without incorporation; joint ventures are widely accepted in Panama although they have no separate legal registry. The Directorate General of Revenue may assign a tax number to the joint ventures in order for the latter to be able to pay taxes if this type of association of persons makes profits.
  1. Relevant Tax Aspects linked to Corporate Law

3.1. Corporate Income Tax

The taxation of Panamanian companies is based on the territoriality principle. Consequently, Panamanian companies carrying on their business outside Panama will not be taxed in Panama on their foreign source income. It is worth mentioning that income derived from interest generated by bank deposits in Panama is exempt from Panamanian income tax, which is a very attractive feature.

As a result of a recent Tax Reform, the corporate income tax rate for the year 2010 was reduced in Panama from 30% to 27.5% and will be further reduced to 25% for the year 2011 onwards, save for taxpayers in certain industries, including energy, telecommunications, insurance/reinsurance, financial, mining and banking sectors, for which the corporate income tax rate remained at 30% for the year 2010, but will be reduced to 27.5% in 2012, and then further reduced to 25% in 2014.

3.2. Income Tax on Capital Gains on the Transfer of Shares (or equivalent)

Save for a few exceptions, capital gains derived from the sale of bonds, shares and other securities issued by companies with business activity in Panama are taxed at a fixed rate of 10% to be paid by the seller.

The buyer shall withhold from the seller a sum equivalent to five percent (5%) of the total value of the sale and remit it to the Panamanian tax authorities within a ten-day period of the closing of the sale.

The seller (taxpayer) may opt to consider the advanced sum withheld by the buyer as the Income Tax due on the capital gain.

However, whenever the amount withheld (5% of the value of the sale) is greater than the amount resulting from applying the 10% rate on gains obtained from the sale (meaning greater than the income tax due), the seller (taxpayer) may request a tax credit.

  1. Ongoing Requirements
  • All companies operating in Panama are required by law to maintain accounting records according to generally accepted accounting principles in the Republic of Panama: International Financial Reporting Standards (IFRS) or NIIF as per its abbreviation in Spanish.
  • The following records are required for corporations operating in Panama: a general journal, a general ledger, a minutes’ book and a stock register.
  • All accounting records must be maintained in Spanish.
  • Accounting records, supporting documents and correspondence must be kept in Panama, as long as the operations are carried out locally. They must be up to date and ready to be inspected by authorities at any time.
  • A certified public accountant must countersign the documents when the capital is higher than US$100,000.00 or sales volume exceeds US$50,000.00.
  • The legal and accounting records and correspondence of companies that exclusively perform offshore operations, may be maintained anywhere in the world.
  • For all companies operating in the Republic of Panama, tax regulations require taxpayers to maintain their financial statements at the disposition of the Directorate General of Revenue and attested by a certified public accountant according to the generally accepted auditing standards in Panama.
  • Although not mandatory, financial statements can be recorded at the Panama Public Registry.
  • There is a statutory audit requirement in Panama for banks, insurance companies and reinsurance companies, as well as for companies registered under the National Securities Commission and for companies operating in a free trade zone. The financial statements must be certified annually by independent auditors.
  • When the accounting records are maintained on technological or electronic means, specific certification from a certified public accountant is required.
  • Amendments to the Articles of Incorporation and changes in their directors/officers should be recorded at the Panama Public Registry.
  1. Confidentiality and Anonymity/ Transparency
  • Panamanian corporations are allowed to issue bearer shares.
  • The identity of the shareholders of a Panamanian corporation and their respective shareholdings is not a matter of public records in Panama. However, the names of the partners of a Panamanian limited liability company should be indicated in the Articles of Incorporation, which is a document to be recorded at the Panama Public Registry, so that information is available to the public.
  • Panama has its own laws on private interest foundations (which have own legal personality) and trusts, which are excellent vehicles for asset protection and estate planning.
  • “Anti money laundering” legislation has been enacted and strengthened in the past few years, according to which given transactions and the effective beneficiaries must be investigated and checked by banks, insurance companies, trust companies, financial institutions, among others, who have a disclosure obligation. Every person and entity subject to anti-money laundering regulations has the obligation to report suspicious transactions to the Financial Analysis Unit. Lawyers are not expressly covered by the anti-money laundering obligations that are imposed on financial institutions and other designated non-financial businesses and professions. Lawyers are required to know their client and maintain enough information to identify them.

Panama



Corporate Law in Paraguay

Compliance with Regulations concerning Foreign Investments in Paraguay

General:

Foreign investments in Paraguay are free of any administrative restrictions although mandatory declarations or permits are required in special cases. In general, investors are able to acquire Paraguay companies or create their own legal entity, buy or rent property, without having to comply with any specific undertakings, including minimum investment or job creation levels. The repatriation of capital is also free of any restrictions, with the exception of some specific cases where there are declaratory requirements.

Prior Authorizations:

  • In certain business sectors as banking, mining, telecommunications, private security services, etc. an authorization is required to acquire a controlling interest and the direct or indirect acquisition of all or part of a business line.

Regulated Activity:

  • Certain activities such as lawyers, accountants, architects, doctors, insurance, etc are regulated and the investor must check whether the regulatory requirements have been satisfied before commencing any such activity.
  1. Procedures and Formalities

Timeframe:

The company will officially come into existence when it has been duly registered with the Public Registry of Commerce and with the Registry of Juridical Persons and Associations. This generally takes between 10 to 14 days after the by-laws of the company have been signed with a Public Notary. A registration certificate will be issued upon incorporation and of the extract of it must be published. It is not usual in Paraguay to use “off-the-shelf” companies.

Legal Expenses:

The expenses for setting up the company generally amount to:

  • publication expenses of approximately €200
  • registration expenses with the Public Registries of approximately €150.
  • Notary fee based on the amount of the subscribed capital.
  • Legal fee for drafting the Bylaws and the procedures to the registration of the company €1,200
  • Accountant fee for recording the company with the Tax, Labor Department, Social Security and Customs authorities €300.

Documents Required for Registration:

Whatever the corporate structure chosen by the investor, the following documents have to be prepared in Spanish and registered with Public Registry of Commerce and Registry of Juridical Persons and Associations:

- the by-laws (“Estatutos”) which will include the appointing the directors (one o more) and two auditors (“Síndicos”),

  • To be appointed Director or Manager is necessary to have a resident permit,
  • proof of the company’s registered address (lease, authorization of domiciliation etc.),
  • all documents in a foreign language must be translated into Spanish by an official translator,
  • choice of a company name; it is always advisable to carry out trademark/tradename searches in order to ensure unrestricted use of the name free of third party rights.

The choice of the corporate structure and the preparation of the Articles of Association will give rise to legal and tax considerations. It is therefore strongly recommended that one seeks the assistance of a Paraguayan lawyer when forming a new company and drafting the necessary documents.

  1. Business Structures

The business structure will depend on the kind of the business, the investor’s strategy and the degree of independence that the Paraguay operations are to have from the parent company.

A foreign company may choose between establishing a branch or a subsidiary to conduct its business in Paraguay.

  1. Branches (sucursales)

The foreign company can perform business in Paraguay directly under its own name.

Therefore, the foreign company forming the branch is responsible for the activities of the branch; if the branch encounters financial problems, the foreign company has unlimited liability for its debts.

Nevertheless, the branch must be registered with the Public Registry of Commerce and with the Registry of Juridical Persons and Associations as any legal entity conducting business in Paraguay.

In addition to the documents aforementioned, the following documents have to be translated into Spanish (official translation) and be supplied with the applicable form requesting registration:

  • a copy of the certificate of incorporation of the foreign company;
  • a copy of the by-laws of the foreign company;
  • shareholders’ or directors’ resolution of the foreign company authorizing the opening of the branch in Paraguay, assigning a capital to it, including the domicile and appointing the legal representative of the branch.

The documents issued abroad need to be legalized by the Paraguayan Consulate nearest to the place of their execution.

The branch is recognized as being a permanent establishment, and it must file its own accounts with the Tax Authorities

From a tax point of view, the branch is normally subject to corporate income tax and VAT and subject to withholding tax on the branch’s profits (depending on the the relevant tax treaty if any)

Branches which conduct preparatory activity only (e.g. representation, liaison offices) and/ or an auxiliary activity (e.g. storage) are not subject to corporate income tax while they do not have incomes of Paraguayan source.

  • Pros : one legal entity.
  • Cons : reporting and administrative requirements (for tax, social, accounting, commercial and corporate purposes similar to a subsidiary);
  • unlimited liability for the foreign company having a Paraguayan branch;
  • corporate tax deductibility of interest, royalties and other services paid by the branch to the foreign company or head-office are admitted but subject to the highest withholding tax rate.
  1. Subsidiary – Creation of an stock Company

2.1. Joint Stock company (“Sociedad Anónima” - SA)

  1. General requirements
  • Minimum capital. There is no minimum capital. The capital of all Paraguayan companies must be denominated in local currency, i.e. “guaranties”,
  • Minimum number of shareholders: 2
  • Liability of the shareholders: limited to shareholder’s participation in the company,
  • Statutory auditors (“Sindicos”): a statutory auditor has to be appointed. A deputy statutory auditor has also to be appointed by the company.
  1. Corporate Governance / Management
  • The joint stock company which is managed by a Board of Directors (“Directorio”). The Board members are individuals (minimum of one). They are appointed by the shareholders. The Board members are no longer required to be shareholders of the company. Tin order to be appointed Director it is necessary to have a resident permit. Normally the Board of Directors appoints a President from amongst its members. The Board decides whether to appoint delegate executive officers to assist the Board of Directors.

General Meetings (“Assemblées Générales”)

There are two types of general meetings:

  • The extraordinary general meeting: in general, when the decisions give rise to a modification of the Bye-laws, which shall be passed by a vote representing more than 60 % of the votes of the attending or represented shareholders.
  • The ordinary general meeting: when the decisions do not trigger a modification of the by-laws. These decisions, adopted by a majority vote, are principally those appointing, dismissing or substituting the members of the Board, appointing the statutory auditors and approving the annual accounts of the company.

Taxation of the Company’s Income:

Joint stock companies are subject to corporate income tax.

  1. Pros and Cons
  • Pros : The joint stock company (“SA”) is suitable for medium and large companies; it is mandatory in order to be to operate in the certain activities, like banking and insurance business, but these activities can alternatively be operated by branches of foreign entities.
  • Cons : the SA’s rules are less flexible and more cumbersome for smaller companies.

2.2 Limited Liability Company (“Sociedad de Responsabilidad Limitada» - SRL)

General Requirements

  • Minimum capital stock: no specific requirement but cannot be created with zero capital stock. 50% of the capital must be deposited in a Official Bank while the registration process in pending.
  • Minimum number of shareholders: 2 – Maximum : 25
  • Liability of the shareholders: limited to shareholder’s participation in the company.

Corporate Governance / Management

  • The company is run by one or several managers (“Gerente”). A manager cannot be a legal entity, he or she must be a natural person.
  • General meetings
    • An extraordinary general meeting is required when the decisions taken trigger an important modification of the By-laws, which shall be passed by unanimous vote representing all shareholders.
  • An ordinary general meeting is required when the shareholders have to approve (by a majority vote) the annual accounts, when they want to appoint or dismiss the manager(s) or appoint the statutory auditors –when required-, and more generally when the decisions to be taken do not trigger a modification of the By-laws.

Taxation of the company’s income :

SRL’s are subject to corporate income tax,

  1. Pros and cons
  • Pros: SRL’s are simple to set up and to run.
  • Cons: there is little flexibility to adapt the corporate governance through the drafting of the by-laws in this type of structure.

Higher cost for the transfer of shares and subject to formalities.

2.3 Other types of companies are also available in Paraguay:

2.3.1 Civil Company (“Sociedad simple”) :

  • used for non trading activities;
  • Unlimited personal liability of the partners.

Taxation of the company’s income: Will be subject to Income Tax from 2013.

2.3.2 Limited Partnership by Shares (“Sociedad en Comandita por Acciones”) : rarely used nowadays

Taxation of the company’s income: subject to corporate income tax.

2.3.3 Limited Liability Sole Trader (“Empresa Individual de Responsabilidad Limitada”): rarely used. Pursuant to the Merchant Law sole entrepreneurs may register their business assets with the Commercial Court, thus limiting their liability to the assigned assets and excluding from the risk of the business their private assets.

Taxation: are subject to income tax.

  1. Relevant Tax Aspects Linked to Corporate Law

3.1. Corporate Tax

INCOME TAX   The taxation of Paraguayan companies is based on a territorial principle. Therefore, Paraguayan companies carrying on their business outside Paraguay will not be taxed in Paraguay (subject to some exceptions) on their foreign source income.

The standard corporate tax rate is 10% on the net profits. Almost all expenditures are treated as deductable expenses, but tax losses cannot be carried forward.

In addition, there is a 5% tax for the distribution of profits or dividends.

The remittance of profits abroad is subject to a withholding tax of 15% on the amount remitted or credited.

VAT

The sales of goods, services and definite importation are subject to Value Added Tax at the rate of 10%, except for financial services, real estate transactions, medicines, some food products, and leases of movables, which are subject to a 5% rate. The sale of agriculture products and animals is exempt.

The transfer of shares is subject to VAT at the rate of 10% on the sale price which exceeds the nominal value of the shares. However, this tax is exempted if the seller notifies the Minister of Finance in due time.

SOCIAL SECURITY.

The employer must pay 16% and withhold 9% from their employees as social security tax over the wages paid.

  1. Ongoing requirements
  • For accounting and tax purposes the book keeping should be kept in Spanish under Paraguayan accounting principles and following Paraguayan tax rules.
  • Annual financial statements in Spanish derived from the accounts should be prepared, and audited when the annual sales of the company amounts Gs. 6.000 MM, approximately € 1,200,000.
  • The financial statements, (the statutory auditor’s report when requested), the management or board’s report to the general meeting, and the shareholder’s resolution approving the financial statements must be filed with the Minister of Finance no later than four months after the closing of the financial year.
  • The initial By-laws as well as all subsequent changes, and changes in management of the company should be filed with the Public Registry of Commerce and Public Registry of Juridical Persons and Associations.
  1. Mergers and Acquisitions and Concentration Clearance

Mergers are known as “fusiones” in Paraguay, where one company completely absorbs another.

Mergers are tax exempted.

Paraguay does not have yet a law on competition. A bill on the subject matter is presently being discussed in Congress.

Mersan Abogados



Corporate Law in Portugal

  1. Compliance with Regulations concerning Foreign Investments in Portugal

General

Portuguese law does not make any difference between a national and foreign held company. In addition, Portugal does not impose restrictions on foreign investors that may consequentially acquire Portuguese companies or businesses under the same conditions as any national investor, except where prior authorisation is required (see “Prior Authorisations” below). Additionally, there is no need to have a local partner. There are no special reporting requirements imposed on an investor due to his nationality and there are no limits imposed on the repatriation of profits or capital.

Declarations

There are no special declarations to be made by foreign investors.

Prior Authorizations

Investments that due to their nature, method or conditions are deemed to affect public safety, policy and health and those relating to weapons, ammunition and military materials or that in any way may imply the exercise of public authority may only be carried out if duly authorised in accordance with the applicable law for each activity.

Regulated Activities

There are certain activities that are regulated and need to meet specific conditions in order to be carried out by investors. Regulated activities include real-estate mediation and construction.

Additionally, there are certain areas in which private investment is limited, such as, for example, the postal communication network, railroad transportation and maritime ports.

  1. Procedures and Formalities

Competent Authority

There are two methods of incorporating a company in Portugal: (i) the regular method, which allows for the incorporation of a tailor made company (i.e. with by-laws drafted with specific provisions to fit the requirements of the founders, such as decision making decision making processes and the management structure) and (ii) a fast track procedure named “Empresa na Hora” (Company on the Hour), which allows for speedier incorporation, but with standard provisions, the only possibility of personalization being the choice of the company name. It is also possible to incorporate a company through the “Empresa na Hora” with a pre-approved name.

The competent authorities for incorporation of the companies are (i) the National Registry of Corporate Bodies (“RNPC” or “Registo Nacional de Pessoas Colectivas”), being the Authority that approves the company name, and (ii) Commercial Registration Offices (“Conservatórias do Registo Comercial”).

Subsequent to incorporation, it is also necessary to register with the Tax and Social Security Authorities.

Should the company be incorporated using the “Empresa na Hora” procedure, the registration of the company will be centralized in the RNPC, which will automatically register the company with the Tax and Social Security Office.

If the regular method is used for incorporation, it is recommended that a Portuguese lawyer drafts the company by-laws and provides advice on the corporate and tax law consequences of incorporation r for the founders and the new company.

Timeframe

The timeframe for incorporation will vary according to which the method of incorporation is used. Incorporation normally takes from 1 to 2 weeks using the regular method. This timeframe may vary depending upon the company to be incorporated and includes all necessary formalities (drafting by-laws, gathering all necessary documentation and commercial registration).

With the “Empresa na Hora” procedure, incorporation is complete within 1 day, provided that the shareholders have all the necessary documentation. However, as mentioned above, the company will use a pre-approved company name and standard by-laws.

Following incorporation, a commercial registry certificate will be granted that will include an on-line access code which is valid for a period of 1 year and that is treated for all legal purposes as a duly certified commercial registry certificate.

Legal Expenses:

Legal expenses for incorporation of a company will vary depending on the method of incorporation used:

  • regular method: circa €600 (this amount includes all the necessary documents for registration);
  • Empresa na Hora method: circa €400.

Incorporation costs may vary due to certain reductions being available in relation to online registrations (such as the appointment of directors) and the fees for the corporate name may vary depending upon the urgency requested in relation to search results. Furthermore, as far as the “Empresa na Hora” is concerned, there is a special reduction of €60 for companies with a corporate object of technological R & D.

Documents Required to be Registered:

Irrespective of the type of company to be incorporated, the following documents must be prepared and registered in the Commercial Registry Office:

  • approval of the company name and scope of activity (following the submission to and approval by the RNPC);
  • full identification of the shareholders and shareholders’ representatives, including copies of ID cards or passports and, for corporate shareholders, legalised copies of the certificate of incorporation of the shareholder, power of attorney or copy of minutes resolving to incorporate the new company.
  • by-laws, to be drafted by lawyers, which may include transitory rules in relation to the management structure to be adopted; and,
  • proof of deposit of the share capital to be filed at the time of the registry procedure or up to 5 days after the incorporation of the company.

It must also be noted that the documents that are written in a foreign language must be supported by a certified Portuguese translation.

  • Business Structure

In order to conduct business in Portugal, a foreign investor may decide on the establishment of a branch or the incorporation of a subsidiary in Portugal.

The decision as to which business structure to adopt is one to be made by the investor in view of the type of business to be carried out and the nature and level of investment to be made in Portugal as well as the level of independence from the parent company.

  1. The Branch (“Sucursal”)

A branch is not a separate legal entity and does not have legal personality. Thus, the founding company is itself held responsible for the entire assets and liabilities of a branch.

In order to establish a branch in Portugal, it is necessary to obtain the approval of the name and register the branch with the RNPC and the relevant Commercial Registration Office.

The following documents will be necessary:

  • proof of legal existence of the founding company (certificate of incorporation or certificate of good standing);
  • by-laws of the founding company;
  • decision to create the branch and indication of the branch’s representative;
  • documents identifying the applicant and respective powers of representation (ie power of attorney).

A branch may also be established in Portugal by means of the fast track procedure known as “Sucursal na Hora”. This procedure takes 1 day and involves a single filing at either the RNPC or the Commercial Registration Office. Reduced registration fees (50% reduction) are charged in relation to fast track procedures.

The Portuguese branch will be subject to taxation in Portugal and it will constitute a permanent establishment (which has several implications from a tax point of view). It must comply with accounting and tax obligations in Portugal.

  1. The Subsidiary – the Portuguese Companies

Commercial companies in Portugal generally assume the form of: (i) a corporation/joint stock company (“S.A.” or “Sociedade Anónima”) or (ii) a private limited company (“Lda.” or “Sociedade Por Quotas”), that can be incorporated with one shareholder, being in this case a sole proprietorship limited company.

The private limited company and the sole proprietorship limited company are regulated by the same legal provisions. Sole proprietorship limited companies have some particularities, which are set out below.

  • Private Limited Companies
  1. General requirements are:
  • share capital represented by quotas (shares), non material, nominative holdings registered in the Commercial Registration Office;
  • the minimum quota nominal value is €100.00, but the quotas may have different nominal values;
  • quotas may be transferred either by a notarial or a private deed, and cannot be listed in the Stock Exchange;
  • the minimum share capital is €5,000.00, with a minimum of 50% paid up in cash upon incorporation – as stated above, the share capital (or minimum cash paid up) must be deposited before incorporation or within 5 days following incorporation - share capital that does not have to be paid up upon incorporation must be paid up within a maximum period of 5 years thereafter;
  • the minimum number of shareholders: 2 (or 1 in the case of sole proprietorship limited companies);
  • the liability of the shareholders is limited to joint and several liability for any outstanding payment for their own quota; and
  • it is possible to limit the right to transfer quotas and to include pre-emption rights.
  1. Corporate Governance/Management:
  • one or more managers (Gerentes);
  • management powers are vested in the managers;
  • it is possible to appoint a company secretary;
  • it is only necessary to appoint a certified chartered accountant (ROC) if, during a period of two years, the company satisfies two of the following conditions:
    • the company's balance sheet exceeds € 1.5M;
    • total turnover and other revenues of at least € 3M;
    • an average number of employees throughout the year is 50 or more;
  • if the above conditions are not met, the company may nevertheless appoint a certified chartered accountant if it so chooses;
  • two types of shareholders’ general meetings, the ordinary general meetings (ie those envisaged by the Law and in the by-laws) and the extraordinary general meetings (which are general meetings convened for a specific purpose);
  • a general meeting is convened by any manager, with at least 15 days’ prior notice – except if a longer period is provided for in the by-laws; and,
  • the chairman of the general meeting shall be the shareholder who possesses or represents the largest fraction of the capital.
  1. Taxation of Company’s Income

The private limited company is subject to corporate income tax, as outlined in section IV below.

  1. Pros and Cons:
  • Pros: simpler structure and less complex management system, ideal for smaller / family owned companies.
  • Cons: cannot be listed on the stock exchange, shareholders may be easily identified and rigid corporate governance.
  • Sole Proprietorship Private Limited Companies

The general rules stated above for the private limited companies are fully applicable to sole proprietorship private limited companies. However, this type of company cannot be a sole shareholder of another sole proprietorship private limited company and consequently person may only be a shareholder in one sole proprietorship private limited company.

  • Corporations/Joint Stock Companies
  1. General requirements:
  • share capital represented by shares, material, may be nominative or bearer, registered in the company’s share register;
  • minimum share nominal value: € 0.01;
  • shares can be transferred by means of private agreement and there are no formalities to fulfil if the company is not subject to deposit;
  • minimum share capital of € 50,000.00, with minimum requirement that 30% of share capital be paid up upon incorporation – as stated above, the share capital deposit (or minimum payment up in cash) must be made prior to incorporation or within 5 days following incorporation. The share capital not paid up upon incorporation must be paid up within a period of 5 years thereafter;
  • minimum number of shareholders upon incorporation: 5 (however a commercial company may be the sole shareholder in a corporation – total initial domination);
  • liability of the shareholders is limited to the shares subscribed;
  • it is possible to introduce limitations on the transfer of shares and include pre-emption rights only if all of the issued shares are nominative;
  • the company may be listed on the Stock Exchange.
  1. Corporate Governance/Management:
  • sole board member (Administrador) (if share capital is lower than €200,000.00) or board of directors (Conselho de Administração) with number defined in the by-laws (odd or even number);
  • one supervisory officer (Fiscal Único) and a substitute, both certified chartered accountants (ROC’s) – or a supervisory board (Conselho Fiscal) with a minimum of three members and one substitute - if the by-laws provide that there are more than three members, two of them must be certified chartered accountants.
  • supervisory board mandatory if the following limits are reached:
    • the company's balance sheet exceeds €100M;
    • a total turnover and other revenues of at least €150M;
    • the average number of employees is 150 or more throughout the year;
  • listed companies must have one company secretary (who must have an adequate degree or be a paralegal) and one substitute, while this is solely an option for non-listed companies;
  • possibility of different management structures, the common structure being consisting of the shareholders’ general meeting and the board of directors and supervisory board – this may be replaced by a structure consisting of shareholders’ general meeting, executive board of directors, general and supervisory council and chartered accountant;
  • two types of shareholders’ general meetings, the ordinary general meetings (i.e. those provided for by Law and in the by-laws) and the extraordinary general meetings (which are general meetings convened for a specific purpose);
  • the chairman of the shareholders general meeting convenes the general meeting with at least 21 days’ prior notice – except if a longer period is provided for in the by-laws; and,
  • the chairman of the shareholders general meeting is appointed in the initial by-laws and by subsequent shareholders’ resolutions.
  1. Taxation of the company’s Income:

Corporations are subject to corporate income tax, as outlined below in section IV.

  1. Pros and Cons:
  • Pros: allows for a complex corporate governance structure; Corporations may be listed on the Stock exchange.
  • Cons: Onerous and burdensome structure may be inadequate for small businesses.
  • Other Types of Companies:

There are other company forms in addition to those described abovet. However, it is fairly uncommon for Portuguese or foreign investors to use any company form other than those described above.

The general partnership (Sociedade em nome colectivo) is a company with unlimited liability in which all partners are jointly liable for the company’s debts. The private assets of the partners can be seized to pay the debts of the company. The management is carried out by each partner, who has the powers to bind and represent the company.

Another type of company is the limited partnership (Sociedade em comandita), in which there are two types of partners: the dormant partners, whose liability is limited to the amount of their capital and full partners who are liable without limits for the company’s debts. The limited partnership may or may not have shares.

  1. Relevant Tax Aspects related to Corporate Law
  • General Considerations on Corporate Income Tax and International Taxation

Corporate income tax (Imposto sobre o Rendimento das Pessoas Colectivas, hereinafter “IRC”) is based on the worldwide income principle, therefore Portuguese resident companies are subject to corporate taxation on their income and gains, irrespective of the source of such gains. A company is deemed as being a resident tax payer in Portugal if it has its statutory seat or place of effective management located in Portugal.

Corporate income tax is proportional, and is subject to the following rates:

  • 5% tax rate is applied to the first € 12,500.00 of taxable profit; and,
  • 25% to the remaining taxable profit.

A local surcharge tax (the “Derrama”) may be levied on taxable profits before the deduction of any carried-forward tax losses, at a maximum rate of 1.5%. Thus, in general, the maximum rate of corporate income taxation (by adding together the corporate income tax and the Derrama) will amount to about 26.5% of net profit. The Derrama is calculated on the IRC generated in each of the municipalities, which have the power to set the rate in their own municipality.

Additionally, since 2010 a State Surcharge (Derrama Estadual) exists, which corresponds to a rate of 2.5% on all taxable profits in excess of €2 Million derived from resident corporations.

Tax resident entities that carry out, as their main activity, a commercial, industrial or agricultural activity, are required to keep an accounting system that complies with the provisions of both commercial and tax law.

Portugal has entered into more than 50 double taxation treaties. The double taxation treaties entered into by Portugal follow the Organization for Economic Cooperation and Development (OECD) Model Convention on Income and on Capital.

The double taxation treaties concluded by Portugal generally apply either the tax exemption or ordinary credit method. In broad terms, under the tax exemption method, the state of residence shall calculate the tax on the basis of the taxpayers’ worldwide income and exempt the proportion that relates to foreign derived income. Under the credit method, the taxpayer’s country of residence shall credit the tax levied in the country of source against the taxes calculated on the same income according to its own tax provisions.

Currently Portugal has double taxation treaties in force with the following countries: Algeria, Austria, Belgium, Brazil, Bulgaria, Canada, Cape Verde, Chile, China, Cuba, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Guinea-Bissau, Hungary, Iceland, India, Indonesia, Ireland, Israel, Italy, Korea, Latvia, Lithuania, Luxembourg, Macau, Malta, Mexico, Morocco, Mozambique, Netherlands, Norway, Pakistan, Poland, Romania, Russia, Singapore, Slovakia, Slovenia, Spain, Sweden, Switzerland, South Africa, Tunisia, Turkey, Ukraine, United Kingdom, United States and Venezuela.

  • Capital Gains

There is no transfer tax on the sale of shares or quotas. Whenever there is a profit derived from the transfer of an asset, shares or quotas, the capital gain may be liable to tax. Capital gains tax is calculated on the difference between the sale proceeds derived from the disposal of a capital asset and its original acquisition cost (indexed in accordance with inflation coefficients if the asset was held for more than 24 months).

There was previously an exemption from capital gains tax for shares held for more than 12 months. This exemption was revoked in 2010. The capital gains arising from the disposal of shares, irrespective of the type of company, is taxed at a rate of 20%. Capital gains tax applicable for non-listed micro and small companies is reduced to 50% of the respective amount (being an effective rate of 10%). Capital gains derived from the sale of shares worth less than € 500.00 in any year are also exempt from tax.

Non resident entities, except if resident in black listed jurisdictions, are exempt from capital gains tax on the sale of shares in Portugal. However, the likelihood is that there will be a tax liability on any capital gain in their country of residence.

With respect to gains arising from the sale or exchange of real estate (or associated rights, excluding real estate used in a trade or business activity) and intellectual property rights (e.g. copyrights, patents or know-how by non original owners), only 50% of the gain is included in the taxable income.

Capital gains resulting from the disposal of business assets are subject to income tax in the same manner as any other commercial income. Business assets are defined as all assets which either wholly or primarily serve and promote an independent business activity.

  1. Ongoing Requirements

According to the Portuguese IRC Code, resident entities are required to file an income tax return each year by the 31st of May or by the end of the fifth month subsequent to the closing date of the taxation period (if different from the annual period of taxation). Annual accounts are filed through “IES” (Informação Empresarial Simplificada), a centralized information form, which is usually done by the accountant of the Company. The requirements for the approval of accounts will vary according to the type of company.

Company accounts may be requested by anyone through the internet at the companies’ website (Portal da Empresa) or at a Commercial Registration Office. The accounts of any company will be available within 1 to 5 days after request.

Amendments to the by-laws, changes in management and transfer of quotas are subject to registration and must be filed with the Commercial Registration Office. The register is public and may be accessed by anyone through the internet or by request at a Commercial Registration Office.

  1. Trust Companies and Anonymity/ Transparency

Portuguese law does not recognize the concept of a trust, since the concept of beneficial ownership is not acknowledged, with the exception of the use of trusts within the Madeira Free Trade Zone.

Therefore, under Portuguese law a trust is deemed as a contract, and as such, all transactions involving a trust will be deemed to be made with the trustees, as legal owners of the trust assets.

Portuguese tax laws do recognize the concept of tax transparent entities, such as partnerships (general and limited). In such entities the profits generated are taxed in the hands of each individual partner.

Although an entity considered to be transparent is not liable to IRC, it is important to note that the calculation of the taxable base is determined in accordance with the rules set in the Corporate Income Tax Code (Código do Imposto Sobre o Rendimento das Pessoas Colectivas). After this calculation, the amounts will be included in the taxable income of the partners and taxed, under IRC (for legal entities) or Individual Income Tax (for individuals).

ABREU ADVOGADOS



Corporate Law in Singapore

  1. GENERAL
  • In Singapore, foreign businesses are often registered as private limited liability companies (commonly known as private limited companies). Other types of companies include public companies, limited liability companies or limited liability partnerships (which mainly applies to professional services).
  • A private limited company is a separate legal entity and shareholders are not liable for the company’s debts beyond the amount of share capital they have contributed, in the absence of fraud.
  • The company may incur obligations or liabilities and hold real estate in its own name, enter into contracts with its members, directors or employees and with third parties.
  • The company continues unchanged even if the identity of its directors and shareholders change.
  • The company has legal capacity. In this respect, it has full capacity to carry on or undertake any business or activity, do any act or enter into any transaction. Directors/shareholders of the company are entitled to decide on the limits of the powers of the company. These limits are set out in the company’s Memorandum and Articles of Association.

BUSINESS LICENCES

Certain types of business activities will require a business licence, permit or approval of a Government Agency. Typically, such licences, permits or approvals would be in respect of the following activities:

  • Professionals such as lawyers, doctors, financial planners, commodity future traders and accountants. This group of professionals would require occupational licences for the professional services that they provide.
  • Special licences are required to operate a private school, a travel agency, a money remittance agency, a liquor distributor, childcare centre, to name a few.
  • Banking, insurance, reinsurance, fund managers, these activities are regulated by the Monetary Authority of Singapore and separate licences which would have to be obtained in order to undertake these activities.
  1. PROCEDURES AND FORMALITIES
  • When proceeding to incorporate a private limited company, the first consideration will have to be the name of the company. The application for the name will have to be submitted to the Singapore Accounting and Corporate Regulatory Authority (“ACRA”).
  • A minimum of 1 resident director is required. The term resident director is not defined in the Singapore Companies Act (Chapter 50) (the “Act”), but this is taken to mean a Singapore Citizen, a Singapore Permanent Resident or a person who has been issued with an EntrePass or an Employment Pass by the Ministry of Manpower. The minimum age for a director is 18 years and such person must not be a bankrupt or convicted or any offence in the past.
  • There is no requirement for a director to also be a shareholder.
  • There must be a minimum of 1 and maximum of 50 shareholders for a private limited company. A director and shareholder may be the same or different person.
  • A foreign company may incorporate a wholly-owned subsidiary as a private limited company. In this case, the quorum for a shareholders’ meeting of the subsidiary is one. If there are more shareholders, the quorum shall be according to the number of shareholders which are represented.
  • The minimum paid-up share capital for registration in Singapore is S$1.00. The paid-up share capital of the company can be increased any time after incorporation of the company. There is no concept of Authorized Share Capital for Singapore companies. There is also no concept of par value of shares in Singapore.
  • Shares may be ordinary or preference shares. Rights, obligations and restrictions attached to each class of shares, for example, pre-emption rights, right to transfer shares, dividend rights, right to receive information, minority rights or reserved matters, appointment of directors, deadlock and liquidation and sale provisions, dispute resolution and governing law provisions, are determined by a shareholders’ agreement and/or pursuant to the company’s constitution (Memorandum and Articles of Association).
  • At the time of the incorporation of the company there must be a registered address in Singapore. The registered address must be a physical address and cannot be a post office box.
  • The incorporation of a company in Singapore is fully computerized and is electronically undertaken. If the company, at the time of submitting the incorporation documents, has provided all the necessary information, barring any unforeseen circumstances, the company can be incorporated within 2 days of the submission of the incorporation documents to ACRA.
  • The Singapore company requires approval of its name by ACRA. The name search application includes indicating the principal objectives of the company, including information on the first director/s and shareholder/s. Once the name has been approved, the name is reserved exclusively for the applicant for a minimum period of 60 days. During that time, steps can be taken to finalize the incorporation documents. If for some reason the incorporation of the company is not completed within the 60 days, it is possible to extend the reservation of the name for a further 60 days by filing an application and paying the requisite fee.
  • The application for the incorporation of the company will entail the provision of the following information:-
  • The directors. The directors will have to sign a consent form indicating their agreement to be appointed directors.
  • The Memorandum and Articles of Association will have to be subscribed by a minimum of one shareholder who will indicate that he will be taking one share at the time of the incorporation.
  • The address of the registered office of the company will have to be provided.
  • A registration fee of S$300.00 is payable to ACRA after the above information has been electronically filed with ACRA.
  • Once the above has been completed, ACRA will issue an e-mail notification indicating that the company has been incorporated. This e-mail notification will include the company number and the date of incorporation.
  • It is optional, but advisable that companies apply for a hardcopy of the Certificate Confirming the Incorporation of the Company.
  • It is advisable that once the company has been incorporated, a business profile search containing particulars of the company should be obtained from ACRA as this search will provide you with the following information:-
  • Company name and registration number
  • Incorporation date
  • Principal activities
  • Paid-up share capital
  • Registered office address
  • Directors’ details
  • Shareholders’ details
  • Company Secretary’s details (if applicable)
  • After incorporation, the Company should arrange to obtain the following:-
  • A book of share certificates
  • Corporate registers and minute book
  • Company seal

 

  1. SINGAPORE COMPANY DIRECTORS

Role of Directors

  • The role of directors is to supervise or manage the business of the company. Functions vary depending upon the size or type of company and the role of the directors in it.
  • In smaller companies, directors manage the company’s business and to a certain extent, employees of the company and make day-to-day decisions involved in running the company.
  • In larger companies, directors take on a supervisory function. The day-to-day decisions may be left to a managing director or other executive management.
  • The company’s powers are vested in the directors. In this respect, they control the company’s business and affairs and are therefore answerable to the company’s shareholders collectively.
  • A quorum of directors may be one or more directors representing different shareholders.
  • The Chairman of the Board of Directors may or may not be  entitled to a casting vote according to the shareholders’ agreement or the company’s constitution.

Duties of Directors

Duties of directors fall under two broad categories:-

  • Statutory duties of care, skill and diligence; and
  • Common law or fiduciary duties.

STATUTORY DUTIES

These duties which are enforced by ACRA would include the following:-

  • At all times act honestly and use reasonable diligence in the discharge of the duties of his office.
  • Updating and maintaining the accounting records of the company.
  • Preparing the financial statements for the company’s Annual General Meeting.
  • Ensuring that the First Annual General Meeting is held within 18 months of the company’s incorporation and following that, in every calendar year at intervals not exceeding 15 months.
  • Ensuring that regular directors and shareholders’ meetings are held in order to review the company’s financial and trading positions.
  • Ensuring that the company maintains the proper statutory books at its registered office.
  • Appointing an auditor within 3 months of the company’s incorporation if the company is not an exempt private company.

COMMON LAW OR FIDUCIARY DUTIES

  • A director shall exercise his discretion in good faith in the interests of the company. In some cases, the interests of the company may be the interests of its members, creditors, other companies in the group and employees.
  • A director shall not place himself in a position of conflict where a personal interest conflicts with his duty to act in the interests of the company.
  • A director is required to disclose his conflict of interests.
  • A director is prohibited from using corporate information or opportunities that he acquires by virtue of his position to make secret profits or unauthorized benefits for himself or any other person or cause detriment to the company.
  • A director has a duty to act for the purposes for which his powers are given and not for collateral purposes.
  • A director shall not knowingly incur debts where there is reasonable grounds to believe that the company would not be able to pay its debts.
  1. ONGOING COMPLIANCE REQUIREMENTS

Once the Singapore company has been incorporated, the Act will require certain ongoing compliance and filing requirements. These are:-

  • Company Secretary

The company must appoint a local company secretary. The company secretary must possess the requisite knowledge and experience to undertake and discharge the duties of company secretary. Any change in the particulars in the company secretary will have to be notified to ACRA within 30 days of the change.

  • Registered Office

A company must have a registered office in Singapore. The registered office must be open and accessible to the public during normal office hours. If there is a change in the address of the registered office, the company must notify ACRA within 14 days of the change.

  • Local resident director

A company may have any number of local and foreign directors. However, at least one director must be ordinarily resident in Singapore. The ordinarily resident director must be either a Singapore Citizen, a Singapore Permanent resident or a person who has been issued with an EntrePass or Employment Pass.

  • Auditors

A company must appoint auditors within 3 months of its date of incorporation. A company however is exempted from audit requirements if it is able to satisfy the following:-

  • All shareholders are individuals;
  • There must be not more than 20 shareholders; and
  • The annual turnover of the company must not be more than S$5 million.
  • Financial year-end.

A company must decide on its financial year-end. If the company is a subsidiary, its financially year-end must be similar with the financial year-end of the holding company. Where this is not the case, the directors/shareholders have the choice of deciding on the financial year-end.

  • Financial accounts

The preparation of the financial accounts is based on the Financial Reporting Standards (“FRS”) which has been adopted in Singapore. The FRS is modeled on similar standards issued by the International Accounting Standards Board. These Financial Statements to be prepared in accordance with the FRS will comprise of:-

  • Profit and Loss Account (Statement of Comprehensive Income)
  • Balance Sheet (Statement of Financial Position);
  • Cash Flow Statement (Statement of Cash Flows); and
  • Equity Statement.
  • Annual General Meeting.
  • A company must hold its Annual General Meeting (“AGM”) once every calendar year.
  • The first AGM must be held within 18 months of the incorporation of the company.
  • Subsequent AGMs must be held within 15 months of the last AGM.
  • The accounts tabled at the AGM must be made up to a date not more than 6 months before the AGM.
  • Annual Return Filing
  • Following the holding of the AGM, the company must file an Annual Return (“AR”) with ACRA.
  • The AR must be filed within 1 month of the AGM.
  • The AR will include particulars of the directors, shareholders, registered address, auditors and financial aspects of the company.
  • Unless the company is an exempt private company, a set of the company’s financials in pdf format as well as in the XBRL format will have to be filed with ACRA.
  • The XBRL format is an electronic system that is adopted by ACRA whereby the Financial Statements are converted to a language that is universally accessible by persons wishing to ascertain a company’s financial status.
  • Income Tax Filings
  • A company is required by law to file a Return of its income with the Inland Revenue Authority of Singapore.
  • The statutory tax year in which income tax is calculated and charged is referred to as the Year of Assessment.
  • Singapore adopts the preceding year basis for tax. This means that the profits of the accounting year ending in the preceding year will form the basis for assessment of the current Year of Assessment.
  1. CORPORATE TAX
  • The Singapore income tax system is annual in its structure and organization. The statutory tax year in which corporate tax is calculated and charged is commonly known as Year of Assessment. Singapore adopts the preceding year basis for taxation. In other words, the profits of the accounting year ending in the preceding year will form the basis for assessment for the current year of assessment.
  • Corporate Tax is payable by companies regardless of whether it is a local or a foreign company operating in Singapore.
  • Corporate Tax will be levied on income accruing in or derived from Singapore or income received in Singapore from outside Singapore.
  • The current tax rate is 17%.
  • Dividends based upon the Company’s profits are payable, but since 1 January 2008, there is no longer any tax on dividends as the Singapore Tax system has moved to a one-tier Corporate Tax system.  This therefore means that when a company declares a dividend of say, S$100.00, the entire amount of S$100.00 can be paid to the shareholder with no deduction/withholding of tax.
  • Singapore registered companies may benefit from very attractive tax exemptions and incentives, for example, from the Economic Development Board. It is advisable to consult qualified professionals on the existing and intended resulting group structure, business and tax implications.
  1. GOODS AND SERVICES TAX
  • Where the company records an annual turnover of its business to be more than S$1 million the company must register for Goods and Services Tax (“GST”).
  • GST is similar to Valued Added Tax in other countries and is a relatively new form of tax in Singapore.
  • GST is levied on all imports of goods in Singapore and on supply of goods and services in Singapore made or offered by entities that are GST registered.
  • The current rate of GST is 7%.
  1. STAMP DUTY

For the transfer or gift of shares, there is a stamp duty of S$0.20 on every S$100.00 or part thereof in respect of the purchase price or net asset value, whichever is the higher.

Stamp duty on property rates start at 1% on the first $180,000 of the purchase consideration or market value of a property, whichever is the higher, rising to 2% for the next $180,000 and 3% for the remainder.

Last December an Additional Buyer's Stamp Duty (ABSD) for private property of between 3 per cent and 10 per cent for Singaporeans, Permanent Residents and foreigners was introduced. Foreigners have to pay 10% ABSD for any residential property.

Central Chambers Law Corporation



Corporate Law in Spain

 Foreign Investment Regulations

  1. General:

Foreign investments in Spain are free, except if the foreign investor is resident in a jurisdiction listed as a tax heaven or in certain specific sectors.

Declarations:

Foreign investments and divestments have to be declared to the Foreign Investors Registry situated at the Ministry of Economics and Finance.

Such declarations are made by means of an official form.

  1. Business structures:

A foreign company can carry on business activities in Spain directly from abroad or through a branch (permanent establishment). A representation office, performing preparatory or ancillary activities is not considered to be a permanent establishment.

A foreign company can also incorporate a Spanish subsidiary in order to carry out the business activities.

  1. Branch (Sucursal)

A branch does not have legal personality. Accordingly, it is the foreign company who is carrying on the activities in Spain, being directly responsible for all the debts and liabilities incurred in relation thereto.

The branch has to be registered at the Commercial Registry of its domicile by means of filing to the Registry the following documents:

(i)         A certificate of registration of the foreign company setting up the branch;

(ii)         a copy of the actual articles of association of the foreign company;

(iii)        the name and particulars of the directors of the foreign company; and

(iv)       the private or public document setting up the branch (most usually a notarial deed).

The document setting up the branch has to contain at least the following information:

(i)         Name to be used by the branch;

(ii)         domicile of the branch;

(iii)        activities to be carried on by the branch within the scope of the objects of the foreign company;

(iv)       persons to be appointed permanently in order to represent the company and their respective powers of representation.

Where any of the a.m. documents are in a foreign language, a Spanish official translation has to be enclosed.

The incorporation procedure, as from the granting of the incorporation deed to the registration of the branch takes between 15 and 30 days time. Anyway, the branch can become active as from the granting of the incorporation deed.

The incorporation expenses consist exclusively in the notarial and registration expenses and depend on the amount of the disbursed funds.

The change of the name or domicile of the foreign company, the removal or appointment of directors, its winding off, the appointment of liquidators, the termination of the liquidation and the insolvency of the company have also to be registered at the Spanish Commercial Registry of the domicile of the branch.

At last the foreign company has to deposit at the Spanish Registry, where its branch has been registered, its annual accounts as well as the consolidated accounts, where applicable. Nevertheless, if such accounts have already been deposited at the Commercial Registry where the foreign company is registered, the deposit of the accounts at the Spanish Registry will not be necessary.

  1. Incorporation of a Spanish subsidiary company

2.1. Joint Stock Company (“sociedad anónima – S.A.”)

  1. General requirements

(i)         Minimum capital: 60,000 €;

(ii)         Minimum number of shareholders: 1;

(iii)        Liability of the shareholders: The liability of the shareholders is limited to the amount of the undisbursed nominal value of their respective shares.

  1. Incorporation

The joint stock company has to be incorporated by means of a deed granted before a notary public and registered at the Commercial Registry of its domicile. The company becomes a legal entity upon its registration.

The incorporation deed has to contain at least the following information:

  1. a) The name and age of the grantors, if they are individuals or its corporate name if they are legal entities and in both cases their nationality and domicile.
  1. b) The willingness of the grantors to incorporate a joint stock company.
  1. c) The cash, assets or rights to be disbursed by each shareholders and the number of shares to be attributed to each of them.
  1. d) The total amount of the incorporation costs.
  1. e) The articles of association of the company.
  1. f) The name and age of the persons entitled to represent the company if they are individuals or its corporate name if they are legal entities and in both cases their nationality and domicile.

The articles of the company have to contain at least:

  1. a) The corporate name of the company.
  1. b) The objects of the company.
  1. c) The duration of the company.
  1. d) The date at which the company will start its activities.
  1. e) The domicile of the company and whether the directors or the shareholders are competent for the setting up, liquidation and transfer of the branches of the company.
  1. f) The share capital, the amount of the capital pending disbursement and the delay for such disbursement to be made.
  1. g) The number of shares, their nominal value and other particulars.
  1. h) The representation body of the company (sole director, joint directors, etc.), the minimum and maximum number of directors in the event of a board, the duration of the office and the directors’ fees.
  1. i) The procedure for discussion and making of resolutions in the board.
  1. j) The date of closure of the financial year.
  1. k) Any restriction to the transfer of the shares.
  1. l) Any accessory obligation of the shareholders.
  1. m) Any special right in favor of the founders or promoters of the company.

The incorporation procedure, as from the granting of the incorporation deed to the registration of the joint stock company takes between 15 and 30 days time. Anyway, the joint stock company can become active as from the granting of the incorporation deed.

The incorporation expenses consist exclusively in the notarial and registration expenses and depend on the amount of the disbursed capital.

  1. Corporate governance

c.1. Directors

The joint stock company can be represented by:

(i)         One sole director with unlimited powers (“administrador único”);

(ii)         Two or more directors with individual unlimited powers (“administradores solidarios”);

(iii)        Two directors with joint powers (“administradores mancomunados”); or

(iv)       A Board of Directors (“Consejo de Administración”), comprising at least 3 members.

Where the company is represented by a Board of Directors, the same has to appoint its president and its secretary. Furthermore, it will grant the powers of representation of the company to one or more of its members, officers or proxies of the company.

The appointment of directors and the granting of powers of representation have to be registered at the Commercial Registry.

  1. Shareholders’ resolutions

The General Shareholders’ Meeting or the sole shareholder, whatever the case may be, is responsible for:

  1. The approval of the annual accounts;
  1. The application of the result;
  1. The approval of the management activity within the financial year.
  1. The amendment of the articles of association, including the change of the corporate name, the transfer of the corporate office, the change of the objects, the decrease or increase of the share capital, the transformation, merger, demerger, winding-off or liquidation of the company.
  1. The appointment and withdrawal of the directors and liquidators.
  1. The appointment of the company’s auditors.

The resolutions have to be made in a meeting, taking place in the municipality of the company’s corporate office if there are more than one shareholder. In the event of a sole shareholder the resolution can be made by it in writing. The resolutions mentioned under points 4., 5. and 6. above have to be raised to the status of a public deed before a notary public and registered at the Commercial Registry of the company.

  1. Accounts

The annual accounts have to be adopted and signed by the directors, audited by the auditors, where applicable, and approved by the General Shareholders’ Meeting or sole shareholder. The adoption of the accounts by the directors has to take place within 3 months as from the end of the financial year and their approval by the Shareholders’ Meeting or the sole shareholder within 6 months as from such date. The approved accounts have to be deposited at the Commercial Registry.

  1. Taxation of the company’s income (Corporate Tax)

The Taxable income is the profit of the company after certain adjustments to be made in accordance with the tax legislation. In relation thereto the following has to be considered:

  • Arm's length interest paid to third parties is tax deductible. Arm's length interest paid to related parties (e.g. shareholders) is tax deductible up to a maximum loan amount of three times the equity of the Spanish company. Above such amount the interest paid is treated as a dividend.
  • Arm's length license fees paid are tax deductible.
  • Transfer prices with related parties may be adjusted by the Tax Office to arm's length prices paid between independent parties.
  • A reasonable contribution to the general expenses of the group is tax deductible under certain conditions.
  • Losses may be carried forward against profits obtained in the following 15 fiscal years.
  • Dividends are not tax deductible.

The taxable inco e is subject to a general tax rate of 30%. Where the company is considered as a small business a tax rate of 25% will apply on an amount of 300,000 € and the general tax rate (30%) on the remaining taxable income. A small business is any business with a turnover under 10,000,000 € in the last financial year. At last, companies with a turnover of less than 5,000,000 € and an average number of employees under 25 in the last financial year are taxed at a rate of 20% on an amount of 300,000 € and of 25% on the remaining taxable income.

2.2. Limited Liability Company (“sociedad de responsabilidad limitada – S.L.”)

  1. General requirements

(i)         Minimum capital: 3,000 €;

(ii)         Minimum number of shareholders: 1;

(iii)        Liability of the shareholders: The shareholders are not liable for the debts of the company.

  1. Incorporation

The limited liability company has to be incorporated by means of a deed, granted before a notary public and registered at the Commercial Registry of its domicile. The company becomes a legal entity upon its registration.

The contain of the incorporation deed and of the articles of association is similar as in the case of incorporation of a joint stock company, but with less stringent requisites. The same applies with respect to the incorporation procedure and expenses.

  1. Corporate governance

The same rules applying to a joint stock company apply to the corporate governance of a limited liability company, whereby in the latter case more than 2 directors with joint powers can be appointed.

  1. Shareholders’ Resolutions

The General Shareholders’ Meeting or the sole shareholder are responsible for:

  1. The approval of the annual accounts;
  1. The application of the result;
  1. The approval of the management activity within the financial year.
  1. The amendment of the articles of association, including the change of the corporate name, the transfer of the corporate office, the change of the objects, the decrease or increase of the share capital, the authorization of the directors to carry out competitive activities, the transformation, merger, demerger, winding-off or liquidation of the company.
  1. The appointment and withdrawal of the directors and liquidators.
  1. The appointment of the company’s auditors.

The resolutions have to be made in a meeting, taking place in the municipality of the company’s corporate office if there are more than one shareholder. In the event of a sole shareholder the resolution can be made by it in writing. The resolutions mentioned under points 4., 5. and 6. above have to be raised to the status of a public deed before a notary public and registered at the Commercial Registry of the company.

  1. Accounts

The annual accounts have to be adopted and signed by the directors, audited by the auditors, where applicable and approved by the General Shareholders’ Meeting or sole shareholder. The adoption of the accounts by the directors has to take place within 3 months as from the end of the financial year and its approval within 6 months as from such date. The approved accounts have to be deposited at the Commercial Registry.

  1. Taxation of the company’s income

Corporate tax is applied to all company without any difference relating to the type of company.

2.3. Limited Partnership by shares (“sociedad en comandita por acciones”)

This kind of company is very rarely used. Its requisites are very similar to such applying to the joint stock companies.

2.4. Limited Partnership (“sociedad en comandita simple – S.Com.”)

Such companies are rarely used, except by German Limited Partnerships incorporating a subsidiary in Spain, due to certain tax advantages in Germany.

2.5. Civil Company

This kind of companies is very rarely used.

They become a legal entity if incorporated by means of a public deed and registered at the Commercial Registry. A civil company is not a tax subject, whereby its profits or losses are attributed to its partners in proportion to their respective interest at the company.

Dr. Frühbeck Abogados, S.L.P.



Corporate Law in Switzerland

  1. Compliance With Regulations Concerning Foreign Investments in Switzerland

General:

Investments in Switzerland are generally free of restrictions and investors will find a business-friendly environment with modest taxation. There are generally no restrictions on foreign ownership of Swiss companies and all industries are generally open to foreign investors. However, there may still be federal or cantonal monopolies in certain business areas (e.g. the mining and marketing of salt) which would require a concession from the proper authorities.

Prior Authorisations:

Apart from concessions for activities in monopolised areas, certain activities may also require authorisation. This is namely the case in the insurance and banking sectors.

Foreign investors should further note that Swiss federal law restricts acquisition of real estate by persons abroad and may require an authorisation by the competent cantonal authority. Real estate which is used as permanent establishment for economic purposes (e.g. manufacturing premises, warehouse facilities, shopping centres etc.) can be purchased without authorisation. Real estate which is acquired in order to be leased or rented out does not fall under the title "use as a permanent establishment" and would need authorisation.

The term acquisition refers to any transaction that gives a non resident actual control over real estate. The participation in companies whose purpose is the acquisition of real estate is therefore also regarded as an acquisition subject to authorisation. In fact, the purchase of just one share of a company involved solely or substantially in acquiring residential property or dealing therein, requires prior authorisation.

The advice of a Swiss notary or a lawyer should be sought if it is unclear whether a certain transaction requires prior authorisation.

Regulated Activity:

In Switzerland certain activities have been regulated for reasons such as health and safety and/or environmental concerns and require authorisation. Such regulations may exist on a federal and a cantonal level. It therefore has to be established on a case by case basis whether an application for authorisation is necessary for a certain activity. Noteworthy regulated activities are those of doctors, dentists, lawyers, public notaries and auditors.

  1. Procedures and Formalities

Competent Authority:

The requirements for setting up a new company in Switzerland are dependent on the legal form. If such setting up requires a mandatory entry in the commercial register (which is always the case if a company runs a commercial business), the respective application has to be made with the commercial register of the canton where the company has its head office. Cantonal registrations are then approved by the Federal Office for the Commercial Register and published in the Swiss Official Gazette of Commerce (which can be searched free of charge under www.shab.ch).

Timeframe:

Entries in the commercial register are effective as of the day they are entered into the daily journal of the commercial register, with the proviso that the Federal Office for the Commercial Register approves the entry.

Against third parties, entries take effect on the first business day following the publication in the Swiss Official Gazette of Commerce (www.shab.ch).

Legal Expenses:

The expenses for setting up a company depend on its legal form and its capital. The basic fee for incorporating a stock corporation or a limited liability company in the commercial registry is CHF 600 for a capital of up to CHF 200,000. If the capital is higher than CHF 200,000 the basic fee will be increased by 0.2 per mille of the amount exceeding CHF 200,000 (e.g. the fee for a capital of CHF 500'000 would therefore be CHF 660). In any event, the maximum basic fee is limited to CHF 10,000.

For each representative and each organ which has to be registered a fee of CHF 20 to 50 applies.

Additional fees apply if the commercial register office has to provide additional services, like certifications of signatures or verifications.

A stamp duty of 1 % is due on the fresh issue of or increase in capital of a stock corporation or a limited liability company. The first CHF 1 million are exempt from such a tax.

Further costs will apply for notarization services (e.g. articles of association need to be notarized) and the preparation of the required documents by a notary or a lawyer, which is recommended.

Documents Required for Registration:

The documents which have to be prepared, certified and/or notarised depend on the legal form of the company which is to be registered. For stock corporations and limited liability companies these documents will include:

  • an application for registration
  • the articles of association
  • a permission to use a C/O address (if applicable)
  • a declaration of acceptance of appointment of the board of directors (stock corporation) or the management board (limited liability company, if applicable)
  • minutes of the meeting of the board of directors/management board regarding constitution of the board and the necessary appointments
  • a declaration of acceptance of appointment of the auditing agency (if applicable)
  • confirmation of payment of the capital into a blocked account

In general, all relevant documents will have to be in one of the official languages of the canton where the application is made.

Company Name:

Depending on the legal form, the name of a company has to meet certain statutory requirements. For example, the name of general and limited partnerships has to be made up of the family name of at least one (general) partner. Stock corporations and limited liability companies, on the other hand, may generally chose their name freely, but have to add a reference to the type of legal entity (e.g. Swissôtel Management GmbH or Nestlé AG).

Swiss law may restrict or prohibit the use of certain elements in the creation of a company name (e.g. "federal", "cantonal", "Red Cross" or "bank").

Company names enjoy varying degrees of protection depending on the legal form of the company. It should therefore be checked beforehand, whether a name is already being used by another company. Company name searches can be made on www.zefix.ch which is free of charge, but offers no guarantee as to the results. The Federal Office for the Commercial Register also offers a company name search service (see: www.regix.ch).

  • Business Structures

Foreign companies planning to do business in Switzerland can either export their goods or services into Switzerland from abroad or form an establishment within Switzerland's territory. Such an establishment can either take the form of a branch or a subsidiary.

  1. Branch ("Zweigniederlassung" / "succursale" / "succursale")

A branch is a commercial business operation which is legally part of (and dependent on) a principal company, but has its own premises and a certain (although limited) amount of commercial autonomy. Commercial autonomy means that the business operation is intended for a longer period and has to be under a permanent dedicated leadership. The commercial autonomy is limited because the branch is supposed to perform an operation similar to that of the principal company.

Foreign companies wishing to establish a branch in Switzerland are required to register the branch in the commercial register of its location (there are 26 commercial registers in Switzerland, one for each canton: see www.zefix.ch). The branch must have the same name as the principal company abroad. Moreover the name must include the location of the principal company abroad, the location of the branch in Switzerland, and the identification as a branch (e.g.: "Compagnie Luxembourgeoise de Banque S.A., Luxembourg, Succursale de Zurich").

At least one authorised representative of the branch must reside in Switzerland and has to be entered in the commercial register.

The application has to be signed by a person with signatory power which is registered (or about to be registered) either at the location of the principal company or the location of the branch. If applicable, the following documents have to be filed together with the application:

  • A certified extract from the commercial register of the principal company
  • A certified copy of the articles of association of the principal company
  • (Certified) information on the paid-in capital (if applicable)
  • Minutes of the competent company organ on the establishment of the branch, its purpose, its representatives and their signatory power
  • A permission to use a C/O-address (if applicable)
  • A permission of the Swiss Financial Market Supervisory Authority (FINMA) (if applicable)

In general, all relevant documents will have to be translated into the official language of the competent canton (sworn translation). Certified documents from foreign authorities or notaries may also require an apostille.

The branch is not a legal person in its own right. Nevertheless it is possible to bring a law suit against the principal company at the location of the branch in Switzerland. Furthermore a creditor may commence debt collection/bankruptcy proceedings at the location of the branch in Switzerland.

With respect to taxation a Swiss branch of a foreign corporation which performs activities in a fixed and independent place of business constitutes a so called permanent establishment. Such a permanent establishment is subject to Swiss corporate tax (or, in case of individual ownership, Swiss income tax) on the portion of its worldwide income and net equity that is attributable to the Swiss business (regarding corporate taxation see chapter 3.1 below). However, it is not subject to the Swiss withholding tax on profit distributions to the head office.

Furthermore, a very favourable tax regime may be agreed for so called “Finance Branches” who have assets of at least CHF 100 million. A Finance Branch under a special tax ruling may deduct a deemed interest payment of 10/11 of its equity and end up with 2 – 5 % Swiss taxes on its real profit. This, of course, only works if the jurisdiction of the foreign head office exempts foreign (i.e. the Swiss) profits and only taxes a praecipuum of e.g. 10 % (vice versa it does not work in countries with a tax credit system).

Branches which only carry out preparatory activities (e.g. representation without the right to sign contracts) or auxiliary services (e.g. storage) are not treated as permanent establishments and are therefore not subject to Swiss taxes.

A branch may be transferred into a corporation without triggering corporate income tax.

  • Pros: No capital requirements for the branch, direct influence of the principal company over the branch. No withholding tax on profit distributions.
  • Cons: The principal company is jointly liable for the business operation of the branch.
  1. Subsidiary – Creation of a Swiss Corporation

Swiss private law at the moment distinguishes ten different company types. For commercial operations, however, two types of company predominate: the stock corporation ("Aktiengesellschaft", abbreviated "AG", in German / "société anonyme", abbreviated "SA", in French / "società anonima", abbreviated "SA", in Italian) and the limited liability company ("Gesellschaft mit beschränkter Haftung", abbreviated "GmbH", in German / "société à responsabilité limitée", abbreviated "S.à.r.l." or "SARL" in French / "società a garanzia limitata", abbreviated "Sagl", in Italian).

2.1. Stock Corporation ("Aktiengesellschaft", abbreviated "AG", in German / "société anonyme", abbreviated "SA", in French / "società anonima", abbreviated "SA", in Italian)

  1. General requirements
  • Minimum share capital: CHF 100,000 (of which 20%, or in any event at least CHF 50,000 have to be paid in)
  • Entry in the commercial register
  • Minimum number of shareholders: 1

(There are no ownership limitations or residence requirements for foreign investors. The shares of a stock corporation may therefore be entirely foreign-owned.)

  • Liability of the shareholder: limited to the shareholder's financial participation in the company
  1. Corporate Governance / Management

b.1. Company Organs

According to law, a stock corporation has three company organs: The general assembly ("Generalversammlung" / "Assemblée générale" / "Assemblea generale"), the board of directors ("Verwaltungsrat" / "Conseil d'administration" / "Consiglio d'amministrazione") and the auditor ("Revisionsstelle" / "Organe de revision" / "Ufficio di revisione").

  • The general assembly, which is made up of all shareholders, is the decision-making organ of the company and has a certain number of non-transferable powers. Namely the power to adopt and amend the articles of association, and to appoint the members of the board of directors and the auditor.
  • The board of directors, whose members (one or more) are elected by the general assembly, is the executive organ of the company. It is responsible for all matters which, according to law or the articles of association, are not the responsibility of the general assembly: in particular, the management of the company and its external representation. If so stipulated in the articles of association, the board of directors is authorised to delegate the management of the company to one or more of its members or to third parties (note that there are special organisational requirements in the insurance and banking sector). The members of the board of directors do not have to be shareholders or of a certain nationality. However, at least one representative of the company (who does not necessarily have to be a member of the board) must reside in Switzerland.
  • The auditor, which is appointed by the general assembly, is the controlling organ.

There is no audit obligation for very small companies (no more than 10 full-time employees), if all shareholders agree (opting out).

There is a limited audit (review) for small and mid sized companies, i.e. if two of the following three criteria are not exceeded in 2 consecutive financial years

-     total assets of CHF 20 million,

-     turnover of CHF 40 million,

-     250 full-time employees.

There is a requirement for an ordinary audit for economically important companies, i.e. if

-     two of the above criteria are exceeded in 2 consecutive years; or

-     the company is listed; or

-     the company is required to prepare consolidated financial statements.

b.2. General Meetings

There are three types of general meetings: ordinary general meetings, extraordinary general meetings and universal meetings.

  • An ordinary general meeting is held annually within six months after the end of the fiscal year and decides on all essential matters (namely adoption and amendment of the articles of association, appointment of the members of the board of directors and the auditing agency, approval of the annual report and the annual accounts, allocation of the profits as shown on the balance sheet).
  • An extraordinary general meeting can be held at any time. It is most common for urgent matters like financial reorganizations in case of loss of capital or takeover bids.
  • A universal meeting is a meeting where all the owners or representatives of all the shares in the company are present. Such a meeting may be held without observing the formal requirements for convening a general meeting. All matters falling within the scope of responsibility of the general meeting may me validly discussed and decided during such a meeting.
  1. Taxation of the Company’s Income:

Stock corporations are subject to corporate tax (see paragraph 3.1 below).

  1. Pros and Cons
  • Pros: Limited liability, legal entity, shares are generally easily tradable (contractual restrictions or restrictions in the articles of association may apply), anonymity of shareholders (shareholders are not disclosed in the commercial register), no limitation on share capital.
  • Cons: Relative high minimum share capital required, formal requirements for incorporation (official authenticated documents, commercial register, articles of association, etc.).

 

2.2. Limited Liability Company ("Gesellschaft mit beschränkter Haftung", abbreviated "GmbH", in German / "société à responsabilité limitée", abbreviated "S.à.r.l." or "SARL" in French / "società a garanzia limitata", abbreviated "Sagl", in Italian)

  1. General Requirements
  • Minimum share capital: CHF 20,000 (the share capital must be fully paid in)
  • Entry in the commercial register
  • Minimum number of shareholders: 1

(There are no ownership limitations or residence requirements for foreign investors. The shares may be owned by natural persons or legal entities. The shares of a limited liability may also be entirely foreign-owned. However, at least one representative of the company must reside in Switzerland.)

  • Liability of the shareholder: Limited to the shareholder's financial participation in the company (however, the articles of association can explicitly require the shareholder to make an additional payment of up to the double amount of the denomination of his share: e.g. if the statutory reserve is no longer covered)
  1. Corporate Governance / Management

The limited liability company blends the capital oriented structure of the stock corporation with the personal elements of a partnership. Among these personal elements are, for example, the option of adopting additional payment requirements for shareholders (see above), the obligation to disclose the identity of the shareholder in the commercial register, the shareholders' fiduciary duty, the option of adopting an obligation for shareholders to refrain from competing activities and, most importantly, the right of the shareholders to manage and represent the company.

The decision on certain essential matters and the appointment of other organs is the sole and non-transferable responsibility of the shareholders' meeting ("Gesellschafterversammlung" / "Assemblée des associés" / "Assemblea dei soci"), which is made up of all shareholders.

The management and representation of the company is the joint responsibility of all shareholders unless the articles of association contain a different provision. The management may be appointed to one or more of the shareholders or to a third party. In any event at least one representative of the company must reside in Switzerland.

There is no audit obligation for very small limited liability companies (no more than 10 full-time employees), if all shareholders agree (opting out).

There is a limited audit (review) for small and mid sized companies, i.e. if two of the following three criteria are not exceeded in 2 consecutive financial years

-     total assets of CHF 20 million,

-     turnover of CHF 40 million,

-     250 full-time employees.

There is a requirement for an ordinary audit for economically important companies, i.e. if

-     two of the above criteria are exceeded in 2 consecutive years; or

-     the company is listed; or

-     the company is required to prepare consolidated financial statements.

  1. Taxation of the company’s income :

Limited liability companies are subject to corporate tax (see chapter 3.1 below).

  1. Pros and cons
  • Pros: Attractive for small and medium sized companies, limited liability, legal entity, low minimum share capital required, can be converted into a stock corporation without liquidation, only one person required as founder
  • Cons: No anonymity of shareholders (shareholders are disclosed in the commercial register), potential responsibility to manage the company, formal requirements for incorporation (official authenticated documents, commercial register, articles of association, etc.).

2.3. Partnerships

In addition to the two corporations outlined in sections 2.1 and 2.2 above, foreign investors may also be interested in establishing partnerships. In contrast to the stock corporation and the limited liability company, partnerships are not legal entities, which means that – depending on the type of partnership – at least some or all members are personally liable for the partnership's liabilities.

Swiss private law distinguishes three types of partnership: The simple partnership ("einfache Gesellschaft" in German / "société simple" in French / "società semplice" in Italian), the general partnership ("Kollektivgesellschaft" in German / "société en nom collectif" in French / "società in nome collectivo" in Italian) and the limited partnership ("Kommanditgesellschaft" in German / "société en commandite" in French / "società in accomandita" in Italian).

  1. Simple Partnership ("einfache Gesellschaft" in German / "société simple" in French / "società semplice" in Italian)

A simple partnership is the basic partnership type. It is established when two or more (natural or legal) persons agree to join forces and means to attain a common purpose. Simple partnerships are usually established on a temporary basis, e.g. for construction projects. A written agreement is not required, which means that those involved may not even be aware that they have established a simple partnership.

In a simple partnership the partners are jointly and severally liable without limitation.

  1. General Partnership ("Kollektivgesellschaft" in German / "société en nom collectif" in French / "società in nome collectivo" in Italian)

A general partnership is an association of two or more natural persons which operates a commercial business under a common company name. The general partnership has to be entered in the commercial register but may begin its business operations before that date.

The general partnership's capital is primarily liable. In addition the partners are jointly and severally liable without limitation.

  1. Limited Partnership ("Kommanditgesellschaft" in German / "société en commandite" in French / "società in accomandita" in Italian)

A limited partnership is similar to that of a general partnership. Like the general partnership it is an association of two or more persons which operates a commercial business under a common company name and has to be registered in the commercial register. In contrast to the general partnership, however, the limited partnership has two types of partners: General partners and limited partners, of which there has to be at least one each. A general partner (which needs to be a natural person) is jointly and severally liable. A limited partner (which can be a natural or a legal person) is liable only up to the amount of his contribution, which has to be entered in the commercial register.

  1. Taxation of Partnerships

The above mentioned partnerships are generally treated as tax transparent entities in Switzerland. Therefore, their income (and net equity) within Switzerland is proportionally taxed at the partners’ level. This means that each partner pays his share of personal income and net wealth tax in case of individual ownership or its share of corporate income and net equity tax in case of corporate ownership.

As an exception to the rule and in order to simplify matters, foreign partnerships that merely have a permanent establishment in Switzerland, are taxed directly at branch level and are always subject to corporate tax, even if they are owned by individuals.

  1. Relevant tax aspects linked to corporate law
  1. Corporate tax
  1. General

Swiss corporations incorporated or effectively managed and controlled in Switzerland are subject to Swiss corporate tax on their worldwide income and net equity. However, income and net equity attributable to a foreign permanent establishment or to foreign real estate are exempt in Switzerland.

Swiss taxes are levied at the federal and the cantonal/communal level. Whereas the federal income tax rate with 7.8 % is the same in all 26 cantons (states), the cantonal/communal tax rates vary considerably between 5 to 17 % (effective rates, before tax deductions). Therefore, the combined income tax rates for ordinary taxed corporations vary between 13 and 25 %, depending in which canton the corporation conducts its business.

Tax losses can be carried forward for 7 years. They may not be carried back, however.

Only the cantons/communities, but not the Federation, levy an additional net equity tax at moderate rates between 0.001 and 0.5 %. In some cantons, the net equity tax can be credited against the income tax (and therefore is zero in case of high profits).

  1. Dividends and capital gains

Dividends received by a corporation on qualified participations are mostly excluded from taxation under the so called participation exemption. This exemption applies if the participation amounts to at least 10 % of the share capital in the subsidiary, or has a fair market value of at least CHF 1 million. Also, capital gains on such qualified participations are mostly exempt if they were held for a minimum period of 1 year.

Dividends received by a Swiss resident individual on qualified participations are taxed only half in most cantons/communities and only at a portion of 60 % for federal tax purposes. Capital gains on privately held shares are totally exempt from Swiss individual tax (however, some tax traps apply).

Outgoing dividends (but generally not interest or royalty payments) are subject to a 35 % withholding tax. This withholding tax can be reduced to zero for dividends paid to EU corporations that own at least 25 % of the shares for a minimum period of 2 years under the so called EU directive on interest taxation. Furthermore, the tax treaties concluded by Switzerland (at the moment more than 80) reduce the withholding tax for qualified corporate shareholdings to zero or 5 % or for unqualified corporate or any individual shareholdings to 15 %.

  1. Tax Holidays

The Federation and/or the cantons/communities may partly or totally exempt corporations from taxes for up to 10 years if they are newly established or if they restructure their business in such a way that it can be compared to the incorporation of a new business (e.g. creation of new jobs mainly in underdevelopped regions).

  1. Holding Companies

Holding companies do not pay any corporate income tax on the cantonal/communal level if they do not perform an active business and if they either have at least 2/3 of their assets invested in participations or if they receive at least 2/3 of their income out of participations. Therefore, they only pay federal income tax of 7.8 % on interest income, royalties, management fees etc., whereas dividend income is mostly exempt also from federal tax under the participation exemption. A very small cantonal/communal net equity tax can be neglected.

  1. Domiciliary and Mixed Companies

Domiciliary and Mixed Companies are taxed at very low rates for income derived from activities abroad, such as purchases and sales in other countries, financing, management of intellectual property etc. Income derived from Swiss sources is taxed at ordinary rates. The combined federal and cantonal/communal tax rate, depending on the proportion of foreign source income, usually amounts to 8 to 15 %. A very small cantonal/communal net equity tax can be neglected.

  1. Transfer taxes on the sale of shares

If a so called securities dealer is involved (mainly banks and companies holding securities with a book value of more than CHF 10 million), a transfer tax (stamp duty) is due on each sale or exchange of securities (especially shares). The tax amounts to:

  • 15 % on securities issued by a Swiss party
  • 30% on securities issued by a foreign party.

Lexpartners.MCS



Corporate Law in Turkey

IKMS Law Firm



Corporate Law in the United Kingdom

  1. Compliance with regulations concerning foreign investments in the UK

General:

Setting up business in the UK is relatively straightforward. There are a wide variety of business vehicles which are open to a foreign investor. Companies can be set up within 24 hours and business can start trading almost immediately.

In contrast to numerous other countries the UK Unlike other countries, there are no restrictions on the number of foreign directors or shareholders.

There are no requirements for foreign investors to file returns in relation to the acquisition of any of the equity or voting rights in a UK company. No additional authorisations are required from foreign investors who wish to acquire controlling interests in certain business sectors such as the military sector.

  1. Procedures and formalities

Competent authority:

All the legal and administrative formalities for setting up a new company are dealt with by Companies House. Tax formalities, such as corporation tax and registering for value added tax (“VAT”) are dealt with by HM Revenue and Customs (“HMRC”). Please note that there are slightly different regimes for England and Wales, Scotland and Northern Ireland.

Timeframe:

The company will officially come into existence when it has been duly registered with Companies House. It is possible to incorporate a Company on the same day by electronic registration. Upon incorporation of the Company, a Certificate of Incorporation will be issued (the date of the certificate being the date when the company comes into existence). The approved memorandum of association (“Memorandum”) and articles of association (“Articles”) of the Company need to be filed as part of the incorporation process. The Articles can either be drafted in a bespoke manner to reflect the particular circumstances and aims of the company and its shareholders, or standard Model Articles can be used to save time and money. New or revised Articles can be adopted by shareholders resolution at any time in the future.

Legal expenses and Statutory Books:

A law firm in the UK will generally charge less than £500 (+ VAT, if applicable) to incorporate a new private limited company (where Model Articles are adopted). Bespoke Articles will generally add significant additional costs.

A company is required to maintain a set of statutory books - which principally comprise of the following Registers:

  • Register of Applications and Allotments (of shares)
  • Register of Transfers (of shares)
  • Register of Directors
  • Register of Secretaries
  • Register of Members
  • Register of Debentures
  • Register of Mortgages and Charges.

The cost of a set of statutory books is approximately £50.

Required documents to be registered:

Whatever the form of the company, the following documents have to be prepared in English and registered with Companies House:

  • The application form to register a Company. This includes a section on the intended directors and shareholders of the Company, whether the Company requires a secretary, the registered office of the Company and a section on the initial shareholdings in the Company; and
  • The Memorandum and Articles of the Company.

Certain documents have to be filed during the Company’s lifetime including the following:

  • Annual Returns (at a cost of £15). This form is a snapshot of general information about the company, its officers, shareholders, capital and registered office.
  • The appointment of further directors.
  • The appointment of a company secretary (although it is no longer necessary to appoint a secretary for a private limited company).
  • Terminating the appointment of a director .
  • Terminating the appointment of a company secretary .
  • Allotment of new shares or changes in share capital.

Companies are also required to file statutory financial statements at Companies House at the end of each financial accounting period (generally a period of 12 months) which must conform to applicable accounting standards (UK GAAP or IFRS). These financial statements will be available for public inspection.

In addition, companies are also required to file returns in relation to Corporation Tax (annually) and where applicable, VAT (monthly, quarterly, or annually) with HMRC during the life of the company.

The preparation of the Articles is important as it may have very speficic legal and tax consequences. Therefore professional legal and accounting advice should be sought. England and Wales have a different legal system to Scotland and Northern Ireland and it is therefore important to seek legal advice from a lawyer who is qualified to advise on the relevant laws.

  • Business structures

The most effective business structure will depend on the kind of business, the investor’s strategy and any tax considerations. A foreign company may choose between trading directly from its home country, establishing a branch office or setting up a UK company to conduct its business in the UK.

Branch

The parent company accounts and the branch accounts have to be filed annually with Companies House. A UK branch can take advantage of the lower corporation tax rates if the parent company’s results are below certain thresholds. It must be noted that the parent company accounts will become publicly available (regardless of whether they are public in the home jurisdiction).

It is possible to establish a representative office if a branch cannot be registered. A representative office has to be registered with Companies House but it is not necessary to file company’s accounts. Representative offices are set up for the following reasons:

  • The parent is not a limited company; or
  • the activities in Great Britain are not sufficient to establish a branch, e.g. internal computer processing or warehousing, marketing or other non-trading activities..

Representative offices are less common than either a branch or setting up a subsidiary. A representative office would not be taxable within the UK and therefore HMRC scrutinises them very closely.

Subsidiary – Creation of a UK Trading Entity

The principal choices of corporate vehicle are:

  • Private Limited Company (“Limited” or “Ltd”).
  • Public Limited Company (“PLC” or “Plc” or “plc”).
  • Limited Liability Partnership (“LLP”).
  • Sole Trader.

A private limited company is the best known corporate vehicle and is often used even if another vehicle might be a better choice. Private limited companies can be either limited by shares or, especially if used by associations or charities, by guarantee.

Private Limited Company

  1. General requirements
  • Minimum share capital: £0.01 (1 pence).
  • Minimum number of shareholders: 1 (with no maximum limit).
  • Liability of the shareholders: limited to shareholder’s participation in the company (eg. the nominal value of the shares held, or guarantee given).
  1. Corporate governance / management
  • A limited company is managed by a board of directors who are either individuals or companies (there is a minimum requirement to have one (1) director and there is no restriction on the maximum number of directors).
  • The board of directors appoints a Chairman in respect of board meetings, but this can often be a nominal position. The Chairman may have a casting vote in meetings and decisions made.
  • The company must keep and maintain a set of statutory books (as referred to above).
  1. Meetings

There are two types of company meetings:

  • At board meetings the directors make decisions regarding the running of the Company; and
  • At the general meeting the shareholders pass resolutions as required by law or the Articles.

There are different types of resolution:

  • Ordinary Resolution – This is passed if the holders of at least 50% of the issued shares in the company present at the general meeting (or represented by proxy) are in favour of it.
  • Special Resolution – A special resolution requires the
  • approval of the holders of at least 75% of the issued shares in the company for it to be passed.

It is worth noting that a Limited Company can pass almost all resolutions as written resolutions, e.g. a resolution that has been circulated, either on paper or electronically, to its members without the need for a meeting. The exceptions to this are:

  • a resolution to remove a director; and
  • a resolution to remove an auditor,
  1. Taxation of the company’s income:

The Company is taxed under the Corporation Tax system (a tax on the profits of the Company). The Company’s income (both trading and capital) is subject to corporation tax in the UK on its worldwide income.

  1. Pros and cons
  • Pros: Widely recognised and respected structure; efficient in respect of tax issues; quick and inexpensive to set up; provides limited liability for the directors and for shareholders.
  • Cons: annual accounts and details of directors and shareholders are publicly known.

Public Limited Company

  1. General requirements
  • Minimum share capital: £50,000
  • Minimum number of shareholders: 1 (with no maximum limit).
  • Minimum number of directors: 2 – at least one of these must be an individual (as opposed to a corporate entity)
  • Liability of the shareholders: limited to shareholder’s participation in the company (principally nominal value of shares held)
  • Secretary: a Company Secretary must be appointed (there are also specific requirements as to who can become a Company Secretary)
  1. Corporate governance / management
  • Before a public limited company can start operating its business it must obtain a certificate from Companies House confirming compliance with the various regulations regarding share capital.
  • A public limited company is managed in a very similar manner to a private limited company. The only exceptions to this are:
  1. Public limited companies have to hold an Annual General Meeting (“AGM”) within 6 months of the end of their annual financial accounting period in addition to any other meetings held during that period.
  1. Public limited companies can only pass a resolution by taking a vote at a meeting of the members (which may be the AGM). Written resolution cannot be used.
  1. A public limited company must give a minimum of 21 days prior notice of its AGM (unless the company’s Articles specify a longer period of notice).
  1. Taxation of the company’s income:

Public limited companies are subject to corporation tax.

  1. Pros and cons
  • Pros: Limited liability for shareholders; greater borrowing power as shareholders have provided more risk capita; can be tax efficient in structure as a subsidiary of a corporate entity; the addition of PLC to the company name gives the company a sense of stature.
  • Cons: Requirement to hold an AGM within 6 months of the financial year end; more onerous reporting requirements; requirement of £50,000 share capital.

Limited Liability Partnership ("LLP”)

  1. General requirements
  • Minimum number of partners: 2 – there is no maximum. If the membership of an LLP does fall below two (for example, due to the death of a member), an application may be lodged for the LLP to be wound up or the Registrar may consider whether the LLP should be struck off if it is no longer operating. Until either of these events occurs, the LLP may continue to trade but if it does so for more than six months, it will lose its limited liability status and the sole member will be jointly and severally liable with the LLP for debts incurred outside the six-month period;
  • An LLP is a separate legal entity to its members;
  • The liability of the members is generally limited to the member’s participation in the company unless membership falls to just one;
  • Designated Members: Members can be designated either on incorporation or in accordance with an LLP agreement. They have particular responsibilities and functions within the LLP. If there is no more than one designated member, then every member is deemed to be a designated member.
  • The duties of a Designated Member reflect those that would normally be carried out by a director or secretary of a company and include:
  • Appointing an auditor (where appropriate).
  • Signing the accounts and delivering them to Companies House.
  • Preparing, signing and delivering the Annual Return to Companies House.
  • Notifying Companies House of any changes to the LLP's membership, name or registered office address.
  • Acting on the LLP's behalf if it is wound up and dissolved.
  1. Corporate governance / management
  • LLP’s are required to provide information similar to that required of companies. Examples of the documents that the LLP must file include:
  1. An annual return.
  2. Annual accounts.
  3. Notification of changes to the LLP's membership.
  4. Notification of changes to designated members' and members' names and residential addresses or changes to any other details registered on Form LL IN01 or LLP2 (in relation to LLP’s incorporated before 1 October 2009).
  5. Notification of changes to the registered office address.
  6. Notification of changes to a member's status (from member to designated member or vice versa).
  7. Details of any mortgage or charge created by the LLP
  8. Notice where LLP records are kept for inspection at an address other than the registered office
  • General principles
  • Generally the rights and duties of the members as between themselves and as between the members and the LLP are governed by an express agreement. Any such LLP agreement is a private document which is confidential to the members. As with an ordinary partnership, the members of an LLP are not legally obliged to enter into any formal LLP agreement but there are clear advantages in signing an LLP agreement. In absence of a specific agreement, the following default provisions will apply:
  • Equal shares. All the members of an LLP are entitled to share equally in the capital and profits of the LLP.
  • Indemnity for payments and personal liabilities. The LLP must indemnify each member for payments made by it and personal liabilities incurred by him either in the ordinary and proper conduct of the business of the LLP or in or about anything necessarily done for the preservation of the business or property of the LLP.
  • Involvement in management. Every member of the LLP may take part in the management of the LLP.
  • No remuneration. No member is entitled to remuneration for acting in the business or management of the LLP.
  • Consent of members required for new members and assignments. No person may be introduced as a member or may voluntarily assign an interest in an LLP without the consent of all existing members.
  • Decision-making. Any difference arising on ordinary matters connected with the LLP's business may be decided by a majority of the members. Any proposed change to the nature of the business of the LLP requires the consent of all members.
  • Access to books and records. The LLP's books and records must be made available for inspection at the registered office of the LLP or at such other place as the members of the LLP think fit. Every member of the LLP may when he thinks fit have access to the books and records to inspect and copy them.
  • Duty to give true accounts and full information. Each member of the LLP must give true accounts and full information of all things affecting the LLP to any other member or his legal representatives.
  • Duty to account for profits from competing business. If a member carries on any business that is of the same nature as and competes with the business of the LLP, and this is done without the consent of the LLP, that member must account for and pay over to the LLP all profits made by him in that other business.
  • Duty to account for benefits derived from transactions concerning the LLP and its business or property. A member must account to the LLP for any benefit derived by him without the consent of the LLP from:
  • Any transaction concerning the LLP.
  • Any use of the property of the LLP.
  • Any use of the name of the LLP.
  • Any use of a business connection of the LLP.
  • A member cannot be expelled from the LLP by a majority of the members unless a power to do so has been conferred by express agreement between the members.

It is unlikely that the default provisions will be appropriate for most LLP’s, therefore it is usual to have a bespoke LLP agreement that displaces or elaborates on these default provisions.

  1. Taxation of the LLP’s income

Where an LLP carries on a "trade profession or other business" with "a view to profit", all the activities of the LLP are generally treated as being carried on in partnership by its members and not by the LLP as a separate entity.   As a result the members are taxable on the income personally and the LLP is not regarded as a taxable entity.

  1. Pros and Cons
  • Pros: separate legal entity, tax efficient; limited liability for its members; has the organisational flexibility of a partnership, any members agreement (LLP agreement) is a private document which is confidential to the members.
  • Cons: Requirements to file information publicly, accounting and filing requirements broadly similar the same as those of a company, a minimum of two people are required to set up and manage the LLP (the designated members).

Sole Trader

  • A sole trader is the simplest form of business in the UK. The owner has to apply to HMRC to be recognised as a sole trader. The business does not have a separate legal identity. It is possible to trade under any name (subject to intellectual property rights and competition law) simply by using a “trading as” style.
  • Pros and cons:
  • Pros: can be tax efficient for small businesses; simple to set-up; no requirement to file any information publicly (although you are still required to provide information to HMRC for your personal tax returns); there are few annual requirements – only one annual tax return to submit.
  • Cons: Unlimited personal liability for the debts and actions of the business; does not possess the same credibility as a limited company; usually seen as one person acting alone.

4.5.       Partnership

  • A Partnership is similar to a Sole Trader, but the business is carried on by more than one person.
  • Pros and cons:
  • Pros: Same as for Sole Trader with the exception that the Partnership will be required to submit one annual partnership return in addition to the personal tax returns for each partner.
  • Cons: Same as for Sole Trader except: Partners have unlimited personal liability and are jointly and severally liable for the debts and actions of the business; there is no separation between ownership and management.

Relevant tax aspects linked to corporate law

Corporation Tax

A company pays corporation tax on the profits of its business. The term "profits" includes all sources of income as for income tax (other than dividends from UK companies) and chargeable gains. Companies resident in the UK are charged to corporation tax on the whole of their worldwide profits (subject to double tax relief for foreign taxes). Companies that are not resident in the UK but that have UK source profits are charged to corporation tax on their UK source profits only if the company both:

  • Trades through a branch or permanent establishment in the UK.
  • Derives its UK source profits through that branch or permanent establishment.

Where a company is resident, or has a permanent establishment, in a country with which the UK has a double taxation treaty, the impact of that treaty must be considered. The current corporation tax rates can be found on www.hmrc.gov.uk

Value Added Tax (“VAT”)

Businesses based in the UK have to register for VAT if their sales or “taxable supplies” exceed a certain threshold – the current threshold is £73,000 of invoiced sales per year. Not all sales are taxable supplies in the UK and differences do exist between countries.

The standard VAT rate is currently 20% as from 4 January 2011.

Once a business is registered for VAT, any VAT suffered on the purchase of goods or services from its suppliers is recoverable from the tax authorities (HMRC) where this relates to taxable supplies. Businesses may opt (depending on the circumstances) to make a VAT return on a monthly, quarterly or yearly schedule, although quarterly is by far the most common.

You can voluntarily register for VAT even if your taxable supplies are below the threshold which enables you to reclaim input VAT. If you are operating as a Sole Trader or Partnership being VAT registered may give your business more credibility.

Capital Law LLP

Linder Myers LLP



Corporate Law in the United States of America

1. Compliance with regulations concerning foreign operations in the United States

Overview:

The United States is generally described as an easy going and friendly country for foreign investment and operations by foreign entities. While this is essentially the case, there are a wide range of statutes and regulations that one may face when trying to begin operations in the United States. Fundamentally, the United States is a country wherein its individual states independently regulate those entities which operate within their boundaries; and overlays federal law to the extent interstate commerce or governmental interests (e.g., anti-trust issues, offering of securities) may be concerned. This chapter will provide a brief overview with the purpose of providing a basic awareness of certain key legal concerns that should be considered when investing or seeking to do business in the United States; however, it does not describe every applicable law and regulation.   Moreover, it is not intended to be a discussion of all tax or securities transfer aspects of doing business in the United States as these are quite intricate and left for a more detailed review based on particular structure, location and needs of a foreign entity. When planning a specific U.S. investment or business transaction, the foreign entity should consult experienced U.S. legal counsel familiar with federal law as well as the operating laws of all of the separate applicable states within the U.S., and tax advisor well versed in international transactions.

  1. Timing, Costs and Formalities

Timeframe:

A foreign entity may do business in the U.S. without any delay if operating on its own – no entry applications or formalities are required. If a new entity is to be created, it will officially come into existence when it has been duly registered within the state where the investor or operator chooses to file its formation documents. Generally, the required time to file is approximately 10 days, plus additional time to prepare all documents abroad and in the U.S. However, all filings may be generally expedited and accomplished within twenty four hours for modest additional fees.

Legal expenses:

The expenses for setting up a new entity generally consist of the following:

  • Corporations: approximately US$1,200 (including legal fees)
  • Limited liability companies: approximately US$1,200 (including legal fees), plus approximately US$1,800-$2,000 for publication in those states that require it (not all do).
  • Joint ventures (which are really general partnerships unless otherwise structured) are not formal entities necessarily, and only the cost of the agreement with the local co-venturer would be incurred.

These costs may increase substantially, however, if unusual provisions in charter documents or agreements with third parties are required. These costs do not include those for having counsel prepare the governing agreements among the members.

Documents to be registered and other procedures:

Whatever the form of the entity that the investor or operator chooses, the following documents must be prepared and filed with the appropriate state government authority (usually the Secretary of State):

  • Foreign corporation forming a branch office (i.e., itself operating) in the U.S.:
    • Application for Authority to do business (necessary to enable suing in the local courts but not an immediate condition to doing business).
    • Copy of original certificate of good standing or its equivalent of foreign company in the state/country of formation.
  • For a new corporation:
    • Certificate or Articles of Incorporation
    • This document is sometimes referred to as a Charter or some similar name (listing the name of the corporation, the address of the business, the name and address of the corporation’s agent - some states require the names and address of the directors of the corporation and the number of shares of stock that the corporation will have to sell to its shareholders). It can contain specific enabling or restrictive conditions which cannot be changed other than by a formal amendment to the document.
    • A filing fee which varies among different states ranging from US$50 to several hundred dollars.
    • Once the corporation is formed, certain documents should be prepared, including by-laws (which establish the procedures by which shareholders elect directors and directors appoint officers and the general operation of the corporation); initial corporate resolutions adopting the by-laws, electing the initial board of directors of the corporation and appointing the initial officers of the corporation; a shareholders’ agreement (if more than one shareholder) which sets forth the rules and regulations governing the shareholders and their ability to transfer shares and management issues; and minutes effectively establishing the initial operatives and operating conditions and approval of any borrowings or incurrence of debt. Note that profits and losses are distributed strictly proportionately to share ownership.
    • Share certificates evidencing the shares of ownership of each equity owner.
    • Obtain a federal tax ID number from the Internal Revenue Service (online, on the phone or by fax).
    • Open bank account.
  • For a Limited Liability Company (LLC):
    • Articles of Organization or Certificate of Formation.
    • In some states, one must publish a notice that it has formed an LLC – usually in two publications, once per week for six weeks, which can will entail publishing fees up to US$2,000.
    • Once the LLC is formed, the LLC members (the equivalent of corporate shareholders) must enter into an operating agreement setting forth the allocations of equity and profits and losses, which need not be proportionate to rights of the members, and the rules for running the company even if the LLC only has one member. (This document is a combination or equivalent of the corporate by-laws and a shareholders’ agreement (if there are multiple members)).
    • The LLC may be run either by its members, Managers or a Board who then need to be elected by the members.
    • Obtain a federal tax ID number from the Internal Revenue Service (online, on the phone or by fax).
    • Open bank account
  • Different Business Options

Foreign companies may choose between merely establishing a branch office or forming a subsidiary or affiliated entity to conduct business in the United States. The business structure will depend on the type of business conducted in the U.S., the investor’s strategy and the degree of independence that the U.S. operations are to have from the parent company. Tax considerations will be critical, but not discussed here.

Branch Office

Some companies choose to commence U.S. based operations by simply opening a U.S. branch. U.S. branches are easy to establish and administer as they are simply an extension of the non-U.S. company’s structure and principal place of business. To formalize a U.S. branch, a non-U.S. company registers as a foreign corporation in the state(s) where the business will be conducted. The essential reason for qualification is to enable the entity to take advantage of the local courts and administrative processes.

A significant disadvantage of establishing a U.S. branch is that the foreign parent company becomes subject to all of the operative laws in the United States and the state where it is registered. This can result in exposing all of its assets to the liabilities of the U.S. operation, including the possibility of a full audit by the U.S. Internal Revenue Service or a state tax authority of all of the foreign entity’s operations. In addition, this exposes the corporation to being sued in the U.S. Federal Courts and State Courts where the corporation is registered.

Subsidiary or Affiliate – Creation of a U.S. company

A foreign investor or operator can form a U.S. entity that is either owned entirely by the non-U.S. company (a subsidiary) or under common ownership with another entity (an affiliate). Business in the United States is conducted using a variety of entity forms, such as corporations, general partnerships, limited partnerships and limited liability companies, which can be wholly owned or owned by multiple parties. U.S. affiliated entities can of course be partially owned by U.S. persons or entities as well, in some embodiment of a joint venture, but this is not required. The most utilized forms of entities are the limited liability company and the corporation.

Limited liability Company (“LLC”)

  1. General requirements

Formation: must file with a state; a state specific filing fee is required.

An LLC offers limited liability protection whereby the owners are fundamentally not personally responsible for the debts and liabilities of the business.

An LLC can have an unlimited number of members (owners), subject to applicable securities laws. Ownership interests are reflected in the Operating Agreement and may or may not be evidenced by ownership certificates.

Non-US residents can be members of an LLC.

Corporations or other entities can be members of an LLC.

An LLC is allowed to have subsidiaries.

The term of an LLC can be perpetual, unless a state requires a fixed amount of time.

The ownership (membership interest) and profits and losses can be divided into numerous classes or allocated in any manner as provided in the Operating Agreement.

Capital raising: may sell membership interests, but subject to terms of the Operating Agreement and federal and state securities law will apply.

  1. Management

Members can set up structure as they choose.

In a small LLC, the members can manage the affairs of the company, while in a larger LLC the members would generally designate one or more Managers or a Board of Directors to manage the company, as it would not make sense to give every investor/member the right to bind the company nor to seek approval of all members for day to day operational decisions.

The role and scope of authority of the manager(s) is determined by the Operating Agreement and permitted actions of the managers may be authorized by a resolution of the members.

The Operating Agreement may allow the managers to also appoint officers of the LLC.

General meetings: State laws require an annual meeting of members of an LLC. Some states may require more than others.

Distribution requirements for profits and losses are regulated by the Operating Agreement and may be disproportionate to equity ownership.

  1. Taxation of the company’s income:

An LLC is a completely pass-through entity whereby the income or loss generated by the business is reflected on the income tax returns of the members; however it may elect to be treated as a tax payer (non-pass through), thus retaining its income and being taxed at the US Federal and State levels. Note that in such case, distributions are treated as non-deductible dividends to the entity, and may again be taxed to the members.

Tax Form: LLCs may elect to be treated as follows:

Single member: to be treated as a disregarded entity, and its activity will be reported on the single member’s tax forms, i.e., no tax returns are required.

Partnership: IRS Form 1065, Members get K-1.

Corporation: IRS form 1120.

  1. Pros and cons

Pros :

  • An LLC has the highest tax efficiency and most flexibility for a business. An LLC can be a “pass-through” entity for federal and most state income tax purposes and pays no tax at the entity level. Any income or loss generated by an LLC passes through to the members of the LLC.
  • Except in case instances, no member of an LLC has personal liability for any debts or obligations of the LLC.
  • An LLC’s capital structure is flexible and allows profits, losses and distributions to be shared on any basis determined through contract (the operating agreement).
  • Foreign entities and foreign shareholders, including corporations, may form this type of entity and take advantage of the tax pass through.

Cons :

  • The LLC is a recent entity structure in most U.S. States and thus clients, third party vendors and governmental authorities, and most importantly the local courts, are less familiar with this vehicle than corporations.
  • The law governing LLCs is less developed than for corporations and partnerships.
  • LLCs may have to be published (depending on the state of formation) and therefore a client will incur about US$1,800-$2,000 more for publication in newspapers.

“C” Corporation (a corporation without an “S” election in effect)

  1. General requirements

Formation: must file with state; a state specific filing fee is required.

Non-US residents can be owners of a C Corporation.

The C Corporation can have an unlimited number of shareholders; however, if the number exceeds 500 the entity will be considered a public entity subject to public entity reporting requirements. Other reporting requirements may apply when even a lower number of shareholders exist.

C Corporations can be owned by other C Corporations, S Corporations, many trusts, LLCs, or partnerships.

A C Corporation offers limited liability protection to its owners as they are fundamentally not personally responsible for the debts and liabilities of the business.

The ownership (stock) can be divided into various classes with different rights to voting, dividends and other preferences.

The stock of a C Corporation is freely transferable (subject to securities laws and shareholder agreement).

There is no minimum capital requirement, except that a debt to equity ratio is monitored by the tax authorities and must fit within guidelines.

The term of a C Corporation is perpetual unless provided otherwise in the Charter.

Capital raising: shares of stock are sold to raise capital (Federal and State securities laws apply, with those lose of every state into which shares are offered being applicable).

  1. Corporate governance / management

The management of a corporation is divided into three levels: the equity owners are the shareholders or stockholders who make the most fundamental and structural decisions; one or more directors, who are elected by the shareholders to represent their interests and direct the planning and policies of the corporation at the strategic level; and the officers, who are elected by the Board of Directors to run the corporation on a day to day basis.

The directors are responsible to the shareholders under the doctrines of duty of care and duty of loyalty, meaning they are expected to use their best business judgment, to actually supervise company management and the condition of the corporation and should not abuse their position of trust to do business with the corporation. Courts generally apply a low threshold as to what constitutes “best business judgment”. Directors do not have to be shareholders or even employees of corporations, and often some component of a Board of Directors must consist of “outside” or independent directors.

Every substantive act and policy of the corporation is to be approved by the Board of Directors and carried out by the officers.

General meetings: A corporation requires formalities, annual meetings of shareholders and directors are required each year and meeting minutes are required to be kept with the corporation’s records.

Ownership interests virtually always (though not statutorily required to be) evidenced by share certificates.

  1. Taxation of the company’s income:

The C Corporation is a separately taxable entity. The profits and losses are taxed directly to the corporation and do not pass through to the owners, and thus the corporation must pay Federal, State and local income taxes – often paying tax in multiple states where it does business. This can lead to double taxation on dividends that are paid out of corporate profits to the owners and are not deductible against the corporation’s income, but this is potentially useful if the taxes in the investor’s home country are higher and the investor intends to leave the funds in the US either for reinvestment or for other purposes. A corporation may elect to be taxed on a pass-through basis, as an “S Corporation,” if strict requirements are met. These requirements are discussed below.

Tax form: IRS Form 1120

  1. Pros and cons

Pros:

  • No shareholder has personal liability for any debts or obligations of a C Corporation, except that the ten largest shareholders of a corporation formed in certain states may be personally liable for certain tax obligations and for compensation and benefits to the corporation’s employees in the event the corporation does not meet these obligations [e.g., New York].
  • There are extensive state regulations/statutes governing most aspects of corporate activities.
  • A C Corporation’s capital structure is less complex. There is no minimum capital requirement, except that a certain debt to equity ratio is needed to avoid negative tax treatment. In general, dividend and liquidating distributions are governed by share percentages and there is no need to maintain capital accounts or revalue a C Corporation’s assets as a result of changes in the corporation’s capital structure or other events.
  • The statutory and case law governing corporations is well-developed. Therefore, more clients understand and embrace this entity.
  • It is possible to take a C Corporation public thereby creating a public market for the shares, subject to all applicable Federal and State securities laws.

Cons:

  • It is the most inefficient tax vehicle for a business, i.e., a C Corporation pays one level of tax on its income and its shareholders pay a second, additional level of tax when the C Corporation distributes the income in the form of a dividend or liquidating distribution.
  • Dividends are not deductible to the corporation.
  • It lacks flexibility in terms of distributions of profits.
  • Operational net losses do not pass through to owners and may only be offset against future profits.

“S” Corporation (a corporation with an “S” election in effect) – Discussed here but not really a viable option for foreign investors.

  1. General requirements

Formation: must file with state; a state specific filing fee is required.

Ownership of an S Corporation is severely restricted.

An S Corporation may not have non-US residents as shareholders.

A subchapter S Corporation is restricted to no more than 100 shareholders.

S Corporations cannot be owned by C Corporations, other S Corporations, many trusts, LLCs, or partnerships.

S Corporation must make a timely election of S Corporation status.

S Corporation offers limited liability protection as the owners are not, with minor exceptions, personally responsible for the debts and liabilities of the business.

The stock of an S Corporation is freely transferable (subject to securities laws and any shareholders agreement).

An S Corporation may have advantages with self-employment taxes.

An S Corporation may only have one class of stock; although it may have voting and nonvoting shares provided there are no economic differences between the shares.

The term of an S Corporation is perpetual, unless provided otherwise in the Charter.

Capital raising: shares of stock are sold to raise capital (subject to securities laws and limitations on ownership of the shares).

  1. Corporate governance / management

Same as C Corporate governance and management

  1. Taxation of the company’s income :

The S Corporation is a pass-through tax entity, like an LLC (except for taxes on the local levels). The income or loss generated by the business is reflected on the income tax return of the owners.

Tax Form: IRS Form 1120S; Shareholders get K-1 for personal tax returns.

  1. Pros and cons
  • Pros:
  • S Corporation has the same pros and cons as a C Corporation.
  • An S Corporation is a more efficient tax vehicle than a C Corporation.
  • An S Corporation is a “pass-through” entity for federal income tax purposes and pays no federal income tax.
  • Any income or loss passes through to the S Corporation’s shareholders.
  • Cons:
  • An S Corporation must comply with capital structure requirements, including its stock having the same distribution rights, not having more than 100 shareholders, all shareholders must either be US resident individuals or certain US resident trusts.
  • There cannot be two classes of stock with different economic conditions, but voting and nonvoting shares are permitted.

Other types of entities are also available in the United States:

Sole proprietorship

Business is owned by a sole proprietor, a single individual.

Management: by sole proprietor.

The Sole Proprietorship is terminated in the event the sole proprietor dies or withdraws.

Minimal paperwork is required – must use personal tax number.

The sole proprietor raises capital but may be subject to securities laws.

The income taxes are paid by sole proprietor.

Sole proprietor can deduct expenses against active business income.

Pros and cons:

  • Pros: Best for sole owner who wants no red tape and is okay with personal liability.
  • Cons: The sole proprietor is held personally liability for all business obligations and all personal assets are exposed.

General Partnership

Business is owned by two or more partners. Partners may be individuals, entities or any combination.

Partnership agreement dictates management and distributions of profits and losses, needs for additional capital, and transferability of partnership interest.

Management decisions are made by the partners.

The partnership terminates automatically if any owner dies or departs, unless partnership agreement states otherwise.

Taxation of the company’s income: Income tax is paid by partners individually unless they elect corporate tax status.

Pros and cons :

  • Pros:
    • Provides structure and format for multiple individuals to act as an entity.
    • Active partners can deduct from active business income.
    • Allows ownership of assets, bank account and other entity functions to reflect business operations.
  • Cons:
    • All partners have joint and several personal liability for business obligations.
    • One partner can bind the business and therefore the individuals.
    • Different laws of states govern.
    • No flexibility as to income and loss allocation.
    • The partnership terminates automatically on death or withdrawal of any partner unless partnership agreement provides otherwise.

Limited Partnership

Business is owned by partners. Partners may be individuals, entities or any combination.

The minimum number of owners required is 1 general partner (which may be a corporation or other entity) and 1 limited partner.

Only the general partners may participate in management.

The Limited Partnership terminates upon death or departure of any partner, unless partnership agreement states otherwise, and upon the failure of someone to serve as the general partner.

Taxation of the company’s income: income tax is paid by the partners unless they elect corporate tax status.

Pros and cons :

Pros :

  • Can have multiple owners with passive owners (imited partners) having limited liability and pass through tax status without forming an LLC.
  • Only general partner is personally liable – if a corporation, then owners of the general partner are also protected personally from creditors of the partnership
  • Cons :
    • The general partner or partners are personally liable for business obligations.
    • The limited partners can have no say in management.
    • The structure is more complex to administer than an LLC.

 

Some tax aspects linked to corporate law

  • Companies are subject to Federal, State and local taxes.
  • Every state in which company does business has its own tax rules and there may be taxes in multiple states, requiring filing multiple tax returns, etc.
  • Some states have personal property taxes imposing tax on inventory left in the state.
  • Branch taxes applied to foreign entities maintaining branch office, which can impact worldwide income.

Formal requirements

Initial:

  • Hold organizational meeting to elect directors and appoint officers, adopt by-laws, approve bank accounts, etc.
  • Create by-laws.
  • Establish banking relationships for deposit, payroll and loan account.
  • Issue shares of stock.
  • Fix a fiscal year.
  • Obtain a corporation seal (for corporations), only required in some states.
  • Contact county and local agencies regarding area business requirements and restrictions.
  • Get tax number.
  • Establish office – lease, services, systems, etc.

On-going:

  • Hold shareholders’ and board of directors’ meetings on a regular basis
  • File tax returns
  • File payroll tax returns
  • File state annual report(s), if required (e.g., Delaware)
  • Comply with all applicable laws and governmental regulations

Summary:

The most efficient and prevalent vehicle for foreign investment in the United States is the limited liability company due to its extensive flexibility in ownership, management, tax options and operations. However, there are situations when a corporation or limited partnership may better serve the details of the investment or needs of the investors. Proper legal and tax advice are essential to a successful investment.

Meister Seelig & Fein LLP



Corporate Law in Hong Kong

  1. Setting up business in Hong Kong

General:

Hong Kong advocates and practices free trade with minimum government intervention. Its low tax rates, skilled workforce, highly-developed infrastructure and advantageous geographical location are major industrial-commercial assets for investors.

Hong Kong continues to be a preferred destination for foreign direct investment (“FDI”). According to the UNCTAD World Investment Report 2009, Hong Kong attracted US$63 billion in inward investments in 2008, making it the world’s seventh largest FDI recipient. There are virtually no restrictions on FDI inflows – with the only exception being that foreign ownership of local broadcasting stations or cable operators may not exceed 49%.

No restrictions are imposed on the entry and repatriation of capital or on conversion and remittance of profits and dividends derived from direct investments.

Hong Kong’s business, trade and investment freedom has led the territory to be ranked as the freest economy in the world for 17 consecutive years by the Index of Economic Freedom, which has been published annually since 1995 by the Heritage Foundation and Wall Street Journal.

Prior authorisations:

  • Where a company incorporated outside of Hong Kong wishes to carry on business in Hong Kong, it will need to register as a ‘non-Hong Kong company’ with the Companies Registry within 1 month of establishing a place of business. A place of business is any place used by the company to transact any business which creates legal obligations, including a share transfer or share registration office.
  • All businesses need to register with the Inland Revenue Department and obtain a business registration certificate. ‘Business’ is defined as including every company; every representative office of any non-Hong Kong company; any form of trade, commerce, profession or other activity carried on for the purpose of gain; and also any club which provides social intercourse or recreation to its members.
  • Gambling activities are unlawful unless specifically permitted by the Gambling Ordinance, which prescribes a limited licensing regime.
  • Certain activities and business sectors need to be pre-approved by relevant government authorities, such as the Health Department (for the sale of medicine), Civil Engineering and Development Department (for the manufacture of dangerous goods), the Trade and Industry Department (for the registration of factories), the Television and Entertainment Licensing Authority, and the Office of the Commissioner of Insurance. For further information on the licences and permits required for specific business sectors, please visit the website of the Support and Consultation Centre for Small and Medium Enterprises of the Trade and Industry Department at:

https://www.success.tid.gov.hk/tid/eng/blics/index.jsp#.

  • The Food and Environmental Hygiene Department (“FEHD”) is responsible for applications in respect of food licences (for restaurants and light refreshment establishments), liquor licences, club liquor licences and karaoke establishment permits. Importation of food into Hong Kong will require registration with the FEHD. To access the various forms for applications to the FEHD, please visit:

http://www.fehd.gov.hk/english/forms/index_forms.html.

  • The General Licensing Section of the Hong Kong Police Force is responsible for applications in respect of pawnbrokers licences, temporary liquor licences, massage establishments licence, arms dealers licences, and security personnel permits. For more information, please visit:

http://www.police.gov.hk/ppp_en/11_useful_info/licences/index.html.

Regulated activity:

  • In order to operate in Hong Kong, banks and deposit-taking companies are required to be authorised by the Monetary Authority.
  • Authorisation from the Monetary Authority is also required for any company whose principal business will be the issuing of ‘stored value cards’, on which data may be stored in electronic, magnetic or optical form and for which a person pays money to the issuer in exchange for the storage of the value of that money on the card.
  • Activities in financial services are regulated by the Securities and Futures Commission (“SFC”). A licence will need to be obtained from the SFC to conduct activities which fall within the 10 categories shown as follows:
    • Dealing in securities
    • Dealing in futures contracts
    • Leveraged foreign exchange trading
    • Advising on securities
    • Advising on futures contracts
    • Advising on corporate finance
    • Providing automated trading services
    • Securities margin financing
    • Asset management
    • Providing credit rating services
  • The SFC will grant licences to non-Hong Kong companies, local companies, and authorised financial institutions. Please note that sole proprietorships and partnerships are not eligible for such licences.
  1. Procedures and formalities

Competent authorities:

The Companies Registry provides services for the incorporation of companies, the registration of non-Hong Kong companies, and facilities for inspection of public records and statutory registers. The website of the Companies Registry can be accessed at:

www.cr.gov.hk.

The Inland Revenue Department is a government department responsible for the administration of ordinances, rules and regulations in respect of taxes, stamp duty and business registration. The website of the Inland Revenue Department can be accessed at:

www.ird.gov.hk.

The Hong Kong Police Force is the appointed Societies Officer for Hong Kong, and is responsible for the administration of local societies, which are governed by the Societies Ordinance. The website of the Societies Office of the Hong Kong Police Force can be accessed at:

http://www.police.gov.hk/ppp_en/11_useful_info/licences/societies.html.

Timeframe:

  • To register a non-Hong Kong company, the certificate of registration and Business Registration Certificate as the case may be can normally be obtained in 14 working days.
  • In respect of an application for the incorporation of a company limited by shares in Hong Kong, the normal turnaround time for the issuance of a certificate of incorporation together with the Business Registration Certificate is 4 working days after the date of submission of the incorporation documents for the company.
  • To save time, an investor may opt to acquire, from a law firm, a ready-made shelf company which has not commenced business and has no liabilities. If necessary, the name of the shelf company can be changed by passing a Special Resolution and filing Form NC2 (‘Notification of Change of Company Name’) with the Companies Registry within 15 days of the date of the special resolution. Once the form is submitted, it will normally take 6 working days to change the name of the company.

Legal expenses:

The legal expenses for setting up a new company will depend on the new company’s business sector and its business size. As a general guide, HK$13,000.00 will typically cover legal services including: assisting in preparing the memorandum and articles of association, post-incorporation board resolutions and completion and submission of the incorporation form to the Companies Registry. For large or complex investments, the legal fee may be higher.

The filing fee for incorporating a company limited by shares is HK$1,720, plus a capital fee of HK$1 for every HK$1,000 of the nominal share capital of the new company. The capital fee is capped at a maximum of HK$30,000 per company. The prescribed Business Registration fee and levy must also be paid together with submission of the Notice to Business Registration Office (form IRBR1) at the same time.

The registration fee for registering a non-Hong Kong company is HK$1,425, plus a HK$295 lodgment fee and if the non-Hong Kong company has not yet filed its business under the Business Registration Ordinance, the prescribed business registration fee and levy must also be paid together with submission of the Notice to Business Registration Office (form IRBR2) at the same time.

Required documentation:

To incorporate a company limited by shares in Hong Kong, the following documents will need to be submitted to the Companies Registry:

  1. Articles and memorandum of association – these do not have to follow any specific format, although a standard form is set out in the Companies Ordinance at Table A.
  2. Form NC1 – this form is available for download from cr.gov.hk/en/forms/specified.htm.
  3. Form IRBR1 – Notice to Business Registration Office together with the prescribed business registration fee and levy.

To register a non-Hong Kong company, the following documents will need to be submitted to the Companies Registry:

  1. Form N1
  2. Certified copy of the instrument defining the company’s constitution – if this is not in Chinese or English, a certified Chinese or English translation will need to be prepared for filing.
  3. Certified copy of the company’s Certificate of Incorporation (or equivalent).
  4. Certified copy of the company’s latest published accounts.
  5. Form IRBR2 – Notice to Business Registration Office together with the prescribed business registration fee and levy.
  • Business structures

In Hong Kong, there are at least 5 types of business structures suitable for foreign investors, namely, a private company limited by shares, a non-Hong Kong company, a representative office, a partnership and a limited liability partnership.

  1. Private company limited by shares

Private companies are common vehicles through which to conduct business in Hong Kong. As at December 2011, there were 945,646 local private companies registered at the Companies Registry.

The liability of a shareholder of a private company is limited to the amount contributed to the company’s capital by the shareholder.

Intending shareholders and directors need not be present in Hong Kong to set up a company, and meetings of a Hong Kong company may be conducted anywhere in the world.

  1. General requirements
  • Generally, the name of the company must include the word limited. Certain words such as “trust”, “Government” and “authority are prohibited from inclusion in the company name, and the name must not be too similar to the name of any existing company recorded at the Companies Registry. The Companies Registry operates an online search engine for searching existing company names, which is accessible from the following web address:

https://www.icris.cr.gov.hk/csci/cns_search.jsp.

For further information on company names, please visit the website of the Companies Registry shown below :

http://www.cr.gov.hk/en/publications/docs/name-e.pdf/

  • A Hong Kong company must have an authorised share capital. With the exception of banks, insurance companies and stock brokers, no minimum authorised or issued share capital is imposed, although shares cannot be of nil par value. The authorised capital of a Hong Kong company may be expressed in any currency. It is common for a Hong Kong company to register an authorised capital of HK$10,000 or the minimum capital necessary, and increase it if and when necessary.
  • The minimum number of shareholders is one. This can be an individual or corporate investor, except where the company is the holding company of the corporate investor. There is no residency requirement for shareholders, and they need not have visited Hong Kong in the past.
  • Every private company shall have at least one director. An individual director must be at least 18 years of age. Corporations may act as directors of the company, provided that the company is not a member of any group of companies listed in Hong Kong.
  • Every private company must have a company secretary. In the case of a company with only one director, such a person cannot also be the company secretary. A corporation cannot be appointed as the company secretary of a private company where the sole director is also the sole director of the corporation. The company secretary must be either a Hong Kong resident or a company incorporated in Hong Kong. As such, many Hong Kong law firms have a company secretarial department to serve investors wishing to appoint a nominee secretary to be responsible for fulfilling the various statutory requirements under Hong Kong company law and the filing of statutory documents.
  • The company’s registered address must be an address in Hong Kong to which all correspondence and notices can be directed. Usually this will be the address from which the company carries on its business, but as an alternative, it is common practice for the company secretarial department of law firms to provide the use of an address for the purpose of satisfying this legal requirement. In addition, the company’s statutory books (such as registers of members and directors, minutes of meetings and memorandum and articles of association) are required to be kept and maintained at the company’s registered address. If otherwise, Form R2 (‘Notification of Location of Registers’) should be filed with the Companies Registry detailing the location of such documents.
  • The company is required to prepare annual accounts and to appoint a Hong Kong auditor to provide an annual financial report to its shareholders. There is no requirement to file the accounts to the Companies Registry.
  • The company must apply for a business registration certificate on an annual basis or every three years (for which there is a fee concession) from the Inland Revenue Department, even if no business is carried out. As of February 2011, first time applicants are required to submit a Business Registration certificate application at the same time as the certificate of incorporation.
  • An annual general meeting, which is a meeting of shareholders, must be conducted once a year, except for the first year after incorporation. The first annual general meeting of a new company must be held within 18 months of incorporation. As mentioned above, shareholder’s meetings may be held anywhere in the world. Also, a written resolution in lieu of the annual general meeting is permitted.
  • An annual return (in the form of Form AR1 (‘Annual Return’) or Form AR 3 (‘Annual Return – Certificate of No Change), both available from cr.gov.hk, is required to be filed to the Companies Registry within 48 hours after each annual general meeting.
  1. Corporate governance / management

In general, the articles of association will contain provisions determining the manner in which decisions are made as to the affairs of the company. Such provisions will typically deal with the calling of board and shareholder meetings, the quorum in such meetings, rights of proxies and so on. However, Hong Kong company law prescribes that certain decisions of a company must be sanctioned by the company’s shareholders in general meeting.

Matters such as changing the company’s name, the removal of a director, altering the company’s objects or the decision to wind up the company will require a special resolution to be passed, which requires the votes of 75% of the shareholders. Unless a special resolution is specified, all resolutions of the company are ordinary resolutions, which require 50% of shareholders’ votes and are used for such matters as issuing shares, appointing auditors and so on.

Usually, 14 clear days’ notice is required to convene a meeting for which an ordinary resolution is proposed and 21 clear days’ notice is required to convene a meeting for which a special resolution is proposed or for the holding of an annual general meeting.

  1. Taxation and stamp duty:
  • Hong Kong benefits from an extremely attractive fiscal regime which exempts certain categories of income which in most other jurisdictions would be subject to profits tax.
  • Hong Kong is the only developed economy which does not impose a sales tax.
  • No capital gains tax is charged on disposal of assets. As a consequence, Hong Kong entity which effects a profitable disposal of foreign real estate, currency gains, or a profitable transfer of capital assets to a foreign subsidiary will not need to pay tax.
  • There is no withholding tax on dividends and interest.
  • The applicable profits tax for Hong Kong companies is payable in respect of profits arising in or derived from Hong Kong. Due to the territorial principle, profits from a foreign source are generally exempted from tax. The current profits tax rate for companies is provided on the website of the Government of Hong Kong, shown below:

http://www.gov.hk/en/residents/taxes/taxfiling/taxrates/profitsrates.htm.

  • Stamp duty is chargeable on transfers of shares in Hong Kong companies. The chargeable amount is 0.2% on the consideration or the value of the transferred shares (whichever is higher) plus ad valorem duty of HK$5 per instrument of transfer.
  • Where a Hong Kong company increases its authorised share capital or issues shares at a premium, capital duty of 0.1% applies to the increase in authorised share capital or the amount of excess of the par value. Capital duty is capped at a maximum of HK$30,000.
  1. Pros and cons
  • Pros:
    • For a typical investor wishing to operate a business for the long term, the incorporation of a local company is arguably the best option. A private company offers separate legal identity, easy transfer of ownership and perpetual existence.
    • There are no residency or nationality restrictions as regards directors and shareholders. There is no prohibition against 100% foreign-owned companies. The implication is that investors may set up wholly-owned subsidiaries in the form of a Hong Kong company.
    • Hong Kong companies benefit from simple and low tax, which follows a territorial basis of taxation.
  • Cons:
    • A lot of paperwork is involved and there are ongoing maintenance procedures required by law, such as the filing of the annual return.
    • The annual return, containing the identities and addresses of the companies’ directors and shareholders are available to anyone who pays a search fee to the Companies Registry. However, if necessary, shareholders can avoid such a problem by creating a trust, thereby causing the name of the beneficiary to be registered instead.
    • Closing a company is more complex and time consuming than for other business vehicles.
  1. Non-Hong Kong Company

A non-Hong Kong company can be described as a branch or an extension of a foreign company. There is generally little practical difference between setting up a non-Hong Kong company and a local company because business activities available to companies in Hong Kong are not dependent upon a company’s place of incorporation.

  1. General requirements
  • An ‘authorised representative is required to accept service of process and notices on behalf of a non-Hong Kong company. The authorised representative should, in the case of an individual, be resident in Hong Kong. Otherwise, the authorised representative should be a Hong Kong firm of solicitors or certified public accountants.
  • The registered name of the non-Hong Kong company is the same as the name of the foreign “parent” company. If the Companies Registrar is of the view that the registered name is too alike to a name already appearing on the index of company names kept at the Companies Registry, the Registrar may require the non-Hong Kong company to use a different name.
  • The name of the non-Hong Kong company, the place of its incorporation, and the fact of its limited liability must be displayed conspicuously at every place where it carries on its business, and on its letterhead. This is normally in the following format: “[Name of company] incorporated in [place] with limited liability”.
  • Every year, a non-Hong Kong company is required to file to the Companies Registry a return confirming there has been no change to the company’s particulars.
  • The non-Hong Kong company’s latest published accounts, and translations thereof if applicable, will also need to be filed with the Companies Registry on an annual basis. Such documents include, for the preceding financial year in each case, a balance sheet, profit and loss account, and group accounts, directors’ report and auditors’ report, if any.
  • The non-Hong Kong company must apply for a business registration certificate on an annual basis from the Inland Revenue Department, even if no business is carried out.
  1. Corporate governance / management
  • The manner in which decisions are made in respect of a non-Hong Kong company are dictated by the constitutional documents of the foreign “parent” company.
  1. Taxation of the company’s income:
  • There is no exemption from the filing of an annual profits tax return. The rate of profits tax levied on a non-Hong Kong company is the same for local companies.
  1. Pros and cons
  • Pros:
    • Hong Kong law does not require the separate audit of a branch office, which implies that lower costs are involved in the maintenance of the branch as compared to a locally-incorporated subsidiary.
    • No stamp duty is payable of the transfer of the Hong Kong business of the non-Hong Kong company. Conversely, stamp duty is charged on transfers of shares in locally-incorporate companies.
    • Where the Hong Kong business of a non-Hong Kong company is terminated, any remaining capital can simply be remitted out of Hong Kong. This avoids the lengthy liquidation process involved in the dissolution of a local company.
    • Some investors opt to use a non-Hong Kong company because of tax implications in the country in which the “parent” foreign company is registered, in particular, in relation to dealing with losses which may be sustained by the Hong Kong operations.
    • The non-Hong Kong company can rely on the credit of its foreign “parent” company.
    • Locally incorporated are subject to restrictions from the use of certain words such as “trust” in its company name, whereas more flexibility will be afforded to a non-Hong Kong company.
  • Cons:
    • A foreign “parent” company to a locally-incorporated company will be a distinct and separate legal entity, whereas in the case of the non-Hong Kong company or branch office, the foreign “parent” company will be liable for the debts of the branch.
    • It is usually simpler and more cost effective to set up a local company than to register a non-Hong Kong company.
    • Where the constitutional document of the foreign “parent” company is not written in English or Chinese, a certified translation will be required.

For further information in relation to the registration of a non-Hong Kong company, please refer to a pamphlet on the subject published by the Companies Registry and available from its website shown below:

http://www.cr.gov.hk/en/publications/docs/14-e.pdf.

  1. Representative office

A foreign company seeking to gain market exposure and a better understanding of Hong Kong’s business environment without the expenditure of setting up a fully-fledged office can opt to register a representative office. A representative office is considered as a temporary administrative office, used to aid the foreign company in activities such as market research, liaison and promotional work. The representative office cannot enter into legal obligations, including engaging in business, concluding contracts, or undertaking the transshipment of goods.

  1. a. General requirements
  • The name of the representative office must match the name of the foreign company, unless such name is already in use in Hong Kong, in which case a different name will need to be adopted.
  • As representative offices are unincorporated entities, there are no registration requirements and there is no need to maintain any statutory documents.
  • Although non profit-generating activities can be undertaken by a representative office, it must nevertheless apply to the Inland Revenue Department for a business registration licence within 1 month of the date of establishment of the office. For this application, the documents required are a completed application form and the proof of identity of the chief officer of the representative office in Hong Kong.
  • Pros:
    • Simple to start up, and requires less capital expenditure than other business vehicles.
    • No registration, filing or corporate governance requirements.
    • No profits tax.
  • Cons:
    • Representative offices cannot engage in profit-generating activities.
  1. Partnership

Where two parties enter into some form of co-operation agreement complementary to the activities and mutual benefit of both parties, a business partnership is formed. Such a relationship is defined in the Partnership Ordinance as a relation which subsists between persons carrying on a business in common with a view of profit.

The rights and obligations of the partners to a partnership are covered by the Partnership Ordinance and the provisions of the partnership agreement entered into by the partners, whether verbal or written.

A point to note for investors is that every partner in a firm is jointly and severally liable with the other partners for the liabilities and obligations of the firm.

As a partnership has no separate legal identity, it cannot enter into contracts, acquire assets, sue or be sued in its own name.

  1. General requirements
  • There is no requirement to register a partnership.
  • The partners must apply for a business registration certificate on an annual basis from the Inland Revenue Department, even if no business is carried out.
  1. Taxation of the partners income:
  • The territorial principle determines whether a partnership will need to pay profits tax.
  • The taxation of a partnership is computed in one sum under the partnership’s name. Tax recoverable under the Inland Revenue Ordinance shall be recoverable out of the assets of the partnership, or from any partner.
  • Tax is assessed on the profits of a partnership notwithstanding the cessation or dissolution of such partnership.
  1. Pros and cons
  • Pros:
    • Fewer statutory controls than companies.
    • No need to register the partnership.
    • Disclosures of financial information are not required.
    • Flexible business structure.
    • Simple and cheap to set up.
    • No mandatory documentation, although it is advisable to formulate a partnership agreement.
  • Cons:
    • A partnership is not a legal entity, and thus the personal liability of each partner is unlimited, and the partner’s personal assets are at risk.
    • Partners are jointly liable for partnership debts, meaning that if one partner is unable to satisfy his/her share of the partnership debt, the remaining partners will be obliged to make up the shortfall.
    • An individual partner may be sued for all the debts of the partnership.
  1. Limited Liability Partnership

A limited partnership is similar to a partnership, but consists of both general partners and limited partners. A general partner assumes unlimited liability for the firm’s debts. A limited partner is liable only to the extent of their investment.

Partners of a limited partnership may be individuals or companies. General partners are responsible for the day-to-day running of the firm’s operations. Limited partners do not have the power to bind the firm. A partner may be introduced into the limited partnership without the need for the consent of the limited partner(s).

So long as the limited partnership continues in existence, a limited partner may not reduce or redeem his or her share capital nor take an active part in the management of the partnership; otherwise, he or she will assume the liability of a general partner.

  1. General requirements
  • A limited partnership is required to be registered at the Companies Registry. The application procedure involves the completion and submission of an application form available from the website of the Companies Registry:

http://www.cr.gov.hk/en/forms/other.htm.

  • The registration fee of a limited partnership is HK$340. For every HK$1,000 or part of HK$1,000 of the sum contributed by each partner, an additional HK$8 is payable to the Companies Registry.
  • The identification documents of each partner will also be required in the registration process. After submission of all the requisite documents, a Certificate of Registration of Limited Partnership will be issued by the Companies Registry with 5 to 7 working days.
  • After registration, a limited partnership must adhere to ongoing filing requirements, namely, the filing of any change in the particulars of the firm to the Companies Registry within 1 week of such change, and the filing of a profits tax return to the Inland Revenue Department. The first profits tax return is normally received within 18 months of the date of registration.
  • If the business income exceeds HK$500,000 in a given year, additional documents will need to be submitted along with the profits tax return, being a certified copy of the firm’s balance sheet and profit and loss account for the basis period and a tax computation indicating how the amount of assessable profits has been arrived at.
  1. Taxation of the partners income:
  • In accordance with the territorial principle, profits arising or derived from Hong Kong will be subject to profits tax at the rate applicable to unincorporated businesses. An exception arises where one of the limited partners in the limited partnership is a corporate entity, in which case the limited partnership is taxed at the prevailing corporate profits tax rate. The tax rates can be obtained from the website of the Government of Hong Kong, show below:

http://www.gov.hk/en/residents/taxes/taxfiling/taxrates/profitsrates.htm.

  • Tax relief is afforded to limited partners if and when a limited liability partnership incurs a loss in any given year of assessment. The taxable amount for a limited partner in such an instance will be limited to the amount of the loss or the amount of the partner’s contribution as at that end of the assessable year, whichever sum is the lesser.
  1. Pros and cons
  • Pros:
    • Flexible business structure.
    • Allows for injection of capital from limited partners, and such investors need not participate in the management of the company.
    • Cheaper to set up than a company.
  • Cons:
    • Accounts need to be prepared to accompany the profits tax return where the limited partnership’s income exceeds HK$500,000.
    • Registration is required. By paying a fee, any person can search and obtain particulars of partners from the Companies Registry. Any change in the partnership’s particulars will need to be notified to the Companies Registry.

Further information on limited partnerships is available from the website of the Companies Registry, show below:

http://www.cr.gov.hk/en/publications/docs/23-e.pdf.

Robertsons Solicitors & Notaries



Corporate Law in Hungary

  1. General

Business associations can be established for pursuing business activities by either foreign or domestic natural persons, by legal persons or by business associations with no legal personality. Such persons may also join these business associations as a member, or acquire a participation (shares) therein later on. With the exception of limited liability companies (“Kft.”) and companies limited by shares (“Rt.”), at least two members are required for the foundation of a business association. Another restriction is that a natural person may be a member with unlimited liability in only one business association at a time.

Pursuant to Hungarian law, there are two types of business associations which have an autonomous legal personality, while the other types do not have an autonomous legal personality. This affects the responsibility of the members.

Upon establishing a business association, the corporate documents must be signed by both the members of the business association and the executive officers and countersigned by an attorney licensed in Hungary. The official signature of the representative of the business association may be certified as follows:

  1. with a signature specimen prepared by a notary public, or
  1. with a signature-sample countersigned by an attorney at law, which the attorney at law is entitled to prepare upon the foundation of a business association, or if corporate modifications are made but only if,
  • he has prepared/modified and countersigned the corporate documents; and
  • the signature-sample is an annex of the corporate registration or modification documents.
  1. Prior Authorizations

The law prescribes that certain economic activities can only be pursued in certain forms of business associations or that the foundation of a business association is subject to an official permit. If the law requires an official permit for the pursuit of an economic activity, the business association can only pursue the activity in question if it is in possession of the respective permit. Unless otherwise provided for by law, activities which require certain specific qualifications can be pursued by business associations if there is at least one personally active member, employee or contracting party satisfying the qualification requirements set forth by law as required for the permit.

  • Procedure and Expenses

III.1.      Competent Authority

Company registration, the provision of information about companies and conducting the judicial supervisory process fall within the competence of the county courts as registry courts. The location of the company’s registered office determines which county court has jurisdiction.

Applications for company registration and /or modifications can be submitted electronically via the electronic system of the Company Registration and Company Information Service operated by the Hungarian Ministry of Justice and Police.

III.2.      Timeframe

Corporate documents have to be submitted to the competent company court by the company’s attorney within 30 days of signing. The company may commence operations after the corporate documents have been submitted to the company court. If the company wishes to pursue activities subject to an official permit, these activities can be pursued once the company is registered and the permit acquired.

III.3.      Legal Expenses and Documents Required

There is no general registration fee for setting up a company; the cost depends on the company form.

The publication fees are as follows:

Business associations with no legal personality Business associations with legal personality
Registration fee through the electronic system HUF 5,000 HUF 5,000
Registration fee for changes through the electronic system HUF 3,000 HUF 3,000

The documents required to register a company, regardless of its form, are as follows:

  • The application form provided by the competent company court;
  • Foundation documents (deed of foundation or articles of association);
  • Foundation permit (if applicable);
  • Company excerpt issued within the last 3 months at the time of its submission (required only if a foreign company is to be a member);
  • Commission agreement with an agent for service of process if a foreign company is a member and does not have a registered office in Hungary or if a foreign natural person is a member who does not have Hungarian residence, if the foreign members wish to mandate an agent for service (it is not compulsory);
  • Statement of the executive officers accepting their position;
  • Statement of the members of the supervisory board and the auditors accepting their position;
  • Title deed of the real estate if real estate forms the capital;
  • Power of attorney;
  • Statement in relation to the taxation of the company.
  1. Business Structures

The business structure depends partly on the nature of business, and partly on the objects of the founder in relation to the segment of the market where he/she wants to operate the company geographically.

There are two types of business associations with legal personality, namely:

  • Limited Liability Company;
  • Company Limited by Shares.

With regard to the international market, foreign company founders can also choose to establish either a branch office or commercial representative office instead of a company.

Company under Formation (“Pre-Company”):

Pursuant to Hungarian law, it is possible to operate the company before registration. The purpose of this regulation is that there is a transitional period between the signing of the company foundation documents and the registration of the company by the competent authority. During this period the founders of the company are entitled to accomplish certain acts in relation to the company undergoing registration. These acts have to be regulated by the law, because on the one hand, they have economic and financial consequences, and on the other hand, the sooner the company can step into the market, the more advantageous it will be for the founders as regards taking part in the competitive market-place and generating profits.

The rules related to companies undergoing registration apply to all types of business structures. The company under formation exists from the time the company foundation documents are signed by the founders. From this time on, the company is entitled to acquire certain rights in connection with its operation, but these activities are limited because the members of the company under registration are not allowed to

  • transfer their shares or quota to other members;
  • amend the company foundation documents;
  • initiate the exclusion procedure of a member;
  • accomplish activities that require preliminary permission from the respective authority;
  • decide on the termination of the company or change the type of company being formed;
  • take part in the foundation of another company or acquire the shares of another company in the name of the company under formation.

The company under registration is entitled to carry on business-like economic activity only after submitting the company foundation documents to the competent Registry Court. The fact that the company is under formation has to be indicated in the name of the company.

IV.1. Branch Office

According to Hungarian law, the branch office does not have its own legal personality; it is a unit of the foreign company, but it can determine its own economic activity. The foreign company has unlimited liability for the debts of the branch office. The foreign company and the branch office have joint and several liability for all debts. When determining the assets of the branch office, all the assets of the foreign company used by the branch office must be counted as the assets of the branch office. It is the duty of the foreign company to continuously provide the assets which the branch office needs for its activities.

The branch office cannot pursue representational activities in the name of the founder. The founder may not dispose of the assets, rights and duties of the branch office which were acquired in the name of the branch office unless the branch office, after being wound-up, is unable to pay its debts, or proceedings have been initiated against it in relation to its rights, duties and payment capacity.

There is no minimum requirement as regards the registered capital of a branch office. The company court requests however that the amount provided by the founder to the branch office is indicated in the foundation documents.

The court does not request the branch office to prove the amount with a bank certificate, so it is not necessary to open a bank account for the purposes of forming the Branch Office, but the operation of the branch office will require the use of a bank account. In terms of the amount, it is advisable to transfer at least HUF 280,000 which is approximately EUR 1,000.

If a permit is required for certain activities or products, the branch office must procure this permit.

Foundation costs:

  • registration fee: HUF 50,000;
  • publication costs: HUF 5,000;
  • costs of certified translations of the certificates of incorporation of foreign legal persons.

Pros and Cons:

  • Pros:
  • one legal entity with the parent company, their supervision operates on a consolidated basis;
  • the registration process is not strict.
  • Cons:
  • reporting and administrative requirements;
  • unlimited, joint and several liability with the parent company.

IV.2. Commercial Representative Office

A commercial representative office is not allowed to pursue any entrepreneurial activity (entrepreneurial activity means activity with the aim or result of acquiring income or wealth).

The following activities may be pursued by the commercial representative office:

  • Negotiation and preparation of contracts for and in the name of the Founder;
  • Informing clients and keeping in contact with them;
  • Pursuing informational, advertising and marketing activities;
  • Concluding contracts for and in the name of the Founder in relation to the operation of the commercial representative office.

There is no minimum requirement for the registered capital of a commercial representative office,. The Company Court requests however that the amount provided by the founder to the commercial representative office be indicated in the foundation documents.

The court does not request the commercial representative office to prove the amount with a bank certificate, so it is not necessary to open a bank account for the purposes of the office’s formation, but the operation of the representative office requires the use of a bank account. In terms of the amount, it is advisable to transfer at least 100,000 HUF.

If a permit is required for certain activities or products, the commercial representative office must procure this permit.

Foundation costs:

  • registration fee: HUF 50,000;
  • publication costs: HUF 5,000;
  • cost of certified translations of the certificates of incorporation of foreign legal persons.

Pros and cons:

  • Pros: easier administration and representation abroad
  • Cons: no real commercial activity can be pursued

IV.3. Subsidiary

IV.3.1. Limited Liability Company (“Korlátolt Felelősségű Társaság” – Kft.)

  1. General requirements
  • Minimum capital: HUF 500,000
  • Minimum number of shareholders: 1
  • Liability of the shareholders: limited to shareholder’s participation in the company
  1. Management: members’ meeting

The main decision-making body is the members’ meeting, which has a quorum if at least half of the registered capital plus one vote or the majority of the quotas is represented.

The company is represented by the managing directors.

According to the respective law, a foreign citizen can be the managing director of the company. The managing director may be appointed for an unlimited period or for a limited period of no more than 5 years. If the managing director has no registered domicile in Hungary, he may authorize a Hungarian delivery agent to receive mail. As it is not necessary to appoint a delivery agent, the Company Court delivers the appropriate documents directly to the managing director through publication in the Company Gazette. On the fifth day following the publication, the documents are considered to be delivered. It is possible for the attorney at law of the limited liability company, its Hungarian member(s), its managing director(s) or member(s) of the supervisory board to act as delivery agents of the foreign citizens registered on the Company Register. Naturally, if the addressee is the company, no such procedure applies but the documents will be sent to the registered seat of the company.

  1. Foundation costs:
  • registration fee: HUF 100,000;
  • publication costs: HUF 5,000;
  • cost of certified translations of the certificates of incorporation of foreign legal persons
  1. Pros and Cons
  • Pros:
  • limited liability, which limits the risks of the founders;
  • the company’s legal personality;
  • the assets of the company belong to the company and not to the shareholders.
  • Cons:
  • in case of a one-man company, the member is not entitled to unemployment benefit.

IV.3.2. Companies Limited by Shares (“Részvénytársaság” – Rt.)

  1. a) General requirements

Companies limited by shares are business associations established with a share capital (registered capital) consisting of shares of a pre-determined number and face value. The obligation of the shareholders of the company includes the provision of the face value or issuance value of the shares. Apart from the exceptions defined in the Companies Act, shareholders do not bear liability for the obligations of the company over and above the face value of the shares.

Companies limited by shares can be established in two forms namely (i) private (“Zártkörűen működő Részvénytársaság” – Zrt.) or (ii) public (Nyilvánosan működő Részvénytársaság” – Nyrt.).

A company limited by shares operates privately if the shares of the company are not available for subscription on a stock market. A company limited by shares operates publicly if the shares of the company are available for subscription on a stock market.

The amount of the initial capital cannot be less than 20 million HUF for a public company limited by shares, and cannot be less than 5 million HUF for a private company limited by shares.

  1. b) Private company limited by shares
  • Minimum capital: HUF 5,000,000
  • Minimum number of shareholders: 1
  • Liability of the shareholders: limited to shareholder’s participation in the company, namely the face value of the subscribed shares
  • Management: board of directors or managing director

The main decision making body is the general meeting, which has to be convened at least once a year. Extraordinary general meeting(s) can be held anytime if necessary.

The managing body is the board of directors, consisting of a minimum of 3 and a maximum of 11 members elected by the general meeting. Its main task is to convene the general meeting, to introduce the annual report to the general meeting and to report on the financial situation and business policy of the company.

If the Articles of Association allow, one general manager can be elected instead of a board of directors. The general manager has the same tasks as the board of directors.

Pros and Cons:

  • Pros:
  • all types of shares can be issued;
  • limited liability, which limits the risks;
  • membership rights can be transferred easily through the shares;
  • the private company limited by shares can be easily transformed into a public company limited by shares.
  • Cons:
  • the conditions to be satisfied in order to form the company are stricter than the conditions for the establishment of a Kft.;
  • there is a minimum amount of registered capital;
  • high operating and maintenance costs.
  1. Public company limited by shares
  • Minimum capital: HUF 20,000,000
  • Minimum number of shareholders: 1
  • Liability of the shareholders: limited to shareholder’s participation in the company, namely the face value of the subscribed shares

Special rules for public companies limited by shares:

The public company limited by shares is not entitled to issue all kinds of shares. It can however issue dematerialized shares. Dematerialized shares can be issued and transferred electronically if they are recorded in an electronic centralized system. The holder of the dematerialized shares has to open a stock account for the registration of his/her shares. Preferential shares relating to the appointment of the executive officers or the members of the supervisory board and preferential shares relating to subscription rights cannot be issued.

If the articles of association allow, a unified management can be established, which carries out both the managing and controlling functions. In this case, the election of a supervisory board is not compulsory.

The election of an audit board is compulsory for a public company limited by shares. The number of the members of the audit board cannot be less than 3. Its main task is to control the annual financial reports and the work of the independent auditor of the company.

  • Management: general meetings, board of directors

The main decision-making body is the general meeting, which has to be convened at least once a year. The shareholders are not allowed to make decisions without holding a general meeting.

The managing body is the board of directors, which is comprised of a minimum of 5 and a maximum of 11 members elected by the general meeting. Its main tasks are to convene the general meeting, to introduce the annual report to the general meeting and to report on the financial situation and business policy of the company.

Pros and Cons:

  • Pros:
  • limited liability, which limits the risks;
  • if the founders do not have the minimum amount required for the registered capital, they can collect shareholders by public announcement.
  • Cons:
  • high operating and maintenance costs;
  • there is a minimum amount of registered capital;
  • the shareholders do not know each other, which makes controlling the company more complicated;
  • reporting liability in the case of acquiring a certain amount of shares.
  1. Foundation Costs:
  • registration fee: HUF 100,000 (private), HUF 600,000 (public);
  • publication costs: HUF 5,000;
  • cost of certified translations of the certificates of incorporation of foreign legal persons.

IV.4. Other Company Forms

IV.4.1. Limited Partnership (“Betéti Társaság” – Bt.)

By virtue of the articles of association of a limited partnership, the members undertake to pursue joint business activities in a way that at least one member (general partner) has unlimited liability for the obligations not covered by the assets of the partnership, jointly and severally with other general partners, while at least one other member (limited partner) is only obliged to provide the contribution that he has undertaken to give in the Articles of Association. With the exceptions set forth in the Hungarian Companies Act, the limited partner is not liable for the obligations of the partnership. The limited partnership does not have a separate legal personality.

  • Minimum capital: there is no minimum registered capital established by the law
  • Minimum number of members: 2
  • Liability of the members: see above
  • Management: the general member is entitled to represent and manage the company. The limited partner does not have the same rights as the general partner unless otherwise regulated in the foundation documents.
  • Foundation costs:
  • registration fee: HUF 50,000;
  • publication costs: HUF 5,000;
  • cost of certified translations of the certificates of incorporation of foreign legal persons.

Pros and Cons:

  • Pros:
  • there is no minimum amount of registered capital;
  • as the general member is entitled to represent and manage the company, it is easy to control the operation of the partnership and the decision-making process;
  • the business activity can be wound-up via a simplified dissolution process.
  • Cons:
  • unlimited liability of the general member;
  • personal contribution is indispensable.

IV.4.2. General Partnership (“Közkereseti Társaság” – Kkt.)

The members of the general partnership undertake to carry on joint business activities within the framework of a general partnership and they provide a capital contribution for this purpose. The partners are each personally, jointly and severally liable for the debts and taxes of the partnership. Profits are shared equally amongst the partners. The general partnership does not have a separate legal personality.

  • Minimum capital: there is no minimum registered capital established by law
  • Minimum number of members: 2
  • Liability of the members: unlimited, joint and several liability
  • Management: the main decision-making body is the members’ meeting where all the members are entitled to take part and vote with the same rights. While generally each partner has an equal right to participate in the management and control of the business, although the Articles of Association may allow the partners to elect certain partners to manage and represent the partnership.
  • Foundation costs:
  • registration fee: HUF 50,000;
  • publication costs: HUF 5,000;
  • cost of certified translations of the certificates of incorporation of foreign legal persons.

Pros and Cons:

  • Pros:
  • members are able to cooperate with each other, they can organise their business activities without establishing a legal person;
  • members are entitled to participate in the decision making;
  • members do not have to possess a significant amount of capital to be able to establish this partnership;
  • members know each other and they can decide about who can be a member;
  • members are entitled to remuneration for their personal work.
  • Cons:
  • unlimited, joint and several liability of the partners.

IV.4.3. Interest Grouping (“Egyesülés”)

The purpose of the grouping is to facilitate or develop the economic activities of its members by pooling resources, activities or skills. By working together in the Interest Grouping, the members produce better results than acting alone. The members of the Grouping do not intend to make profits for the grouping itself. If it does make any profits, they will be distributed among its members.

  • Minimum capital: there is no minimum registered capital established by law
  • Minimum number of members: 2
  • Liability of the members: the members’ liability is unlimited, members are jointly and severally liable for the debts exceeding the assets of the Grouping.
  • Management: the main decision-making body is the members’ meeting. Each member has one vote, although the Articles of Association may give certain members more than one vote, provided that none of the members hold the majority of the votes.
  • Foundation costs:
  • registration fee: HUF 50,000;
  • publication costs: HUF 5,000;
  • cost of certified translations of the certificates of incorporation of foreign legal persons.

Pros and Cons:

  • Pros:
  • the aim of the members is not to increase profit but to cooperate in order to increase the efficiency of their own activity by joint representation of their interests.
  • Cons:
  • unlimited, joint and several liability.
  1. Taxation of Companies – Corporate Tax and Dividend Tax

Corporate profit is subject to corporate tax.

Please note that some changes can be expected regarding Hungarian tax law because of the policies to be implemented by the new government.

From 1 January 2011 the corporate tax rate will be 10% instead of 19%.

V.1. Persons subject to Corporate Tax

Pursuant to the Hungarian Corporate Tax Act, the following legal entities are deemed resident taxpayers:

  • companies established under Hungarian law: Company Limited by Shares (Zrt; Nyrt.), Limited Liability Company (Kft.), General Partnership (Kkt.), Limited Partnership (Bt.) and other organisations (e.g. foundations, associations), the registered office of which is in the territory of Hungary.
  • non-resident taxpayers performing entrepreneurial activities at business premises in Hungary.

No group taxation is permitted under Hungarian law.

In general, the tax year corresponds to the calendar year. Pursuant to the Hungarian Accounting Act, taxpayers, however, may exercise discretion under certain conditions in deciding on a financial year that differs from the calendar year.

V.2. Taxable Income

The tax liability of resident taxpayers applies both to their income from Hungary and from abroad. Pre-tax profits represents the corporate tax base.

Based on a general anti-avoidance rule, the Hungarian Tax Authority is obliged to qualify contracts, transactions and other similar acts in accordance with their true contents. A further anti-avoidance general provision is that no costs or expenses will qualify as costs or expenses if the only purpose of incurring such costs or expenses is to attain a tax allowance (tax relief, tax incentive).

If the higher of either the pre-tax profits or the tax base is below 2% of the adjusted total income, the taxpayer is obliged to

  • pay tax on 2% of the adjusted total income, or
  • make a declaration on a form supplementing the tax return, which will qualify as a tax declaration.

V.3. Items Adjusting the Tax Base

V.3.1. The tax base is increased by the following items: fines, penalties, late payment penalty interest due to delay in payment of taxes, etc.

V.3.2. Depreciation

As a general taxation rule, the entire cost of purchase or cost of production can be written off.

V.3.3. Development reserves

The portion of the retained earnings earmarked for future capital investments (development reserves) is subject to accelerated depreciation and can be recognised as a lump sum deduction from the pre-tax profits. The taxpayer may release the earmarked reserves exclusively in accordance with the costs of the implemented capital investment over 4 tax years following the generation of such reserves. However, deduction due to accelerated depreciation cannot exceed 50% of the pre-tax profits or HUF 500,000 in any tax year.

V.3.4. Provisions

The tax base must be increased with the amount of the provision for contingent and future liabilities accounted for as expenses. The amount recognised as income due to the utilisation of such provision qualifies as a tax-base decreasing item. 

V.3.5. Losses

As per the currently effective regulations, deferred losses of previous tax years (negative tax base), in an amount of the taxpayer’s choice, can be deducted from the tax base or rolled on without limitations.

V.3.6. Dividends

Income from dividends is deducted from the tax base when the corporate tax liability of Hungarian companies is determined. However, dividends received from a controlled foreign company cannot be deducted from the tax base.

No withholding tax is levied on dividends paid by a company registered in Hungary to another company (whether registered in Hungary or abroad).

V.3.7. Profits from off shore companies

The unpaid dividend share of Hungarian companies in a controlled foreign company increases the tax base. If the dividend is paid at a later date, the tax base can be reduced by this amount, to the extent of the amount taken into account earlier as an increasing factor. 

V.3.8. Transfer pricing

Transfer price regulations have been established in accordance with OECD guidelines. Under the transfer price regulations, if the prices applied in related-party transactions differ from arm’s length prices applied in unrelated parties, the company must take the difference between the two and

  • deduct it from the company’s pre-tax profits, if
  • its taxable profits are higher than if the arm’s length principle would have been applied;
  • the related company is also a resident company in Hungary, or if it is a non-resident company, it must be a corporate taxpayer in the country of its primary place of business (this does not apply to controlled foreign companies); and
  • it holds a document signed by both parties establishing the difference,

or

  • add it to its pre-tax profits if the taxable income is lower than if the arm’s length principle would have been applied.

The above transfer price regulations need not be applied to long-term agreements concluded by small and medium-size enterprises if the related company in question has been established for the purpose of sale and purchase, and if the voting rights of the small and medium-size enterprises concerned in the related company exceed 50% on aggregate.

V.3.9. Controlled foreign companies

Payments to controlled foreign companies do not qualify as eligible costs incurred in the interest of the company except when the taxpayer can prove that the payment has been made in connection with its business operations.

V.4. Tax Rates

The corporate income tax rate is 19% from 1 January 2010. If certain conditions are met, a 10% rate can be applied to the portion of the tax base up to HUF 50 million, and a 19% rate to the portion in excess of HUF 50 million.

Progressive taxation can be applied to taxpayers who

  • do not claim tax allowance;
  • employ at least one employee in the tax year;
  • have declared social security tax liability of an amount that is a minimum (from 1 January 2010) of 27% of twice the annualised amount of the prevailing minimum salary (or the amount of the prevailing minimum salary in case of taxpayers with a registered office in one of the disadvantaged regions) multiplied by the average number of employees;
  • the taxpayer’s tax base or earnings before tax in the current tax year and in the preceding tax year  reaches the minimum income (profit); and
  • the taxpayer has complied with the statutory regulations pertaining to employment.

The gains from the 10% tax rate received must be spent exclusively to achieve certain objectives declared by the law (e.g. capital investment and employment)

V.5. Tax Allowances

V.5.1. Investment tax allowance

Taxpayers investing in socially and economically disadvantaged regions are eligible for tax relief. Eligible investments include:

  • capital investments valued at least HUF 3 billion at current prices and serving the purpose of manufacturing,
  • capital investments put into operation in counties with a high unemployment rate.

In order for the criteria of eligibility for tax relief to be met, further conditions must also be satisfied, for instance, the number of staff must be increased.

V.5.2. Development tax allowance

The following capital investments are eligible for tax allowance:

  • projects started and operated within the administrative jurisdiction of a preferential local self-government, valued at HUF 1 billion or more at current prices,
  • projects aimed at the provision of broad band Internet services,
  • projects valued at HUF 100 million or more at current prices exclusively for motion picture and video production,
  • projects which will give rise to the creation of new jobs.

V.6. Exclusion of Double Taxation

Double taxation can be excluded unilaterally or on the basis of a treaty concluded with the related countries. Unilateral withholding tax applies to 90% of the tax amount paid (payable) abroad and may not exceed the amount of the tax calculated in accordance with Hungarian regulations.

If a treaty is to be observed, a tax allowance serving the purpose of excluding double taxation can be granted in accordance with the treaty.  

V.7. Non-Resident Companies

V.7.1. The income generated by non-resident enterprises carrying on business operations at their permanent branches in Hungary will be subject to tax for their business operations carried out at their permanent branches in Hungary.

A separate statutory regulation specifies the cases where foreign enterprises must have some form of business (e.g. a branch) in the territory of Hungary.

The taxable income of a permanent establishment must be assessed in accordance with the rules applicable to domestic companies. The tax base of a foreign enterprise in respect of its permanent establishment in Hungary must be adjusted so that the tax base is reduced at least in proportion to all its revenue and income derived from its operating costs and expenses incurred by the permanent business establishment and is increased by the operating and overhead costs and expenses directly incurred at the business establishment in question. It should be further increased by 5% of the revenues and income that have been earned through, but not directly recorded for the business establishment.

Permanent establishments apply the flat or the two-tier rate and are also eligible for tax allowances.

Foreign organisations which do not have a permanent business establishment in Hungary are not subject to corporate tax in respect of their income earned in Hungary.

V.7.2. Starting from 2010, foreign organisations that are legal entities established by Hungarian law, or which have no legal entity, personal associations, other organisations, and foreign entrepreneurs with an establishment in Hungary and who pay (provide) interest, copy right or service fees, and whose country of registration has no valid agreement with Hungary on the avoidance of double taxation (identified as “foreign companies” in Hungary) are liable to corporate tax on such income. The tax base is the amount of the interest, royalty or service fee, with certain exceptions. The tax rate is 30% that must be withheld, paid and declared to the tax authorities by the Hungarian payer.

V.7.3. Starting from 2010, foreign persons receiving income from the sale or withdrawal of shares in Hungarian companies holding real estate (known in Hungary as “members of companies holding real estate”), are liable to pay corporate tax on such income to the Hungarian tax authorities at the general corporate income tax rate. The tax base is the positive amount of the payment received upon sale or upon the reduction of the registered capital of the company, but reduced by the proven expenses relating to its maintenance.

V.8. General Administration (Tax Refund and Tax Declaration, Payment of Taxes)

Taxpayers whose tax year coincides with the calendar year must file their corporate tax return no later than 31 May of the year immediately following the tax year to which the tax return pertains. Taxpayers whose tax year differs from the calendar year must file their tax return within 150 days following the last day of the tax year to which the tax return pertains.

The taxpayer establishes the amount of corporate tax to be paid by self-assessment.

Please note that 1 EUR is 281 HUF at the time of the preparation of this information

Hungary



Corporate Law in India

  1. Compliance with regulations concerning foreign investment in India

Setting up of business in India has now become simpler compared to earlier years of closed economy.

Major bodies of law in India affecting foreign investment are the –

  1. Foreign Exchange Management Act of 1999 ("FEMA"),
  2. the Companies Act of 1956,
  3. The Industries(Development And Regulation) Act1951,
  4. The Competition Act, 2002 and
  5. The New Industrial Policy of 1991.

Foreign collaboration and equity participation in India is regulated by the Foreign Exchange Management Act of 1999 and rules and regulations thereunder. The Industries (Development & Regulation) Act of 1951 governs industrial regulation. The Companies Act of 1956 regulates corporations and their management in India. The Competition Act, 2002 governs fair competition and trade practices in the market. The New Industrial Policy of 1991 ("NIP") which lays down the policy and procedure for foreign investment has liberalized and simplified the investment procedures.

  1. Foreign Direct Investment Policy

Foreign Direct Investment (FDI) under automatic route is now allowed in all sectors, including the services sector, except a few sectors where the existing and notified sectoral policy does not permit FDI beyond a ceiling. FDI for virtually all trades / activities can be brought in through the automatic route under powers delegated to the Reserve Bank of India (RBI), and for remaining trades / activities through government approval. Government approvals are accorded on the recommendation of the Foreign Investment Promotion Board (FIPB).

A1.          Automatic Route

No prior approval is required for FDI under the Automatic Route. Only information to the RBI within 30days of inward remittances or issue of shares to Non Residents is required.  RBI has prescribed a new form, Form FC-GPR for reporting shares issued to the Foreign Investors by an Indian company. Foreign industries which do not need prior approval are required to notify the regional office of the Reserve Bank of India (RBI) within 30 days of receipt of inward remittances and file the required documents with that office within 30 days after issue of shares to foreign investors, namely:

  • name of the collaborators
  • details of allotment
  • copy of the foreign collaboration agreement
  • the original foreign inward remittance certificate from the authorised dealer and other specified information

Decisions on all foreign investment are taken within 30 days of application and the use of foreign brand name/trades is possible.

A2.          Government Approval

Foreign investments not covered under the ‘Automatic Route’ are considered for Governmental Approval on the recommendation of the Foreign Investment Promotion Board (FIPB).

Applications have to be be submitted in FC/IL form or on plain paper the FIPB), Department of Economic Affairs, Ministry of Finance. Non Resident Indians are required to submit their proposals to the Secretariat for Industrial Assistance (SIA), the Department of Industrial Policy and Promotion for consideration of FIPB. Investors are required to give the description of activities as per the National Industrial Classification of all Economic Activities (NIC) in their submissions.

A.3          SECTORAL INVESTMENT LIMITS IN INDIA

Foreign Direct Investment in India is allowed on automatic route in almost all sectors except

  • Proposals that require an industrial license and cases where foreign investment is more than 24% in the equity capital of manufacturing entities in small scale industries.
  • Proposals in which the foreign collaborator has a previous venture/tie-up in India.
  • Proposals relating to acquisition of shares in an existing Indian company in favour of a Foreign/Non-Resident Indian (NRI)/Overseas Corporate Body (OCB) investor; and
  • Proposals falling outside notified sectoral policy/caps or under sectors in which FDI is not permitted and/or whenever any investor chooses to make an application to the Foreign Investment Promotion Board and not to avail him or herself of the automatic route.

                FDI is not allowed under the following sectors: Arms and ammunition, Atomic Energy, Coal and lignite, Rail Transport, Mining of metals like iron, manganese, chrome, gypsum, sulfur, gold, diamonds, copper, zinc.

                Up to 100 per cent equity is allowed in the following sectors : 34 High Priority Industry Groups, Export Trading Companies, Hotels and Tourism-related Projects, Hospitals, Diagnostic Centers, Shipping, Deep Sea Fishing, Oil Exploration, Power, Housing and Real Estate Development, Highways, Bridges and Ports, Sick Industrial Units, Industries Requiring Compulsory Licensing, Industries Reserved for Small Scale Sector. Prior approval of the government is compulsory for banking and non banking financial companies (NBFCs), civil aviation, telecom services, petroleum explorations, venture capital funds, trading; defence production, atomic energy, bulk drugs and intermediates, mining, advertising and films.

A4.          SPECIAL PROMOTIONAL SCHEMES

A4.1        Export Oriented Units (EOUs)

The scheme for 100 % Export Oriented Units was introduced in 1980 for generating production capacity for exports. Under this scheme, businesses are eligible to procure machinery, raw materials, components, consumables, etc; from indigenous / imported sources, free of excise / custom duty.

EOUs do no need to not obtain separate industrial licenses for the manufacture of items in the SSI sector, irrespective of the investment in plant and machinery. Entities undertaking to export their entire production of goods and services may be set up under the EOU Schemes. Such entities may be engaged in manufacture, services, repair, remaking, reconditioning, reengineering, etc.

A4.2        Export Processing Zones (EPZ)

The Export Processing Zones set up as enclaves separated from the Domestic Tariff Area (DTA) by fiscal barriers, are intended to provide an internationally competitive duty free environment for export production at low cost. India has seven Export Processing Zones (EPZs), at Kandla (Gujarat), Mumbai (Maharashtra), Noida(UP),Madras (Tamil Nadu), Cochin (Kerala ), Falta (West Bengal) and Visakhapatnam (Andra Pradesh).

  1. BUSINESS STRUCTURES IN INDIA

A foreign company planning to set up business operations in India has the following two options:

  • As an Indian entity (incorporated company)
  • As a foreign company       (unincorporated company)

For registration and incorporation, a set of application forms has to be filed with Registrar of Companies (ROC). Once a company has been duly registered and incorporated as an Indian company, it is subject to Indian laws and regulations as applicable to other domestic Indian companies.
B1.           INDIAN ENTITY

A foreign company can commence operations in India by incorporating a company under the Companies Act, 1956 through:

  • Joint Ventures; or
  • Wholly Owned Subsidiaries

Foreign equity in such Indian companies can be up to 100% depending on the requirements of the investor, subject to equity caps in respect of the area of activities under the Foreign Direct Investment (FDI) policy.

  1. a) Joint Venture With An Indian Partner

    Foreign Companies can set up their operations in India by forging strategic alliances with Indian partners. Joint Venture may entail the following advantages for a foreign investor:
  • Established distribution/ marketing set up of the Indian partner
  • Available financial resource of the Indian partners
  • Established contacts of the Indian partners which help smoothen the process of setting up of operations

India's foreign direct investment rules have been substantially liberalised since the country first allowed foreign investment in the early 1990s. Most sectors are now open to 100% FDI. However, many foreign investors still prefer to set up a joint venture with an Indian partner company as this can give them access to the Indian partner's pre-established market and distribution channels, local management and know-how.

  1. b) Wholly Owned Subsidiary Company

    Foreign companies can also set up wholly owned subsidiary in sectors where 100% foreign direct investment is permitted under the FDI policy.

The principal forms of business structures in India are:

  • Sole Proprietorship

An individual on his/her own account carries out the business or profession. No formal procedure or formality is required for setting up a sole proprietary.

  • Partnership

A business relationship entered into by a formal agreement between two or more persons or corporations carrying on a business in common. Such partnerships are created under the Partnership Act of 1932 and where required is registered with the Registrar of Firms.

  • Company

A legal entity formed under the Companies Act, 1956. It can be public or private.

  • Limited Liability Partnership(LLP)

The LLP is an alternative corporate business entity that provides the benefits of limited liability of a company but allows its members the flexibility of organizing their internal management on the basis of a mutually-arrived agreement, as is the case in a partnership.

Companies incorporated in India and branches of foreign corporations are regulated by the Companies Act, 1956. The Act, which has been enacted to oversee the functioning of companies in India, draws heavily from the United Kingdom’s companies acts and although similar, is more comprehensive. The Registrar of Companies (ROC) and the Company Law Board (CLB), both working under the Department of Company Affairs, ensure compliance with the Act.

Types of Companies

A subsidiary or a joint venture company can be formed either as a private limited company or a public limited company and can have either limited or unlimited liability. A company can be limited by shares or by guarantee. In the former, the personal liability of members is limited to the amount unpaid on their shares while in the latter the personal liability is limited by a pre-decided nominated amount. For a company with unlimited liability, the liability of its members is unlimited. A company is regulated inter alia by the Ministry of Company Affairs/Registrar of Companies (ROC) under the Companies Act 1956. Once a company has been duly registered and incorporated as an Indian company, it is subject to Indian laws and regulations as applicable to other domestic Indian companies. Apart from statutory government owned concerns, the most prevalent form of large business enterprises is a company incorporated with limited liability. Companies limited by guarantee and unlimited companies are relatively uncommon.

(i)    Private Companies

A private company incorporated under the Act has the following characteristics:

  • The right to transfer shares is restricted.
  • The maximum number of its shareholders is limited to 50 (excluding employees).
  • No offer can be made to the public to subscribe to its shares and debentures. Prohibits any invitation to the public to subscribe for any shares or debentures of the company
  • Private companies are less regulated than public companies as they deal with the relatively smaller amounts of public money.
  • Prohibits any invitation or acceptance of deposits from persons other than its members, directors or their relatives
  • The minimum paid up capital at the time of incorporation of a private limited company is Indian Rupees 1,00,000 (approximately US Dollars 2,250).
  • There is no upper limit to the authorized capital and the paid up capital. It can be increased any time, by payment of additional stamp duty and registration fees.

A private company is deemed to be a public company in the following situations:

  • When 25 percent or more of the private company’s paid-up capital is held by one or more public company.
  • The private company holds 25 percent or more of the paid-up share capital of a public company.
  • The private company accepts or renews deposits from the public.
  • The private company’s average annual turnover exceeds Rs. 250 million during a period of 3 consecutive financial years.

A private Company can be formed either by

  • incorporation of a new company for a new business , or
  • conversion of an existing business of a sole proprietor or a partnership into a company.

(ii)    Public Companies

A public company is defined as a company which is not a private company and must have a minimum paid-up capital of five lakh rupees or such higher paid-up capital, as may be prescribed.

INCORPORATING A COMPANY

In order to incorporate a company the following steps have to be taken, which can take between three or four months:

1. The name:

The promoters of the company must select three or four suitable names and should indicate the main object of the company. The name should not resemble the name of any other company already registered and must not violate the provisions of Emblems and names (Prevention of Improper Use) Act, 1950. A foreign brand name for the sale of goods in India is permitted.

The company must apply to the relevant Registrar of Companies to ascertain the availability of the name along with a fee (Form 1-A). On submitting the application, the Registrar of Companies sends an approval letter within about 10 days. If the proposed name is not available the same application can be used for another name.

2. Memorandum of Association:

The Memorandum of Association, containing the basic objects on which the company is incorporated (the name, the State in which the registered office is to be situated, the main objects of the company to be pursued, the liability of the members and the authorized capital) has to be drafted.

3. Articles of Association:

The articles of association of the company which govern the internal management of affairs of the company and the conduct of its business have to be prepared.

4. Registration of company and issue of capital:

After completion of the preliminary steps the company has to file the following documents with the Register of Companies (ROC) of the State in which the company is proposed to be incorporated:

  • Duly stamped original and one duplicate of the company’s memorandum of association and articles of association, signed by at least two subscribers in his/her own hand, his/her father's name, occupation, address and the number of shares subscribed for and witnessed by at least one person
  • The agreement, if any, which the company proposes to enter into with any individual for appointments as its managing director
  • A copy of the letter of the ROC confirming the availability of the name
  • Documents evidencing payment of prescribed registration and filing fees
  • Documents evidencing the directorship and situation of the registered office (Form 32 and Form 18) and declaration of compliance with requirements of the Companies Act (Form 1 and Form 29) for giving consent to act as director in case of public company
  • The amount of registration fee payable (regulated with reference to the amount of authorized capital)

6. Issue of share capital:

After registration, the company can start trading and issue shares. It is necessary for a public company to obtain a Certificate of Commencement of Business, before commencing business.

Process for incorporation of Limited Liability Partnership (LLP)

The Limited Liability Partnership Act of 2008 introduced Limited Liability Partnerships (LLP) in India. This format would be quite useful for small and medium enterprises in general and for the enterprises in services sector in particular, including professionals and knowledge based enterprises. An LLP is a body corporate and a legal entity separate from its partners and has perpetual succession. While the LLP is a separate legal entity, liable to the full extent of its assets, the liability of the partners is limited to their agreed contribution in the LLP.  Further, no partner is liable for the independent or unauthorized actions of other partners, thus allowing individual partners to be shielded from joint liability created by another partner’s wrongful business decisions or misconduct. The Indian Partnership Act 1932 does not apply to LLPs and there is no upper limit on the number of partners in an LLP unlike an ordinary partnership where the maximum number of partners cannot exceed 20.  An LLP must maintain annual accounts reflecting the true and fair view of its state of affairs. The taxation of LLPs is governed by the Income Tax Act, 1961.

  1. AS A FOREIGN COMPANY

Foreign Companies can set up their operations in India through:

  • Liaison Office/Representative Office
  • Project Office
  • Branch Office

Such offices can undertake any permitted activities. Companies have to register themselves with the Registrar of Companies (ROC) within 30 days of setting up a place of business in India. Such offices can undertake activities permitted under the Foreign Exchange Management (Establishment in India of branch or office of other place of business) Regulations, 2000.

  1. a) Liaison Office(LO)

A liaison office acts as a channel of communication between the principal place of business or head office and entities in India. The liaison office cannot undertake any commercial activity directly or indirectly and cannot, therefore, earn any income in India. Its role is limited to collecting information about possible market opportunities and providing information about the company and its products to prospective Indian customers. It can promote export/import from/to India and also facilitate technical/financial collaboration between parent company and companies in India. Approval for establishing a liaison office in India is granted by Reserve Bank of India (RBI).

Remittance facilities  - As stated above, a liaison office cannot earn any income in India (except for interest on surplus funds lying in its local bank account subject to certain conditions). Therefore, all expenses of the liaison office have to be met out of inward remittances from the head office. Any balance in the liaison office account can typically be repatriated, but only at the time of closure of the liaison office.

Under the current exchange control regulations, a liaison office is permitted to:

  • Represent the parent/group companies in India ;
  • Promote exports and imports from/to India;
  • Promote technical /financial collaborations between parent/group companies and companies in India ;
  • Act as a communication channel between parent/group companies and companies in India.

Typically, a liaison office is not permitted to:

  • Earn any income;
  • Undertake any industrial, trading or commercial activity;
  • Enter into any agreement on behalf of the head office;
  • Borrow or lend money for any commercial activity;
  • Charge any fee or commission or otherwise earn any income, in respect of liaison activities carried on in India.

Taxation  - Even though liaison offices are not permitted to earn any income in India section 139(1) of the Income Tax Act 1961 requires all companies to file a return on income. Hence, liaison offices are also required to file an income return.

Exit options - Closure of a liaison office normally involves a time frame of five to six weeks. An application enclosing the prescribed documentation is required to be made to the requisite regional office of RBI.  The Bankers/Authorized Dealers are now authorised to extend the validity period of liaison offices of foreign entities and also deal with closure application of such liaison offices in India. The LO of Foreign banks obtaining prior approval from RBI under the Banking Regulation do not need separate RBI approval under the foreign exchange regulations. Similarly foreign insurance companies are permitted to set-up LO without RBI approval subject to necessary approval from the Insurance Regulatory and Development Authority of India.

  1. b) Project Office(PO)

Foreign Companies planning to execute specific projects in India can set up temporary project/site offices in India. RBI has now granted general permission to foreign entities to establish Project Offices subject to specified conditions. Such offices cannot undertake or carry on any activity other than the activity relating and incidental to execution of the project. Project Offices may remit outside India the surplus profits of the project on its completion, general permission for which must have been granted by the RBI.  It is no longer necessary to obtain prior RBI approval for a PO that meets specified conditions and only post facto filings are mandatory. Similarly they can be wound up without any specific approval by relevant filings through Bankers. A PO can is permitted to open, hold and maintain one or more foreign currency accounts subject to prescribed conditions /parameters.
Remittance facilities  - A project office is permitted to open and operate a bank account including a foreign currency account in India. Typically, expenses of the project office in India can be met only from inward remittances from the head office, or rupee amounts received locally under approved contract(s). Outward remittances from the bank account are permitted subject to certain compliance requirements.

Taxation - A project office is considered as an extension of a foreign company in India. Therefore, income earned by the project office is taxable in India in accordance with the taxation provisions applicable to foreign companies under the Income Tax Act 1961.

Exit options - Being a restricted business presence in India, the process for closure of a project office is straightforward, and normally involves a time frame of five to six weeks. An application enclosing the prescribed documentation has to be made to the regional office of RBI in case the project office was established under the approval route and to the Authorized Dealer in case the project office was established under the general permission.

  1. c) Branch Office(BO)

Foreign companies engaged in manufacturing and trading activities abroad are allowed to set up Branch Offices in India.

Scope of activities - Branch offices are permitted to undertake only those activities, as approved by RBI. They are generally allowed to do the following:

  • Rendering professional or consultancy services
  • Carrying out research work, in which the parent company is engaged.
  • Promoting technical or financial collaborations between Indian companies and parent or overseas group company.
  • Representing the parent company in India and acting as buying/selling agents in India.
  • Rendering services in Information Technology and development of software in India.
  • Rendering technical support to the products supplied by the parent/ group companies.
  • Foreign airline/shipping company.

The activities permitted for a BO does not include manufacturing and domestic/retail trading. However, no prior approval is required to set up a BO in SEZ to undertake manufacturing or service activity provided 100 percent FDI is allowed under the Automatic Route in this sector and it may be subject to other conditions. The BO of Foreign banks obtaining prior approval from RBI under the Banking Regulation do not need separate RBI approval under the foreign exchange regulations. The Bankers/Authorized dealers are now authorized to deal with the closure application of Branch offices of foreign companies in India.

A branch office can subcontract manufacturing services to an Indian manufacturer. Branch Offices established with the approval of RBI, may remit profits, net of applicable Indian taxes and subject to RBI guidelines to destinations outside India.

Approval process - An application in the prescribed form has to be submitted to the RBI for establishing a branch office in India. The lead time for processing a branch office approval typically ranges from four to five weeks, unless the application is referred to the administrative ministry concerned (such as in the case of banking entities) within the Government of India for comments which may lead to an increase in processing time.
Taxation - A branch office is considered as an extension of a foreign company in India. Therefore, income earned by the branch office is taxed in India in accordance with the taxation provisions applicable to foreign companies under the Income Tax Act 1961.  In case the provisions of a tax treaty between India and the country of which the foreign company is resident, are more beneficial than the Income Tax Act 1961, then it is open to the foreign company to elect being taxed under the provisions of the relevant tax treaty.

Exit options - Closure of a branch office normally involves a time frame of six to eight weeks. An application enclosing the prescribed documentation has to be made to the Central office of RBI.

Compliances - Apart from obtaining RBI approval for establishing a liaison office, project office or branch office, the foreign company is also required to register with the Registrar of Companies ("ROC"). An application has to be filed in the prescribed form within 30 days of the establishment of the office in India with the ROC. The ROC will issue a certificate of establishment of place of business in India to the foreign company. Applications for setting up Liaison Offices/ Project Offices/ Branch Offices may be submitted in form FNC 1. A non-resident Indian or a person of Indian origin resident outside India may invest by way of contribution to the capital of a firm or a proprietary concern in India on non-repatriation basis provided:

  • The amount is invested by inward remittance or out of an NRE/FCNR/NRO account maintained with an Authorised Dealer (AD)
  • The firm is not engaged in any agricultural/plantation or real estate business
  • The amount invested is not eligible for repatriation outside India.   NRIs/PIO may invest in sole proprietorship concerns/ partnership firms with repatriation benefits with the approval of the Government /RBI.

There are numerous eligibility criteria and procedural guidelines for the establishment of LOs by foreign entities in India. The foreign entity needs to have a successful profit making track record during for the immediately preceding 3 years in the home country. Further, a net worth of not less than USD 50,000 is also required. The foreign company proposing to set-up a BO in India needs to have a successful profit making track record during for the immediately preceding 5 years in the home country and a net worth of not less than USD 100,000. Foreign companies that do not satisfy the eligibility criteria and are subsidiaries of other companies may submit a Letter of Comfort from their parent company in a prescribed format subject to the parent company satisfying the eligibility criteria.

Post set-up in India, various registrations and compliance obligations entail on the LO/BO including obtaining a Unique Identification Number from the RBI. In view of sizeable paperwork and time frame obligations, the entire process needs to be carefully planned and implemented.

  1. SETTING UP INDUSTRIAL UNDERTAKINGS

Besides the general approvals required by a foreign company to invest in India, the following clearances/permissions are required, for setting up industrial/manufacturing ventures:

  1. Industrial Licensing - If the intended products require compulsory licensing, applications are to be made on form IL to the Secretariat of Industrial Approvals. Applications may be prepared by either the Indian partner or by the foreign company.
  1. Import Export Code Number: Issued by the RBI for carrying out import and export transactions of capital, goods and raw materials, etc.
  1. 3. Local and Central Sales Tax Registration Number: Issued by the local state government, Department of Revenue, required for all sales within the state and for interstate sales.
  1. Pollution Clearance: Allocated by the State Pollution Control Board. If the proposed business is a large project, the Central Pollution Control Board is also involved in the clearance process.
  1. Land Allotment for Industrial Plot: Industrial land is allotted by the State Industrial Development Corporation or Development Authority concerned. Provisional letters are issued in approved industrial areas, subject to final allotment based on the sanction of building plans prepared by a qualified architect, pollution clearance and certification from the Inspectorate of Factories for working conditions like safety, hygiene, lighting and other amenity standards.
  1. Electricity/Power Connection: The State Electricity Board gives approvals for connection and distribution of private power. The allotment process takes from 2 - 6 months depending on the efficiency of the local authorities.
  1. Attestation of list of Imported Capital Goods: Issued by the Director General of Foreign Trade or Collectorate of Customs and Excise, Ministry of Commerce.
  1. Registration under the Factories Act: Issued by the Inspectorate of Factories, which sets norms for worker safety and general working conditions in factories.
  1. 9. Product Specific Clearances: In certain industries such as drugs, cosmetics, food products, mining, etc. clearances are required from respective authorities.

India



Corporate Law in Ireland

Ireland has long had an international reputation as a major inward investment location with particular emphasis on the information technology and pharmaceutical sectors.

Ireland also has a range of tax incentives available including a 25% R&D Tax Credit scheme since 2004 (in addition to a tax deduction at 12.5% for R&D expenditure in Ireland), stamp duty exemptions on the transfer of Intellectual Property and exemption for income arising from certain qualifying patents. Ireland also has an attractive rate of corporation tax at 12.5% for trading income and 25% for non-trading income.

  1. Procedures and formalities

Competent authority:

The Companies Registration Office (“CRO”) is the statutory authority for registering new companies in the Republic of Ireland and has a number of other core functions including the receipt and registration of post incorporation documents. The CRO also makes available company information to the public and is taking an increasingly active role in company law enforcement.

Statutory regulation:

Companies are primarily regulated by the Companies Acts 1963 to 2009 (“Companies Acts”) and subordinate legislation.

Timeframe:

A company registered under the Companies Acts becomes a body corporate as and from the date mentioned in its certificate of incorporation as issued by the CRO. If the company purports to carry on business before the Certificate of Incorporation has been issued, the company will be trading without limited liability protection and may be liable for any debts incurred prior to incorporation

Incorporation Schemes:

Applications to incorporate an Irish Company are made to the CRO. The fast track procedure allows companies to be incorporated within 5 working days while the normal process takes up to 15 working days.

Subject to certain exceptions, it is illegal for anyone other than an Irish solicitor to draw up or prepare a memorandum or articles of association.

Expenses:

The CRO filing expenses for setting up a company are as follows:

Document Paper Electronic
New private limited company (Form A1) 100 50 (CRODisk)*
Application by plc to commence business & declaration of particulars (Form 70) 300 N/A
External company registration (Forms F1/F12/F13) 60 N/A
Registration of a business or trading name (Forms RBN1/RBN1A/RBN1B) 40 20
LP1 - Application for registration of a limited partnership 2.50 N/A

 

In order to incorporate a company it is necessary to file with the CRO:

  • a copy of the memorandum and articles of association signed by the initial member(s) who have subscribed for shares;
  • a statutory form (Form A1) signed by the initial member(s), the initial directors and the initial secretary; and
  • the prescribed incorporation fee

Company or business name:

It is important that persons forming companies satisfy themselves of the acceptability of the proposed name for their company in advance of submission of documents to the CRO.

There are restrictions on the choice of company name and the CRO can refuse to register a name in certain circumstances, for example:-

  • if it is already on the Register or if it is phonetically or visually similar to a name which already appears on the Register; or
  • if it is offensive.

Therefore, in order to avoid any additional expense, signs, headed notepaper, stationery, advertising etc. should not be printed until the Certificate of Incorporation has been issued by the CRO.

Banking facilities

Before the Company can commence trading, it must have a bank account.

Constitutional documents:

Every company must adopt a set of Memorandum and Articles of Association. The Memorandum of Association, a company’s primary constitutional document, must record the Company’s name, objects, capital and state whether the liability of its members is to be limited or unlimited. Articles of Association detail the company’s internal management rules.

  1. Business structures

The choice of a particular business structure will depend on the needs of the investor. A foreign company can choose between establishing a branch or a subsidiary to conduct business in Ireland.

  1. Branches

External companies

An external (foreign) company registered abroad may establish (1) a place of business or (2) a branch in the State. The external company must register with the CRO within one month of the establishment of a place of business in the State. Differing rules apply to the registration of a place of business or a branch.

  • Place of Business

This is an office which performs operations ancillary or incidental to the company’s business. A place of business would include a share transfer office or an office undertaking promotional activities for the business of the company. Any business resulting from the activities of the place of business must be dealt with by representatives of the company in the home state.

Procedure.

The external company must register with the CRO within one month of the establishment of a place of business in the State. A registration form must be filed with the CRO; it must be accompanied by a certified copy of the Memorandum and Articles of Association of the external company in the original language, the original date of incorporation and the filing fee. Where required, a certified English translation of all documents must accompany the application. The place of business must also register its business name with the CRO.

Ongoing filing requirements differ depending on the nature of the external company.

  • Branch

In general terms a branch does not have its own legal personality and is not legally distinct from the external company. The external company has unlimited liability for any debts of the branch.

All branches established in Ireland must be registered under the EC (Branch Disclosures) Regulations 1993 ("Branch Disclosure Regulations") within one month of establishment. The regulations apply to the equivalent of Irish limited liability companies, incorporated in another state, which establish a branch in this state. There are some differences between the requirements imposed on a company from a member state of the European Union and companies from other countries.

The Branch Disclosure Regulations require the following to be provided to the CRO within one month of the establishment of the branch:

  • A certified copy of the charter, statutes or memorandum and articles of the external company;
  • A copy of the certificate of incorporation of the company;
  • Copies of the latest accounting documents (accounts of the external company for the period, any consolidated group accounts, annual reports or auditors reports);
  • Details of the name and legal classification of the company;
  • Place of registration of the company;
  • Registered number of the company;
  • Name of branch (if different from company name);
  • Address of the branch;
  • Activities of the branch;
  • A list of particulars of persons authorised to represent the company, the extent of their powers in relation to the company and whether they can represent the company alone/jointly;
  • Name of person in Ireland authorised to accept service of process on behalf of the company; and
  • Name of person in Ireland responsible for ensuring compliance with the regulations.

All companies, including private companies, operating a branch in the State are required to file:

  • the accounts of the company for the period, including if it has one or more subsidiaries, any consolidated accounts of the group
  • any annual report of the directors for the period
  • the report of the auditors on the company accounts
  • any report of the auditors on the directors’ report

Places of business and branches must register their business names with the CRO. Registration of a business name does not afford any right of priority to or exclusivity of use to any name.

An external company is liable to Irish corporation tax on profits arising from any business conducted through an Irish branch.

  1. The meaning of a Subsidiary in Irish Law and the Creation of an Irish company

Under Irish law, a company (“Company B” for the purpose of this paragraph) will be a subsidiary of another company (“Company A”) if Company A is (1) a member of Company B and controls the composition of its board of directors; or (2) holds more than half in nominal value of its equity share capital; or (3) holds more than half in nominal value of its shares carrying voting rights (other than voting rights which arise only in specified circumstances); or       Company B is a subsidiary of any company which is a subsidiary of Company A.

There are four types of Irish limited company:

  • A private company limited by shares:
  • No minimum capitalisation requirement
  • Members' liability, if the company is wound up, is limited to the amount unpaid on the shares the members hold.
  • Minimum number of members is 1 (see Single member company section below)
  • Maximum number of members is 99.
  • This entity type is by far the most common in Ireland
  • A private company limited by guarantee not having a share capital:
  • Minimum capitalisation requirement of €1.
  • Minimum of seven members.
  • Members' liability is limited to the amount they have undertaken to contribute to the assets of the company, in the event it is wound up, not exceeding the amount specified in the memorandum.
  • Many charitable and professional bodies use this form of company
  • Offers separate legal personality, limited liability but does not require fundraising from the members.
  • A private company limited by guarantee having a share capital:
  • Maximum number of members is 99.
  • Minimum number of members is 1 (see Single member company section below)
  • Members have liability under two headings;
  • the amount unpaid on the shares they hold
  • the amount they have undertaken to contribute to the assets of the company, in the event that it is wound up.
  • A public limited company:
  • Minimum of seven members
  • No maximum amount of members
  • Member liability is limited to the amount unpaid on any shares held by them.
  • Nominal value of the company's allotted share capital must not be less than €38,092.14, at least 25% of which must be fully paid up before the company commences business or exercises any borrowing powers.
  • May or may not be quoted on a Stock Exchange
  • The company must not commence any business or exercise any borrowing powers until a certificate entitling it to commence business has been issued by the CRO. To acquire such a certificate, the company must file Form 70 (A4) which confirms that the nominal value of the company’s allotted share capital
  • Note that it is unlawful to issue any form of prospectus except in compliance with the Companies Acts 1963-2009.

Single Member Company

A single member company is a private company limited by shares ((1) above) or a guarantee company having a share capital ((3) above), which is incorporated with one member, or whose membership is reduced to one person.

  • Must have at least two directors and a secretary.
  • Annual General Meetings and Extraordinary General Meetings need not be held if the sole member so decides (subject to modifications required by the European Communities (Single-Member Private Limited Companies) Regulations 1994)
  • Accounts and reports that would normally be laid before the AGM of a company still need to be prepared and forwarded to the member.

Unlimited company

  • No limit placed on the liability of the members.
  • Minimum of two members
  • Recourse may be had by creditors to the members in respect of any liabilities owed by the company which the company has failed to discharge.
  • No annual return is required to be filed with the CRO.

There are several other forms of company which can be registered in Ireland which will not be addressed in detail.

UCITS

A UCIT is a public limited company formed under EU Regulation (European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 1989 & 1999) and the Companies Acts 1963-2009. The sole object of a UCIT is the collective investment in transferable securities of capital raised from the public that operates on the principle of risk-spreading. The Central Bank of Ireland has to approve registration of a UCIT. Form A1 and the draft memorandum and articles of association must be submitted to the CRO.

  1. Partnerships

Unlimited partnerships

A partnership is not a separate legal entity from its members. Partners have unlimited liability and partnerships are not required to go through a registration process. There are two types of partnership in which the partners have unlimited liability (1) a partnership at will (informal partnership) and (2) a formal partnership. A formal partnership should always operate under a written agreement otherwise certain terms and conditions will automatically be considered to govern the partnership and the partners.

Limited partnerships

A limited partnership is a particular type of partnership which permits some of the partners to benefit from limited liability. The partnership consists of at least one general partner who has unlimited liability and one or more limited partners. There are limits on the number of limited partners allowed in a limited partnership. Limited partners are liable for partnership obligations only to the extent of the cash and property they contribute. If the general partner is a limited company, the limited partnership is obliged to file its accounts on the public record with the CRO. A partnership, limited or general, is required to register the business name of the partnership with the Registrar of Business Names

Investment limited partnerships

This type of partnership is a collective investment scheme with at least one general partner with unlimited liability and one limited partner having as its principal business the investment of its funds in property of all kinds. A certificate of authorisation from the Central Bank is required.

A partnership as such is not chargeable to income tax. Each partner is charged individually for the tax referable to his/her share of the partnership income.

  1. Taxation

All companies resident in the State and all non resident companies which carry on a trade in the State through a branch or agency, subject to specific exceptions, are liable to corporation tax. The Taxes Consolidation Act, 1997 and subsequent Finance Acts are the primary pieces of legislation.

A company which commences to carry on a trade, profession or business is obliged to deliver a written statement within thirty days of commencement to the Revenue Commissioners containing such information as the name of the company, its registered office, the name of the secretary and the nature of the trade, profession or business.

When a company first comes within the charge to Irish tax, the company (whether an Irish company or a foreign company through its Irish branch) is required to file a form with the Irish Revenue Commissioners. This form provides for the registration for Irish corporation tax, PAYE/PRSI (social insurance) and VAT, as appropriate.

Rates of Taxation

The rates of Corporation Tax effective from 1st January 2002 are 12.5% for trading income and 25% for non-trading income (although there may be opportunities to avail of reliefs or exemptions to minimise tax liabilities). Non-trading income is sometimes referred to as passive income (e.g. investment income, foreign dividends and rental income).

A company is considered to be Irish tax resident if it is managed and controlled in Ireland.

Additional rates of tax that may apply:

  • No capital duty is chargeable on the allotment of shares in an Irish company.
  • There is a 1% stamp duty payable on the transfer of shares above a €1,000 total value.
  • Dividend withholding tax is payable but there are exceptions to this where the dividend is paid to:

(a)                   a person (other than a company) who is neither resident nor ordinarily resident in the State and who is resident for tax purposes in a country with which Ireland has a double taxation treaty (a tax treaty country) or in another EU member state,

(b)                   a company resident in another EU member state or in a tax treaty country and which is not controlled by Irish residents, where a certificate of tax residence is provided from the tax authority of the country concerned and a certificate from the auditor of the non-resident company is provided certifying that it is not controlled by Irish residents.

  • Capital Gains tax is payable on any chargeable gains at a rate of 25%

Tax is payable on a preliminary basis and is generally payable in two instalments during the company’s accounting period, calculated with reference to previous tax liability or projected liability.

In general, a company’s tax accounting period will coincide with its financial accounting period. However, a tax accounting period may not exceed a period of 12 months

  1. Corporate Governance
  • Meetings and Resolutions

The day to day business of a company is conducted by its board of directors. Certain types of a company’s business require the approval of its members, for example where it is proposed to amend the memorandum or articles of association of a company.

Any powers which have not been delegated or cannot be delegated to the directors are the powers of the members.

The members may resolve to take certain actions. A minimum of three (in the case of a public limited company) or two (in the case of a non-single member private limited company) members may pass resolutions. The resolution must be passed by the requisite majority of those persons entitled to vote at a meeting properly notified in advance to the members and where a quorum is present.

Annual General Meeting

An AGM must be held once in each calendar year following incorporation and not more than 15 months after the previous one. 21 clear days notice of the AGM must be given unless all entitled to attend and vote agree to accept shorter notice. Certain business must be laid before the members at the meeting, including presenting the company’s accounts to its members.

Extraordinary General Meeting

Any meeting of the members of the company, other than an AGM, is an Extraordinary General Meeting (EGM). 14 clear day’s notice is required unless all entitled to attend agree to accept shorter notice. The directors may convene an EGM or one may be requisitioned by a member provided they meet certain shareholding thresholds set out in the Companies Acts.

  • Types of resolution

Special resolution

Special resolutions are required where specified by the Companies Acts or where the Articles of Association so state.   The members must be given 21 days clear notice and a 75% majority approval for the resolution to be adopted must be secured.

Ordinary resolutions

The notice period required varies depending on the type of meeting. A simple majority of the members present must vote in favour of the resolution for it to be adopted. Certain resolutions must be filed with the CRO.

Written resolutions

Where the articles of association provide, it is often possible for a resolution to be passed by way of written resolution without the need to convene and vote at a meeting of members.. It is not possible to transact the business of an AGM by written resolution as the Companies Acts provide that an AGM must take place.

Statutory registers

A private limited company must maintain registers of members and directors; a register of every instrument creating a charge and a register containing particulars of the interests of directors, secretaries and connected persons must also be kept. These registers must be made available for inspection by members of the company.

Although not required by law, it is not uncommon for further registers recording details of applications, allotments and uses of the company seal to be kept.

Minutes

Every company must keep minutes of proceedings at general meetings of the company. Members have a right to inspect these minutes but not the minutes of any meetings of the company directors.

Shares

Every member of a company is entitled to a certificate specifying the number of shares held by him.

  1. Ongoing requirements

Auditors

Every company (except for small companies – see below) is required to appoint an auditor, whose principal function is to examine the books of account, annual accounts and directors’ report made or kept by the directors and officers of the company, and to make a report on his findings to the members of the company.

Annual accounts must be filed every year. If the company is fully trading, audited accounts must be prepared by the auditor. “Small companies” whose turnover and assets are below certain levels (below €7.3m turnover and below €3.65m in assets) may not be required to have their financial statements audited. The company must not be a parent company or a subsidiary company. The obligation to file those unaudited financial statements with the Companies Registration Office remains.

Ongoing obligations

  • Certain particulars of the company are required to be listed on the company letterhead, website, email and faxes.
  • The registered office of a company is that to which CRO correspondence and all formal legal notices addressed to the company will be sent. The registered office can be anywhere in the State.
  • A company may not be incorporated and registered unless it appears to the Registrar of Companies that the company, when registered, will carry on an activity in the State.
  • All company types must have one secretary and a minimum of two directors.
  • One of the directors must be resident in an European Economic Area (EEA) member state.  The secretary may be one of the directors of the company. A body corporate may act as secretary to another company, but not to itself. The requirement to have at least one resident director from a European Economic Area (EEA) member state does not apply to any company which for the time being holds a bond, in the prescribed form, in force to the value of €25,394.76
  • A nameplate is obliged to be affixed outside every office or place in which the company carries on business.
  • The company must have a common seal.
  • A company is obliged to deliver an annual return at least once in every year to the CRO. An annual return contains details of the company’s directors and secretary, its registered office, details of members and share capital. The return is required to be made up to the company’s Annual Return Date (ARD) and filed with the CRO within 28 days of that date.
  1. Trust companies and anonymity/ transparency
  • An Irish company can issue bearer shares provided the company’s articles permit it. Bearer shares are rarely issued.
  • Shareholder details are kept in statutory books and filed in the CRO
  • An overall tax planning structure may be set up to protect anonymity of shareholders but the CRO and the registers kept by companies are only concerned with the legal title (and not the beneficial ownership) to shares.
  • There is a statutory prohibition on the entry of any trust, express, implied or constructive, on the statutory books of companies and the CRO do not record this information either.

Lavelle Solicitors



Corporate Law in Israel

  1. Introduction

Israeli Company Law recognizes the right to incorporate, and provides that "Any person may found a company, provided that none of the purposes of the company are illegal, immoral or contrary to public policy."

The philosophy which forms the basis of Israeli Company Law is recognition of the autonomy of the founders’ will and minimal intervention in the matters of the company, starting from the stage of its establishment and continuing throughout the entire period of its existence. The individual is free to incorporate and he needs to be free to determine the contents of his incorporation. Since that is so, a substantial portion of the provisions of Israeli Company Law is non-mandatory and only a minority is mandatory. The freedom of will finds expression, for example, in the ability to vary the types of shares and the ability in principle to amend the Articles of Association by a simple majority. The mandatory aspect is preserved primarily in places where it is required to protect third parties.

This chapter will deal with the process of establishing a company in Israel, through specifying and explaining the various documents required for the purpose of registering the company, as well as a description of the various organs in a company and their authority.

In addition thereto, since Israeli Company Law recognizes the ability of a company organized outside of Israel to maintain a place of business in Israel, if it is registered as a foreign company, we will describe the registration process of a foreign company.

  1. Establishing a Company in Israel
  2. Procedures for Forming and Registering a Company

A party wishing to establish a company in Israel is required to submit to the Registrar of Companies in Israel a number of documents, which shall be detailed below.

It should be noted that all the documents that are submitted to the Registrar of Companies must be written in Hebrew. Therefore, documents that need to be signed by a signatory who does not know how to read Hebrew, will be translated into English and submitted to the Register of Companies; then they are translated back to Hebrew and accompanied with a notarial certificate as to the correctness of such translation.

  1. An Application to Register a Company

The party wishing to register a company must submit to the Registrar of Companies an application pursuant to Form No. 1 in the Supplement to the Companies Regulations (Reporting, Registration Details and Forms), 5760 – 1999 (hereinafter: “Reporting Regulations”), called ‘An Application to Register a Company’, completed with the required details (the details of the applicant, the details of the company, proposed name, purposes of the company, address of the registered office, the company's capital and the liability of the shareholders).

The name of the person signing the application to register a company, his ID number, and his signature on the application are to be certified by an attorney who shall note that he warned the signatory as to the consequences of his declaration.

If the signing of the application is done abroad, then the certification of the signature must be made before an Israeli consular representative or diplomat in writing, signed and sealed personally on the document or annexed to the document, or in writing by a public notary signed personally and sealed with his notarial seal and certified in writing by an Israeli diplomatic or consular representative, and with his official seal on the document or annexed to the document.

In the event that the sole applicant does not have Israeli ID, there shall be attached a confirmed copy of his passport, certified by one of the following: an Israeli diplomatic or consular representative or a notary authorized in the country that issued the passport, or an attorney having an Israeli license to practice law or a notary authorized in the country of residence of the individual who is not an Israeli resident.

In the event that the applicant is a company that was incorporated outside of Israel, there shall be attached a confirmed copy of the Certificate of Incorporation or registration of the company in the country where it was incorporated, together with a certification as to the existence of the company at that time, certified as stated above, and translated into Hebrew or English, confirmed by a notary and certified as aforesaid.

  1. The Articles of Association of the Company

Each company must have Articles of Association, which shall organize the understandings among the founders of the company. The Articles of Association must be signed by the initial shareholders of the Company and there shall be noted therein the allocation of shares, as well as the name, address and ID number of each shareholder. If a shareholder does not have Israeli ID, a copy of his passport shall be attached and certified as stated above. An attorney shall certify by his signature on the Articles of Association the identity of those executing the Articles of Association and their qualifications, in accordance with the methods of certification that were noted above.

Due to the importance of this document, we will deal with it separately below.

  1. Declaration of the Initial Shareholders

Each one of the initial shareholders of the company must declare, if he is an individual: that he is qualified to form a company and to hold shares therein and that he is not limited by law (such as, that he is a minor, incompetent, limited in means, bankrupt, or someone whose business has been limited by the courts); and with regard to a company: that the company was lawfully registered and that there is no legal limitation imposed upon it. If the sole shareholder is not the bearer of Israeli ID, he shall present a copy of his passport; if the shareholder is a foreign company, it shall present a copy of its Certificate of Incorporation or registration of the company, as is noted above. The declaration must be certified by an attorney who warns the person signing that he must tell the truth, in accordance with the rules of certification noted above.

It should be noted that a company can have a sole shareholder.

  1. Declaration of the Initial Directors

The initial directors must make a declaration, prepared in accordance with Form No. 2 in the Reporting Regulations, with regard to an individual: that he is qualified to serve as an initial director of the company and there is no lawful limitation to do so and he is willing to serve as an initial director; and with regard to a company: that it is lawfully registered and that there is no lawful limitation preventing it from serving as a director, that no liquidation order has been issued against it and that it has not decided to go into voluntary liquidation, and the identity of the individual who will serve as director on behalf of the company should also be specified. The aforementioned rules with regard to a foreign citizen and/or company, as well as with regard to certification of the declaration, apply also with regard to this matter.

Who is qualified to serve as a director?

A director, as stated, can be an individual or a company, unless it is provided otherwise in the company's Articles of Association.

A minor, an incompetent person, someone who has been declared bankrupt, as well as a company that has decided to liquidate voluntarily or against whom an order of liquidation has been issued, cannot be appointed as director.

In a public company, a person cannot be appointed and shall not serve as a director if he also lacks the required qualifications and the ability to dedicate the proper amount of time to the function of company director, paying attention, among other things, to the special needs and size of the company. Likewise, someone who was convicted in a final court decision of one of the crimes specified in the Companies Law may not be appointed as a director of a public company, unless five years have expired since the date of the judgment convicting him, and so long as the court did not hold that, despite the conviction for the crimes stated, and in paying attention to the circumstances of the crime, there is no obstacle to serving as a director in a public company. (It should be noted that the law imposes on the candidate for the office of director a duty of disclosure regarding a conviction as stated above. The law also stipulates that a director's office shall terminate when a director has been convicted by a final judgment of an offense provided in the Companies Law).

The initial directors of the company are appointed by the incorporators of the company and their service shall end upon the completion of the first General Meeting, unless it is provided otherwise in the Articles of Association of the company.

  1. Evidence Regarding the Payment of the Fee

Someone seeking to register a company is required to append evidence regarding the payment of the company registration fee. The amount of the fee, as of the current time, stands at NIS 2,435.

In addition to the said one-time payment, NIS 2 must be paid for each certified copy of a page of the Articles of Association submitted.

In addition to the fee required for the purpose of registering a company, as stated, there is a fixed annual fee that is paid each year, commencing with the second year of the company's existence, which is (as of the current time) as follows:

  • If the fee is paid by December 31 of the year-sum of NIS 1,386.
  • If the fee is paid by the end of February of that year - a reduced amount of NIS 1,043.
  • If the fee is paid after the end of the year, it shall be at the rate at the time of the payment.

The Registrar of Companies will register a company if he finds that all the requirements pursuant to the Companies Law have been fulfilled in connection with the registration and any matter that is a condition thereof. A company that is incorporated will receive a Certificate of Incorporation, in which there shall also be noted the serial number given to the company. Any document or report that is submitted to the Registrar after the incorporation of the company should bear this number. The Certificate of Incorporation shall serve as final proof that all the requirements pursuant to the Companies Law have been complied with as regards the incorporation and any matter that is a condition thereof.

The company exists from the date it is incorporated as noted in the Certificate of Incorporation.
It should be noted that the documents filed with the Registrar of Companies are open to the public and anyone can view them and receive certified copies of them.

  1. The Company’s Articles of Association

In order for the company to act as an independent legal entity, there is a need to determine the agreement reached between the founders of the company. The agreement is set out in the Articles of Association of the company that, from a legal point of view, has the validity of a multi-party contract between the company and its shareholders and among themselves.

The Israeli legislative trend, according to which one should permit freedom of business, also applies to the drafting of the Articles of Association. Legislation permits the drafters of the Articles of Association to stipulate most of the provisions of the Companies Law, and to adjust them to their requirements.

The content of the Articles of Association should be tailored to the needs of the founders, their goals and their considerations in establishing the company, within the limits of law.

There are a number of details that a company must include in its Articles of Association:

°               The name of the company (we will deal with below).

°               The purposes of the company (this will be dealt with below).

°               Details regarding the authorized share capital of the company, including the number of shares per class. A private company has the freedom to vary its shares and to determine the different rights of each class of shares. A company can have shares, all of which shall have a par value (in addition to their number, the par value of each share shall then be noted in the Articles of Association), or all with no par value (and then only their number shall be listed in the Articles of Association).

°               Details regarding the limitation of liability of the shareholders, to the extent there is any. The founders of the company can decide that the company to be established shall be limited in liability or unlimited in liability. A limited liability company is a company whose shareholders are liable for the debts of the company only up to the limit of their obligations towards it (the obligation can be the sum that the shareholders undertook to pay for their shares or the personal guaranty of the shareholders). A company unlimited in liability is a company where the liability of the shareholders is not limited. If the liability of the shareholders is limited, the manner of limitation shall also be specified in the Articles of Association.

A company may include in its Articles of Association subjects that relate to the company or its shareholders, including:

°               The rights and obligations of the shareholders and of the company.

°               Provisions regarding the manner of managing the company and the number of directors.

°               Any other subject that the shareholders deem appropriate to stipulate in the Articles of Association.

  1. Name of the Company

The philosophy behind Israeli Company Law is the freedom of choice, so that each company can be registered with any name, subject to the limitations provided by Law.

The Companies Law imposes restrictions in choosing a name, as detailed below:

  1. A company shall not be registered with a name that is the name of a company lawfully registered in Israel or that is so similar to it as to be misleading.
  2. A company shall not be registered with a name that is the registered trade name regarding goods or services that are similar to or have a similar purpose as those goods or services for which the company wishes to register, or a name that is so similar that it is considered to be misleading, unless it is proven to the Registrar of Companies that the owner of the trade name agreed thereto in writing.
  3. A company shall not be registered with a name that the Registrar believes is fraudulent or misleading.
  4. A company shall not be registered with a name that the Registrar believes is likely to harm public policy or public feelings.

There are provisions in other laws that prohibit the use of various expressions, such as the prohibition of the use of the word "bank" without permission.

In addition, the name of a company in which the liability of shareholders is limited, shall include at the end the notation "limited liability" or "Ltd.".

  1. Purposes of the Company

The Companies Law requires a company to state its purposes in its Articles of Association by determining one of three of the following purposes:

°               the company may engage in any legal business;

°               the company may engage in any legal business other than the types of businesses that are specified in the Articles of Association of the company;

°               the company may engage in the types of businesses that are specified in the Articles of Association of the company.

None of the purposes of the company may violate the Law, be immoral, or violate public policy.

It should be noted that Israeli law provides that the objective of the company is to act pursuant to business considerations to maximize its profit, and one can take into consideration, among other things, the matters of its creditors, its employees and the public; likewise, the company may contribute a reasonable sum for a worthy purpose, even if the contribution is not within the framework of such business considerations, if a provision in that regard was stated in the Articles of Association.

  1. Registered Office of the Company

Each company must maintain a registered office in the State of Israel. The registered office need not necessarily be the office in which the business of the company is being conducted, but the address to which one can address any notice to the company. A notice as to the location of the office shall be provided to the Registrar of Companies together with the submission of the application for the establishment of the company. A company whose registered address is the address of another person (such as the office of an attorney or an accountant) shall also note the name of that person.

The Companies Law requires the company to maintain at its registered office the documents specified below, including by electronic means, provided that those entitled to examine them shall have the opportunity to examine them and to receive copies of the documents:

°               the Articles of Association;

°               minutes of the General Meetings for a period of seven years from the time of the meeting;

°               minutes of the meetings of the Board of Directors and their resolutions;

°               minutes of the committees of the Board of Directors;

°               copies of notices of the company to its shareholders in the past seven years;

°               the financial statements of the company;

°               a list of the shareholders, and in a public company also a list of substantial shareholders (a substantial shareholder is defined as someone who holds five percent or more of the issued share capital of the company or the voting rights therein);

°               a list of the directors and their alternates, if there are such;

°               the Certificate of Incorporation, register of charges, and register of bond holders.

  1. The Primary Organs of the Company

The understanding of the authorities of the primary organs of the company is important in order to understand the manner and means of operating the company in Israel and accordingly, to make intelligent decisions regarding the structure and the division of authority in the company that is to establish itself in Israel in the future.

There are three primary entities that operate in the name of the company: the Board of Directors, the General Meeting of Shareholders and the General Manager. Each one of the organs has a specific authority defined by the Law and in the Articles of Association, and together they cooperate to achieve a joint purpose: maximize profits.

The General Meeting

The General Meeting is a meeting in which all the shareholders of the company participate and which constitutes a framework in which the shareholders exercise their voting power and influence the way the company is managed. The General Meeting has special standing since it is authorized to amend the Articles of Association and within this framework it determines the defined area of authority of the other organs of the company.

In general, the General Meeting is divided into two types: an Annual General Meeting and an Extraordinary General Meeting.

An Annual General Meeting is a meeting of all the shareholders that must be called once a year and no later than 15 months after the last Annual Meeting. A private company, as distinguished from a public company, may provide in its Articles of Association that it is not required to hold an Annual Meeting unless the matter is required to appoint an auditing accountant or unless one of the shareholders or directors demands that the company will hold such a meeting.

The following subjects are generally brought before the Annual General Meeting for consideration:

  • a discussion of the Financial Statements, the Profit & Loss Statement, the Directors' Report, the Annual Balance Sheet and the Auditor's Report;
  • a discussion of the dividend that is proposed to be distributed;
  • the selection of an auditing accountant;
  • the election of directors;
  • any subject that the Articles of Association provide shall be discussed at the Annual Meeting or any subject that is provided in the agenda of the meeting.

An Extraordinary Meeting is defined in a residual manner as any meeting that is not an annual one. An Extraordinary Meeting is called at the request of the Board of Directors or a director/ directors or a shareholder having a particular percentage of the capital of the company or the voting rights therein (in accordance with the type of company).

There is an additional kind of meeting, referred to as a "Class Meeting", in which a particular class of shareholders participate, where there exists in the company a number of classes of shares.

The authority of the General Meeting:

The Companies Law grants to the General Meeting a set of authorities that cannot be transferred to another organ:

°               amendments to the Articles of Association;

°               the appointment of the auditing accountant of the company, the terms and termination of his employment;

°               the appointment of external directors;

°               the approval of the activities and businesses that require the approval of the General Meeting;

°               increasing and decreasing the authorized share capital;

°               a merger.

The Law permits a company to add to the Articles of Association subjects that may be adopted by the General Meeting.

In addition, the Law permits a company to provide in its Articles of Association provisions according to which the General Meeting may be granted the authority given to another organ, for a particular matter or for a particular period of time.

Moreover, where a Board of Directors is precluded from exercising its powers, and the exercise of one of its powers is essential for the proper management of the company, the General Meeting may exercise it in place of the Board of Directors, even if there is no provision for such in the Articles of Association, for so long as the Board of Directors is so precluded, and provided that the General Meeting has determined that the Board of Directors is indeed precluded from so acting and that the exercise of the power is essential.

The Board of Directors

The function of the Board of Directors is to outline the policy of the company and to supervise the General Manager and his activities.

The Companies Law grants to the Board of Directors a number of powers:

°               to establish the operational plans of the company, the principles for financing them, and the priorities among them;

°               to examine the financial condition of the company, and determine the credit limit for which the company can apply;

°               to establish the organizational structure and the salary policy;

°               to decide on the issuance of a series of bonds;

°               to prepare the financial statements and approve them;

°               to report to the Annual Meeting on the status of company matters and on its business results;

°               to appoint and dismiss the General Manager;

°               to decide on the actions and the transactions that require its approval pursuant to the Articles of Association or pursuant to the provisions of Law (such as a transaction of an office holder having a personal interest);

°               to allot shares and securities convertible to shares up to the limit of the registered share capital of the Company;

°               to decide on the distribution of a dividend or the cancellation of shares / convertible securities of the company or to exercise them with shares of the company;

°               to express its opinion on special tender offers;

°               the Board of Directors of a public company is granted additional authority.

In addition, the Companies Law grants residuary general authority to the Board of Directors in providing that the authority of the company that was not granted by law or by the Articles of Association to another organ may be exercised by the Board of Directors.

Likewise, the Companies Law provides that the Board of Directors may direct the General Manager as to how to act on a given matter, and if the General Manager does not fulfill such instructions, the Board of Directors may exercise the power required to fulfill the instruction in his place, even if no such provision is set forth in the Articles of Association.

Where the General Manager is precluded from exercising his powers, the Board of Directors may exercise them in his place, even if there is no provision for such in the Articles of Association.

In general, the Companies Law takes a broad approach according to which the number of directors who will serve in the company is determined by its Articles of Association. Nevertheless, the Law provides that in a private company there must be at least one director and that in a public company at least two external directors must serve, in addition to an ordinary director.

The Board of Directors shall meet as is required by the company at least once per year, and in a public company, at least once every three months. The Chairman of the Board may call a meeting of the Board of Directors at any time. The Board of Directors shall hold a meeting on the subject specified at the request of two directors. In a company in which the Board of Directors has up to five members, one director may request a meeting on a specified subject; or one director if such a provision is set forth in the Articles of Association of the Company or if a matter of the company to be discussed involves a breach of law or failure to respect proper business procedures.

The General Manager

The Companies Law provides that a public company must, and a private company may, appoint a General Manager (in the case where there is no General Manager, the Board of Directors manages the company). A company may appoint more than one General Manager.

The General Manager holds the senior management function in the company and is responsible for the ongoing management thereof, within the framework of the policies established by the Board of Directors.

The General Manager is subject to the supervision of the Board of Directors and is appointed and dismissed by it.

The Companies Law grants the General Manager residuary management authority, that is, any managerial and operational authority that was not granted by the Companies Law or the Articles of Association to another organ is within his authority.

The Law permits a company to provide in its Articles of Association provisions according to which the authority given to the General Manager may be transferred to the authority of the Board of Directors, either for a particular matter or for a particular period of time.

  1. A Foreign Company

As stated above, a company that was incorporated outside of Israel can maintain a place of business in Israel, but only if it was registered with the Registrar of Companies as a foreign company. A foreign company is defined in the Companies Law as a legal entity, other than a partnership, that was incorporated outside of Israel.

A company that seeks to be registered in Israel as a foreign company with a place of business in Israel must submit a request to the Registrar of Companies within a month from the date of the establishment of the place of business, together with the documents specified below:

°               a copy and translation into Hebrew of the documents under which the company is incorporated or pursuant to which it operates, as required under the laws of the country in which it is incorporated, including its Articles of Association, if any;

°               a certified copy of the Certificate of Incorporation or Registration of the company in the country in which the foreign company was incorporated, together with a certification of the existence of the company at that time, certified as stated above;

°               a list of the directors of the company;

°               the name and the address of a person resident in Israel who is authorized to receive judicial documents on behalf of the company and to receive notices issued to the company;

°               a copy certified in the manner that has been approved by the Minister of a power of attorney authorizing a person normally resident in Israel to act on behalf of the company in Israel;

°               a receipt for the payment of the registration fee. The amount is identical to that required for the establishment of an ordinary company.

After the registration of the company as a "foreign company", the provisions of the Companies Law shall apply to it, with obligatory changes. The company must pay an annual fee, the same as any company.

The company must notify the Registrar of Companies of any change in a document or of directors or in the name or address of the attorney or the person who acts in the name of the company in Israel within 14 days from the date of the change.

  1. Conclusion

The formation of a company in Israel is not a complicated procedure, but one must pay attention to the requirements of the law in order to ensure the fast registration of the company.

In addition to the procedure involved in setting-up a company, and alongside it, one must take into account business considerations and seek legal counsel in order to ensure the clear establishment of the objectives, terms and rights that the founders of the company seek to achieve.

Balter, Guth, Aloni & Co.



Corporate Law in Italy

  1. Compliance with regulations concerning foreign investments in Italy

General:

Foreign investments in Italy are free of any administrative restrictions although mandatory declarations or permits are required in special cases. In general, investors are able to acquire Italian companies or create their own legal entity, buy or rent property, with no minimum investment requirement or responsibility to create a minimum number of jobs. They do not have to comply with specific undertakings or commitments just because they are foreign investors.

Prior authorizations:

In certain business sectors, for example, gambling, private security services, trade in weapons and other military equipment, insurance and banking, an authorization is required to carry out such activities, or in order to acquire a controlling interest and the direct or indirect acquisition of all or part of a business line.

Regulated activity:

Certain professions, such as lawyers, accountants, real estate agents, doctors are regulated and the participants must satisfy the required conditions in order to carry out this activity.

  1. Procedures and formalities

Competent authority:

The formalities for setting up a new company must be administered in various public offices: the deed of constitution of a company must be drafted by a Notary Public and executed at the Companies Register (“Registro delle Imprese”); taxation documents are filed at the Incomes Agency (“Agenzia delle Entrate”); social security and social insurance information at the relative public offices: Istituto Nazionale della Previdenza Sociale – INPS - and Istituto Nazionale Assicurazione Infortuni sul Lavoro – INAIL. All these offices are located in the principal cities in Italy and present throughout the Italian territory.

Formalities:

The formalities for setting up a company in Italy include the following: (i) opening a bank account (ii) obtaining an Italian fiscal code and VAT number, (iii) registering the company in the Companies Register.

Research will be conducted into the choice of a company name and ensuring that it can be used.

When one or more shareholders are legal entities, a resolution from their competent managing body is required pursuant to which the legal entity has determined to incorporate the new company or take a participation in the same.

A proxy or authorized attorney will be required for each shareholder who will not personally attend the meeting with the Notary Public for the purpose of drawing up the Deed of Incorporation.

Timeframe:

The company will officially come into existence when it has been duly registered with the Companies Register (the time required from when the documents are ready for filing at the Companies Register is approximately 10 days, plus time beforehand to prepare all the documents). Upon registration a certificate is issued. It is possible to carry out the registration formalities on-line.

Legal expenses:

The expenses for setting up a company vary depending on the amount of company capital and will include registration expenses with the Companies Register, as well as the Notary Public’s fees.

Required documents to be registered:

For all companies carrying out a commercial activity, the following documents have to be prepared in Italian and registered with the Companies Register:

  • the Articles of Association and by-laws drafted by a Notary Public;
  • shareholders’ and directors’ details (date and place of birth, residence address, photocopies of their passports or identity cards) - foreign shareholders and directors must have an Italian VAT or fiscal code number;
  • Statutory Auditors’ details (if appointed);
  • all documents in a foreign language must be translated into Italian with a certified translation or consular legalization; the preparation of the Articles of Association is an important act which may have legal and tax consequences. Therefore the assistance of an Italian lawyer and an accountant for advice on legal and tax matters is recommended.
  • Business structures

The choice of the business structure will depend on the kind of business, the investor’s strategy and the degree of independence that the Italian operations will be given by the parent company or by the shareholders.

A foreign company may choose between establishing a branch or a subsidiary to conduct business in Italy.

  1. Branch («sede secondaria»)

A foreign company can perform business in Italy directly under its own name. A branch does not have its own legal personality. Therefore, the foreign company is responsible and if the branch encounters financial problems, the foreign company has unlimited liability for its debts. Nevertheless, the branch must be registered with the Italian Companies Register and must make an application for its own Italian VAT number and fiscal code. The foreign company has to appoint a permanent representative of the Italian branch and file his name with Italian Companies Register.

In addition to the aforementioned documents, the following documents have to be translated in Italian (certified translation or consular legalization) and supplied:

  • a copy of the certificate of good standing of the foreign company;
  • a copy of the foreign company’s managing body’s resolution resolving to open a branch in Italy and to appoint a branch manager with the power to represent the foreign company in Italy.

The branch must file its own accounts with the Italian Companies Register on an annual basis. It must also file the accounts of the foreign company translated into Italian.

From a tax point of view, the branch which conducts active business constitutes a permanent establishment and is subject to Italian corporate income tax and VAT and may be subject to withholding tax on the branch’s profits (depending on the residence of the parent company and the relevant tax treaty, if any; no branch withholding tax applies to branches of EU companies).

Branches that only conduct a preparatory activity (e.g. representation, liaison offices) and/or an auxiliary activity (e.g. storage) are not regarded as constituting a permanent establishment and are not subject to corporate tax.

There are provisions in the corporate and tax regulations which will permit subsequent incorporation of the branch as an Italian company through the branch contributing it business (as a contribution in kind) to the new subsidiary company. Subject to certain conditions, this can be performed under a favorable tax regime.

Merger of an Italian company into its EU parent can also occur, thus transforming the subsidiary into a branch. Subject to certain conditions, this can be performed under a favorable regime.

Pros and cons

  • Pros : one legal entity
  • Cons : reporting and administrative requirements (for tax, social, accounting, commercial and corporate purposes similar to a subsidiary);
  • unlimited liability for the foreign company with an Italian branch.
  1. Subsidiary – Creation of an Italian company

2.1. Joint Stock Company («Società per Azioni» - S.p.A.)

  1. General requirements
  2. Minimum capital stock: € 120,000 (NB: the capital of all Italian companies must be denominated in Euros); contribution in kind in the form of assets or credits balances, are permitted.
  3. Down payment of stock capital before the incorporation: 25% minimum and 100% in case of sole shareholder.
  • Minimum number of shareholders: one. Shareholder participation in the company’s capital is represented by stocks.
  1. Liability of the shareholders: limited to shareholder’s participation in the company.
  2. Directors can also be shareholders.
  3. Directors do not have to be Italian citizens.
  • Directors may be removed at any time; however, directors may have a claim for damages against the company if removed without just cause. Appointment of an external auditor or a firm of external auditors, each of them qualified to act in such capacity under Italian law that verifies during the fiscal year that (i) the company’s accounting records are correctly kept and accurately reflect the company’s activities, (ii) the financial statements correspond to the accounting records.
  • The transfer of shares, bearer and nominative, is free of restrictions, unless otherwise stated in the by-laws. Registration duties and notary fees are due upon the transfer of nominative shares. Specific rules apply to listed public companies.
  1. Corporate governance / management

b.1. There are three types of governance models for Joint Stock Companies; the choice among one of them is decided by the shareholders upon incorporation or subsequently by shareholders’ resolution.

The Ordinary System. The joint stock company is managed by a Sole Director (“Amministratore Unico”) or by a Board of Directors (“Consiglio d’Amministrazione”), pursuant to the Company’s By-Laws. The board members (“Amministratori”) or the Sole Director are appointed by the shareholders, at the shareholder meeting, which also determines the number of directors and their remuneration. A chairman (“Presidente”) may be appointed by the Board of Directors or by the shareholder, depending on the By-laws. The chairman of the board of directors is the legal representative of the company. The board of directors may delegate certain powers to one or more managing directors (“Amministratori Delegati”), determining the nature and scope of powers of each managing director. The board of directors may also revoke such delegation at any time. The Board reports to the annual shareholder’s meeting the results of its activity and the results of the company operations. The board of directors may also appoint a general manager (“Direttore Generale”), who has powers for specific acts or categories of acts and for the day to day management of the company.

Statutory auditors (“Collegio Sindacale”): The company's shareholders elect a board of statutory auditors (composed of three or five effective members, pursuant to company's by-laws, plus two deputy members). The company’s board of statutory auditors is required to verify (i) that the company complies with applicable laws and its by-laws, (ii) respects principles of good governance, and (iii) the application of correct management principles in the conduct of business and the adequacy of the company’s organizational structure, internal audit system and administrative-accounting system. Furthermore, if so provided by the company's by-laws and the applicable Italian regulations, the Statutory Auditors could be required to carry out company audit activities, verifying the company's accounting records and financial statements, in lieu of external auditors (see, 2.1, a, vii, above).

The Dual System. The shareholders elect a Supervisory Board (“Consiglio di Sorveglianza”), formed by a minimum of three members; it is in charge of supervision and control of the executive board’s management and reporting to the shareholders’ meeting. The Supervisory Board appoints an Executive Board (“Consiglio di Gestione”) who is in charge of the management of the company. The executive board is composed of individuals (minimum of two). The executive board is appointed for no more than three fiscal years, and this appointment can be revoked by the supervisory board.

External auditor: The shareholders appoint an external auditor or a firm of external auditors, each of them qualified to act in such capacity under Italian law, that shall verify during the fiscal year that (i) the company’s accounting records are correctly kept and accurately reflect the company’s activities, (ii) that the financial statements correspond to the accounting records.

The Single System. The Shareholders elect a board of directors (“Consiglio d’Amministrazione”), formed by individuals, which is in charge of the management of the company. The board of directors appoints, among its members, a supervisory board (“Comitato per il controllo sulla Gestione”), in charge of the supervision and control of the board of directors’ management. It is chosen from members of the board of directors who do not take part in executive committees and have not been assigned with delegated roles or particular responsibilities or to perform management functions. At least one of the members of the supervisory board must be a statutory auditor.

External auditor: The shareholders appoint an external auditor or a firm of external auditors, each of them qualified to act in such capacity under Italian law, that shall verify during the fiscal year that (i) the company’s accounting records are correctly kept and accurately reflect the company’s activities, (ii) that the financial statements correspond to the accounting records..

b.2. Shareholders’ meetings («Assemblea dei Soci»)

There are two types of shareholders’ meetings:

  • The extraordinary shareholders’ meeting: in general, mandatory when a decision is required to modify the by-laws,
  • The ordinary shareholders’ meeting: when the decisions do not trigger a modification of the by-laws. These decisions are principally to appoint, dismiss or substitute the members of the boards, to approve the annual accounts of the company, to appoint the external auditors and the statutory auditors, the chairman of the company's board of statutory auditors and fix the remuneration of its members.

Shareholders are entitled to attend and vote at ordinary and extraordinary shareholders’ meetings. Votes may be cast personally or by proxy. The shareholders’ meeting must be convened at least once a year.

  1. Taxation of the company’s income:

Joint stock companies are subject to corporate income tax (IRES) and local/county tax (“Imposta Regionale sulle Attività Produttive” - IRAP).

  1. Pros and cons
  • Pros : A joint stock company (SpA) is suitable for large companies. An SpA structure is sometimes mandatory, such as for example when the company must be quoted on the stock exchange or in order to operate banking activities.
  • Cons : the SpA rules are less flexible and generally inadequate for medium sized and smaller companies.

2.2. Limited Liability Company («Società a Responsabilità limitata» - SRL)

  1. General requirements
  • Minimum capital stock: € 10,000.00.
  • The shareholders’ participations in the company’s capital is not represented by shares but by quotas..
  • Shareholders’ participations can also be paid with contributions in kind.
  • Down payment of capital stock before the incorporation: minimum of 25%. 100% in case of a sole shareholder.
  • Minimum number of shareholders: one – there is no limit on the maximum number of shareholders.
  • Liability of the shareholders: limited to shareholder’s participation in the company.
  • Directors can also be shareholders.
  • Directors do not have to be Italian citizens.
  • The transfer of quotas is free of any restrictions, unless otherwise stated in the by-laws; should the by-laws limit the transfer of quotas in case of death, the heirs of the deceased quota holder have the right to withdraw from the S.r.l. Registration duties and notary fees are due for the transfer of quotas.
  1. Corporate governance / management
  • The company is run by one (“Amministratore Unico”) or several directors (“amministratore(i)”). Each company director has the general power to represent the company, unless otherwise provided by the by-laws.
  • The Articles of Incorporation can state whether management must act collectively by board resolution or individually by each manager independently or by two or more managers with a joint signature. Most of the provisions relevant to the S.p.A.’s ordinary system of corporate governance are applicable to the SRL.
  • Board of Statutory auditors (“Collegio Sindacale”): not required as a rule, unless the company exceeds certain thresholds provided by the Italian legislation, with regard to assets, sales and employees.
  • Shareholders’ decisions. The following items are reserved to the exclusive decision of the shareholders and cannot be enacted by a directors’ resolution: decisions concerning modifications to the by-laws, decisions substantially altering the company’s purpose or a fundamental right of the shareholders, the approval of the annual accounts, appointment or dismissal of director(s) or statutory auditors.
  1. Taxation of the company’s income:

Limited Liabilities Companies are subject to corporate income tax (IRES) and local/county tax (IRAP).

2.3. Limited partnership by shares («Società in Accomandita per Azioni» – S.A.P.A.)

  1. General requirements
  2. Minimum capital stock: 120,000.00 euros;
  3. This type of company has two different kinds of shareholders:

-The limited shareholders who have a liability limited to their participation;

-The unlimited shareholders whose liability for the company’s liabilities is unlimited.

  • The company name must contain at least the name of one of the unlimited shareholders.
  1. The creditors of a company cannot claim payment from the unlimited shareholders without first requesting payment from the company.
  1. Corporate Governance / management
  • A S.A.P.A. has the same rules as an S.p.A., except for some compatibility provisions applicable to this kind of company.
  • The general shareholders meeting functions like that of an S.p.A., but the unlimited shareholders cannot vote on decisions concerning the appointment and the dismissal of auditors and any action for damages against them.
  • The unlimited shareholders are by right directors and are subject to the sameresponsibilities asdirectors of S.p.A.'s.
  1. Taxation of the company’s income:

SAPA’s are subject to corporate income tax (IRES) and local/county tax (IRAP).

The Italian juridical system provides for other types of companies):

2.4. Simple company («Società Semplice») :

  1. General requirements
  • Used for non trading activities such as holding of real estate, portfolio and real estate management, professional services.
  • Unlimited personal liability of the partners.
  • Each partner has the power to fully represent the company, unless differently provided by the Deed of Incorporation.

b.Taxation of the company’s income: Shareholders are subject to tax on their share of the company’s taxable income, while such companies are also subject to local/county tax (IRAP).

Pros and cons:

  • Pros: Good vehicle for holding real estate and for portfolio holding. No need to register this company or to file annual accounts with the Companies Register.
  • Cons: Restricted scope of activities; if the company is commercially active, risk of requalification for corporate tax. Personal unlimited liability of the partners.

2.5. Commercial partnership (« Società in nome collettivo » - S.N.C.) :

  1. General requirements:
  • Shareholders are natural persons and, subject to certain conditions, may be legal entities.
  • Shareholders are all eligible to be directors.
  • Unlimited joint liability of all partners.
  • The company name must contain at least the name of one of the shareholders.
  • Used for trading activities.
  1. Taxation of the company’s income : Shareholders are subject to tax on their share of the company’s taxable income, while such companies are also subject to local/county tax (IRAP)

Pros and cons :

Pros: Adequate structure for joint-ventures and for achieving a form of tax consolidation when the parent has a substantial control over the subsidiary.

Cons : Risky structures when the partners are not legal entities subject to limited liability due to the joint unlimited liability.

2.6. Limited partnership («Società in Accomandita Semplice» - S.A.S.) :

  1. General requirements
  • This type of company, like the SAPA, has two different kinds of shareholders:

- the limited shareholders who have a liability limited to their participation;

- the unlimited shareholders whose liability for the company’s liabilities is unlimited.

  • The unlimited shareholders are only eligible to be appointed as directors.
  • The company name must contain at least the name of one of the unlimited shareholders.
  • The creditors of a company cannot claim payment from the unlimited shareholders without first requesting payment from the company.
  1. Taxation of the company’s income: portion of profits related to limited shareholders’ rights (“Accomandanti”) are taxed according to tax transparent rules. Unlimited shareholders (“Accomandatari”) are subject to tax on their share of the company’s taxable income.

2.7. European Economic Interest Group («EEIG»): this corporate entity’s main purpose is        to achieve savings for its members. Suitable for joint ventures which have such goals.

Taxation of the company’s income: Tax transparent entities.

2.8. European Company: Close to SpA but with the focus to operate in several EU jurisdictions. Recently enacted into Italian corporate law.

Taxation of the company’s income: The company’s income is subject to corporate income tax.

  1. Relevant tax aspects linked to corporate law

3.1. Corporate tax

The standard corporate tax rates are: 27.5% IRES and 3.9% IRAP. The IRAP tax rate could vary pursuant to regulations adopted by the Italian regional Public Administrations. Taxable income is almost always higher than the income resulting from the financial statement, because there are several limitations to the deductibility of certain costs.e.

Tax losses can be carried forward for no more than 5 years. However, tax losses in the first 3 fiscal years following incorporation can be carried forward indefinitely. An optional tax consolidation regime applies to companies subject to Italian corporate income tax when the parent has substantial control over the subsidiary.

3.2. Transfer taxes on the sale of shares

A gain on the sale of company’s shares is taxed as set out below:

If a share is deemed as “unqualified” (which normally is “less than 25% of share capital”), the gain is subject to fixed proportional taxation at a rate of 20%.

If a share is deemed as “qualified”, 49.72% of the gain concurs to the shareholder’s personal taxable income and consequently is taxed at the progressive personal income tax (IRPEF) rate.

If the share is held by another company, under certain conditions, the “participation exemption” rule applies, whereby only 5% of the gain is subject to taxation.

Dividends are normally taxed pursuant to the same rules applicable to capital gains.

Capital gains arising from the sale of shares in a start-up company (7 years or younger) are not taxed when the proceeds are promptly injected into another start-up (3 years or younger) operating in the same business.

  1. Ongoing requirements

For accounting and tax purposes, the book keeping should be kept in Italian under Italian accounting principles and following Italian tax rules.

Annual financial statements in Italian should be prepared, and audited when so requested by applicable regulations.

For all entities (except Simple Companies, and GEIE’s) the financial statements, (the statutory auditor’s report when requested), the management’s (or board’s) report to the shareholders’ meeting, and extracts of the shareholder’s resolution approving the financial statements must be filed with the local companies register. For the SpA, SRL and SAPA the financial statements must be filed no later than 120 days, or 180 days in exceptional cases after the closing of the financial year. Failing to do so triggers civil penalties. Anyone can have access to this information, as published on the website of the Companies Register.

The initial by-laws as well as all its subsequent amendments, and changes in management of the company, should be filed with the Companies Register, this information being accessible to anyone, including via the internet.

  1. Trust companies. Anonymity/Transparency

Trusts do not specifically exist under Italian law but Italy has signed the Aja Convention on the Recognition of Trusts dated 1 July, 1985, entering into force in Italy by the Law L.364/89. Accordingly, the Italian juridical system recognizes the legal and tax aspects of trusts lawfully set up and governed by the law of a relevant jurisdiction.

For all types of companies, except for Simple Companies, the list of shareholders is publicly registered with the companies register. Shareholders are also known by the tax authorities through returns disclosing the recipients of dividend income.

Regulations on the use of cash and securities are contained in the legislative decree N.231 of November 21, 2007, which implemented the anti-money laundering directives n.2005/60 and 2006/70 of the European Union. Such legislation requires that transfers into or out of Italy of cash or securities in excess of €12,500 be reported in writing to the Bank of Italy by residents or non-residents that effect such transfers directly, or by credit institutions and other intermediaries that effect such transactions on their behalf and who all have a disclosure obligation.

There are currently no exchange controls, as such, in Italy restricting rights derived from the ownership of shares. Residents and non-residents of Italy may hold foreign currency and foreign securities of any kind, within and outside Italy. Non-residents may invest in Italian securities without restriction and may transfer to and from Italy cash, instruments of credit and securities, in both foreign currency and Euro, representing interest, dividends, other asset distributions and the proceeds of any dispositions.

Individuals, non-profit entities and partnerships that are residents of Italy must disclose on their annual tax returns all investments and financial assets held outside Italy, as well as the total amount of transfers to, from, within and between countries other than Italy relating to such foreign investments or financial assets, even if at the end of the taxable period foreign investments or financial assets are no longer owned. Generally, no such tax disclosure is required if the total value of the foreign investments or financial assets at the end of the taxable period or the total amount of the transfers effected during the fiscal year does not exceed €10,000.

MCM Avvocati

Studio Legale Campanale



Corporate Law in Malaysia

  1. General Introduction

Malaysia operates a market economy. It welcomes and encourages foreign investments. It has a developed legal system based largely on English law. English is widely spoken and remains the primary language of commerce and law. And like most other developing nations in the Asian region, it is undergoing structural changes as it attempts to transform its economy into a knowledge- and service-based economy by moving away from its traditional manufacturing and export oriented outlook. In the process, the Government has invested heavily in education and training a work force better prepared to face the challenges of the market economy of the 21st century.

Malaysia, as a former British colony, has inherited a legal system that is based on the English common law. English is the lingua franca of business and commerce in Malaysia.

The Companies Act of Malaysia is largely based on the Companies Act, 1961 of the State of Victoria, Australia, which in turn can trace its roots to the English Companies Act 1948. Although there have been significant changes to the Malaysian Companies Act over the years, the underlying principles of company law remain the same. English cases decided on pari materia provisions to the Malaysian Companies Act are, although not binding on Malaysian Courts, regarded as persuasive and seldom departed from.

  1. Types of Companies

The Companies Act, 1965 recognises three types of companies that can be incorporated in Malaysia:

  • a company limited by shares;
  • a company limited by guarantee; and
  • an unlimited company.

A company limited by shares is the most appropriate legal vehicle to be incorporated for purposes of trade and commerce.

  1. Company Limited by Shares

A “company limited by shares” refers to a company where the liabilities of its shareholders are limited to the capital committed by the shareholders, whether at the time of incorporation or thereafter.

In Malaysia, all shares still carry a nominal or par value (“par value”). The par value of a share could be in any amount, the minimum being 1 sen [100 sen makes RM1.00]. The par value sets the limit or extent of personal liability of shareholders. For example, if a share carries a par value of RM1.00 each (this is the typical par value of shares issued in Malaysia), then the shareholder is liable to contribute up to RM1.00 on the share subscribed or purchased. Typically, shares are credited as fully paid up at the point of issuance, i.e., the entire par value is paid up. But that is not always the case. A shareholder can contribute in stages towards its full capital commitment. In such a situation, the shareholder can be called upon by the company, or if the company is liquidated, by its liquidator, to pay up the balance unpaid.

The minimum capital of a company limited by shares is RM2.00 comprising 2 ordinary shares which must be held by at least 2 persons if both shareholders are individuals but may be held by one person if the shareholder is a company. The process of incorporating a company may take up to 2-3 weeks, but if time is of the essence, a shelf company can be acquired within a day or two depending on the ability of the acquirer to provide replacement directors and shareholders. A shelf company is essentially a ready made company that has never transacted any business and which has been incorporated specifically to be sold to anyone who want to bypass the lengthy registration or incorporation process.

The cost of incorporating or acquiring a shelf company is in the region of RM3,500.00.

Separate Legal Entity

Once a company is incorporated, it is regarded as a separate and perpetual legal entity and can sue and be sued.

Memorandum and Articles of Association

A company's constitution and the rules governing its administration are set out in its Memorandum of Association and its Articles of Association. The Memorandum of Association essentially sets out the objects and powers of the company, i.e., the types of businesses that it can engage in whilst the Articles of Association sets out the rules governing the running of the company.

A company’s Memorandum and Articles of Association can be tailored for specific needs, but the Companies Act, 1965 does provide a model Memorandum of Association and a model set of Articles of Association, both of which are usually adopted by companies at the point of incorporation.

Directors

The Malaysian Companies Act requires every company to have at least two resident directors. A “resident” is not defined in the Companies Act, but is generally taken to mean a person who resides in Malaysia and is a tax resident in Malaysia. A resident is distinct from a citizen. Hence, a foreigner can qualify as a resident if he physically resides in Malaysia whilst a Malaysian citizen who does not reside in Malaysia cannot qualify as a resident director.

There are no specific legal qualifications or requirements to be a director of a Malaysian company save and except that the person must be of full age, meaning at least 18 years of age. A director must be a natural person.

The Malaysian Companies Act does however disqualify certain persons from being a director of a company, i.e., any person who:

  • is an undischarged bankrupt or subsequently becomes a bankrupt;
  • is prohibited by the Companies Act from being a director, for example, a person who was a director of a company that went into involuntary liquidation and was ordered or restrained by the Court from acting as a director in other companies;
  • is convicted of certain offences including (but not limited to) offences involving fraud or dishonesty; or
  • is convicted of certain offences under the Companies Act or in connection with the promotion, formation or management of a company.

Duties of Directors

The duties and obligations of directors are quite extensive and have become increasingly so as the rise of corporate governance has resulted in the Malaysian Companies Act being amended over the years to reflect such a trend.

The extent of a director’s duties and obligations merits a paper on its own but briefly the duties and obligations of a director fall into 2 general categories:-

  • statutory duties, as expressly created under the Malaysian Companies Act and other legislations; and
  • common law duties.

In reality there is a degree of overlap between the statutory duties and common law duties imposed on a director as the former is often a codification and an extension of the latter. The common law duties of directors are also known as fiduciary duties. The exact and comprehensive definition of a fiduciary duty is problematic as it has many facets to it, but one of the primary aspects is the duty to “act honestly”.

In acting honestly, the law expects a director to put the interests of the company over and above his own. Where a situation of potential conflict arises, a director is obligated to make the appropriate disclosures. The standard Articles of Association prohibits a director from voting on a contract with the company in which he is interested and should he have voted, his vote would not count.

Power of Management

In Malaysia, the general power of management of a company resides with its board of directors. The CEO is usually made a member of the board of directors, otherwise he would only be able to attend board meetings at the invitation of the board of directors.

Although the power of management vests in the board of directors, the Malaysian Companies Act imposes on the directors statutory obligations to seek the approval of the company’s shareholders before undertaking certain transactions. Examples include:-

  • issuance of new shares;
  • substantial transactions; and
  • connected party transactions.

Substantial Transactions

Section 132C of the Malaysian Companies Act prohibits a director from carrying into effect any arrangement or transaction for:-

  • the acquisition of an undertaking or property of a substantial value; or
  • the disposal of a substantial portion of the company’s undertaking or property

Any transaction of the foregoing nature undertaken without securing the company’s shareholders’ approval would be void except in favour of any person dealing with the company for valuable consideration and without actual notice of the contravention.

A “substantial value” or “substantial portion” of a company’s undertaking or property is defined to mean[1]:

  • a value exceeding 25% of the total assets of the company;
  • the net profits (after deducting all charges except taxation and excluding extraordinary items) attributed to it amounts to more than 25% of the total net profit of the Company; or
  • a value exceeding 25% of the issued share capital of the company,

whichever is the highest.

As most private companies are incorporated with fairly low paid up capital, the effect of Section 132C is that many transactions would require the prior approval of the shareholders; otherwise they will be void and the directors would have inadvertently contravened the Act.

Connected Party Transactions

Section 132E(1) of the Companies Act prohibits a company from carrying into effect any arrangement or transaction where a director or a substantial shareholder of the company or its holding company, or a person connected with such a director or substantial shareholder:

(a)           acquires or is to acquire shares or non-cash assets of the requisite value, from the company; or

(b)           disposes of or is to dispose of shares or non-cash assets of the requisite value, to the company.

An arrangement or transaction carried into effect in contravention of the foregoing provision shall be void unless there is prior approval of the arrangement or transaction by the shareholders of the company.

non-cash assets” means any property or interest in property other than cash.

requisite valueinter alia means a value exceeding RM250,000 or if the value does not exceed RM250,000 but exceeds 10% of the company’s asset value provided it is not less than RM10,000.00.

The thresholds for triggering Sections 132C and 132E are fairly low and directors ought to be aware of these provisions in the management of companies incorporated in Malaysia.

Loans to Directors

In line with good corporate governance principles, subject to limited exceptions, the following related-party transactions are also prohibited under the Malaysian Companies Act:

  • The grant of loans by a company to a director unless the company is an *exempt private company.
  • The grant of loans by a company to a **person connected to a director unless the company is an exempt private company.

*      “exempt private company” means a private company which has no more than 20 individual shareholders, none of whom hold shares beneficially for any corporation.

**     “person connected” is a fairly complex definition but would generally mean the director’s family or companies owned or controlled by that director

Foreign Ownership of Malaysian Companies

There is no law that restricts or prohibits a foreigner from owning 100% of a Malaysian incorporated company. Prior to 30 June 2009, Malaysia’s Foreign Investment Committee (“FIC”), a special purpose committee set up under the Economic Planning Unit within the Prime Minister’s department, inter alia regulated and administered foreign equity participation in Malaysian companies. The FIC guidelines regulating the acquisition of equity stakes, mergers and takeovers were recently abolished.

However, the lack of formal legislation and the absence of the FIC does not mean that there is no control or policy restriction on foreign equity ownership in Malaysian incorporated companies.

Malaysia is a multi-racial country comprising 3 major ethnic groups namely, the Malays, Chinese and the Indians. Historically, the economy of Malaysia was dominated by foreign and local Chinese interests. The gross under representation of the Malays in the economic sector resulted in political instability which led to race riots in 1969. Arising from the race riots, the Government promoted a policy of affirmative action in favour of the Malays known as the New Economic Policy (“NEP”). The primary objective of the NEP is to eradicate poverty and also to economically promote the Malays whom the Government now refers to as the Bumiputeras.

The NEP, in spite of its many failings, is a general success in that hardcore poverty in rural Malaysia is largely eradicated and the economy has achieved a more balanced distribution of wealth amongst the races. This had led to social and political stability that paved the way for the country’s spectacular economic growth in the 1970s and 80s.

Although the NEP has officially expired, many of its affirmative action approaches favouring Bumiputeras continued and are found in the present policy. The new policy of the Government is intended to address some of the weaknesses of the NEP and at the same time minimise distortion to the Malaysian economy by encouraging competition and growth.

The applicability and the extent of applicability of the Government’s affirmative action policies in relation to a foreign investment in Malaysia will very much depend on the particular economic sector in which the investment is undertaken. There are, for example, no equity conditions imposed on foreign ownership in the manufacturing sector. This means, a foreigner can own up to 100% of the equity of a manufacturing based company. On the other hand, a company incorporated in Malaysia for the purpose of supplying goods and services to the national petroleum company (“Petronas”) may be required by Petronas to have a certain percentage of Bumiputera equity. Generally, companies wishing to undertake contracts with the Federal and State Governments, Government agencies, statutory bodies and Government-linked companies may be required to have a certain proportion of Bumiputera equity participation in its share capital.

[1] These definitions are only applicable to companies other than public listed companies. For a public listed company, it must comply with the same value prescribed by the provisions of the listing requirements of the Stock Exchange.

Cheah Teh & Su



Corporate Law in Mexico

Corporate Trading Vehicles

Restricted Activities and Prior Authorization

Certain restricted activities, including but not limited to national ground passenger and cargo transportation, radio transmission and television services, are reserved only for Mexican persons or companies. Other activities allow the possibility of limited participation of foreign investment, with percentages lower than those required to secure majority participation in the capital stock of a company with such purpose. And finally, certain other activities or levels of participation require authorization by Mexican authorities in order for the investor to secure majority participation. All other activities require that the foreign investor sign a waiver of the protection afforded by their home country, and accept treatment identical to a Mexican national, under the penance that, should they invoke the legal protection of their home country, they risk losing the subject matter of their investment in favor of the nation. Some strategic activities are exclusively exploited by the Federal Government such as oil and gas, electricity distribution and nuclear energy among others.

Branches/Agencies

Spanish: Sucursales/Agencias.

Commercial companies in Mexico are regulated by General Commercial Corporations Law, whereas civil companies are incorporated pursuant to the legislation of each State, depending on their corporate domicile, that is to say, civil companies and associations are regulated by Civil Codes. The legal existence of all companies, civil or commercial, is recognized throughout all states.

All private foreign companies are recognized under Federal Civil Code, articles 25 and 2736. Their legal powers may not exceed those of the country in which they were organized.

In addition to other legal requirements foreign companies must have authorization from the Ministry of Economy in order to be able to conduct their business in Mexican territory: Authorization is required for two different purposes: Either the permission to carry out commercial transactions, which enables the foreign company to register its bylaws and other documents in the Public Registry of Commerce (Foreign Branch); or the permission to merely represent the company’s interests in México, rather than trade (Representative Office).

The company’s legal representative has to apply for the foreign branch authorization. In order to demonstrate the authority to act as legal representative he or she should have power of attorney notarized by a Notary Public either in México or abroad.

A foreign Branch does not have Mexican legal personality; it is subject to the regulations of their own country regarding internal functions and legal representation. However, the branch may be sued in the jurisdiction in which it has established a permanent domicile or a permanent establishment. Liability is directly attributed to the foreign head office.

Employees of any foreign branch operating in México are subject to Mexican Labor Law, regardless of their nationality.

As far as tax regime is concerned, a foreign branch with a permanent establishment in Mexico, as long as its main administration is not located within the country, may, but is not obligated to, request to be considered a Mexican tax payer by registration on the tax payer registry.

In order to maintain permanent operations in Mexico, any foreign commercial company must comply with the following formalities:

  • Registration in the Public Registry for Commerce;
  • Registration in the national Foreign Investment Registry, within forty days of the commencement of operations pursuant to article 32 of Foreign Investment Law.

It is usually recommended not to operate in Mexico through a branch of a foreign Company, but instead through a Mexican subsidiary as this is a way to avoid liabilities in the country of origin and limit the scope of liability within the Mexican territory.

Subsidiaries

A Mexican subsidiary must be organized as a company under Mexican Legislation. The holding company, foreign or national, shall hold the majority of the equity or shares, depending on the structure chosen, and in the case of a foreign holding company, taking into account the restrictions provided in the Foreign Investment Law. A subsidiary may take the form of any of the structures mentioned below.

Joint Ventures

Joint ventures are not specifically regulated by Mexican legislation; no obligations are imposed by the law. However, it is a contractual vehicle often used as, even without specific legislation; it is possible to use the general principles of contracts to regulate the rights of the joint venture partners. Furthermore, memorandums of understanding, although not specifically provided for in commercial legislation or otherwise, may be executed and delivered containing any terms not contrary to Mexican law. Characteristics thereto shall be outlined by the parties, and may include issues regarding the vehicle to be utilized, the capital contributions, and the management thereto. The parties are bound by the agreement, subject to the fulfillment of conditions precedent, such as obtaining the necessary permits and trademarks.

In the joint venture agreement, it is very common to provide that the intended commercial activity is to be carried out by a Mexican company, the most common vehicles for joint ventures in Mexico being (i) S.A. (Sociedad Anónima – anonymous company, capital stock represented by shares, liability limited to the payment of the subscribed value of the shares), (ii) S. de R.L., (Sociedad de Responsabilidad Limitada - Limited Liability Company, popular due to the taxation regimes it is subject to in light of the international tax treaties signed by Mexico), and (iii) Trust Agreements (in Mexico, only certain regulated institutions, such as banks, are allowed to be Trustees of a Trust Fund)

Forms of Company Organization

In Mexico, although the law provides for six different types of commercial companies, only two types, in their different forms, are currently commonly used by foreign investors. The six different types of companies are however listed below for the sake of completeness.

Common Characteristics relating to the formation of all types of Commercial Companies

All commercial Companies in Mexico are subject to the following common rules set out below.

  • They are all required to have at least two partners, and certain companies, more than two, depending on the legal provisions applicable and may be managed by a Board of Directors or a sole administrator.
  • They all have legal personality and are therefore legally distinct from their partners.
  • They must all have by-laws of incorporation, and have them registered in the Public Commercial Registry, which confirms that they are validly incorporated under Mexican Law and makes their existence universally binding on third parties.
  • In order to be incorporated, a permit needs to be issued by the Ministry of Economy authorizing the corporate name of the entity.
  • All companies must be registered on the Federal Tax Payers Registry.
  • All commercial companies may opt for the Variable Capital Stock regime, which allows for further simplicity regarding formalities relating to the increase or reduction of their capital stock. When a company has opted for such a regime, the letters “de C.V.” or the wording “de Capital Variable” shall be placed after the denomination of the company. The law prevents certain commercial companies, such as banks, from opting for such regime.

- General Partnership – Sociedad en Nombre Colectivo (S.N.C.). Also known as “General Partnership”, is a corporate vehicle with a firm or trade name (including all the names of all of the partners) where all of the partners have unlimited joint and several responsibility for the company's obligations and the company’s capital and/or ownership is not represented by negotiable instruments. This type of company is hardly ever used in Mexico anymore.

- Limited Liability Partnership - Sociedad en Comandita (S. en C.) Also known as “Limited Partnership”, this is a Partnership in which there are two kinds of partners. The first kind (“Comanditado”) shall have unlimited, joint and several liability, whereas the second kind (“Comanditario”) shall have limited liability, is only liable for the payment of their partnership contribution. “Comanditarios are not allowed to participate in the management of the partnership.

- Limited Liability Share Partnership - Sociedad en Comandita por Acciones (S. en C. por A.) Also known as “Limited Partnership with Shares", is a company subject to the rules that govern Corporations (“Sociedad Anónima") and has two kinds of partners, the first kind (“Comanditado”) has unlimited, joint and several liability, whereas the second kind has limited liability, and is only liable to the subscribed value of the shares acquired. Regarding the partners with shares, the general provisions of the by-laws are applicable, subject to these conforming to the specific legislative provisions relating to this form of partnership. Rarely, this type of partnership is used to limit liabilities of different stockholder groups.

- Cooperation Company – Sociedad Cooperativa (SC) This is a collective vehicle or charitable-orientated commercial company with the purpose of satisfying collective or individual necessities by carrying out production, distribution or sale of goods and services. This type of company grants all of its partners the right to a single vote, regardless of their participation in the capital stock of the company. For the incorporation of this kind of company a minimum of 5 partners is needed (with exceptions). Liability may be limited to the stipulated payment for the share certificates, or the by-laws can provide for extended liability up to a specified amount. Foreign individuals are unable to carry out administration or direction activities in the company. They are also controlled by the Ministry of State responsible for social development. The State may have certain special participations in this kind of company, by granting certain goods or concessions to the company. This type of company is established and governed by special laws.

- Limited Liability Company - Sociedad de Responsabilidad Limitada (S. de R.L.) This kind of company requires a minimum capital stock of MXN $ 3,000.00 for incorporation. In order to be incorporated, there must be a minimum of two partners and no more than a maximum of fifty. The capital stock is not represented by shares, but rather, by the partner’s interest. Every thousand Mexican pesos in the company give the partner a single vote in the general partners meeting, the latter being the most important governing body in the company. A single manager or a board of managers may run the administration of the company. When expressly stated in the by-laws, partners shall be obligated to make additional contributions to the capital stock in proportion to their original contribution. To transfer partner’s interests, the partners representing a majority of capital stock must authorize it, unless a higher percentage is required in the by-laws. When transferring partner’s interests to foreign persons, there is a right of first refusal in favor of the other partners within the company. A statutory auditor or board of statutory auditors may be appointed by the general partners meeting, but this is not compulsory. This type of company is often used in “pass through” tax structures.

- Corporation – Sociedad Anónima (S.A.) This is the most widely and commonly used commercial company in Mexico. The law provides for a number of variants, which are set out briefly below.

  • Traditional Corporation: (S.A.). It is a company with limited liability for its shareholders, where they only have to pay for the amount corresponding to each share. The minimum fixed capital stock is MXN $ 50,000.00, with a few exceptions, such as banks (which, incidentally, must be organized under this regime), which need higher minimum fixed capital stock. Shares can have a denominated value or none at all, and the number of shares that can be issued is unlimited but must be at least two. Share transfers are not restricted unless otherwise provided in the by-laws. All share certificates must include the name of the holder thereto. The company can be managed by a single manager or by a board of directors. Shareholders possessing 33% of the total stock have the right to summon a general shareholder meeting, which is the most important governing body of the corporation. Shareholder’s meetings are, depending on the subject matter of the meeting, ordinary or extraordinary. A traditional corporation may not acquire its own shares. Corporations must have a statutory auditor or a board of statutory auditors, appointed by the general shareholders’ meeting.
  • Investment Promotion Corporation - Sociedad Anónima Promotora de Inversión (S.A.P.I.). Although very similar to the traditional corporation regarding its internal organization structure, this variant of the S.A. is intended to provide shareholders with better rights of participation, including the possibility to appoint a member to the board and convene shareholders’ meetings with a lower percentage shareholding than that required in the traditional corporation. The special provisions for this particular kind of corporation are found in the Securities Market Law. This corporation has become widely used for new large companies, and a number of traditional corporations have been transformed into A.P.I., in the main due to the advantages relating to the protection of minority rights. Investment Promotion Corporations must be managed by a board of managers. Furthermore, it may adopt the management regime provided for the S.A.B. Corporation, including the appointment of a chief executive officer (Director General) but without the need to appoint independent members of the board (a member who does not have any kind of conflict of interest whatsoever regarding the company in question, and must be chosen as a member based on his or her expertise and professional prestige). It should however be noted that where the S.A.P.I. is not specially provided for, the general rules relating to the traditional corporation are applicable. Liability for officers, directives and board members may be limited by means of the by-laws. Statutory auditors must be appointed, unless the company wishes to opt for the management regime provided for the S.A.B. Corporation, in which case it must appoint a Statutory Audit and Corporate Governance Committee confirmed by at least three members of the board of managers.

Share transfers of any nature may be restricted in any way in the by-laws, as well as causes for mandatory exclusion or voluntary withdrawal. In addition, shares may be issued with veto rights or limited or no voting or economic rights. The company may purchase or otherwise acquire its own shares. Agreements entered into by and with shareholders, shall be binding on the company as well as the parties thereto. Tag-along and drag-along agreements can be provided for in the by-laws.

S.A.P.I. corporations who wish to issue shares on the National Securities Registry must opt for a special transitional regime called Investment Promotion Publicly Traded Corporation. This regime may only last three years, after which the company will become a S.A.B. Guidelines relating to this transitional regime must be adopted by the company.

  • Publicly Traded CorporationSociedad Anónima Bursátil (S.A.B.). All corporations which wish to place public share offers on the Stock Market must opt for this regime. This kind of corporation, although not altogether different from the traditional corporation, is subject to further regulatory requirements prescribed by Securities Market Law. Management must be carried out by a board of directors consisting of no more than 21 members and their respective deputies, of which at least 25% must be independent members (see above under S.A.P.I. for definition), and a chief executive officer. The board of directors, contrary to the traditional corporation, has specific duties imposed on it by the Securities Market Law. Furthermore, the board of managers must form one or more committees, including a Statutory Audit and Corporate Governance Committee. This kind of corporation is subject to strict corporate governance guidelines of due diligence and loyalty included in the Securities Market Law. The chief executive officer can be vested with the necessary power to deal with many operational issues without the need to consult the board of managers.
  • Variable Capital- Capital Variable (“C.V.”) In Variable Capital stock regimes, the company’s capital can be increased by way of subsequent contributions of the partners or by the admission of new partners, and could be decreased by way of partial or total withdrawal of contributions, without further formalities than those established by the General Commercial Corporations Laws. Variable Capital Companies are governed by the provisions that apply to the relevant type of company, and those of the corporation on accounting and responsibilities of the directors, except for the modifications set forth in the special chapter for this regime. Incorporation by-laws shall contain, in addition to the provisions that apply to the nature of the company, the conditions which govern the increase and reduction of capital. Any increase or reduction of capital shall be entered in a register owned by the company.

Governance of a Corporation

A president of the board and a general director (much like a single chief executive officer) must be appointed. The board will have the power to supervise the general director in the management of the company, and the president will have the duty to execute and deliver the resolutions of the board of directors. The secretary of the board of directors shall not be a member of the board. The board of directors will have a broad range of powers, but in practice only a few of these are really exercised by the board.

Compliance

Financial and stock markets are regulated by the National Securities and Banking Commission, a body under the direction of the Public Credit and Finance Ministry, which is internally presided over by a Governance Meeting and a President. The Commission supervises financial institutions and companies issuing public share offers.

Venture Capital Funding

Trust Agreements: It is not uncommon for Trust Agreements to be utilized in the execution of joint ventures in Mexico. In accordance with item I) of article 27 of the Mexican Constitution, foreign investors are prohibited from acquiring direct dominium of the land in specific areas, giving them permission to use real estates by the establishment of a trust, in which foreign investors become beneficiaries of the real estate property.

Trust Agreements in Mexico provide that all property rights are transferred to the trustee, and that only banking and other authorized financial institutions may be trustees.

Venture capital is regulated by private law. There is no specific law on this subject but funding is more often documented by means of by-laws of a corporation and shareholder agreements. The SAPI is a perfect vehicle to document a venture capital corporation as the law provides for venture capital protection provisions in this type of company.

Directors’ and shareholders’ liabilities.

With regard to partnerships, liability for the directors and management bodies is unlimited, joint and several. For some partnerships, this unlimited liability extends to all partners, whereas in some other partnerships, liability only extends to those partners who are legally able to participate in the management of the partnership. Also, directors and managers will face full civil, criminal and tax liability for duties owed by the partnership.

In cooperation companies, liability may be limited to the capital stock subscribed to by partners, or a higher amount set out in the by-laws. As far as management is concerned, managers face full civil, criminal and tax liability.

In limited liability companies, partners are only liable for payment of their portion of the capital stock. Managers and directors are fully liable for criminal, civil and tax claims, unless they have voted against certain resolutions that would allow them to distance themselves from the conduct adopted by the management of the company.

As far as all corporations are concerned, liability for shareholders is limited to the payment of subscribed value of their shares. Managers and directors face full civil, criminal and tax liabilities, and the by-laws may also require that they put in place a guarantee deposit. Furthermore, in publicly traded corporations, the board of managers is obliged to adhere to the corporate governance obligations.

Mergers

Mergers in Mexico can take one of two forms: (i) a company completely absorbs another company, and the latter disappears; or (ii) two companies unite to create a new one.

Mergers may be decided by each of the participating companies in accordance with the type of company. Merger agreements are published in the local gazette of the corporate domicile, in order to give notice to any creditor who may want to object to the intended merger.

Reverse mergers (“escisión”) allow one corporate entity to extinguish and split its assets and capital and to convert one company into two or more companies.

Mergers will be effective three months after registration on the Public Registry for Commerce, unless consent on behalf of all creditors is obtained for the merger, or an agreement is reached to pay all outstanding debts.

When companies intend to merge, in circumstances where they may have an impact on the relevant market, in particular where it is a large transaction, they must submit to a “notice of concentration” procedure, during which the Federal Antitrust and Competition Commission, pursuant to the provisions of the Federal Economic Competition Law, shall examine whether to authorize the merger.

Cross-border Transaction Issues

Mexican law is consistent with the OECD principles and so are the tax treaties entered into by Mexico and other countries to avoid double taxation. Transfer pricing, permanent establishment, withholding taxes and other provisions are very standard.

VAHG Vázquez Aldana, Hernández Gómez & Associates



Corporate Law in Mozambique

  1. Compliance with regulations concerning foreign investments in Mozambique

General

Mozambican law does not establish significant differences between a company owned by Mozambican nationals and one held in foreign ownership. Mozambique grants several incentives, namely tax benefits, to foreign investment in the country. There are special requirements applicable to a foreign investor and there are limits imposed to capital repatriation under Mozambican law.

Private Foreign Investment

Investments covered by the applicable legislation must aim to and meet the requirements of at least 7 of the following objectives:

  • Implementation, rehabilitation, expansion or modernization of the economic infrastructures destined to the operation of production activities or to the provision of services;
  • Expansion and enhancement of the national production capacity or of the provision of services supporting the production activity;
  • Contribution to training, multiplication and development of entrepreneurship and Mozambican entrepreneurial partnerships;
  • Creation of jobs for national workers and the increase of professional qualification of the Mozambican workforce;
  • Promotion of the technological development, increase of productivity and entrepreneurial efficiency;
  • Increase and diversification of exports;
  • Productive provision of services and currency generating services;
  • Reduction and replacement of imports;
  • Contribution to improve the supply of the internal market and to satisfy the priority and essential needs of the populations;
  • Direct or indirect contribution to the improvement of the balance of payments and of the public treasury.

Application

The investment proposal must be presented in prescribed form in four copies, in the Portuguese or English language, with the following documents:

  • Documents proving the legal existence of the promoters if they are legal entities, or individual identification if they are natural persons;
  • topographic map or sketch of the location intended to set up the entity;
  • Other additional information for the analysis of the project, including, but not limited to:
    • Reports and account balance of the last tax year, as well as any catalogues, brochures and other illustrated publications regarding the activity of the promoter;
    • Curriculum vitae and criminal record of the person or principle persons who will be responsible for the implementation and operation of the project;
    • Proposal of the draft articles of incorporation of the company to be incorporated and registered in Mozambique if the implementing company does not yet have any legal existence.

For proposals regarding indirect investment, additional documents must be included:

  • Property registration title or evidence of an exclusive right of access or use in the specific form for the indirect investment under consideration, with an indication of the relevant validity period;
  • Contract proposal or any other valid documents which establish the terms and conditions applicable to the use or for the form of investment.

General principles

The Mozambican Law on Investment of 1993, the Regulations of the Investment law of 2009, the Code of Fiscal Benefits of 2009, and the Foreign Exchange Law of 2009 define the regime to which investments are subject as well as the type of incentives that can be granted in connection with such investments. It contains a list of general principles and guarantees that are intended to safeguard and promote investments in Mozambique.

Responsible bodies

The CPI – Centro de Promoção de Investimentos

The CPI is a center for the promotion of investments in Mozambique, and it offers a package of services to assist both domestic and foreign investors.

The mission of the CPI is:

  • To promote the attraction of national and foreign direct investment;
  • To provide institutional assistance to investors in the approval and implementation of investment projects;
  • To promote, receive and register investment projects;
  • To guarantee the concession of fiscal and customs incentives to investors;
  • To promote business linkages between national and foreign companies, SMEs and large undertakings;
  • To identify potential financial partners and/or technological partners for joint ventures;
  • To identify and disseminate investment opportunities;
  • To promote programmes of assistance to the development of businesses, particularly national businesses.

The CPI assists investors in the implementation of their project, for example, in the licensing of their activity, the obtaining of entry, work, and residence visas, and in the authorizations of customs exemptions and property licensing.

The GAZEDA is the institution responsible for the Industrial Free Zones and Economic Special Zones.

The Ministry of Industry and Commerce (MIC) is responsible for trade and industrial policy drafting.

The Instituto para a Promoção de Exportações (IPEX) is the traditional trade promotion body which promotes exports from Mozambique to foreign markets. Its role covers the identification and advice to exporters and investors regarding market access opportunities and export-related logistical services.

Repatriation of funds

According to Law No. 11/2009 of March 11, 2009, all foreign exchange operations must be notified to the Bank of Mozambique (BoM), which must authorize them and duly register them. Residents are permitted to hold foreign exchange accounts in Mozambique as well as abroad, but have a duty to declare them.

Repatriation of net profits and dividends is also subject to authorisation by the BoM. Article 14 of the Law on Investment guarantees the remittance of funds abroad in connection to certain elements as listed below under the guarantees granted to investors.

Tax and customs benefits and incentives

Article 6 of the Regulations of the Investment Law, 2009 sets the minimum value for foreign direct investment at MZN 2,500,000 (about US$94,162) for eligibility for external remittance of profits and repatriation of invested capital. There is no minimum amount for national investment.

Notwithstanding existing agreements for the promotion and protection of foreign investment between the Mozambican State and certain other countries, Mozambican legislation on investments provides that investors benefit from the following guarantees:

  • Legal protection of their property and rights, including those applicable to industrial property;
  • Freedom to import capital and to contract loans to carry out the investment;
  • Remittance of funds for the following:
    • Exportable profits resulting from investments eligible for export of profits under the Regulations of the Investment Law of 2009;
    • Royalties and other payments for remuneration of indirect investments that are associated to the grant and transfer of intellectual property in technology;
    • Amortization of loans and payment of interest on loans that are contracted in the international financial market and apply to the respective investment projects;
    • Compensation payable in case of nationalisation or expropriation;
    • Invested and re-exportable foreign capital, in addition to the ability to export profits.
    • Absence of restrictions regarding loans or payment of interest abroad[1];
    • Absence of restrictions regarding the transfer of dividends abroad[2];
    • Arbitration in accordance with the International Center for the Settlement of Investment Disputes (ICSID) or the Regulation of the International Chamber of Commerce for conflicts regarding investments.

In addition to the guarantees on property and transfer of funds abroad, the Mozambican State guarantees the concession of tax incentives and benefits, i.e. the tax mechanisms which provide for a reduction in tax payments in order to benefit activities recognized as having a public, social or cultural interest, as well as encouraging the economic development of the country.

  • Exemption from import obligations and from VAT on primary goods;

Tax Credit per investment: Tax credit for investments for a period of 5 years and equal to 5%, for investments carried out in Maputo, and 10% in all other locations, of the total investment made.

Training: Costs for professional training of Mozambican employees is deductible from the taxable corporate income during the first 5 years to a maximum of 5% of the taxable income, and up to 10% for the training in the use of equipment that is considered new technology.

Infrastructure: For private investments or investments conducted under public-private partnerships aimed at basic public infrastructure, alongside the exemption in terms of VAT and custom duties, investors benefit from:

  • 80% reduction in Corporate Income Tax (IRPC) rate for the first 5 years;
  • 60% reduction in the IRPC rate from year 6 to 10;
  • 25% reduction in the IPRC rate from year 11 to 15.

Rural Commerce and Industry: Projects involving the construction and/or rehabilitation of infrastructure to be used exclusively for the conduct of commercial and industrial activity in rural areas receive additional customs duty and VAT exemptions.

Industrial Free Zones and Special Economic Zones: Investments in industrial free zones and special economic zones may benefit from exemptions in customs duty and VAT, as well as reductions of the IRPC. Such zones are also subject to specific regulations.

Agriculture and Fishing: In addition to the general exemptions in customs duty and VAT, as well as those for professional training and for infrastructure projects, investments in agriculture and fishing may also benefit from:

  • 80% reduction on IPRC until 31 December 2015
  • 50% reduction on IPRC from 2016 until 2025

Tourism: Certain investments in this sector may benefit from tax exemptions for customs duty and VAT on equipment related to tourism and hotels. Moreover, they may also benefit from tax credits in the areas of new technologies, professional training and infrastructure expenses. The depreciation of tangible fixes goods can be increased by 50% of the normal rate.

Science and Technological parks: Investments in the area of specific research, information and technology, as well as research in the area of science and technological parks may benefit from an exemption on the IPRS of 100% for the first 5 fiscal years and a deduction of respectively 50% and 10% for the following 6 to 10 fiscal years and 11 to 15 fiscal years.

Modernization and Introduction of New Technologies: The value invested in specialized equipment which is considered by the competent entity as cutting-edge technology for the development of authorized entrepreneurial activities benefits during the first 5 years from a deduction of the tax base, for IRPC purposes, up to a limit of 15% of the tax base.

Expenses considered tax costs: During a period of 10 years starting from the date of operation, companies can use the following as tax costs for the determination of the tax base for the IRPC:

  • 110% (for the City of Maputo) or 120% (the remaining Provinces), of the expended value of all expenses incurred in the construction and renovation of roads, railways, airports, mail, telecommunications, water supply, electric power, schools, hospitals and other works which are considered a public utility by the competent authorities and proved as such by the Tax Authorities, and
  • 50% in the case of expenses incurred in the purchase, for their own patrimony, of works of art and other objects representing the Mozambican culture, as well as activities which contribute to its development.

Procedure

The procedures for investment and obtaining benefits, incentives and guarantees are set out in Law No. 3/93 and supplementary legislation, and require the following:

  • The investor submits three copies of a business plan and/or three copies of the CPI application form to the CPI for approval. Further documents (such as copies of ID, articles of association of the company, maps, proof of technical and financial capability, investor and/or company profile) are filed with the application.
  • The CPI coordinates the application and approval process, together with the local and national authorities. The CPI will also negotiate the terms of the authorization with the investors directly.
  • Upon agreement between the CPI and the investors on the terms of the authorization, the CPI then refers the project for approval to the competent authority (the Provincial Governor, the Minister of Planning and Development or the Council of Ministers, depending on the project size).

Upon approval by the competent authority, the issued authorisation includes a draft ministerial order (Despacho) or Council of Ministers Internal Resolution, which will provide the specific terms and conditions regarding the approved investment project. The authorisation will provide:

  • The identification of the proponent investors;
  • The project designation and objectives;
  • The name of the implementing company;
  • The location and scope of operations;
  • The value and structuring of the investment;
  • The investment incentives and guarantees;
  • The number of national and foreign persons to be employed;
  • The time limit and terms for the start of the implementation of the project;
  • Any other specific terms to be included in the authorisation that are relevant given the characteristics of the project.

Once the authorisation is issued and the project approved, the implementation has to start within a maximum of 120 days starting from the date of notification of the authorisation, unless a different time period had been set by the authorisation.

Implementation of the project

The registration of a company can be carried out at public One-Stop-Shop Bureaus (Balcões de Atendimento Único-BAUs) which have been established in every provincial capital throughout the country through the Decree No. 14/2007 of 30 May.

Regulated Activities

Most economic branches are open to foreign equity ownership with the exception of the media and telecommunications sectors, for which foreign ownership stakes are limited to 20% . The land-line telecommunication sector is exclusively reserved for public investment, and Telecommunications of Mozambique S.A.R.L. is the only company allowed to operate in that sector.

  1. Procedures and Formalities for the Incorporation of Companies in Mozambique

The new Company Code allows five (5) forms of companies, but the Private Limited Companies (Sociedade por Quotas) and the Public Limited Companies (Sociedade Anonima) are the most common types adopted for setting up business.

Formalities

The procedure for the incorporation of companies in Mozambique comprises of the following steps:

  • Agreement on the wording and final documents of the company’s Articles of Association by the shareholders, or public deed of incorporation before a Notary;
  • Obtaining a Company License;
  • Obtaining licenses for the activity from the authority responsible for the intended economic sector;
  • Tax registration and obtaining of a tax registration number before the Tax office of the location where the activity is carried out;
  • Registration before the Labour Office and the Social Security Office, Instituto Nacional de Segurança Social (INSS);
  • Opening of a bank account for the purpose of depositing the share capital. Necessary documents are a certified copy of the company’s name reservation certificate, draft of the Articles of Association of the company, and certified copy of the shareholders identification documents;
  • Registry of the company before the Commercial Registry Office. The documents necessary for this process are a certified copy of the company denomination reservation certificate, draft of the Articles of Association of the company, proof of existence of a bank account, and certified copy of the shareholders identification documents;
  • Publication of the Articles of Association in the Official Gazette (Boletim da República) by the Commercial Registry Office.

All documents prepared abroad, as well as the Articles of Association and Registration Certificates and powers of attorney must be certified by a Notary Public and stamped by the Mozambican Consular Office present in the country the documents originated from.

Timeframe

The timeframe for incorporating a company in Mozambique is estimated to take about 13 days. The aim is to reduce the number of days for incorporation of a company to 1-2 days.

Legal expenses:

There are certain prescribed fees but in general terms it will cost 13.91 % of income per capita to start a company in Mozambique.

III. Business structures

The two most used corporate structures for investments in Mozambique are the Private Limited Company, sociedade por quotas (“SQ”), and the Public Limited Company, sociedade anónima (“SA”).

A- Private Limited Companies

  1. General requirements:
  • Share capital represented by quotas;
  • Partner identification registered at the Commercial Registry Office;
  • Quotas may have different nominal values but cannot be lower than MT 500;
  • There is no minimum amount of share capital for the incorporation of a Mozambican private limited company. However, the Companies Registrar may deny the registration of a private limited company the share capital of which is clearly insufficient for the pursuit of the corporate purpose of the Company. The share capital can be increased or reduced following certain procedures provided by law.
  • Minimum number of members: 2[3];
  • Maximum number of members: 30;
  • Members' liability: partners are jointly liable for putting up all of the capital agreed in the articles of association. Members shall only be obligated to pay the additional capital contributions if the articles of association or applicable legislation so require.
  1. Corporate governance/management
  • One or more managers (Administradores) appointed by Partners’ decision;
  • The management powers remain with the managers;
    • The articles of association may determine that the company has a supervisory board;
  • Two types of shareholders general meetings: the ordinary general meeting (i.e. prescribed by Law and in the by-laws, namely the general meeting to approve the annual report and financial statements) and the extraordinary general meeting (convened for a specific purpose);
  • general meetings are convened by any manager, with at least 30 days notice in advance and must be published in the most widely read newspaper of the company’s head office locality ; and,
  • The chairman of the general meeting shall be the shareholder who possesses or represents the largest fraction of the capital.
  1. Taxation of the company income:

Private Limited Companies are subject to corporate income tax, as described below.

  1. Pros and cons:
  • Pros: Simpler structure and less complex management system; ideal for smaller companies / family owned companies.
  • Cons: Cannot be listed in stock exchange markets; partners may be easily identified; fixed corporate governance.

B- Public limited companies

  1. General requirements:
  • Share capital represented by shares, material, which may be nominative or bearer.
  • There is no minimum capital provided by law;
  • The company may be incorporated if at least 25% of the share capital is paid up.
  • Minimum number of shareholders at incorporation: 3;
  • Liability of the shareholders: Limited to the shares subscribed;
  • The transfer of shares and pre-emption rights provisions are allowed; however, in this case, the shares must be nominative;
  • The company may be listed in the Stock Exchange.
  1. Corporate governance/management:
  • Sole board member (Administrador Único) or board of directors (Conselho de Administração) with the number of directors defined in the by-laws (necessarily an odd number);
  • One supervisory officer (Fiscal Único) or a supervisory board (Conselho Fiscal).
  • Only one management structure, comprised of a shareholders’ general meeting, board of directors and supervisory board;
  • Two types of shareholders general meetings, the ordinary general meetings (i.e. those foreseen by Law and in the by-laws, namely the general meeting to approve the annual report and financial statements) and the extraordinary general meetings (which are general meetings convened for a specific purpose);
  • The chairman of the shareholders general meeting is appointed in the initial by-laws and by subsequent shareholders’ resolutions.
  1. Taxation of the company income:

Public limited companies are subject to corporate income tax, as described below in section V.

  1. Pros and cons:
  • Pros: Allows a complex corporate governance structure; these may be listed in stock exchange markets.
  • Cons: Heavier and burdensome structure may be inadequate for small businesses.
  1. IV. Foreign Exchange

Exchange Control Regulations apply to all contracts or service agreements which imply payments to a foreign entity. These contracts or agreements must be registered with the Central Bank of Mozambique.

  1. Relevant tax aspects related to corporate law

Taxes

The Mozambique tax system provides for national and municipal taxation. The taxation can be collective or individual, direct or indirect, namely direct for income and health, and indirect for expenditures.

  • Corporate Income Tax (IRPC): Charged according to generated income during the tax year at a rate of 32%.
  • Personal Income Tax (IRPS): Charged according to the annual global income, paid by natural persons residing in Mozambique and by non-residents who have income generated in the country. This tax is progressive and the maximum rate stands at 32%.
  • Value Added Tax (IVA): Charged through the sale of goods and services in Mozambique, as well as in connection with the import of goods. The applicable rate is 17%.
  • Special Consumer Tax (ICE) : Charged in connection with certain goods produced locally or imported, at a rate of:
    • 2,5% for raw materials
    • 5% for essential goods
    • 7,5% for intermediary goods
    • 20% for consumer goods

Other applicable taxes are, for example, Stamp Duty, Municipal Taxes, Inheritance and Donation Tax, Gaming Tax, National Reconstruction Tax, Automobile Tax and Real Estate Transfer Tax.

        Tax Enforcement

Mozambique’s Tax Administration is improving skills on tax enforcement. Because the tax code was complex, many businesses (especially SMEs) could not comply fully with all of its requirements. Consequently, many entrepreneurs faced differenced treatment and costly penalties, which created incentives for unofficial side payments to tax officials in some cases.

Recent evidence suggests that the Tax Administration is improving taxpayer services and tax education programs. However, there are still many complexities or procedural requirements that can mislead taxpayers. In addition, the incentive structure of the Tax Administration encourages severe enforcement actions whenever a local tax office is falling short of an assigned revenue target. This can create costly problems for small and medium businesses.

Tax evasion and smuggling is still extensive, along with bribery and corruption. Again, in this field, the Tax Administration has made progress in adopting and publicizing a code of conduct for tax and customs officials, emphasizing integrity and professionalism. However, the revenue loss is still considerable.

        International Taxation

Mozambique has signed bilateral investment agreements with the following nations: Algeria, Belgium, China, Cuba, Denmark, Egypt, Finland, France, Germany, Indonesia, Italy, Mauritius, The Netherlands, Portugal, South Africa, Sweden, Switzerland, The United Kingdom, the United States of America, and Zimbabwe.

Double Taxation Treaties have also been agreed with Portugal, Mauritius, Italy, and the United Arab Emirates.

        Groups of Companies

There is no special regime regarding the taxation of groups of companies.

[1] The approval of an investment project and the subsequent approval of the exchange with a foreign country are mandatory.

[2] The approval of an investment project and the subsequent approval of the exchange with a foreign country are mandatory.

[3] It is possible to register a sole shareholder private company. Such company will have to adopt a legal designation that identify such sole shareholding situation (Sociedade Unipessoal)

ABREU ADVOGADOS



Corporate Law in The Netherlands

The Netherlands has a flexible and accessible legal framework for setting up business with a lot of choices. Business operations can be set up as a legal (corporate) entity, or without legal personality, with liability, or without. The first choice to be made is the form the business in the Netherlands will be set up. A check with the Chamber of Commerce, whether the name under which the business is set up is not already used by another company or another person, is also necessary. Your business name must not be confusing or misleading.

 

 

  1. Compliance with Regulations Concerning Foreign Investments in the Netherlands

 

 

 

Prior Authorisations

 

Prior authorization for business set-ups, by way of license or permit, is only necessary in the Netherlands in relation to a small number of business sectors.

 

A consistent gaming policy is performed by the Minister of Justice for setting up business in gambling activities or games of chance. Another example: it is prohibited to hold an interest which exceeds ten per cent in or control more than ten per cent of a Dutch based bank, a management company of a corporation for collective investment in transferable securities, an investment firm or an insurer ('financial corporation') without obtaining the authorisation of the Dutch National Bank or the Minister of Finance. Holding specific interests in an electronic money institution is also prohibited without prior authorisation.

 

If one starts a business in the catering sector, it is necessary to obtain a drink and catering permit from the local council. The local council can also stipulate that the manager must have a record of good behaviour, must be at least 21 and in possession of a Social Hygiene certificate. If a business represents a risk for the environment, it will be necessary to obtain an environmental permit.

 

 

Regulated Activity

 

For regulated professions, it is necessary to check whether the required conditions are satisfied before setting up a practice as, for example, a doctor, lawyer or civil-law notary.

 

 

  1. Procedures and Formalities

 

 

  1. Competent Authorities

 

Ministry of Justice

The Ministry of Justice issues a so-called Declaration of No Objection. It is possible that this requirement may be removed in the near future with regard to the incorporation of a NV or BV.

 

Civil Law Notary

To incorporate a legal entity, a deed entitled “the Articles of Association” must be signed before a civil-law Notary.

 

Chamber of Commerce

The Chamber of Commerce is the central body responsible for maintaining records about company up-dates. When the Articles of Association are amended, a copy should be sent to the Chamber of Commerce. Companies are further obliged to give up-to-date information on their managing directors/supervisory directors and their authority to sign for and behalf of the company. Any other officers with such authority should also be registered. NVs and BVs are obliged to publish their annual accounts with the Chamber of Commerce. Publication should take place within 8 days after approval of the annual accounts.

 

  1. Timeframe

 

The timeframe for setting up a B.V. (the most common form) is some (2/3) weeks:

  • a day for the deposit of the minimum capital required in the bank;
  • a few days to check the company name for appropriateness and validity at the Chamber of Commerce (self check via the website[1] takes less than an hour);
  • a few days to submit details of the founder (s) and first managing director(s) to the Ministry of Justice for approval or to obtain the “Declaration of No Objection”;
  • a few days for a civil-law notary to draft the deed of incorporation (Articles of Association)
  • a few days for the registration of the company in the commercial register at the local Chamber of Commerce and to obtain a registration number;
  • a day to register with the local tax authorities. The registration form can be filed in a day but it will take the tax office 4–6 weeks to provide the required tax numbers. A separate registration form must be filed for income tax and this can also take 4 weeks.

 

  1. Legal Expenses

 

Below are examples of the expenses associated with setting up a B.V., (prices mid 2010),:

  • checking the company name with the Chamber of Commerce approx €90.00 (via website kvk.nl, also in English: no cost);
  • Civil-law Notary’s fees for drafting the Articles of Association approx € 750.00 (rates are negotiable and can be on the basis of an hourly rate or fixed fee);
  • registration of the Declaration of No Objection from the Ministry of Justice, approx € 90.00;
  • registration of the company at the trade Register & filing the Articles of Association from €40.00 (initial and annual fees depend on the number of employees and the authorized share capital of the firm, see kvk.nl)
  • registration at the tax authorities is ‘free’.

 

  1. Documents Required to be Registered

 

  • Declaration of No Objection from the Ministry of Justice is required,
  • A copy of the Articles of Association must be filed with the Chamber of Commerce,
  • For a branch, several copy documents are required, see below for comments on branch.

 

 

III Business Structures

 

Foreign companies can operate in the Netherlands through a branch or through a subsidiary. There are no restrictions regarding the setting up of a branch or a subsidiary. Repatriation of capital and profits is not subject to any restrictions either.

 

Contrary to a company, a branch is not a separate legal entity. Hence, when a branch enters into a transaction the foreign owner of the branch will be a party to that transaction. The owner of the branch will be responsible for satisfying the obligations of the transaction and will be liable for the payment of the debts of the branch.

 

  1. Branches

 

In most cases, the organization of a branch of a foreign company in the Netherlands does not require prior governmental approval. The foreign head office needs to file certain documents and data with the Chamber of Commerce. The following particulars have to be disclosed:

  1. For the branch: the trade name of the branch; brief description of its activities; number of people working at the branch and the full address of the branch;
  2. For the branch manager: surname, first name, full address, date and place of birth, nationality, and the terms and the start and end date of his/her power and authority to represent the branch; the branch manager’s signature and a copy of an identity document must be deposited.
  3. For the foreign company: the name and legal form of the company, the (foreign) Chamber of Commerce where it is registered, the registration number and the personal details of its managing directors and supervisory directors; the start and end date of their assignment, the terms of their power and authority to represent the company; Deed of Incorporation, Articles of Incorporation and bylaws (if any) of the company (submitted in Dutch, English, German or French); the annual accounts of the company as drawn up, audited and disclosed pursuant to the law of the country of origin (submitted in Dutch, English, German or French); an extract from the foreign Chamber of Commerce or document of registration, issued no later than one month earlier.

The following additional information must be disclosed if the company is established outside the European Economic Area: the law by which the company is governed, the address of its head office and, at least once a year, the amount of the company’s issued share capital.

 

  1. Subsidiary / Creation of a New Company

 

Under Dutch law a distinction is to be made between commercial organizations with and without legal (corporate) personality.

 

2.1        Legal Entities with Legal/Corporate Personality

 

There is no joint and several liability between shareholders.

 

2.1.1        Private Company with Limited Responsibility/Restricted Liability

(“Besloten Vennootschap” or “BV”)

 

In the Netherlands businesses are commonly set up in the form of a BV. As a result most legal entities are organized as a BV (with the legal form of the Foundation (“Stichting”) coming second). A BV can be incorporated within a short period. The BV is an attractive vehicle for foreign companies allowing them to carry out their Dutch commercial activities.

 

For the incorporation of a BV the following three requirements need to be met:

(a) a so-called Declaration of No Objection from the Ministry of Justice must be obtained;

(b) the minimum share capital of €18,000 is paid up; and

(c) the notarial deed of incorporation containing the Articles of Association is executed.

 

General Requirements

 

Minimum Capital

Issued and paid-up share capital is €18,000. It is not necessary that the share capital is paid up entirely in cash. Contributions may also be made in kind, i.e. a business. At the time of incorporation an accounting statement should show that the contribution in kind have a positive net worth of €18,000 upon incorporation. The company’s liability is restricted to its paid-up capital.

 

Shares

A BV only has registered shares. It is not allowed to issue share certificates. All the shareholders should be registered in its shareholders’ register. Shares cannot usually be transferred free of restrictions; Restrictions can apply normally a transfer will be subject to either an offering procedure (aanbiedingsregeling) or an approval procedure (goedkeuringsregeling).

 

Management/Corporate Bodies

Typically a BV has a Board of Managing Directors (Directie) and a General Meeting of Shareholders (Algemene Vergadering van Aandeelhouders). Further, it may have a Board of Supervisory Directors (Raad van Commissarissen) and, if it employs 50 people or more, a Works Council (Ondernemingsraad). A legal entity can act as the Managing Director. Only the General Meeting of Shareholders can appoint and/or dismiss a Managing Director. Generally Managing Directors are only personally liable for their actions if they have committed serious mismanagement.

 

Publication Requirements

Upon incorporation a copy of the Articles of Association (Statuten) is filed with the Registrar of the Chamber of Commerce. In addition, a BV is obliged to publish its annual accounts and deposit the same with the Chamber of Commerce. The requirements to be met in these annual accounts depend on the size of the company.

 

Advantages of a BV

 

  • no personal liability for the members of the Board of Managing Directors, not even in the case of bankruptcy, with the exception of bankruptcy in the first year after establishment and except for cases of serious mismanagement;
  • shares can be transferred easily;
  • its legal structure enhances the decision-making process. Another legal entity can act as its Managing Director. Often the sole shareholder is also the Managing Director.

 

 

Disadvantages of a BV

 

  • Its minimum capital is € 18,000 plus other costs and taxes ranging between € 1,000 and € 2,000 for the civil-law notary, fees for the issuance of the Declaration of Non Objection by the Ministry of Justice and the entry on the Commercial Register etc.;
  • Its incorporation usually takes a few weeks to complete;
  • A sole shareholder is not allowed to issue specific instructions to the Board of Managing Directors of the BV.

 

2.1.2        The Public Company (“naamloze vennootschap” or “NV”))

 

NVs are usually large companies listed on the stock exchange. It is the ideal legal form for a large company which requires significant external capital.

 

The following is required to incorporate an NV:

(a) a notarial deed of incorporation containing the Articles of Association;

(b) a Declaration of No Objection by the Ministry of Justice; and

(c) participation by each of the founders in the company’s capital.

 

General Requirements

 

Minimum capital

The minimum issued and paid up share capital at the time of incorporation of an NV is €45,000. The founders must be able to demonstrate that they have this minimum sum at their disposal at the moment of incorporation.

 

Shares

In addition to registered shares, an NV can issue bearer shares (aandelen aan toonder) which can be bought and sold on the stock exchange. Shares in an NV are, in principle, freely transferable and can therefore be traded easily. An NV may issue share certificates and should maintain a register of share certificate holders.

 

Management / Corporate Bodies

An NV is required to have a Board of Managing Directors (Directie) and a General Meeting of Shareholders (Algemene Vergadering van Aandeelhouders). It may have a Board of Supervisory Directors (Raad van Commissarissen) and, if it employs 50 people or more, a Works Council (Ondernemingsraad). The Managing Directors are appointed and dismissed by the General Meeting of Shareholders. A legal person may also act as Managing Director. The General Meeting of Shareholders is authorized to amend the Articles of Association (Statuten), to issue new shares and to dissolve the company. The Supervisory Board supervises the Management Board and advises it. A Supervisory Board is required by law when the company is qualified as a “large company” (structuurvennootschap), meaning (a) the issued capital together with the reserves is at least €10.5 million; (b) there is a Works Council; and (c) the company has at least 100 employees. The Supervisory Board in a large company has a more influential role to play. Rules for appointment of such supervisory directors are stipulated by law. The Works Council is required by law in any company having at least 50 employees. The Works Council has the right to advise in relation to certain decisions of the Management Board and it may even have the right to vote with respect to other decisions specified by law.

 

Publication Requirements

A copy of the notarial deed of incorporation containing the Articles of Association should be registered with the Commercial register of the Chamber of Commerce immediately after incorporation. The company is also required to publish its annual accounts. There are specific requirements for public companies listed on the Stock Exchange regarding the semi-annual and quarterly reports. Publication takes place by filing the annual accounts with the Commercial register of the Chamber of Commerce.

 

2.2           Legal Entities without Legal Personality

 

There are various forms of commercial organizations without any legal personality. The entrepreneur will be held jointly and severally liable to the full extent of his property. Legal forms without a separate legal personality thus result in the founders assuming personal liability for the debts of the organization.

 

2.2.1        General Partnership (“Vennootschap onder Firma” or “VOF”)

 

A General Partnership is a form of cooperation between two or more persons jointly operating a business and acting as an organisation. In other words, they do business under a joint name. This type of cooperation is entered into by a partnership agreement between its partners. Such agreement, if not in writing, can be derived from the utilisation of the suffix ‘VOF”.

 

A distinction should be made between the partnership’s capital and the private capital of each of the partners. The company’s capital is also called the segregated capital (afgescheiden vermogen) and can only be claimed by the creditors of the company. Creditors of the partners individually cannot claim this capital. Each partner is fully, jointly and severally liable for all the partnership’s debts.

 

2.2.2        Limited Partnership (“Commanditaire Vennootschap”)

 

A Limited Partnership is a special kind of General Partnership (maatschap), the most important difference being the fact that it has two kinds of partners: Managing Partners and Limited or Dormant Partners. The Managing Partner is personally and severally liable for the firm's debts, in the same way as a partner in a General Partnership, but this does not apply to the Limited or Dormant Partners, who are liable only to the extent of their investment. The Limited Partnership is well suited for businesses with investors who do not want to loan the necessary capital, but are prepared to invest by making such capital available to the company at their own risk, often with beneficial fiscal consequences.

 

2.2.3        Sole Proprietorship (“Eenmanszaak”)

 

In a Sole Proprietorship (eenmanszaak), a natural person runs a business for his own account and at his own risk. In this form of business no distinction can be made between the business capital and the private capital of the entrepreneur. The owner is personally liable for all debts of the company. Creditors of the business can claim against the private capital of the owner.

 

 

2.2.4        Partnership (“Maatschap”)

 

This is a form of cooperation between two or more persons who each contribute their labour, assets and/or property and who strive to achieve a certain common objective. The individual partners are not required to contribute equally to the partnership. A partnership agreement should define all the obligations between the partners. Profits and losses should be divided proportionally among the partners in relation to their contribution unless differently provided for in the partnership agreement. All partners are equally liable for the company’s debts. Partnerships are often set up by professionals: doctors, attorneys, civil-law notaries, accountants, tax advisors etc.

 

2.2.5        Non-Profit Association (“Vereniging zonder winstoogmerk”)

 

An Association is a partnership / joint venture between 2 or more people with a shared goal. An Association is established by notarial deed containing its constitution (statuten). The Cooperative Association (Coöperatie) and the Mutual Insurance Association (onderlinge waarborgmaatschappij) commonly have commercial objectives. Rabobank is set up as a Cooperative (coöperatie). The Cooperative Association and the Mutual Insurance Association are subject to specific additional legislation.

 

  1. Legal Aspects

 

Originally Cooperatives were set up for a definite purpose or time. However, currently most Cooperatives are established for an indefinite period of time.

 

  1. Advantages of an Association

 

  • an Association can be established without obtaining a Declaration of No Objection from the Ministry of Justice;
  • no personal liability for the members of the Board, not even in the case of bankruptcy, except for cases of serious mismanagement.

 

  1. Disadvantages of an Association

 

  • any profits are to be utilized in accordance with its (charitable) objective(s);
  • many associations are paralyzed by their General Meeting.

 

2.6. Foundation (“Stichting”)

 

A Foundation (Stichting) is a separate legal entity that administers funds that are often provided for social or charitable ends. It does not distribute its surplus funds to its shareholders but instead uses them to help pursue its goals.

 

A primary difference between a Stichting and a BV is that a Stichting does not issue shares. However, a Stichting may issue participations, it may have personnel and can compensate its Managing Directors. A Stichting commonly has only one body: a Board of Managing Directors which may elect its own successors.

 

 

 

 

  1. Legal Aspects

 

A Stichting can be established within hours. It simply requires the execution by a civil-law notary of a deed containing the constitution (statuten). A Stichting can be an extremely flexible device.

 

  1. Advantages of a Stichting

 

  • a Stichting can be established without a Declaration of No Objection from the Ministry of Justice. No minimum capital needs to be paid up;
  • it is easy to establish and extremely flexible compared to the Association (Vereniging);
  • no personal liability for the members of the board, not even in the case of bankruptcy, except for cases of serious mismanagement.

 

  1. Disadvantages of a Stichting

 

  • any profits are to be utilised in accordance with its (charitable) objective(s). As a result its capital may end up in the hands of the dead’s (de dode hand);
  • it is regarded as unusual to carry out commercial activities under the legal structure of a Stichting. Traditionally, commercial activities are carried out under the legal structure of a BV which offers a sufficient level of flexibility and a solid legal structure. Whilst a foundation is more flexible than a BV, a disadvantage is that profits cannot be distributed in the form of dividends. Profits are invested in accordance with the (charitable) objectives of the Stichting. This means that a foundation cannot be used for the pursuit of commercial activities in the EU; however, a so-called “stichting administratiekantoor” may be of use to administer the shares in a BV, with the BV itself carrying out the commercial activities. Fiscal considerations will have a bearing on all these options.

 

  1. New Structures

 

New structures such as the flexible private company and incorporated Partnerships (“Personenvennootschappen”) are becoming increasingly popular.

 

3.1. Flexible Private Company with Limited Liability (“Flex-BV”)

 

In the light of the European Court of Justice (ECJ) case law on the freedom of establishment, the Dutch government has recently launched legislative proposals that are designed to simplify and increase the flexibility of its national limited liability companies (the Dutch “besloten vennootschap met beperkte aansprakelijkheid”). These structures offer some important advantages to investors, such as no minimum capital, non-voting and non-profit participating shares and shareholder instruction rights in the Articles of Association.

 

These modifications are proposed by the Ministry of Justice and Economic Affairs to make the private company with limited liability more attractive for entrepreneurs. The so-called Flex BV is scheduled to enter into force during the course of 2012.

 

 

  1. Issues for Investors

 

The Incorporation

It is easier to set up a Flex-BV because there are fewer requirements and some barriers will cease to exist altogether, such as:

  • abolition of the minimum capital requirement (currently €18,000 for a B.V.),
  • abolition of the capital contribution statement (“bankverklaring”) ,
  • abolition of the audit report (“accountants-verklaring”),
  • authorized capital becomes optional,
  • liability ceases to apply.

 

  1. General Modifications (compared to the B.V.)

 

The Protection of Creditors

There will be a payment test (“uitkeringstest”) before any distribution of dividends can be made so as to ensure that the company retains sufficient liquidity and remains solvent. Directors and shareholders can be liable if they do not observe this test.

 

Freedom of Organization

Companies will get more freedom to differentiate the provisions of their Articles of Association from the provisions imposed by law. Non-voting shares or shares without profit entitlement can be issued.

 

Flexibility with regard to Decision-Making

It will become easier to adopt resolutions outside shareholders’ meetings, which can be held abroad. The notice period for calling a meeting becomes 8 days.

 

Abolition of the Transfer Restriction

Transfer restrictions will no longer be mandatory. The purchase by a company of its own issued share capital will become possible without limitations.

 

Improvement of Dispute Settlement Procedure

The improvement of the dispute settlement procedure (“geschillenregeling”) will shorten the timeframe of the procedures. Therefore the possibilities of appeal (in the interim period) (“tussentijds hoger beroep”) will be reduced.

 

3.2. Incorporated Partnerships (“Personenvennootschappen”)

 

The implementation of the new Law providing for Incorporated Partnerships (“Wet Personenvennootschappen”) has been postponed and is unlikely to come into force before 2012.

 

Legislative Proposal regarding Incorporated Partnerships (Wvp)

The Law of (Un)incorporated Partnerships has no effect on Sole Proprietorships (“Eenmanszaken”) and Private Companies with limited liability (“BV”); it will however seriously impact on the General Partnership (“Vennootschap onder Firma”), the Limited Partnership (“Commanditaire Vennootschap”) and the Partnership (“Maatschap”).

 

Upon the Law of Incorporated Partnerships coming into force, the Partnership (“Maatschap”) and the General partnership (“Vennootschap onder Firma”) as legal terms will disappear. They will automatically become partnerships with legal personality (“Personenvennootschap”), with possible consequences for the formal liability of the cooperative medical industry (doctors etc.).

 

The general term for a partnership with legal personality (“Personenvennootschap”) becomes “Partnership” to be distinguished from a “Silent Partnership” (“stille vennootschap”) and a “Public Partnership” (“openbare vennootschap”, “OV”). The Public Partnership will be known to the public using a trade name while the silent partnership will refrain from using a trade name.

 

3.2.1 Silent Partnership (“Stille Vennootschap”)

 

The Silent Partnership is a cooperative venture not using a common trade name when doing business. The Silent Partnership does not need to be registered with the Chamber of Commerce, unless carrying out business. The partners of a Silent Partnership remain equally liable to the (contractual) obligations of the partnership in case of a valid and adequate power of attorney of the other partners. In addition to this, the Silent Partnership will have – contrary to current legislation - separate capital.

 

3.2.2 Unincorporated Public Partnership

(“Openbare Vennootschap zonder rechtspersoonlijkheid”, “OV”)

 

A Public Partnership uses a common trade name. A partner who acts for and on behalf of the partnership, commits the partnership as a contracting party. Creditors may seek recovery from the total capital of the partnership. Furthermore, the partners are personally and severally liable.

 

3.2.3 Incorporated Public Partnership

(“Openbare vennootschap met rechtspersoonlijkheid”, “OVR”)

 

The new legislative proposal makes it possible for a Public Partnership to acquire its own legal personality by notarial deed. Legal personality makes entering and resigning from a partnership easier.

A Public Partnership can simply be transformed into a limited partnership (“OVR”) so as to restrict liability of directors and shareholders. Fiscal considerations may have a bearing on this decision. Another important amendment is the continuation of the partners. Resignation of the Public Partnership no longer gives rise to the dissolution of the total partnership, but simply results in a partial dissolution where the partnership keeps its own identity.

3.2.4 Unincorporated Limited Partnership

(“Commanditaire Vennootschap zonder rechtspersoonlijkheid”, “CV”)

 

The legal structure of “Limited Partnerships” will remain a form of partnership. The liability of the limited partner is in principle restricted, but the limited partner may be held fully liable if he has a deciding influence on the acts of the director. This is the same as in current legislation.

 

3.2.5 Incorporated Limited Partnership

(“Commanditaire Vennootschap met rechtspersoonlijkheid”, CVR)

 

The Limited Partnership can obtain legal personality under the same conditions as a Public Partnership: the limited partnership can be incorporated by executing the partnership deed as a notarial deed.

 

 

  1. Corporate Governance Code / Management

 

The Dutch Corporate Governance Code (hereinafter also referred to as the Code) was introduced in 2003 and reviewed in 2008. The revised Code has been in force since 1 January 2009. It contains principles and best practice provisions for good corporate governance. The focus of the Code is on the company’s stakeholders, including members of the Management Board and Supervisory Board, and other parties, including institutional investors. Relations between the company and its employees are regulated elsewhere, but the interests of the employees should be taken into account as well. Compliance with the Code is in accordance with the ‘apply or explain’ principle, which means that the Code should be applied or an explanation should be given for any deviation from it. Compliance is mandatory for companies listed on the Amsterdam Stock Exchange. In order to comply with the Code, the Management Board and Supervisory Board of a company are obliged to inform the shareholders about the corporate governance structure that has been adopted..

 

The Dutch Corporate Governance Code is based on the principle that a company is a long–term alliance between the various parties involved in the company. According to the preamble of the Dutch Corporate Governance Code, the Management Board has overall responsibility for balancing these interests, with a view to ensuring continuity of the enterprise. The company will attempt to create long-term shareholder value. The Management Board does not carry out its duties on its own because the Supervisory Board will supervise the policy of the Management Board and will assist it by providing advice.

 

Since the introduction of the Dutch Corporate Governance Code, shareholders have taken a more active approach and exercised their rights to a greater extent. In some cases this has resulted in disputes between the Management Board, the Supervisory Board and the Shareholders, which have been the subject of interesting rulings by the Enterprise Division of the Amsterdam Court of Appeal (Ondernemingskamer).

 

The procedures and functioning of Management and Supervisory Boards have also evolved since the introduction of the Code. Internal risk management has gained in importance, and the role of the Supervisory Board has become more intensive and specialised, owing in part to the way in which the various Supervisory Board committees function. In recent years the issue of the remuneration of members of the Management Board in listed companies has increasingly come into the public domain.

 

 

  1. Relevant Tax Aspects (Olaf van Grieken)

 

Corporate Tax

 

Companies resident in the Netherlands are subject to 25.5% Dutch corporate income tax on their worldwide income. Companies resident outside the Netherlands are only subject to Dutch corporate income tax in respect of income from specific Dutch sources. The most important of these sources are profits derived from an enterprise carried out through a permanent establishment in the Netherlands, income from Dutch real estate, profits derived from a passively held substantial shareholding in a company resident in the Netherlands and interest derived from loans to a Netherlands resident company in which the lender directly or indirectly holds a substantial interest. Dutch tax treaties usually limit Dutch taxation rights in respect of the abovementioned substantial shareholdings and loans.

 

The effective tax rate on the Dutch corporate profits of companies with international activities is usually lower than 25.5%. This is the result of the Dutch participation exemption and the application of the arm’s length principle for the benefit of the taxpayer.

 

The participation exemption exempts income and capital gains derived from qualifying shareholdings in subsidiaries. A 5% shareholding in a subsidiary of which the assets consists predominantly of business assets or real property should generally qualify. Furthermore, a 5% shareholding in a subsidiary that is subject to an effective rate of tax of 10% or more qualifies. If a shareholding qualifies for the participation exemption, income and capital gains derived from qualifying profit participating loans granted by the shareholder or a related Dutch company to the company in which the shares are held, will also be covered by the participation exemption.

 

Transactions entered into by Dutch taxpayers must be at arm’s length. Contrary to many other countries, the Netherlands applies the arm’s length principle also in favour of the taxpayers (explicitly and repeatedly ruled by the Supreme Court and under circumstances eligible for an advance ruling from the Dutch tax authorities). If a Dutch taxpayer acquires assets or services from related parties at prices below the arm’s length price, either a step-up in the tax basis of the asset or a deduction for notional expenses can be claimed. This mechanism is often used to reduce the effective tax rate. If a foreign group transfers or starts a very profitable activity in the Netherlands, the Dutch taxpayer in the group can claim a step-up in tax basis of the goodwill that is contributed (even if that Dutch taxpayer does not pay for the goodwill). The goodwill can then be depreciated over 10 years, which will reduce the taxable profit and thus the effective tax rate. Similarly, if the group makes an interest free loan or royalty free license available to the Dutch taxpayer, the Dutch taxpayer can deduct interest or royalties as if an arm’s length interest or royalty were paid. This again reduces the Dutch taxable profits and thus the effective tax rate.

 

As described above, there are possibilities for Dutch taxpayers to reduce their tax basis and to reduce their effective tax rate. They should however carefully plan their financing structure in order to avoid limitations on the deductibility of interest. Interest is not deductible on the basis of thin capitalization rules or anti-base erosion rules.

 

Withholding Taxes

The Netherlands do not levy withholding taxes on interest or royalties. Furthermore, the bilateral tax treaties concluded by the Netherlands do not usually allow withholding tax on interest and royalties or only allow the other country to levy a limited withholding tax on interest and royalties. Dutch companies are therefore ideal to exploit loan portfolios and portfolios of licensed intellectual property.

 

Although dividend distributions made by companies resident in the Netherlands are, under Dutch domestic tax law, subject to 15% withholding tax, in corporate structuring through the Netherlands, as a rule of thumb, the withholding tax is usually zero. Under the EU Parent-Subsidiary Directive and the tax treaties that the Netherlands have concluded, dividend withholding tax is often reduced to zero. If the Dutch tax treaties or the EU Parent-Subsidiary Directive do not reduce the dividend withholding tax to zero, dividend withholding tax can often be eliminated by using a cooperative as the Dutch top holding between the foreign shareholder(s) and the Dutch company. A cooperative is a legal entity that is treated for Dutch corporate income tax purposes as a company. So, a cooperative also benefits from the participation exemption. The main difference between a cooperative and a company is that a cooperative does not have shareholders but members, and, in addition, distributions of a cooperative are by law not subject to withholding tax. Provided that the members are engaged in a business, they will not be subject to Dutch income tax or corporate income tax. The cooperative can therefore eliminate withholding tax in cases where a Dutch company is used for private equity investment and in cases where a multinational group invests in Dutch companies or through Dutch companies.

 

Dividend withholding tax on dividends received by Dutch companies from their foreign subsidiaries are in most cases reduced under the Dutch tax treaties or EU Parent-Subsidiary Directive to either zero or five percent. The combination of (i) no or low withholding tax on dividends received, (ii) no withholding tax on dividends distributed, (iii) the availability of the participation exemption, (iv) the availability of almost 100 investment protection treaties and (v) the possibility to create real substance with real business activities in the Netherlands, makes the Netherlands a preferred location for holding companies in multinational groups.

 

Taxes on the Transfer of Shares

The Netherlands do not levy a stamp duty or transfer duty on shares. However, a transfer of shares in a company of which the assets consist of more than 50% of Dutch real estate, triggers a 6% real estate transfer tax. Under circumstances non-treaty country shareholders can be subject to taxation on a capital gain provided they are passive foreign shareholders that hold 5% or more in the Dutch company. Dutch corporate shareholders are only subject to corporate income tax on gains derived from a transfer of shares in a company if they hold less than 5% in the company or if the shareholding does not qualify for the participation exemption. Individual Dutch shareholders are only subject to income tax on gains if they hold 5% or more in a company.

 

Ruling Practice

The Dutch tax authorities are known for their accessibility and their willingness to conclude advanced rulings and advanced pricing agreements. A specialized ruling department resides in Rotterdam.

 

  1. Trusts

 

Anglo Saxon Trusts, as such, do not exist under Dutch law. However, the Netherlands are a signatory to the Treaty on the Recognition of Trusts. Accordingly, Dutch courts recognize trusts. From a Dutch tax perspective, the assets of a trust are usually attributed to either the settlor or the beneficiaries of the trust. Occasionally a vehicle similar to a trust can be created using a Dutch foundation (Stichting).

[1] See the website of the chamber of commerce (also in English): www.kvk.nl

 

Marxman Advocaten

De Advocaten van Van Riet



Corporate Law in Hong Kong

  1. Setting up business in Hong Kong

General:

Hong Kong advocates and practices free trade with minimum government intervention. Its low tax rates, skilled workforce, highly-developed infrastructure and advantageous geographical location are major industrial-commercial assets for investors.

Hong Kong continues to be a preferred destination for foreign direct investment (“FDI”). According to the UNCTAD World Investment Report 2009, Hong Kong attracted US$63 billion in inward investments in 2008, making it the world’s seventh largest FDI recipient. There are virtually no restrictions on FDI inflows – with the only exception being that foreign ownership of local broadcasting stations or cable operators may not exceed 49%.

No restrictions are imposed on the entry and repatriation of capital or on conversion and remittance of profits and dividends derived from direct investments.

Hong Kong’s business, trade and investment freedom has led the territory to be ranked as the freest economy in the world for 17 consecutive years by the Index of Economic Freedom, which has been published annually since 1995 by the Heritage Foundation and Wall Street Journal.

Prior authorisations:

  • Where a company incorporated outside of Hong Kong wishes to carry on business in Hong Kong, it will need to register as a ‘non-Hong Kong company’ with the Companies Registry within 1 month of establishing a place of business. A place of business is any place used by the company to transact any business which creates legal obligations, including a share transfer or share registration office.
  • All businesses need to register with the Inland Revenue Department and obtain a business registration certificate. ‘Business’ is defined as including every company; every representative office of any non-Hong Kong company; any form of trade, commerce, profession or other activity carried on for the purpose of gain; and also any club which provides social intercourse or recreation to its members.
  • Gambling activities are unlawful unless specifically permitted by the Gambling Ordinance, which prescribes a limited licensing regime.
  • Certain activities and business sectors need to be pre-approved by relevant government authorities, such as the Health Department (for the sale of medicine), Civil Engineering and Development Department (for the manufacture of dangerous goods), the Trade and Industry Department (for the registration of factories), the Television and Entertainment Licensing Authority, and the Office of the Commissioner of Insurance. For further information on the licences and permits required for specific business sectors, please visit the website of the Support and Consultation Centre for Small and Medium Enterprises of the Trade and Industry Department at:

https://www.success.tid.gov.hk/tid/eng/blics/index.jsp#.

  • The Food and Environmental Hygiene Department (“FEHD”) is responsible for applications in respect of food licences (for restaurants and light refreshment establishments), liquor licences, club liquor licences and karaoke establishment permits. Importation of food into Hong Kong will require registration with the FEHD. To access the various forms for applications to the FEHD, please visit:

http://www.fehd.gov.hk/english/forms/index_forms.html.

  • The General Licensing Section of the Hong Kong Police Force is responsible for applications in respect of pawnbrokers licences, temporary liquor licences, massage establishments licence, arms dealers licences, and security personnel permits. For more information, please visit:

http://www.police.gov.hk/ppp_en/11_useful_info/licences/index.html.

Regulated activity:

  • In order to operate in Hong Kong, banks and deposit-taking companies are required to be authorised by the Monetary Authority.
  • Authorisation from the Monetary Authority is also required for any company whose principal business will be the issuing of ‘stored value cards’, on which data may be stored in electronic, magnetic or optical form and for which a person pays money to the issuer in exchange for the storage of the value of that money on the card.
  • Activities in financial services are regulated by the Securities and Futures Commission (“SFC”). A licence will need to be obtained from the SFC to conduct activities which fall within the 10 categories shown as follows:
    • Dealing in securities
    • Dealing in futures contracts
    • Leveraged foreign exchange trading
    • Advising on securities
    • Advising on futures contracts
    • Advising on corporate finance
    • Providing automated trading services
    • Securities margin financing
    • Asset management
    • Providing credit rating services
  • The SFC will grant licences to non-Hong Kong companies, local companies, and authorised financial institutions. Please note that sole proprietorships and partnerships are not eligible for such licences.
  1. Procedures and formalities

Competent authorities:

The Companies Registry provides services for the incorporation of companies, the registration of non-Hong Kong companies, and facilities for inspection of public records and statutory registers. The website of the Companies Registry can be accessed at:

www.cr.gov.hk.

The Inland Revenue Department is a government department responsible for the administration of ordinances, rules and regulations in respect of taxes, stamp duty and business registration. The website of the Inland Revenue Department can be accessed at:

www.ird.gov.hk.

The Hong Kong Police Force is the appointed Societies Officer for Hong Kong, and is responsible for the administration of local societies, which are governed by the Societies Ordinance. The website of the Societies Office of the Hong Kong Police Force can be accessed at:

http://www.police.gov.hk/ppp_en/11_useful_info/licences/societies.html.

Timeframe:

  • To register a non-Hong Kong company, the certificate of registration and Business Registration Certificate as the case may be can normally be obtained in 14 working days.
  • In respect of an application for the incorporation of a company limited by shares in Hong Kong, the normal turnaround time for the issuance of a certificate of incorporation together with the Business Registration Certificate is 4 working days after the date of submission of the incorporation documents for the company.
  • To save time, an investor may opt to acquire, from a law firm, a ready-made shelf company which has not commenced business and has no liabilities. If necessary, the name of the shelf company can be changed by passing a Special Resolution and filing Form NC2 (‘Notification of Change of Company Name’) with the Companies Registry within 15 days of the date of the special resolution. Once the form is submitted, it will normally take 6 working days to change the name of the company.

Legal expenses:

The legal expenses for setting up a new company will depend on the new company’s business sector and its business size. As a general guide, HK$13,000.00 will typically cover legal services including: assisting in preparing the memorandum and articles of association, post-incorporation board resolutions and completion and submission of the incorporation form to the Companies Registry. For large or complex investments, the legal fee may be higher.

The filing fee for incorporating a company limited by shares is HK$1,720, plus a capital fee of HK$1 for every HK$1,000 of the nominal share capital of the new company. The capital fee is capped at a maximum of HK$30,000 per company. The prescribed Business Registration fee and levy must also be paid together with submission of the Notice to Business Registration Office (form IRBR1) at the same time.

The registration fee for registering a non-Hong Kong company is HK$1,425, plus a HK$295 lodgment fee and if the non-Hong Kong company has not yet filed its business under the Business Registration Ordinance, the prescribed business registration fee and levy must also be paid together with submission of the Notice to Business Registration Office (form IRBR2) at the same time.

Required documentation:

To incorporate a company limited by shares in Hong Kong, the following documents will need to be submitted to the Companies Registry:

  1. Articles and memorandum of association – these do not have to follow any specific format, although a standard form is set out in the Companies Ordinance at Table A.
  2. Form NC1 – this form is available for download from cr.gov.hk/en/forms/specified.htm.
  3. Form IRBR1 – Notice to Business Registration Office together with the prescribed business registration fee and levy.

To register a non-Hong Kong company, the following documents will need to be submitted to the Companies Registry:

  1. Form N1
  2. Certified copy of the instrument defining the company’s constitution – if this is not in Chinese or English, a certified Chinese or English translation will need to be prepared for filing.
  3. Certified copy of the company’s Certificate of Incorporation (or equivalent).
  4. Certified copy of the company’s latest published accounts.
  5. Form IRBR2 – Notice to Business Registration Office together with the prescribed business registration fee and levy.
  • Business structures

In Hong Kong, there are at least 5 types of business structures suitable for foreign investors, namely, a private company limited by shares, a non-Hong Kong company, a representative office, a partnership and a limited liability partnership.

  1. Private company limited by shares

Private companies are common vehicles through which to conduct business in Hong Kong. As at December 2011, there were 945,646 local private companies registered at the Companies Registry.

The liability of a shareholder of a private company is limited to the amount contributed to the company’s capital by the shareholder.

Intending shareholders and directors need not be present in Hong Kong to set up a company, and meetings of a Hong Kong company may be conducted anywhere in the world.

  1. General requirements
  • Generally, the name of the company must include the word limited. Certain words such as “trust”, “Government” and “authority are prohibited from inclusion in the company name, and the name must not be too similar to the name of any existing company recorded at the Companies Registry. The Companies Registry operates an online search engine for searching existing company names, which is accessible from the following web address:

https://www.icris.cr.gov.hk/csci/cns_search.jsp.

For further information on company names, please visit the website of the Companies Registry shown below :

http://www.cr.gov.hk/en/publications/docs/name-e.pdf/

  • A Hong Kong company must have an authorised share capital. With the exception of banks, insurance companies and stock brokers, no minimum authorised or issued share capital is imposed, although shares cannot be of nil par value. The authorised capital of a Hong Kong company may be expressed in any currency. It is common for a Hong Kong company to register an authorised capital of HK$10,000 or the minimum capital necessary, and increase it if and when necessary.
  • The minimum number of shareholders is one. This can be an individual or corporate investor, except where the company is the holding company of the corporate investor. There is no residency requirement for shareholders, and they need not have visited Hong Kong in the past.
  • Every private company shall have at least one director. An individual director must be at least 18 years of age. Corporations may act as directors of the company, provided that the company is not a member of any group of companies listed in Hong Kong.
  • Every private company must have a company secretary. In the case of a company with only one director, such a person cannot also be the company secretary. A corporation cannot be appointed as the company secretary of a private company where the sole director is also the sole director of the corporation. The company secretary must be either a Hong Kong resident or a company incorporated in Hong Kong. As such, many Hong Kong law firms have a company secretarial department to serve investors wishing to appoint a nominee secretary to be responsible for fulfilling the various statutory requirements under Hong Kong company law and the filing of statutory documents.
  • The company’s registered address must be an address in Hong Kong to which all correspondence and notices can be directed. Usually this will be the address from which the company carries on its business, but as an alternative, it is common practice for the company secretarial department of law firms to provide the use of an address for the purpose of satisfying this legal requirement. In addition, the company’s statutory books (such as registers of members and directors, minutes of meetings and memorandum and articles of association) are required to be kept and maintained at the company’s registered address. If otherwise, Form R2 (‘Notification of Location of Registers’) should be filed with the Companies Registry detailing the location of such documents.
  • The company is required to prepare annual accounts and to appoint a Hong Kong auditor to provide an annual financial report to its shareholders. There is no requirement to file the accounts to the Companies Registry.
  • The company must apply for a business registration certificate on an annual basis or every three years (for which there is a fee concession) from the Inland Revenue Department, even if no business is carried out. As of February 2011, first time applicants are required to submit a Business Registration certificate application at the same time as the certificate of incorporation.
  • An annual general meeting, which is a meeting of shareholders, must be conducted once a year, except for the first year after incorporation. The first annual general meeting of a new company must be held within 18 months of incorporation. As mentioned above, shareholder’s meetings may be held anywhere in the world. Also, a written resolution in lieu of the annual general meeting is permitted.
  • An annual return (in the form of Form AR1 (‘Annual Return’) or Form AR 3 (‘Annual Return – Certificate of No Change), both available from cr.gov.hk, is required to be filed to the Companies Registry within 48 hours after each annual general meeting.
  1. Corporate governance / management

In general, the articles of association will contain provisions determining the manner in which decisions are made as to the affairs of the company. Such provisions will typically deal with the calling of board and shareholder meetings, the quorum in such meetings, rights of proxies and so on. However, Hong Kong company law prescribes that certain decisions of a company must be sanctioned by the company’s shareholders in general meeting.

Matters such as changing the company’s name, the removal of a director, altering the company’s objects or the decision to wind up the company will require a special resolution to be passed, which requires the votes of 75% of the shareholders. Unless a special resolution is specified, all resolutions of the company are ordinary resolutions, which require 50% of shareholders’ votes and are used for such matters as issuing shares, appointing auditors and so on.

Usually, 14 clear days’ notice is required to convene a meeting for which an ordinary resolution is proposed and 21 clear days’ notice is required to convene a meeting for which a special resolution is proposed or for the holding of an annual general meeting.

  1. Taxation and stamp duty:
  • Hong Kong benefits from an extremely attractive fiscal regime which exempts certain categories of income which in most other jurisdictions would be subject to profits tax.
  • Hong Kong is the only developed economy which does not impose a sales tax.
  • No capital gains tax is charged on disposal of assets. As a consequence, Hong Kong entity which effects a profitable disposal of foreign real estate, currency gains, or a profitable transfer of capital assets to a foreign subsidiary will not need to pay tax.
  • There is no withholding tax on dividends and interest.
  • The applicable profits tax for Hong Kong companies is payable in respect of profits arising in or derived from Hong Kong. Due to the territorial principle, profits from a foreign source are generally exempted from tax. The current profits tax rate for companies is provided on the website of the Government of Hong Kong, shown below:

http://www.gov.hk/en/residents/taxes/taxfiling/taxrates/profitsrates.htm.

  • Stamp duty is chargeable on transfers of shares in Hong Kong companies. The chargeable amount is 0.2% on the consideration or the value of the transferred shares (whichever is higher) plus ad valorem duty of HK$5 per instrument of transfer.
  • Where a Hong Kong company increases its authorised share capital or issues shares at a premium, capital duty of 0.1% applies to the increase in authorised share capital or the amount of excess of the par value. Capital duty is capped at a maximum of HK$30,000.
  1. Pros and cons
  • Pros:
    • For a typical investor wishing to operate a business for the long term, the incorporation of a local company is arguably the best option. A private company offers separate legal identity, easy transfer of ownership and perpetual existence.
    • There are no residency or nationality restrictions as regards directors and shareholders. There is no prohibition against 100% foreign-owned companies. The implication is that investors may set up wholly-owned subsidiaries in the form of a Hong Kong company.
    • Hong Kong companies benefit from simple and low tax, which follows a territorial basis of taxation.
  • Cons:
    • A lot of paperwork is involved and there are ongoing maintenance procedures required by law, such as the filing of the annual return.
    • The annual return, containing the identities and addresses of the companies’ directors and shareholders are available to anyone who pays a search fee to the Companies Registry. However, if necessary, shareholders can avoid such a problem by creating a trust, thereby causing the name of the beneficiary to be registered instead.
    • Closing a company is more complex and time consuming than for other business vehicles.
  1. Non-Hong Kong Company

A non-Hong Kong company can be described as a branch or an extension of a foreign company. There is generally little practical difference between setting up a non-Hong Kong company and a local company because business activities available to companies in Hong Kong are not dependent upon a company’s place of incorporation.

  1. General requirements
  • An ‘authorised representative is required to accept service of process and notices on behalf of a non-Hong Kong company. The authorised representative should, in the case of an individual, be resident in Hong Kong. Otherwise, the authorised representative should be a Hong Kong firm of solicitors or certified public accountants.
  • The registered name of the non-Hong Kong company is the same as the name of the foreign “parent” company. If the Companies Registrar is of the view that the registered name is too alike to a name already appearing on the index of company names kept at the Companies Registry, the Registrar may require the non-Hong Kong company to use a different name.
  • The name of the non-Hong Kong company, the place of its incorporation, and the fact of its limited liability must be displayed conspicuously at every place where it carries on its business, and on its letterhead. This is normally in the following format: “[Name of company] incorporated in [place] with limited liability”.
  • Every year, a non-Hong Kong company is required to file to the Companies Registry a return confirming there has been no change to the company’s particulars.
  • The non-Hong Kong company’s latest published accounts, and translations thereof if applicable, will also need to be filed with the Companies Registry on an annual basis. Such documents include, for the preceding financial year in each case, a balance sheet, profit and loss account, and group accounts, directors’ report and auditors’ report, if any.
  • The non-Hong Kong company must apply for a business registration certificate on an annual basis from the Inland Revenue Department, even if no business is carried out.
  1. Corporate governance / management
  • The manner in which decisions are made in respect of a non-Hong Kong company are dictated by the constitutional documents of the foreign “parent” company.
  1. Taxation of the company’s income:
  • There is no exemption from the filing of an annual profits tax return. The rate of profits tax levied on a non-Hong Kong company is the same for local companies.
  1. Pros and cons
  • Pros:
    • Hong Kong law does not require the separate audit of a branch office, which implies that lower costs are involved in the maintenance of the branch as compared to a locally-incorporated subsidiary.
    • No stamp duty is payable of the transfer of the Hong Kong business of the non-Hong Kong company. Conversely, stamp duty is charged on transfers of shares in locally-incorporate companies.
    • Where the Hong Kong business of a non-Hong Kong company is terminated, any remaining capital can simply be remitted out of Hong Kong. This avoids the lengthy liquidation process involved in the dissolution of a local company.
    • Some investors opt to use a non-Hong Kong company because of tax implications in the country in which the “parent” foreign company is registered, in particular, in relation to dealing with losses which may be sustained by the Hong Kong operations.
    • The non-Hong Kong company can rely on the credit of its foreign “parent” company.
    • Locally incorporated are subject to restrictions from the use of certain words such as “trust” in its company name, whereas more flexibility will be afforded to a non-Hong Kong company.
  • Cons:
    • A foreign “parent” company to a locally-incorporated company will be a distinct and separate legal entity, whereas in the case of the non-Hong Kong company or branch office, the foreign “parent” company will be liable for the debts of the branch.
    • It is usually simpler and more cost effective to set up a local company than to register a non-Hong Kong company.
    • Where the constitutional document of the foreign “parent” company is not written in English or Chinese, a certified translation will be required.

For further information in relation to the registration of a non-Hong Kong company, please refer to a pamphlet on the subject published by the Companies Registry and available from its website shown below:

http://www.cr.gov.hk/en/publications/docs/14-e.pdf.

  1. Representative office

A foreign company seeking to gain market exposure and a better understanding of Hong Kong’s business environment without the expenditure of setting up a fully-fledged office can opt to register a representative office. A representative office is considered as a temporary administrative office, used to aid the foreign company in activities such as market research, liaison and promotional work. The representative office cannot enter into legal obligations, including engaging in business, concluding contracts, or undertaking the transshipment of goods.

  1. a. General requirements
  • The name of the representative office must match the name of the foreign company, unless such name is already in use in Hong Kong, in which case a different name will need to be adopted.
  • As representative offices are unincorporated entities, there are no registration requirements and there is no need to maintain any statutory documents.
  • Although non profit-generating activities can be undertaken by a representative office, it must nevertheless apply to the Inland Revenue Department for a business registration licence within 1 month of the date of establishment of the office. For this application, the documents required are a completed application form and the proof of identity of the chief officer of the representative office in Hong Kong.
  • Pros:
    • Simple to start up, and requires less capital expenditure than other business vehicles.
    • No registration, filing or corporate governance requirements.
    • No profits tax.
  • Cons:
    • Representative offices cannot engage in profit-generating activities.
  1. Partnership

Where two parties enter into some form of co-operation agreement complementary to the activities and mutual benefit of both parties, a business partnership is formed. Such a relationship is defined in the Partnership Ordinance as a relation which subsists between persons carrying on a business in common with a view of profit.

The rights and obligations of the partners to a partnership are covered by the Partnership Ordinance and the provisions of the partnership agreement entered into by the partners, whether verbal or written.

A point to note for investors is that every partner in a firm is jointly and severally liable with the other partners for the liabilities and obligations of the firm.

As a partnership has no separate legal identity, it cannot enter into contracts, acquire assets, sue or be sued in its own name.

  1. General requirements
  • There is no requirement to register a partnership.
  • The partners must apply for a business registration certificate on an annual basis from the Inland Revenue Department, even if no business is carried out.
  1. Taxation of the partners income:
  • The territorial principle determines whether a partnership will need to pay profits tax.
  • The taxation of a partnership is computed in one sum under the partnership’s name. Tax recoverable under the Inland Revenue Ordinance shall be recoverable out of the assets of the partnership, or from any partner.
  • Tax is assessed on the profits of a partnership notwithstanding the cessation or dissolution of such partnership.
  1. Pros and cons
  • Pros:
    • Fewer statutory controls than companies.
    • No need to register the partnership.
    • Disclosures of financial information are not required.
    • Flexible business structure.
    • Simple and cheap to set up.
    • No mandatory documentation, although it is advisable to formulate a partnership agreement.
  • Cons:
    • A partnership is not a legal entity, and thus the personal liability of each partner is unlimited, and the partner’s personal assets are at risk.
    • Partners are jointly liable for partnership debts, meaning that if one partner is unable to satisfy his/her share of the partnership debt, the remaining partners will be obliged to make up the shortfall.
    • An individual partner may be sued for all the debts of the partnership.
  1. Limited Liability Partnership

A limited partnership is similar to a partnership, but consists of both general partners and limited partners. A general partner assumes unlimited liability for the firm’s debts. A limited partner is liable only to the extent of their investment.

Partners of a limited partnership may be individuals or companies. General partners are responsible for the day-to-day running of the firm’s operations. Limited partners do not have the power to bind the firm. A partner may be introduced into the limited partnership without the need for the consent of the limited partner(s).

So long as the limited partnership continues in existence, a limited partner may not reduce or redeem his or her share capital nor take an active part in the management of the partnership; otherwise, he or she will assume the liability of a general partner.

  1. General requirements
  • A limited partnership is required to be registered at the Companies Registry. The application procedure involves the completion and submission of an application form available from the website of the Companies Registry:

http://www.cr.gov.hk/en/forms/other.htm.

  • The registration fee of a limited partnership is HK$340. For every HK$1,000 or part of HK$1,000 of the sum contributed by each partner, an additional HK$8 is payable to the Companies Registry.
  • The identification documents of each partner will also be required in the registration process. After submission of all the requisite documents, a Certificate of Registration of Limited Partnership will be issued by the Companies Registry with 5 to 7 working days.
  • After registration, a limited partnership must adhere to ongoing filing requirements, namely, the filing of any change in the particulars of the firm to the Companies Registry within 1 week of such change, and the filing of a profits tax return to the Inland Revenue Department. The first profits tax return is normally received within 18 months of the date of registration.
  • If the business income exceeds HK$500,000 in a given year, additional documents will need to be submitted along with the profits tax return, being a certified copy of the firm’s balance sheet and profit and loss account for the basis period and a tax computation indicating how the amount of assessable profits has been arrived at.
  1. Taxation of the partners income:
  • In accordance with the territorial principle, profits arising or derived from Hong Kong will be subject to profits tax at the rate applicable to unincorporated businesses. An exception arises where one of the limited partners in the limited partnership is a corporate entity, in which case the limited partnership is taxed at the prevailing corporate profits tax rate. The tax rates can be obtained from the website of the Government of Hong Kong, show below:

http://www.gov.hk/en/residents/taxes/taxfiling/taxrates/profitsrates.htm.

  • Tax relief is afforded to limited partners if and when a limited liability partnership incurs a loss in any given year of assessment. The taxable amount for a limited partner in such an instance will be limited to the amount of the loss or the amount of the partner’s contribution as at that end of the assessable year, whichever sum is the lesser.
  1. Pros and cons
  • Pros:
    • Flexible business structure.
    • Allows for injection of capital from limited partners, and such investors need not participate in the management of the company.
    • Cheaper to set up than a company.
  • Cons:
    • Accounts need to be prepared to accompany the profits tax return where the limited partnership’s income exceeds HK$500,000.
    • Registration is required. By paying a fee, any person can search and obtain particulars of partners from the Companies Registry. Any change in the partnership’s particulars will need to be notified to the Companies Registry.

Further information on limited partnerships is available from the website of the Companies Registry, show below:

http://www.cr.gov.hk/en/publications/docs/23-e.pdf.

Robertsons Solicitors & Notaries



Corporate Law in Hungary

  1. General

Business associations can be established for pursuing business activities by either foreign or domestic natural persons, by legal persons or by business associations with no legal personality. Such persons may also join these business associations as a member, or acquire a participation (shares) therein later on. With the exception of limited liability companies (“Kft.”) and companies limited by shares (“Rt.”), at least two members are required for the foundation of a business association. Another restriction is that a natural person may be a member with unlimited liability in only one business association at a time.

Pursuant to Hungarian law, there are two types of business associations which have an autonomous legal personality, while the other types do not have an autonomous legal personality. This affects the responsibility of the members.

Upon establishing a business association, the corporate documents must be signed by both the members of the business association and the executive officers and countersigned by an attorney licensed in Hungary. The official signature of the representative of the business association may be certified as follows:

  1. with a signature specimen prepared by a notary public, or
  1. with a signature-sample countersigned by an attorney at law, which the attorney at law is entitled to prepare upon the foundation of a business association, or if corporate modifications are made but only if,
  • he has prepared/modified and countersigned the corporate documents; and
  • the signature-sample is an annex of the corporate registration or modification documents.
  1. Prior Authorizations

The law prescribes that certain economic activities can only be pursued in certain forms of business associations or that the foundation of a business association is subject to an official permit. If the law requires an official permit for the pursuit of an economic activity, the business association can only pursue the activity in question if it is in possession of the respective permit. Unless otherwise provided for by law, activities which require certain specific qualifications can be pursued by business associations if there is at least one personally active member, employee or contracting party satisfying the qualification requirements set forth by law as required for the permit.

  • Procedure and Expenses

III.1.      Competent Authority

Company registration, the provision of information about companies and conducting the judicial supervisory process fall within the competence of the county courts as registry courts. The location of the company’s registered office determines which county court has jurisdiction.

Applications for company registration and /or modifications can be submitted electronically via the electronic system of the Company Registration and Company Information Service operated by the Hungarian Ministry of Justice and Police.

III.2.      Timeframe

Corporate documents have to be submitted to the competent company court by the company’s attorney within 30 days of signing. The company may commence operations after the corporate documents have been submitted to the company court. If the company wishes to pursue activities subject to an official permit, these activities can be pursued once the company is registered and the permit acquired.

III.3.      Legal Expenses and Documents Required

There is no general registration fee for setting up a company; the cost depends on the company form.

The publication fees are as follows:

Business associations with no legal personality Business associations with legal personality
Registration fee through the electronic system HUF 5,000 HUF 5,000
Registration fee for changes through the electronic system HUF 3,000 HUF 3,000

The documents required to register a company, regardless of its form, are as follows:

  • The application form provided by the competent company court;
  • Foundation documents (deed of foundation or articles of association);
  • Foundation permit (if applicable);
  • Company excerpt issued within the last 3 months at the time of its submission (required only if a foreign company is to be a member);
  • Commission agreement with an agent for service of process if a foreign company is a member and does not have a registered office in Hungary or if a foreign natural person is a member who does not have Hungarian residence, if the foreign members wish to mandate an agent for service (it is not compulsory);
  • Statement of the executive officers accepting their position;
  • Statement of the members of the supervisory board and the auditors accepting their position;
  • Title deed of the real estate if real estate forms the capital;
  • Power of attorney;
  • Statement in relation to the taxation of the company.
  1. Business Structures

The business structure depends partly on the nature of business, and partly on the objects of the founder in relation to the segment of the market where he/she wants to operate the company geographically.

There are two types of business associations with legal personality, namely:

  • Limited Liability Company;
  • Company Limited by Shares.

With regard to the international market, foreign company founders can also choose to establish either a branch office or commercial representative office instead of a company.

Company under Formation (“Pre-Company”):

Pursuant to Hungarian law, it is possible to operate the company before registration. The purpose of this regulation is that there is a transitional period between the signing of the company foundation documents and the registration of the company by the competent authority. During this period the founders of the company are entitled to accomplish certain acts in relation to the company undergoing registration. These acts have to be regulated by the law, because on the one hand, they have economic and financial consequences, and on the other hand, the sooner the company can step into the market, the more advantageous it will be for the founders as regards taking part in the competitive market-place and generating profits.

The rules related to companies undergoing registration apply to all types of business structures. The company under formation exists from the time the company foundation documents are signed by the founders. From this time on, the company is entitled to acquire certain rights in connection with its operation, but these activities are limited because the members of the company under registration are not allowed to

  • transfer their shares or quota to other members;
  • amend the company foundation documents;
  • initiate the exclusion procedure of a member;
  • accomplish activities that require preliminary permission from the respective authority;
  • decide on the termination of the company or change the type of company being formed;
  • take part in the foundation of another company or acquire the shares of another company in the name of the company under formation.

The company under registration is entitled to carry on business-like economic activity only after submitting the company foundation documents to the competent Registry Court. The fact that the company is under formation has to be indicated in the name of the company.

IV.1. Branch Office

According to Hungarian law, the branch office does not have its own legal personality; it is a unit of the foreign company, but it can determine its own economic activity. The foreign company has unlimited liability for the debts of the branch office. The foreign company and the branch office have joint and several liability for all debts. When determining the assets of the branch office, all the assets of the foreign company used by the branch office must be counted as the assets of the branch office. It is the duty of the foreign company to continuously provide the assets which the branch office needs for its activities.

The branch office cannot pursue representational activities in the name of the founder. The founder may not dispose of the assets, rights and duties of the branch office which were acquired in the name of the branch office unless the branch office, after being wound-up, is unable to pay its debts, or proceedings have been initiated against it in relation to its rights, duties and payment capacity.

There is no minimum requirement as regards the registered capital of a branch office. The company court requests however that the amount provided by the founder to the branch office is indicated in the foundation documents.

The court does not request the branch office to prove the amount with a bank certificate, so it is not necessary to open a bank account for the purposes of forming the Branch Office, but the operation of the branch office will require the use of a bank account. In terms of the amount, it is advisable to transfer at least HUF 280,000 which is approximately EUR 1,000.

If a permit is required for certain activities or products, the branch office must procure this permit.

Foundation costs:

  • registration fee: HUF 50,000;
  • publication costs: HUF 5,000;
  • costs of certified translations of the certificates of incorporation of foreign legal persons.

Pros and Cons:

  • Pros:
  • one legal entity with the parent company, their supervision operates on a consolidated basis;
  • the registration process is not strict.
  • Cons:
  • reporting and administrative requirements;
  • unlimited, joint and several liability with the parent company.

IV.2. Commercial Representative Office

A commercial representative office is not allowed to pursue any entrepreneurial activity (entrepreneurial activity means activity with the aim or result of acquiring income or wealth).

The following activities may be pursued by the commercial representative office:

  • Negotiation and preparation of contracts for and in the name of the Founder;
  • Informing clients and keeping in contact with them;
  • Pursuing informational, advertising and marketing activities;
  • Concluding contracts for and in the name of the Founder in relation to the operation of the commercial representative office.

There is no minimum requirement for the registered capital of a commercial representative office,. The Company Court requests however that the amount provided by the founder to the commercial representative office be indicated in the foundation documents.

The court does not request the commercial representative office to prove the amount with a bank certificate, so it is not necessary to open a bank account for the purposes of the office’s formation, but the operation of the representative office requires the use of a bank account. In terms of the amount, it is advisable to transfer at least 100,000 HUF.

If a permit is required for certain activities or products, the commercial representative office must procure this permit.

Foundation costs:

  • registration fee: HUF 50,000;
  • publication costs: HUF 5,000;
  • cost of certified translations of the certificates of incorporation of foreign legal persons.

Pros and cons:

  • Pros: easier administration and representation abroad
  • Cons: no real commercial activity can be pursued

IV.3. Subsidiary

IV.3.1. Limited Liability Company (“Korlátolt Felelősségű Társaság” – Kft.)

  1. General requirements
  • Minimum capital: HUF 500,000
  • Minimum number of shareholders: 1
  • Liability of the shareholders: limited to shareholder’s participation in the company
  1. Management: members’ meeting

The main decision-making body is the members’ meeting, which has a quorum if at least half of the registered capital plus one vote or the majority of the quotas is represented.

The company is represented by the managing directors.

According to the respective law, a foreign citizen can be the managing director of the company. The managing director may be appointed for an unlimited period or for a limited period of no more than 5 years. If the managing director has no registered domicile in Hungary, he may authorize a Hungarian delivery agent to receive mail. As it is not necessary to appoint a delivery agent, the Company Court delivers the appropriate documents directly to the managing director through publication in the Company Gazette. On the fifth day following the publication, the documents are considered to be delivered. It is possible for the attorney at law of the limited liability company, its Hungarian member(s), its managing director(s) or member(s) of the supervisory board to act as delivery agents of the foreign citizens registered on the Company Register. Naturally, if the addressee is the company, no such procedure applies but the documents will be sent to the registered seat of the company.

  1. Foundation costs:
  • registration fee: HUF 100,000;
  • publication costs: HUF 5,000;
  • cost of certified translations of the certificates of incorporation of foreign legal persons
  1. Pros and Cons
  • Pros:
  • limited liability, which limits the risks of the founders;
  • the company’s legal personality;
  • the assets of the company belong to the company and not to the shareholders.
  • Cons:
  • in case of a one-man company, the member is not entitled to unemployment benefit.

IV.3.2. Companies Limited by Shares (“Részvénytársaság” – Rt.)

  1. a) General requirements

Companies limited by shares are business associations established with a share capital (registered capital) consisting of shares of a pre-determined number and face value. The obligation of the shareholders of the company includes the provision of the face value or issuance value of the shares. Apart from the exceptions defined in the Companies Act, shareholders do not bear liability for the obligations of the company over and above the face value of the shares.

Companies limited by shares can be established in two forms namely (i) private (“Zártkörűen működő Részvénytársaság” – Zrt.) or (ii) public (Nyilvánosan működő Részvénytársaság” – Nyrt.).

A company limited by shares operates privately if the shares of the company are not available for subscription on a stock market. A company limited by shares operates publicly if the shares of the company are available for subscription on a stock market.

The amount of the initial capital cannot be less than 20 million HUF for a public company limited by shares, and cannot be less than 5 million HUF for a private company limited by shares.

  1. b) Private company limited by shares
  • Minimum capital: HUF 5,000,000
  • Minimum number of shareholders: 1
  • Liability of the shareholders: limited to shareholder’s participation in the company, namely the face value of the subscribed shares
  • Management: board of directors or managing director

The main decision making body is the general meeting, which has to be convened at least once a year. Extraordinary general meeting(s) can be held anytime if necessary.

The managing body is the board of directors, consisting of a minimum of 3 and a maximum of 11 members elected by the general meeting. Its main task is to convene the general meeting, to introduce the annual report to the general meeting and to report on the financial situation and business policy of the company.

If the Articles of Association allow, one general manager can be elected instead of a board of directors. The general manager has the same tasks as the board of directors.

Pros and Cons:

  • Pros:
  • all types of shares can be issued;
  • limited liability, which limits the risks;
  • membership rights can be transferred easily through the shares;
  • the private company limited by shares can be easily transformed into a public company limited by shares.
  • Cons:
  • the conditions to be satisfied in order to form the company are stricter than the conditions for the establishment of a Kft.;
  • there is a minimum amount of registered capital;
  • high operating and maintenance costs.
  1. Public company limited by shares
  • Minimum capital: HUF 20,000,000
  • Minimum number of shareholders: 1
  • Liability of the shareholders: limited to shareholder’s participation in the company, namely the face value of the subscribed shares

Special rules for public companies limited by shares:

The public company limited by shares is not entitled to issue all kinds of shares. It can however issue dematerialized shares. Dematerialized shares can be issued and transferred electronically if they are recorded in an electronic centralized system. The holder of the dematerialized shares has to open a stock account for the registration of his/her shares. Preferential shares relating to the appointment of the executive officers or the members of the supervisory board and preferential shares relating to subscription rights cannot be issued.

If the articles of association allow, a unified management can be established, which carries out both the managing and controlling functions. In this case, the election of a supervisory board is not compulsory.

The election of an audit board is compulsory for a public company limited by shares. The number of the members of the audit board cannot be less than 3. Its main task is to control the annual financial reports and the work of the independent auditor of the company.

  • Management: general meetings, board of directors

The main decision-making body is the general meeting, which has to be convened at least once a year. The shareholders are not allowed to make decisions without holding a general meeting.

The managing body is the board of directors, which is comprised of a minimum of 5 and a maximum of 11 members elected by the general meeting. Its main tasks are to convene the general meeting, to introduce the annual report to the general meeting and to report on the financial situation and business policy of the company.

Pros and Cons:

  • Pros:
  • limited liability, which limits the risks;
  • if the founders do not have the minimum amount required for the registered capital, they can collect shareholders by public announcement.
  • Cons:
  • high operating and maintenance costs;
  • there is a minimum amount of registered capital;
  • the shareholders do not know each other, which makes controlling the company more complicated;
  • reporting liability in the case of acquiring a certain amount of shares.
  1. Foundation Costs:
  • registration fee: HUF 100,000 (private), HUF 600,000 (public);
  • publication costs: HUF 5,000;
  • cost of certified translations of the certificates of incorporation of foreign legal persons.

IV.4. Other Company Forms

IV.4.1. Limited Partnership (“Betéti Társaság” – Bt.)

By virtue of the articles of association of a limited partnership, the members undertake to pursue joint business activities in a way that at least one member (general partner) has unlimited liability for the obligations not covered by the assets of the partnership, jointly and severally with other general partners, while at least one other member (limited partner) is only obliged to provide the contribution that he has undertaken to give in the Articles of Association. With the exceptions set forth in the Hungarian Companies Act, the limited partner is not liable for the obligations of the partnership. The limited partnership does not have a separate legal personality.

  • Minimum capital: there is no minimum registered capital established by the law
  • Minimum number of members: 2
  • Liability of the members: see above
  • Management: the general member is entitled to represent and manage the company. The limited partner does not have the same rights as the general partner unless otherwise regulated in the foundation documents.
  • Foundation costs:
  • registration fee: HUF 50,000;
  • publication costs: HUF 5,000;
  • cost of certified translations of the certificates of incorporation of foreign legal persons.

Pros and Cons:

  • Pros:
  • there is no minimum amount of registered capital;
  • as the general member is entitled to represent and manage the company, it is easy to control the operation of the partnership and the decision-making process;
  • the business activity can be wound-up via a simplified dissolution process.
  • Cons:
  • unlimited liability of the general member;
  • personal contribution is indispensable.

IV.4.2. General Partnership (“Közkereseti Társaság” – Kkt.)

The members of the general partnership undertake to carry on joint business activities within the framework of a general partnership and they provide a capital contribution for this purpose. The partners are each personally, jointly and severally liable for the debts and taxes of the partnership. Profits are shared equally amongst the partners. The general partnership does not have a separate legal personality.

  • Minimum capital: there is no minimum registered capital established by law
  • Minimum number of members: 2
  • Liability of the members: unlimited, joint and several liability
  • Management: the main decision-making body is the members’ meeting where all the members are entitled to take part and vote with the same rights. While generally each partner has an equal right to participate in the management and control of the business, although the Articles of Association may allow the partners to elect certain partners to manage and represent the partnership.
  • Foundation costs:
  • registration fee: HUF 50,000;
  • publication costs: HUF 5,000;
  • cost of certified translations of the certificates of incorporation of foreign legal persons.

Pros and Cons:

  • Pros:
  • members are able to cooperate with each other, they can organise their business activities without establishing a legal person;
  • members are entitled to participate in the decision making;
  • members do not have to possess a significant amount of capital to be able to establish this partnership;
  • members know each other and they can decide about who can be a member;
  • members are entitled to remuneration for their personal work.
  • Cons:
  • unlimited, joint and several liability of the partners.

IV.4.3. Interest Grouping (“Egyesülés”)

The purpose of the grouping is to facilitate or develop the economic activities of its members by pooling resources, activities or skills. By working together in the Interest Grouping, the members produce better results than acting alone. The members of the Grouping do not intend to make profits for the grouping itself. If it does make any profits, they will be distributed among its members.

  • Minimum capital: there is no minimum registered capital established by law
  • Minimum number of members: 2
  • Liability of the members: the members’ liability is unlimited, members are jointly and severally liable for the debts exceeding the assets of the Grouping.
  • Management: the main decision-making body is the members’ meeting. Each member has one vote, although the Articles of Association may give certain members more than one vote, provided that none of the members hold the majority of the votes.
  • Foundation costs:
  • registration fee: HUF 50,000;
  • publication costs: HUF 5,000;
  • cost of certified translations of the certificates of incorporation of foreign legal persons.

Pros and Cons:

  • Pros:
  • the aim of the members is not to increase profit but to cooperate in order to increase the efficiency of their own activity by joint representation of their interests.
  • Cons:
  • unlimited, joint and several liability.
  1. Taxation of Companies – Corporate Tax and Dividend Tax

Corporate profit is subject to corporate tax.

Please note that some changes can be expected regarding Hungarian tax law because of the policies to be implemented by the new government.

From 1 January 2011 the corporate tax rate will be 10% instead of 19%.

V.1. Persons subject to Corporate Tax

Pursuant to the Hungarian Corporate Tax Act, the following legal entities are deemed resident taxpayers:

  • companies established under Hungarian law: Company Limited by Shares (Zrt; Nyrt.), Limited Liability Company (Kft.), General Partnership (Kkt.), Limited Partnership (Bt.) and other organisations (e.g. foundations, associations), the registered office of which is in the territory of Hungary.
  • non-resident taxpayers performing entrepreneurial activities at business premises in Hungary.

No group taxation is permitted under Hungarian law.

In general, the tax year corresponds to the calendar year. Pursuant to the Hungarian Accounting Act, taxpayers, however, may exercise discretion under certain conditions in deciding on a financial year that differs from the calendar year.

V.2. Taxable Income

The tax liability of resident taxpayers applies both to their income from Hungary and from abroad. Pre-tax profits represents the corporate tax base.

Based on a general anti-avoidance rule, the Hungarian Tax Authority is obliged to qualify contracts, transactions and other similar acts in accordance with their true contents. A further anti-avoidance general provision is that no costs or expenses will qualify as costs or expenses if the only purpose of incurring such costs or expenses is to attain a tax allowance (tax relief, tax incentive).

If the higher of either the pre-tax profits or the tax base is below 2% of the adjusted total income, the taxpayer is obliged to

  • pay tax on 2% of the adjusted total income, or
  • make a declaration on a form supplementing the tax return, which will qualify as a tax declaration.

V.3. Items Adjusting the Tax Base

V.3.1. The tax base is increased by the following items: fines, penalties, late payment penalty interest due to delay in payment of taxes, etc.

V.3.2. Depreciation

As a general taxation rule, the entire cost of purchase or cost of production can be written off.

V.3.3. Development reserves

The portion of the retained earnings earmarked for future capital investments (development reserves) is subject to accelerated depreciation and can be recognised as a lump sum deduction from the pre-tax profits. The taxpayer may release the earmarked reserves exclusively in accordance with the costs of the implemented capital investment over 4 tax years following the generation of such reserves. However, deduction due to accelerated depreciation cannot exceed 50% of the pre-tax profits or HUF 500,000 in any tax year.

V.3.4. Provisions

The tax base must be increased with the amount of the provision for contingent and future liabilities accounted for as expenses. The amount recognised as income due to the utilisation of such provision qualifies as a tax-base decreasing item. 

V.3.5. Losses

As per the currently effective regulations, deferred losses of previous tax years (negative tax base), in an amount of the taxpayer’s choice, can be deducted from the tax base or rolled on without limitations.

V.3.6. Dividends

Income from dividends is deducted from the tax base when the corporate tax liability of Hungarian companies is determined. However, dividends received from a controlled foreign company cannot be deducted from the tax base.

No withholding tax is levied on dividends paid by a company registered in Hungary to another company (whether registered in Hungary or abroad).

V.3.7. Profits from off shore companies

The unpaid dividend share of Hungarian companies in a controlled foreign company increases the tax base. If the dividend is paid at a later date, the tax base can be reduced by this amount, to the extent of the amount taken into account earlier as an increasing factor. 

V.3.8. Transfer pricing

Transfer price regulations have been established in accordance with OECD guidelines. Under the transfer price regulations, if the prices applied in related-party transactions differ from arm’s length prices applied in unrelated parties, the company must take the difference between the two and

  • deduct it from the company’s pre-tax profits, if
  • its taxable profits are higher than if the arm’s length principle would have been applied;
  • the related company is also a resident company in Hungary, or if it is a non-resident company, it must be a corporate taxpayer in the country of its primary place of business (this does not apply to controlled foreign companies); and
  • it holds a document signed by both parties establishing the difference,

or

  • add it to its pre-tax profits if the taxable income is lower than if the arm’s length principle would have been applied.

The above transfer price regulations need not be applied to long-term agreements concluded by small and medium-size enterprises if the related company in question has been established for the purpose of sale and purchase, and if the voting rights of the small and medium-size enterprises concerned in the related company exceed 50% on aggregate.

V.3.9. Controlled foreign companies

Payments to controlled foreign companies do not qualify as eligible costs incurred in the interest of the company except when the taxpayer can prove that the payment has been made in connection with its business operations.

V.4. Tax Rates

The corporate income tax rate is 19% from 1 January 2010. If certain conditions are met, a 10% rate can be applied to the portion of the tax base up to HUF 50 million, and a 19% rate to the portion in excess of HUF 50 million.

Progressive taxation can be applied to taxpayers who

  • do not claim tax allowance;
  • employ at least one employee in the tax year;
  • have declared social security tax liability of an amount that is a minimum (from 1 January 2010) of 27% of twice the annualised amount of the prevailing minimum salary (or the amount of the prevailing minimum salary in case of taxpayers with a registered office in one of the disadvantaged regions) multiplied by the average number of employees;
  • the taxpayer’s tax base or earnings before tax in the current tax year and in the preceding tax year  reaches the minimum income (profit); and
  • the taxpayer has complied with the statutory regulations pertaining to employment.

The gains from the 10% tax rate received must be spent exclusively to achieve certain objectives declared by the law (e.g. capital investment and employment)

V.5. Tax Allowances

V.5.1. Investment tax allowance

Taxpayers investing in socially and economically disadvantaged regions are eligible for tax relief. Eligible investments include:

  • capital investments valued at least HUF 3 billion at current prices and serving the purpose of manufacturing,
  • capital investments put into operation in counties with a high unemployment rate.

In order for the criteria of eligibility for tax relief to be met, further conditions must also be satisfied, for instance, the number of staff must be increased.

V.5.2. Development tax allowance

The following capital investments are eligible for tax allowance:

  • projects started and operated within the administrative jurisdiction of a preferential local self-government, valued at HUF 1 billion or more at current prices,
  • projects aimed at the provision of broad band Internet services,
  • projects valued at HUF 100 million or more at current prices exclusively for motion picture and video production,
  • projects which will give rise to the creation of new jobs.

V.6. Exclusion of Double Taxation

Double taxation can be excluded unilaterally or on the basis of a treaty concluded with the related countries. Unilateral withholding tax applies to 90% of the tax amount paid (payable) abroad and may not exceed the amount of the tax calculated in accordance with Hungarian regulations.

If a treaty is to be observed, a tax allowance serving the purpose of excluding double taxation can be granted in accordance with the treaty.  

V.7. Non-Resident Companies

V.7.1. The income generated by non-resident enterprises carrying on business operations at their permanent branches in Hungary will be subject to tax for their business operations carried out at their permanent branches in Hungary.

A separate statutory regulation specifies the cases where foreign enterprises must have some form of business (e.g. a branch) in the territory of Hungary.

The taxable income of a permanent establishment must be assessed in accordance with the rules applicable to domestic companies. The tax base of a foreign enterprise in respect of its permanent establishment in Hungary must be adjusted so that the tax base is reduced at least in proportion to all its revenue and income derived from its operating costs and expenses incurred by the permanent business establishment and is increased by the operating and overhead costs and expenses directly incurred at the business establishment in question. It should be further increased by 5% of the revenues and income that have been earned through, but not directly recorded for the business establishment.

Permanent establishments apply the flat or the two-tier rate and are also eligible for tax allowances.

Foreign organisations which do not have a permanent business establishment in Hungary are not subject to corporate tax in respect of their income earned in Hungary.

V.7.2. Starting from 2010, foreign organisations that are legal entities established by Hungarian law, or which have no legal entity, personal associations, other organisations, and foreign entrepreneurs with an establishment in Hungary and who pay (provide) interest, copy right or service fees, and whose country of registration has no valid agreement with Hungary on the avoidance of double taxation (identified as “foreign companies” in Hungary) are liable to corporate tax on such income. The tax base is the amount of the interest, royalty or service fee, with certain exceptions. The tax rate is 30% that must be withheld, paid and declared to the tax authorities by the Hungarian payer.

V.7.3. Starting from 2010, foreign persons receiving income from the sale or withdrawal of shares in Hungarian companies holding real estate (known in Hungary as “members of companies holding real estate”), are liable to pay corporate tax on such income to the Hungarian tax authorities at the general corporate income tax rate. The tax base is the positive amount of the payment received upon sale or upon the reduction of the registered capital of the company, but reduced by the proven expenses relating to its maintenance.

V.8. General Administration (Tax Refund and Tax Declaration, Payment of Taxes)

Taxpayers whose tax year coincides with the calendar year must file their corporate tax return no later than 31 May of the year immediately following the tax year to which the tax return pertains. Taxpayers whose tax year differs from the calendar year must file their tax return within 150 days following the last day of the tax year to which the tax return pertains.

The taxpayer establishes the amount of corporate tax to be paid by self-assessment.

Please note that 1 EUR is 281 HUF at the time of the preparation of this information

Hungary



Corporate Law in India

  1. Compliance with regulations concerning foreign investment in India

Setting up of business in India has now become simpler compared to earlier years of closed economy.

Major bodies of law in India affecting foreign investment are the –

  1. Foreign Exchange Management Act of 1999 ("FEMA"),
  2. the Companies Act of 1956,
  3. The Industries(Development And Regulation) Act1951,
  4. The Competition Act, 2002 and
  5. The New Industrial Policy of 1991.

Foreign collaboration and equity participation in India is regulated by the Foreign Exchange Management Act of 1999 and rules and regulations thereunder. The Industries (Development & Regulation) Act of 1951 governs industrial regulation. The Companies Act of 1956 regulates corporations and their management in India. The Competition Act, 2002 governs fair competition and trade practices in the market. The New Industrial Policy of 1991 ("NIP") which lays down the policy and procedure for foreign investment has liberalized and simplified the investment procedures.

  1. Foreign Direct Investment Policy

Foreign Direct Investment (FDI) under automatic route is now allowed in all sectors, including the services sector, except a few sectors where the existing and notified sectoral policy does not permit FDI beyond a ceiling. FDI for virtually all trades / activities can be brought in through the automatic route under powers delegated to the Reserve Bank of India (RBI), and for remaining trades / activities through government approval. Government approvals are accorded on the recommendation of the Foreign Investment Promotion Board (FIPB).

A1.          Automatic Route

No prior approval is required for FDI under the Automatic Route. Only information to the RBI within 30days of inward remittances or issue of shares to Non Residents is required.  RBI has prescribed a new form, Form FC-GPR for reporting shares issued to the Foreign Investors by an Indian company. Foreign industries which do not need prior approval are required to notify the regional office of the Reserve Bank of India (RBI) within 30 days of receipt of inward remittances and file the required documents with that office within 30 days after issue of shares to foreign investors, namely:

  • name of the collaborators
  • details of allotment
  • copy of the foreign collaboration agreement
  • the original foreign inward remittance certificate from the authorised dealer and other specified information

Decisions on all foreign investment are taken within 30 days of application and the use of foreign brand name/trades is possible.

A2.          Government Approval

Foreign investments not covered under the ‘Automatic Route’ are considered for Governmental Approval on the recommendation of the Foreign Investment Promotion Board (FIPB).

Applications have to be be submitted in FC/IL form or on plain paper the FIPB), Department of Economic Affairs, Ministry of Finance. Non Resident Indians are required to submit their proposals to the Secretariat for Industrial Assistance (SIA), the Department of Industrial Policy and Promotion for consideration of FIPB. Investors are required to give the description of activities as per the National Industrial Classification of all Economic Activities (NIC) in their submissions.

A.3          SECTORAL INVESTMENT LIMITS IN INDIA

Foreign Direct Investment in India is allowed on automatic route in almost all sectors except

  • Proposals that require an industrial license and cases where foreign investment is more than 24% in the equity capital of manufacturing entities in small scale industries.
  • Proposals in which the foreign collaborator has a previous venture/tie-up in India.
  • Proposals relating to acquisition of shares in an existing Indian company in favour of a Foreign/Non-Resident Indian (NRI)/Overseas Corporate Body (OCB) investor; and
  • Proposals falling outside notified sectoral policy/caps or under sectors in which FDI is not permitted and/or whenever any investor chooses to make an application to the Foreign Investment Promotion Board and not to avail him or herself of the automatic route.

                FDI is not allowed under the following sectors: Arms and ammunition, Atomic Energy, Coal and lignite, Rail Transport, Mining of metals like iron, manganese, chrome, gypsum, sulfur, gold, diamonds, copper, zinc.

                Up to 100 per cent equity is allowed in the following sectors : 34 High Priority Industry Groups, Export Trading Companies, Hotels and Tourism-related Projects, Hospitals, Diagnostic Centers, Shipping, Deep Sea Fishing, Oil Exploration, Power, Housing and Real Estate Development, Highways, Bridges and Ports, Sick Industrial Units, Industries Requiring Compulsory Licensing, Industries Reserved for Small Scale Sector. Prior approval of the government is compulsory for banking and non banking financial companies (NBFCs), civil aviation, telecom services, petroleum explorations, venture capital funds, trading; defence production, atomic energy, bulk drugs and intermediates, mining, advertising and films.

A4.          SPECIAL PROMOTIONAL SCHEMES

A4.1        Export Oriented Units (EOUs)

The scheme for 100 % Export Oriented Units was introduced in 1980 for generating production capacity for exports. Under this scheme, businesses are eligible to procure machinery, raw materials, components, consumables, etc; from indigenous / imported sources, free of excise / custom duty.

EOUs do no need to not obtain separate industrial licenses for the manufacture of items in the SSI sector, irrespective of the investment in plant and machinery. Entities undertaking to export their entire production of goods and services may be set up under the EOU Schemes. Such entities may be engaged in manufacture, services, repair, remaking, reconditioning, reengineering, etc.

A4.2        Export Processing Zones (EPZ)

The Export Processing Zones set up as enclaves separated from the Domestic Tariff Area (DTA) by fiscal barriers, are intended to provide an internationally competitive duty free environment for export production at low cost. India has seven Export Processing Zones (EPZs), at Kandla (Gujarat), Mumbai (Maharashtra), Noida(UP),Madras (Tamil Nadu), Cochin (Kerala ), Falta (West Bengal) and Visakhapatnam (Andra Pradesh).

  1. BUSINESS STRUCTURES IN INDIA

A foreign company planning to set up business operations in India has the following two options:

  • As an Indian entity (incorporated company)
  • As a foreign company       (unincorporated company)

For registration and incorporation, a set of application forms has to be filed with Registrar of Companies (ROC). Once a company has been duly registered and incorporated as an Indian company, it is subject to Indian laws and regulations as applicable to other domestic Indian companies.
B1.           INDIAN ENTITY

A foreign company can commence operations in India by incorporating a company under the Companies Act, 1956 through:

  • Joint Ventures; or
  • Wholly Owned Subsidiaries

Foreign equity in such Indian companies can be up to 100% depending on the requirements of the investor, subject to equity caps in respect of the area of activities under the Foreign Direct Investment (FDI) policy.

  1. a) Joint Venture With An Indian Partner

    Foreign Companies can set up their operations in India by forging strategic alliances with Indian partners. Joint Venture may entail the following advantages for a foreign investor:
  • Established distribution/ marketing set up of the Indian partner
  • Available financial resource of the Indian partners
  • Established contacts of the Indian partners which help smoothen the process of setting up of operations

India's foreign direct investment rules have been substantially liberalised since the country first allowed foreign investment in the early 1990s. Most sectors are now open to 100% FDI. However, many foreign investors still prefer to set up a joint venture with an Indian partner company as this can give them access to the Indian partner's pre-established market and distribution channels, local management and know-how.

  1. b) Wholly Owned Subsidiary Company

    Foreign companies can also set up wholly owned subsidiary in sectors where 100% foreign direct investment is permitted under the FDI policy.

The principal forms of business structures in India are:

  • Sole Proprietorship

An individual on his/her own account carries out the business or profession. No formal procedure or formality is required for setting up a sole proprietary.

  • Partnership

A business relationship entered into by a formal agreement between two or more persons or corporations carrying on a business in common. Such partnerships are created under the Partnership Act of 1932 and where required is registered with the Registrar of Firms.

  • Company

A legal entity formed under the Companies Act, 1956. It can be public or private.

  • Limited Liability Partnership(LLP)

The LLP is an alternative corporate business entity that provides the benefits of limited liability of a company but allows its members the flexibility of organizing their internal management on the basis of a mutually-arrived agreement, as is the case in a partnership.

Companies incorporated in India and branches of foreign corporations are regulated by the Companies Act, 1956. The Act, which has been enacted to oversee the functioning of companies in India, draws heavily from the United Kingdom’s companies acts and although similar, is more comprehensive. The Registrar of Companies (ROC) and the Company Law Board (CLB), both working under the Department of Company Affairs, ensure compliance with the Act.

Types of Companies

A subsidiary or a joint venture company can be formed either as a private limited company or a public limited company and can have either limited or unlimited liability. A company can be limited by shares or by guarantee. In the former, the personal liability of members is limited to the amount unpaid on their shares while in the latter the personal liability is limited by a pre-decided nominated amount. For a company with unlimited liability, the liability of its members is unlimited. A company is regulated inter alia by the Ministry of Company Affairs/Registrar of Companies (ROC) under the Companies Act 1956. Once a company has been duly registered and incorporated as an Indian company, it is subject to Indian laws and regulations as applicable to other domestic Indian companies. Apart from statutory government owned concerns, the most prevalent form of large business enterprises is a company incorporated with limited liability. Companies limited by guarantee and unlimited companies are relatively uncommon.

(i)    Private Companies

A private company incorporated under the Act has the following characteristics:

  • The right to transfer shares is restricted.
  • The maximum number of its shareholders is limited to 50 (excluding employees).
  • No offer can be made to the public to subscribe to its shares and debentures. Prohibits any invitation to the public to subscribe for any shares or debentures of the company
  • Private companies are less regulated than public companies as they deal with the relatively smaller amounts of public money.
  • Prohibits any invitation or acceptance of deposits from persons other than its members, directors or their relatives
  • The minimum paid up capital at the time of incorporation of a private limited company is Indian Rupees 1,00,000 (approximately US Dollars 2,250).
  • There is no upper limit to the authorized capital and the paid up capital. It can be increased any time, by payment of additional stamp duty and registration fees.

A private company is deemed to be a public company in the following situations:

  • When 25 percent or more of the private company’s paid-up capital is held by one or more public company.
  • The private company holds 25 percent or more of the paid-up share capital of a public company.
  • The private company accepts or renews deposits from the public.
  • The private company’s average annual turnover exceeds Rs. 250 million during a period of 3 consecutive financial years.

A private Company can be formed either by

  • incorporation of a new company for a new business , or
  • conversion of an existing business of a sole proprietor or a partnership into a company.

(ii)    Public Companies

A public company is defined as a company which is not a private company and must have a minimum paid-up capital of five lakh rupees or such higher paid-up capital, as may be prescribed.

INCORPORATING A COMPANY

In order to incorporate a company the following steps have to be taken, which can take between three or four months:

1. The name:

The promoters of the company must select three or four suitable names and should indicate the main object of the company. The name should not resemble the name of any other company already registered and must not violate the provisions of Emblems and names (Prevention of Improper Use) Act, 1950. A foreign brand name for the sale of goods in India is permitted.

The company must apply to the relevant Registrar of Companies to ascertain the availability of the name along with a fee (Form 1-A). On submitting the application, the Registrar of Companies sends an approval letter within about 10 days. If the proposed name is not available the same application can be used for another name.

2. Memorandum of Association:

The Memorandum of Association, containing the basic objects on which the company is incorporated (the name, the State in which the registered office is to be situated, the main objects of the company to be pursued, the liability of the members and the authorized capital) has to be drafted.

3. Articles of Association:

The articles of association of the company which govern the internal management of affairs of the company and the conduct of its business have to be prepared.

4. Registration of company and issue of capital:

After completion of the preliminary steps the company has to file the following documents with the Register of Companies (ROC) of the State in which the company is proposed to be incorporated:

  • Duly stamped original and one duplicate of the company’s memorandum of association and articles of association, signed by at least two subscribers in his/her own hand, his/her father's name, occupation, address and the number of shares subscribed for and witnessed by at least one person
  • The agreement, if any, which the company proposes to enter into with any individual for appointments as its managing director
  • A copy of the letter of the ROC confirming the availability of the name
  • Documents evidencing payment of prescribed registration and filing fees
  • Documents evidencing the directorship and situation of the registered office (Form 32 and Form 18) and declaration of compliance with requirements of the Companies Act (Form 1 and Form 29) for giving consent to act as director in case of public company
  • The amount of registration fee payable (regulated with reference to the amount of authorized capital)

6. Issue of share capital:

After registration, the company can start trading and issue shares. It is necessary for a public company to obtain a Certificate of Commencement of Business, before commencing business.

Process for incorporation of Limited Liability Partnership (LLP)

The Limited Liability Partnership Act of 2008 introduced Limited Liability Partnerships (LLP) in India. This format would be quite useful for small and medium enterprises in general and for the enterprises in services sector in particular, including professionals and knowledge based enterprises. An LLP is a body corporate and a legal entity separate from its partners and has perpetual succession. While the LLP is a separate legal entity, liable to the full extent of its assets, the liability of the partners is limited to their agreed contribution in the LLP.  Further, no partner is liable for the independent or unauthorized actions of other partners, thus allowing individual partners to be shielded from joint liability created by another partner’s wrongful business decisions or misconduct. The Indian Partnership Act 1932 does not apply to LLPs and there is no upper limit on the number of partners in an LLP unlike an ordinary partnership where the maximum number of partners cannot exceed 20.  An LLP must maintain annual accounts reflecting the true and fair view of its state of affairs. The taxation of LLPs is governed by the Income Tax Act, 1961.

  1. AS A FOREIGN COMPANY

Foreign Companies can set up their operations in India through:

  • Liaison Office/Representative Office
  • Project Office
  • Branch Office

Such offices can undertake any permitted activities. Companies have to register themselves with the Registrar of Companies (ROC) within 30 days of setting up a place of business in India. Such offices can undertake activities permitted under the Foreign Exchange Management (Establishment in India of branch or office of other place of business) Regulations, 2000.

  1. a) Liaison Office(LO)

A liaison office acts as a channel of communication between the principal place of business or head office and entities in India. The liaison office cannot undertake any commercial activity directly or indirectly and cannot, therefore, earn any income in India. Its role is limited to collecting information about possible market opportunities and providing information about the company and its products to prospective Indian customers. It can promote export/import from/to India and also facilitate technical/financial collaboration between parent company and companies in India. Approval for establishing a liaison office in India is granted by Reserve Bank of India (RBI).

Remittance facilities  - As stated above, a liaison office cannot earn any income in India (except for interest on surplus funds lying in its local bank account subject to certain conditions). Therefore, all expenses of the liaison office have to be met out of inward remittances from the head office. Any balance in the liaison office account can typically be repatriated, but only at the time of closure of the liaison office.

Under the current exchange control regulations, a liaison office is permitted to:

  • Represent the parent/group companies in India ;
  • Promote exports and imports from/to India;
  • Promote technical /financial collaborations between parent/group companies and companies in India ;
  • Act as a communication channel between parent/group companies and companies in India.

Typically, a liaison office is not permitted to:

  • Earn any income;
  • Undertake any industrial, trading or commercial activity;
  • Enter into any agreement on behalf of the head office;
  • Borrow or lend money for any commercial activity;
  • Charge any fee or commission or otherwise earn any income, in respect of liaison activities carried on in India.

Taxation  - Even though liaison offices are not permitted to earn any income in India section 139(1) of the Income Tax Act 1961 requires all companies to file a return on income. Hence, liaison offices are also required to file an income return.

Exit options - Closure of a liaison office normally involves a time frame of five to six weeks. An application enclosing the prescribed documentation is required to be made to the requisite regional office of RBI.  The Bankers/Authorized Dealers are now authorised to extend the validity period of liaison offices of foreign entities and also deal with closure application of such liaison offices in India. The LO of Foreign banks obtaining prior approval from RBI under the Banking Regulation do not need separate RBI approval under the foreign exchange regulations. Similarly foreign insurance companies are permitted to set-up LO without RBI approval subject to necessary approval from the Insurance Regulatory and Development Authority of India.

  1. b) Project Office(PO)

Foreign Companies planning to execute specific projects in India can set up temporary project/site offices in India. RBI has now granted general permission to foreign entities to establish Project Offices subject to specified conditions. Such offices cannot undertake or carry on any activity other than the activity relating and incidental to execution of the project. Project Offices may remit outside India the surplus profits of the project on its completion, general permission for which must have been granted by the RBI.  It is no longer necessary to obtain prior RBI approval for a PO that meets specified conditions and only post facto filings are mandatory. Similarly they can be wound up without any specific approval by relevant filings through Bankers. A PO can is permitted to open, hold and maintain one or more foreign currency accounts subject to prescribed conditions /parameters.
Remittance facilities  - A project office is permitted to open and operate a bank account including a foreign currency account in India. Typically, expenses of the project office in India can be met only from inward remittances from the head office, or rupee amounts received locally under approved contract(s). Outward remittances from the bank account are permitted subject to certain compliance requirements.

Taxation - A project office is considered as an extension of a foreign company in India. Therefore, income earned by the project office is taxable in India in accordance with the taxation provisions applicable to foreign companies under the Income Tax Act 1961.

Exit options - Being a restricted business presence in India, the process for closure of a project office is straightforward, and normally involves a time frame of five to six weeks. An application enclosing the prescribed documentation has to be made to the regional office of RBI in case the project office was established under the approval route and to the Authorized Dealer in case the project office was established under the general permission.

  1. c) Branch Office(BO)

Foreign companies engaged in manufacturing and trading activities abroad are allowed to set up Branch Offices in India.

Scope of activities - Branch offices are permitted to undertake only those activities, as approved by RBI. They are generally allowed to do the following:

  • Rendering professional or consultancy services
  • Carrying out research work, in which the parent company is engaged.
  • Promoting technical or financial collaborations between Indian companies and parent or overseas group company.
  • Representing the parent company in India and acting as buying/selling agents in India.
  • Rendering services in Information Technology and development of software in India.
  • Rendering technical support to the products supplied by the parent/ group companies.
  • Foreign airline/shipping company.

The activities permitted for a BO does not include manufacturing and domestic/retail trading. However, no prior approval is required to set up a BO in SEZ to undertake manufacturing or service activity provided 100 percent FDI is allowed under the Automatic Route in this sector and it may be subject to other conditions. The BO of Foreign banks obtaining prior approval from RBI under the Banking Regulation do not need separate RBI approval under the foreign exchange regulations. The Bankers/Authorized dealers are now authorized to deal with the closure application of Branch offices of foreign companies in India.

A branch office can subcontract manufacturing services to an Indian manufacturer. Branch Offices established with the approval of RBI, may remit profits, net of applicable Indian taxes and subject to RBI guidelines to destinations outside India.

Approval process - An application in the prescribed form has to be submitted to the RBI for establishing a branch office in India. The lead time for processing a branch office approval typically ranges from four to five weeks, unless the application is referred to the administrative ministry concerned (such as in the case of banking entities) within the Government of India for comments which may lead to an increase in processing time.
Taxation - A branch office is considered as an extension of a foreign company in India. Therefore, income earned by the branch office is taxed in India in accordance with the taxation provisions applicable to foreign companies under the Income Tax Act 1961.  In case the provisions of a tax treaty between India and the country of which the foreign company is resident, are more beneficial than the Income Tax Act 1961, then it is open to the foreign company to elect being taxed under the provisions of the relevant tax treaty.

Exit options - Closure of a branch office normally involves a time frame of six to eight weeks. An application enclosing the prescribed documentation has to be made to the Central office of RBI.

Compliances - Apart from obtaining RBI approval for establishing a liaison office, project office or branch office, the foreign company is also required to register with the Registrar of Companies ("ROC"). An application has to be filed in the prescribed form within 30 days of the establishment of the office in India with the ROC. The ROC will issue a certificate of establishment of place of business in India to the foreign company. Applications for setting up Liaison Offices/ Project Offices/ Branch Offices may be submitted in form FNC 1. A non-resident Indian or a person of Indian origin resident outside India may invest by way of contribution to the capital of a firm or a proprietary concern in India on non-repatriation basis provided:

  • The amount is invested by inward remittance or out of an NRE/FCNR/NRO account maintained with an Authorised Dealer (AD)
  • The firm is not engaged in any agricultural/plantation or real estate business
  • The amount invested is not eligible for repatriation outside India.   NRIs/PIO may invest in sole proprietorship concerns/ partnership firms with repatriation benefits with the approval of the Government /RBI.

There are numerous eligibility criteria and procedural guidelines for the establishment of LOs by foreign entities in India. The foreign entity needs to have a successful profit making track record during for the immediately preceding 3 years in the home country. Further, a net worth of not less than USD 50,000 is also required. The foreign company proposing to set-up a BO in India needs to have a successful profit making track record during for the immediately preceding 5 years in the home country and a net worth of not less than USD 100,000. Foreign companies that do not satisfy the eligibility criteria and are subsidiaries of other companies may submit a Letter of Comfort from their parent company in a prescribed format subject to the parent company satisfying the eligibility criteria.

Post set-up in India, various registrations and compliance obligations entail on the LO/BO including obtaining a Unique Identification Number from the RBI. In view of sizeable paperwork and time frame obligations, the entire process needs to be carefully planned and implemented.

  1. SETTING UP INDUSTRIAL UNDERTAKINGS

Besides the general approvals required by a foreign company to invest in India, the following clearances/permissions are required, for setting up industrial/manufacturing ventures:

  1. Industrial Licensing - If the intended products require compulsory licensing, applications are to be made on form IL to the Secretariat of Industrial Approvals. Applications may be prepared by either the Indian partner or by the foreign company.
  1. Import Export Code Number: Issued by the RBI for carrying out import and export transactions of capital, goods and raw materials, etc.
  1. 3. Local and Central Sales Tax Registration Number: Issued by the local state government, Department of Revenue, required for all sales within the state and for interstate sales.
  1. Pollution Clearance: Allocated by the State Pollution Control Board. If the proposed business is a large project, the Central Pollution Control Board is also involved in the clearance process.
  1. Land Allotment for Industrial Plot: Industrial land is allotted by the State Industrial Development Corporation or Development Authority concerned. Provisional letters are issued in approved industrial areas, subject to final allotment based on the sanction of building plans prepared by a qualified architect, pollution clearance and certification from the Inspectorate of Factories for working conditions like safety, hygiene, lighting and other amenity standards.
  1. Electricity/Power Connection: The State Electricity Board gives approvals for connection and distribution of private power. The allotment process takes from 2 - 6 months depending on the efficiency of the local authorities.
  1. Attestation of list of Imported Capital Goods: Issued by the Director General of Foreign Trade or Collectorate of Customs and Excise, Ministry of Commerce.
  1. Registration under the Factories Act: Issued by the Inspectorate of Factories, which sets norms for worker safety and general working conditions in factories.
  1. 9. Product Specific Clearances: In certain industries such as drugs, cosmetics, food products, mining, etc. clearances are required from respective authorities.

India



Corporate Law in Ireland

Ireland has long had an international reputation as a major inward investment location with particular emphasis on the information technology and pharmaceutical sectors.

Ireland also has a range of tax incentives available including a 25% R&D Tax Credit scheme since 2004 (in addition to a tax deduction at 12.5% for R&D expenditure in Ireland), stamp duty exemptions on the transfer of Intellectual Property and exemption for income arising from certain qualifying patents. Ireland also has an attractive rate of corporation tax at 12.5% for trading income and 25% for non-trading income.

  1. Procedures and formalities

Competent authority:

The Companies Registration Office (“CRO”) is the statutory authority for registering new companies in the Republic of Ireland and has a number of other core functions including the receipt and registration of post incorporation documents. The CRO also makes available company information to the public and is taking an increasingly active role in company law enforcement.

Statutory regulation:

Companies are primarily regulated by the Companies Acts 1963 to 2009 (“Companies Acts”) and subordinate legislation.

Timeframe:

A company registered under the Companies Acts becomes a body corporate as and from the date mentioned in its certificate of incorporation as issued by the CRO. If the company purports to carry on business before the Certificate of Incorporation has been issued, the company will be trading without limited liability protection and may be liable for any debts incurred prior to incorporation

Incorporation Schemes:

Applications to incorporate an Irish Company are made to the CRO. The fast track procedure allows companies to be incorporated within 5 working days while the normal process takes up to 15 working days.

Subject to certain exceptions, it is illegal for anyone other than an Irish solicitor to draw up or prepare a memorandum or articles of association.

Expenses:

The CRO filing expenses for setting up a company are as follows:

Document Paper Electronic
New private limited company (Form A1) 100 50 (CRODisk)*
Application by plc to commence business & declaration of particulars (Form 70) 300 N/A
External company registration (Forms F1/F12/F13) 60 N/A
Registration of a business or trading name (Forms RBN1/RBN1A/RBN1B) 40 20
LP1 - Application for registration of a limited partnership 2.50 N/A

 

In order to incorporate a company it is necessary to file with the CRO:

  • a copy of the memorandum and articles of association signed by the initial member(s) who have subscribed for shares;
  • a statutory form (Form A1) signed by the initial member(s), the initial directors and the initial secretary; and
  • the prescribed incorporation fee

Company or business name:

It is important that persons forming companies satisfy themselves of the acceptability of the proposed name for their company in advance of submission of documents to the CRO.

There are restrictions on the choice of company name and the CRO can refuse to register a name in certain circumstances, for example:-

  • if it is already on the Register or if it is phonetically or visually similar to a name which already appears on the Register; or
  • if it is offensive.

Therefore, in order to avoid any additional expense, signs, headed notepaper, stationery, advertising etc. should not be printed until the Certificate of Incorporation has been issued by the CRO.

Banking facilities

Before the Company can commence trading, it must have a bank account.

Constitutional documents:

Every company must adopt a set of Memorandum and Articles of Association. The Memorandum of Association, a company’s primary constitutional document, must record the Company’s name, objects, capital and state whether the liability of its members is to be limited or unlimited. Articles of Association detail the company’s internal management rules.

  1. Business structures

The choice of a particular business structure will depend on the needs of the investor. A foreign company can choose between establishing a branch or a subsidiary to conduct business in Ireland.

  1. Branches

External companies

An external (foreign) company registered abroad may establish (1) a place of business or (2) a branch in the State. The external company must register with the CRO within one month of the establishment of a place of business in the State. Differing rules apply to the registration of a place of business or a branch.

  • Place of Business

This is an office which performs operations ancillary or incidental to the company’s business. A place of business would include a share transfer office or an office undertaking promotional activities for the business of the company. Any business resulting from the activities of the place of business must be dealt with by representatives of the company in the home state.

Procedure.

The external company must register with the CRO within one month of the establishment of a place of business in the State. A registration form must be filed with the CRO; it must be accompanied by a certified copy of the Memorandum and Articles of Association of the external company in the original language, the original date of incorporation and the filing fee. Where required, a certified English translation of all documents must accompany the application. The place of business must also register its business name with the CRO.

Ongoing filing requirements differ depending on the nature of the external company.

  • Branch

In general terms a branch does not have its own legal personality and is not legally distinct from the external company. The external company has unlimited liability for any debts of the branch.

All branches established in Ireland must be registered under the EC (Branch Disclosures) Regulations 1993 ("Branch Disclosure Regulations") within one month of establishment. The regulations apply to the equivalent of Irish limited liability companies, incorporated in another state, which establish a branch in this state. There are some differences between the requirements imposed on a company from a member state of the European Union and companies from other countries.

The Branch Disclosure Regulations require the following to be provided to the CRO within one month of the establishment of the branch:

  • A certified copy of the charter, statutes or memorandum and articles of the external company;
  • A copy of the certificate of incorporation of the company;
  • Copies of the latest accounting documents (accounts of the external company for the period, any consolidated group accounts, annual reports or auditors reports);
  • Details of the name and legal classification of the company;
  • Place of registration of the company;
  • Registered number of the company;
  • Name of branch (if different from company name);
  • Address of the branch;
  • Activities of the branch;
  • A list of particulars of persons authorised to represent the company, the extent of their powers in relation to the company and whether they can represent the company alone/jointly;
  • Name of person in Ireland authorised to accept service of process on behalf of the company; and
  • Name of person in Ireland responsible for ensuring compliance with the regulations.

All companies, including private companies, operating a branch in the State are required to file:

  • the accounts of the company for the period, including if it has one or more subsidiaries, any consolidated accounts of the group
  • any annual report of the directors for the period
  • the report of the auditors on the company accounts
  • any report of the auditors on the directors’ report

Places of business and branches must register their business names with the CRO. Registration of a business name does not afford any right of priority to or exclusivity of use to any name.

An external company is liable to Irish corporation tax on profits arising from any business conducted through an Irish branch.

  1. The meaning of a Subsidiary in Irish Law and the Creation of an Irish company

Under Irish law, a company (“Company B” for the purpose of this paragraph) will be a subsidiary of another company (“Company A”) if Company A is (1) a member of Company B and controls the composition of its board of directors; or (2) holds more than half in nominal value of its equity share capital; or (3) holds more than half in nominal value of its shares carrying voting rights (other than voting rights which arise only in specified circumstances); or       Company B is a subsidiary of any company which is a subsidiary of Company A.

There are four types of Irish limited company:

  • A private company limited by shares:
  • No minimum capitalisation requirement
  • Members' liability, if the company is wound up, is limited to the amount unpaid on the shares the members hold.
  • Minimum number of members is 1 (see Single member company section below)
  • Maximum number of members is 99.
  • This entity type is by far the most common in Ireland
  • A private company limited by guarantee not having a share capital:
  • Minimum capitalisation requirement of €1.
  • Minimum of seven members.
  • Members' liability is limited to the amount they have undertaken to contribute to the assets of the company, in the event it is wound up, not exceeding the amount specified in the memorandum.
  • Many charitable and professional bodies use this form of company
  • Offers separate legal personality, limited liability but does not require fundraising from the members.
  • A private company limited by guarantee having a share capital:
  • Maximum number of members is 99.
  • Minimum number of members is 1 (see Single member company section below)
  • Members have liability under two headings;
  • the amount unpaid on the shares they hold
  • the amount they have undertaken to contribute to the assets of the company, in the event that it is wound up.
  • A public limited company:
  • Minimum of seven members
  • No maximum amount of members
  • Member liability is limited to the amount unpaid on any shares held by them.
  • Nominal value of the company's allotted share capital must not be less than €38,092.14, at least 25% of which must be fully paid up before the company commences business or exercises any borrowing powers.
  • May or may not be quoted on a Stock Exchange
  • The company must not commence any business or exercise any borrowing powers until a certificate entitling it to commence business has been issued by the CRO. To acquire such a certificate, the company must file Form 70 (A4) which confirms that the nominal value of the company’s allotted share capital
  • Note that it is unlawful to issue any form of prospectus except in compliance with the Companies Acts 1963-2009.

Single Member Company

A single member company is a private company limited by shares ((1) above) or a guarantee company having a share capital ((3) above), which is incorporated with one member, or whose membership is reduced to one person.

  • Must have at least two directors and a secretary.
  • Annual General Meetings and Extraordinary General Meetings need not be held if the sole member so decides (subject to modifications required by the European Communities (Single-Member Private Limited Companies) Regulations 1994)
  • Accounts and reports that would normally be laid before the AGM of a company still need to be prepared and forwarded to the member.

Unlimited company

  • No limit placed on the liability of the members.
  • Minimum of two members
  • Recourse may be had by creditors to the members in respect of any liabilities owed by the company which the company has failed to discharge.
  • No annual return is required to be filed with the CRO.

There are several other forms of company which can be registered in Ireland which will not be addressed in detail.

UCITS

A UCIT is a public limited company formed under EU Regulation (European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 1989 & 1999) and the Companies Acts 1963-2009. The sole object of a UCIT is the collective investment in transferable securities of capital raised from the public that operates on the principle of risk-spreading. The Central Bank of Ireland has to approve registration of a UCIT. Form A1 and the draft memorandum and articles of association must be submitted to the CRO.

  1. Partnerships

Unlimited partnerships

A partnership is not a separate legal entity from its members. Partners have unlimited liability and partnerships are not required to go through a registration process. There are two types of partnership in which the partners have unlimited liability (1) a partnership at will (informal partnership) and (2) a formal partnership. A formal partnership should always operate under a written agreement otherwise certain terms and conditions will automatically be considered to govern the partnership and the partners.

Limited partnerships

A limited partnership is a particular type of partnership which permits some of the partners to benefit from limited liability. The partnership consists of at least one general partner who has unlimited liability and one or more limited partners. There are limits on the number of limited partners allowed in a limited partnership. Limited partners are liable for partnership obligations only to the extent of the cash and property they contribute. If the general partner is a limited company, the limited partnership is obliged to file its accounts on the public record with the CRO. A partnership, limited or general, is required to register the business name of the partnership with the Registrar of Business Names

Investment limited partnerships

This type of partnership is a collective investment scheme with at least one general partner with unlimited liability and one limited partner having as its principal business the investment of its funds in property of all kinds. A certificate of authorisation from the Central Bank is required.

A partnership as such is not chargeable to income tax. Each partner is charged individually for the tax referable to his/her share of the partnership income.

  1. Taxation

All companies resident in the State and all non resident companies which carry on a trade in the State through a branch or agency, subject to specific exceptions, are liable to corporation tax. The Taxes Consolidation Act, 1997 and subsequent Finance Acts are the primary pieces of legislation.

A company which commences to carry on a trade, profession or business is obliged to deliver a written statement within thirty days of commencement to the Revenue Commissioners containing such information as the name of the company, its registered office, the name of the secretary and the nature of the trade, profession or business.

When a company first comes within the charge to Irish tax, the company (whether an Irish company or a foreign company through its Irish branch) is required to file a form with the Irish Revenue Commissioners. This form provides for the registration for Irish corporation tax, PAYE/PRSI (social insurance) and VAT, as appropriate.

Rates of Taxation

The rates of Corporation Tax effective from 1st January 2002 are 12.5% for trading income and 25% for non-trading income (although there may be opportunities to avail of reliefs or exemptions to minimise tax liabilities). Non-trading income is sometimes referred to as passive income (e.g. investment income, foreign dividends and rental income).

A company is considered to be Irish tax resident if it is managed and controlled in Ireland.

Additional rates of tax that may apply:

  • No capital duty is chargeable on the allotment of shares in an Irish company.
  • There is a 1% stamp duty payable on the transfer of shares above a €1,000 total value.
  • Dividend withholding tax is payable but there are exceptions to this where the dividend is paid to:

(a)                   a person (other than a company) who is neither resident nor ordinarily resident in the State and who is resident for tax purposes in a country with which Ireland has a double taxation treaty (a tax treaty country) or in another EU member state,

(b)                   a company resident in another EU member state or in a tax treaty country and which is not controlled by Irish residents, where a certificate of tax residence is provided from the tax authority of the country concerned and a certificate from the auditor of the non-resident company is provided certifying that it is not controlled by Irish residents.

  • Capital Gains tax is payable on any chargeable gains at a rate of 25%

Tax is payable on a preliminary basis and is generally payable in two instalments during the company’s accounting period, calculated with reference to previous tax liability or projected liability.

In general, a company’s tax accounting period will coincide with its financial accounting period. However, a tax accounting period may not exceed a period of 12 months

  1. Corporate Governance
  • Meetings and Resolutions

The day to day business of a company is conducted by its board of directors. Certain types of a company’s business require the approval of its members, for example where it is proposed to amend the memorandum or articles of association of a company.

Any powers which have not been delegated or cannot be delegated to the directors are the powers of the members.

The members may resolve to take certain actions. A minimum of three (in the case of a public limited company) or two (in the case of a non-single member private limited company) members may pass resolutions. The resolution must be passed by the requisite majority of those persons entitled to vote at a meeting properly notified in advance to the members and where a quorum is present.

Annual General Meeting

An AGM must be held once in each calendar year following incorporation and not more than 15 months after the previous one. 21 clear days notice of the AGM must be given unless all entitled to attend and vote agree to accept shorter notice. Certain business must be laid before the members at the meeting, including presenting the company’s accounts to its members.

Extraordinary General Meeting

Any meeting of the members of the company, other than an AGM, is an Extraordinary General Meeting (EGM). 14 clear day’s notice is required unless all entitled to attend agree to accept shorter notice. The directors may convene an EGM or one may be requisitioned by a member provided they meet certain shareholding thresholds set out in the Companies Acts.

  • Types of resolution

Special resolution

Special resolutions are required where specified by the Companies Acts or where the Articles of Association so state.   The members must be given 21 days clear notice and a 75% majority approval for the resolution to be adopted must be secured.

Ordinary resolutions

The notice period required varies depending on the type of meeting. A simple majority of the members present must vote in favour of the resolution for it to be adopted. Certain resolutions must be filed with the CRO.

Written resolutions

Where the articles of association provide, it is often possible for a resolution to be passed by way of written resolution without the need to convene and vote at a meeting of members.. It is not possible to transact the business of an AGM by written resolution as the Companies Acts provide that an AGM must take place.

Statutory registers

A private limited company must maintain registers of members and directors; a register of every instrument creating a charge and a register containing particulars of the interests of directors, secretaries and connected persons must also be kept. These registers must be made available for inspection by members of the company.

Although not required by law, it is not uncommon for further registers recording details of applications, allotments and uses of the company seal to be kept.

Minutes

Every company must keep minutes of proceedings at general meetings of the company. Members have a right to inspect these minutes but not the minutes of any meetings of the company directors.

Shares

Every member of a company is entitled to a certificate specifying the number of shares held by him.

  1. Ongoing requirements

Auditors

Every company (except for small companies – see below) is required to appoint an auditor, whose principal function is to examine the books of account, annual accounts and directors’ report made or kept by the directors and officers of the company, and to make a report on his findings to the members of the company.

Annual accounts must be filed every year. If the company is fully trading, audited accounts must be prepared by the auditor. “Small companies” whose turnover and assets are below certain levels (below €7.3m turnover and below €3.65m in assets) may not be required to have their financial statements audited. The company must not be a parent company or a subsidiary company. The obligation to file those unaudited financial statements with the Companies Registration Office remains.

Ongoing obligations

  • Certain particulars of the company are required to be listed on the company letterhead, website, email and faxes.
  • The registered office of a company is that to which CRO correspondence and all formal legal notices addressed to the company will be sent. The registered office can be anywhere in the State.
  • A company may not be incorporated and registered unless it appears to the Registrar of Companies that the company, when registered, will carry on an activity in the State.
  • All company types must have one secretary and a minimum of two directors.
  • One of the directors must be resident in an European Economic Area (EEA) member state.  The secretary may be one of the directors of the company. A body corporate may act as secretary to another company, but not to itself. The requirement to have at least one resident director from a European Economic Area (EEA) member state does not apply to any company which for the time being holds a bond, in the prescribed form, in force to the value of €25,394.76
  • A nameplate is obliged to be affixed outside every office or place in which the company carries on business.
  • The company must have a common seal.
  • A company is obliged to deliver an annual return at least once in every year to the CRO. An annual return contains details of the company’s directors and secretary, its registered office, details of members and share capital. The return is required to be made up to the company’s Annual Return Date (ARD) and filed with the CRO within 28 days of that date.
  1. Trust companies and anonymity/ transparency
  • An Irish company can issue bearer shares provided the company’s articles permit it. Bearer shares are rarely issued.
  • Shareholder details are kept in statutory books and filed in the CRO
  • An overall tax planning structure may be set up to protect anonymity of shareholders but the CRO and the registers kept by companies are only concerned with the legal title (and not the beneficial ownership) to shares.
  • There is a statutory prohibition on the entry of any trust, express, implied or constructive, on the statutory books of companies and the CRO do not record this information either.

Lavelle Solicitors



Corporate Law in Israel

  1. Introduction

Israeli Company Law recognizes the right to incorporate, and provides that "Any person may found a company, provided that none of the purposes of the company are illegal, immoral or contrary to public policy."

The philosophy which forms the basis of Israeli Company Law is recognition of the autonomy of the founders’ will and minimal intervention in the matters of the company, starting from the stage of its establishment and continuing throughout the entire period of its existence. The individual is free to incorporate and he needs to be free to determine the contents of his incorporation. Since that is so, a substantial portion of the provisions of Israeli Company Law is non-mandatory and only a minority is mandatory. The freedom of will finds expression, for example, in the ability to vary the types of shares and the ability in principle to amend the Articles of Association by a simple majority. The mandatory aspect is preserved primarily in places where it is required to protect third parties.

This chapter will deal with the process of establishing a company in Israel, through specifying and explaining the various documents required for the purpose of registering the company, as well as a description of the various organs in a company and their authority.

In addition thereto, since Israeli Company Law recognizes the ability of a company organized outside of Israel to maintain a place of business in Israel, if it is registered as a foreign company, we will describe the registration process of a foreign company.

  1. Establishing a Company in Israel
  2. Procedures for Forming and Registering a Company

A party wishing to establish a company in Israel is required to submit to the Registrar of Companies in Israel a number of documents, which shall be detailed below.

It should be noted that all the documents that are submitted to the Registrar of Companies must be written in Hebrew. Therefore, documents that need to be signed by a signatory who does not know how to read Hebrew, will be translated into English and submitted to the Register of Companies; then they are translated back to Hebrew and accompanied with a notarial certificate as to the correctness of such translation.

  1. An Application to Register a Company

The party wishing to register a company must submit to the Registrar of Companies an application pursuant to Form No. 1 in the Supplement to the Companies Regulations (Reporting, Registration Details and Forms), 5760 – 1999 (hereinafter: “Reporting Regulations”), called ‘An Application to Register a Company’, completed with the required details (the details of the applicant, the details of the company, proposed name, purposes of the company, address of the registered office, the company's capital and the liability of the shareholders).

The name of the person signing the application to register a company, his ID number, and his signature on the application are to be certified by an attorney who shall note that he warned the signatory as to the consequences of his declaration.

If the signing of the application is done abroad, then the certification of the signature must be made before an Israeli consular representative or diplomat in writing, signed and sealed personally on the document or annexed to the document, or in writing by a public notary signed personally and sealed with his notarial seal and certified in writing by an Israeli diplomatic or consular representative, and with his official seal on the document or annexed to the document.

In the event that the sole applicant does not have Israeli ID, there shall be attached a confirmed copy of his passport, certified by one of the following: an Israeli diplomatic or consular representative or a notary authorized in the country that issued the passport, or an attorney having an Israeli license to practice law or a notary authorized in the country of residence of the individual who is not an Israeli resident.

In the event that the applicant is a company that was incorporated outside of Israel, there shall be attached a confirmed copy of the Certificate of Incorporation or registration of the company in the country where it was incorporated, together with a certification as to the existence of the company at that time, certified as stated above, and translated into Hebrew or English, confirmed by a notary and certified as aforesaid.

  1. The Articles of Association of the Company

Each company must have Articles of Association, which shall organize the understandings among the founders of the company. The Articles of Association must be signed by the initial shareholders of the Company and there shall be noted therein the allocation of shares, as well as the name, address and ID number of each shareholder. If a shareholder does not have Israeli ID, a copy of his passport shall be attached and certified as stated above. An attorney shall certify by his signature on the Articles of Association the identity of those executing the Articles of Association and their qualifications, in accordance with the methods of certification that were noted above.

Due to the importance of this document, we will deal with it separately below.

  1. Declaration of the Initial Shareholders

Each one of the initial shareholders of the company must declare, if he is an individual: that he is qualified to form a company and to hold shares therein and that he is not limited by law (such as, that he is a minor, incompetent, limited in means, bankrupt, or someone whose business has been limited by the courts); and with regard to a company: that the company was lawfully registered and that there is no legal limitation imposed upon it. If the sole shareholder is not the bearer of Israeli ID, he shall present a copy of his passport; if the shareholder is a foreign company, it shall present a copy of its Certificate of Incorporation or registration of the company, as is noted above. The declaration must be certified by an attorney who warns the person signing that he must tell the truth, in accordance with the rules of certification noted above.

It should be noted that a company can have a sole shareholder.

  1. Declaration of the Initial Directors

The initial directors must make a declaration, prepared in accordance with Form No. 2 in the Reporting Regulations, with regard to an individual: that he is qualified to serve as an initial director of the company and there is no lawful limitation to do so and he is willing to serve as an initial director; and with regard to a company: that it is lawfully registered and that there is no lawful limitation preventing it from serving as a director, that no liquidation order has been issued against it and that it has not decided to go into voluntary liquidation, and the identity of the individual who will serve as director on behalf of the company should also be specified. The aforementioned rules with regard to a foreign citizen and/or company, as well as with regard to certification of the declaration, apply also with regard to this matter.

Who is qualified to serve as a director?

A director, as stated, can be an individual or a company, unless it is provided otherwise in the company's Articles of Association.

A minor, an incompetent person, someone who has been declared bankrupt, as well as a company that has decided to liquidate voluntarily or against whom an order of liquidation has been issued, cannot be appointed as director.

In a public company, a person cannot be appointed and shall not serve as a director if he also lacks the required qualifications and the ability to dedicate the proper amount of time to the function of company director, paying attention, among other things, to the special needs and size of the company. Likewise, someone who was convicted in a final court decision of one of the crimes specified in the Companies Law may not be appointed as a director of a public company, unless five years have expired since the date of the judgment convicting him, and so long as the court did not hold that, despite the conviction for the crimes stated, and in paying attention to the circumstances of the crime, there is no obstacle to serving as a director in a public company. (It should be noted that the law imposes on the candidate for the office of director a duty of disclosure regarding a conviction as stated above. The law also stipulates that a director's office shall terminate when a director has been convicted by a final judgment of an offense provided in the Companies Law).

The initial directors of the company are appointed by the incorporators of the company and their service shall end upon the completion of the first General Meeting, unless it is provided otherwise in the Articles of Association of the company.

  1. Evidence Regarding the Payment of the Fee

Someone seeking to register a company is required to append evidence regarding the payment of the company registration fee. The amount of the fee, as of the current time, stands at NIS 2,435.

In addition to the said one-time payment, NIS 2 must be paid for each certified copy of a page of the Articles of Association submitted.

In addition to the fee required for the purpose of registering a company, as stated, there is a fixed annual fee that is paid each year, commencing with the second year of the company's existence, which is (as of the current time) as follows:

  • If the fee is paid by December 31 of the year-sum of NIS 1,386.
  • If the fee is paid by the end of February of that year - a reduced amount of NIS 1,043.
  • If the fee is paid after the end of the year, it shall be at the rate at the time of the payment.

The Registrar of Companies will register a company if he finds that all the requirements pursuant to the Companies Law have been fulfilled in connection with the registration and any matter that is a condition thereof. A company that is incorporated will receive a Certificate of Incorporation, in which there shall also be noted the serial number given to the company. Any document or report that is submitted to the Registrar after the incorporation of the company should bear this number. The Certificate of Incorporation shall serve as final proof that all the requirements pursuant to the Companies Law have been complied with as regards the incorporation and any matter that is a condition thereof.

The company exists from the date it is incorporated as noted in the Certificate of Incorporation.
It should be noted that the documents filed with the Registrar of Companies are open to the public and anyone can view them and receive certified copies of them.

  1. The Company’s Articles of Association

In order for the company to act as an independent legal entity, there is a need to determine the agreement reached between the founders of the company. The agreement is set out in the Articles of Association of the company that, from a legal point of view, has the validity of a multi-party contract between the company and its shareholders and among themselves.

The Israeli legislative trend, according to which one should permit freedom of business, also applies to the drafting of the Articles of Association. Legislation permits the drafters of the Articles of Association to stipulate most of the provisions of the Companies Law, and to adjust them to their requirements.

The content of the Articles of Association should be tailored to the needs of the founders, their goals and their considerations in establishing the company, within the limits of law.

There are a number of details that a company must include in its Articles of Association:

°               The name of the company (we will deal with below).

°               The purposes of the company (this will be dealt with below).

°               Details regarding the authorized share capital of the company, including the number of shares per class. A private company has the freedom to vary its shares and to determine the different rights of each class of shares. A company can have shares, all of which shall have a par value (in addition to their number, the par value of each share shall then be noted in the Articles of Association), or all with no par value (and then only their number shall be listed in the Articles of Association).

°               Details regarding the limitation of liability of the shareholders, to the extent there is any. The founders of the company can decide that the company to be established shall be limited in liability or unlimited in liability. A limited liability company is a company whose shareholders are liable for the debts of the company only up to the limit of their obligations towards it (the obligation can be the sum that the shareholders undertook to pay for their shares or the personal guaranty of the shareholders). A company unlimited in liability is a company where the liability of the shareholders is not limited. If the liability of the shareholders is limited, the manner of limitation shall also be specified in the Articles of Association.

A company may include in its Articles of Association subjects that relate to the company or its shareholders, including:

°               The rights and obligations of the shareholders and of the company.

°               Provisions regarding the manner of managing the company and the number of directors.

°               Any other subject that the shareholders deem appropriate to stipulate in the Articles of Association.

  1. Name of the Company

The philosophy behind Israeli Company Law is the freedom of choice, so that each company can be registered with any name, subject to the limitations provided by Law.

The Companies Law imposes restrictions in choosing a name, as detailed below:

  1. A company shall not be registered with a name that is the name of a company lawfully registered in Israel or that is so similar to it as to be misleading.
  2. A company shall not be registered with a name that is the registered trade name regarding goods or services that are similar to or have a similar purpose as those goods or services for which the company wishes to register, or a name that is so similar that it is considered to be misleading, unless it is proven to the Registrar of Companies that the owner of the trade name agreed thereto in writing.
  3. A company shall not be registered with a name that the Registrar believes is fraudulent or misleading.
  4. A company shall not be registered with a name that the Registrar believes is likely to harm public policy or public feelings.

There are provisions in other laws that prohibit the use of various expressions, such as the prohibition of the use of the word "bank" without permission.

In addition, the name of a company in which the liability of shareholders is limited, shall include at the end the notation "limited liability" or "Ltd.".

  1. Purposes of the Company

The Companies Law requires a company to state its purposes in its Articles of Association by determining one of three of the following purposes:

°               the company may engage in any legal business;

°               the company may engage in any legal business other than the types of businesses that are specified in the Articles of Association of the company;

°               the company may engage in the types of businesses that are specified in the Articles of Association of the company.

None of the purposes of the company may violate the Law, be immoral, or violate public policy.

It should be noted that Israeli law provides that the objective of the company is to act pursuant to business considerations to maximize its profit, and one can take into consideration, among other things, the matters of its creditors, its employees and the public; likewise, the company may contribute a reasonable sum for a worthy purpose, even if the contribution is not within the framework of such business considerations, if a provision in that regard was stated in the Articles of Association.

  1. Registered Office of the Company

Each company must maintain a registered office in the State of Israel. The registered office need not necessarily be the office in which the business of the company is being conducted, but the address to which one can address any notice to the company. A notice as to the location of the office shall be provided to the Registrar of Companies together with the submission of the application for the establishment of the company. A company whose registered address is the address of another person (such as the office of an attorney or an accountant) shall also note the name of that person.

The Companies Law requires the company to maintain at its registered office the documents specified below, including by electronic means, provided that those entitled to examine them shall have the opportunity to examine them and to receive copies of the documents:

°               the Articles of Association;

°               minutes of the General Meetings for a period of seven years from the time of the meeting;

°               minutes of the meetings of the Board of Directors and their resolutions;

°               minutes of the committees of the Board of Directors;

°               copies of notices of the company to its shareholders in the past seven years;

°               the financial statements of the company;

°               a list of the shareholders, and in a public company also a list of substantial shareholders (a substantial shareholder is defined as someone who holds five percent or more of the issued share capital of the company or the voting rights therein);

°               a list of the directors and their alternates, if there are such;

°               the Certificate of Incorporation, register of charges, and register of bond holders.

  1. The Primary Organs of the Company

The understanding of the authorities of the primary organs of the company is important in order to understand the manner and means of operating the company in Israel and accordingly, to make intelligent decisions regarding the structure and the division of authority in the company that is to establish itself in Israel in the future.

There are three primary entities that operate in the name of the company: the Board of Directors, the General Meeting of Shareholders and the General Manager. Each one of the organs has a specific authority defined by the Law and in the Articles of Association, and together they cooperate to achieve a joint purpose: maximize profits.

The General Meeting

The General Meeting is a meeting in which all the shareholders of the company participate and which constitutes a framework in which the shareholders exercise their voting power and influence the way the company is managed. The General Meeting has special standing since it is authorized to amend the Articles of Association and within this framework it determines the defined area of authority of the other organs of the company.

In general, the General Meeting is divided into two types: an Annual General Meeting and an Extraordinary General Meeting.

An Annual General Meeting is a meeting of all the shareholders that must be called once a year and no later than 15 months after the last Annual Meeting. A private company, as distinguished from a public company, may provide in its Articles of Association that it is not required to hold an Annual Meeting unless the matter is required to appoint an auditing accountant or unless one of the shareholders or directors demands that the company will hold such a meeting.

The following subjects are generally brought before the Annual General Meeting for consideration:

  • a discussion of the Financial Statements, the Profit & Loss Statement, the Directors' Report, the Annual Balance Sheet and the Auditor's Report;
  • a discussion of the dividend that is proposed to be distributed;
  • the selection of an auditing accountant;
  • the election of directors;
  • any subject that the Articles of Association provide shall be discussed at the Annual Meeting or any subject that is provided in the agenda of the meeting.

An Extraordinary Meeting is defined in a residual manner as any meeting that is not an annual one. An Extraordinary Meeting is called at the request of the Board of Directors or a director/ directors or a shareholder having a particular percentage of the capital of the company or the voting rights therein (in accordance with the type of company).

There is an additional kind of meeting, referred to as a "Class Meeting", in which a particular class of shareholders participate, where there exists in the company a number of classes of shares.

The authority of the General Meeting:

The Companies Law grants to the General Meeting a set of authorities that cannot be transferred to another organ:

°               amendments to the Articles of Association;

°               the appointment of the auditing accountant of the company, the terms and termination of his employment;

°               the appointment of external directors;

°               the approval of the activities and businesses that require the approval of the General Meeting;

°               increasing and decreasing the authorized share capital;

°               a merger.

The Law permits a company to add to the Articles of Association subjects that may be adopted by the General Meeting.

In addition, the Law permits a company to provide in its Articles of Association provisions according to which the General Meeting may be granted the authority given to another organ, for a particular matter or for a particular period of time.

Moreover, where a Board of Directors is precluded from exercising its powers, and the exercise of one of its powers is essential for the proper management of the company, the General Meeting may exercise it in place of the Board of Directors, even if there is no provision for such in the Articles of Association, for so long as the Board of Directors is so precluded, and provided that the General Meeting has determined that the Board of Directors is indeed precluded from so acting and that the exercise of the power is essential.

The Board of Directors

The function of the Board of Directors is to outline the policy of the company and to supervise the General Manager and his activities.

The Companies Law grants to the Board of Directors a number of powers:

°               to establish the operational plans of the company, the principles for financing them, and the priorities among them;

°               to examine the financial condition of the company, and determine the credit limit for which the company can apply;

°               to establish the organizational structure and the salary policy;

°               to decide on the issuance of a series of bonds;

°               to prepare the financial statements and approve them;

°               to report to the Annual Meeting on the status of company matters and on its business results;

°               to appoint and dismiss the General Manager;

°               to decide on the actions and the transactions that require its approval pursuant to the Articles of Association or pursuant to the provisions of Law (such as a transaction of an office holder having a personal interest);

°               to allot shares and securities convertible to shares up to the limit of the registered share capital of the Company;

°               to decide on the distribution of a dividend or the cancellation of shares / convertible securities of the company or to exercise them with shares of the company;

°               to express its opinion on special tender offers;

°               the Board of Directors of a public company is granted additional authority.

In addition, the Companies Law grants residuary general authority to the Board of Directors in providing that the authority of the company that was not granted by law or by the Articles of Association to another organ may be exercised by the Board of Directors.

Likewise, the Companies Law provides that the Board of Directors may direct the General Manager as to how to act on a given matter, and if the General Manager does not fulfill such instructions, the Board of Directors may exercise the power required to fulfill the instruction in his place, even if no such provision is set forth in the Articles of Association.

Where the General Manager is precluded from exercising his powers, the Board of Directors may exercise them in his place, even if there is no provision for such in the Articles of Association.

In general, the Companies Law takes a broad approach according to which the number of directors who will serve in the company is determined by its Articles of Association. Nevertheless, the Law provides that in a private company there must be at least one director and that in a public company at least two external directors must serve, in addition to an ordinary director.

The Board of Directors shall meet as is required by the company at least once per year, and in a public company, at least once every three months. The Chairman of the Board may call a meeting of the Board of Directors at any time. The Board of Directors shall hold a meeting on the subject specified at the request of two directors. In a company in which the Board of Directors has up to five members, one director may request a meeting on a specified subject; or one director if such a provision is set forth in the Articles of Association of the Company or if a matter of the company to be discussed involves a breach of law or failure to respect proper business procedures.

The General Manager

The Companies Law provides that a public company must, and a private company may, appoint a General Manager (in the case where there is no General Manager, the Board of Directors manages the company). A company may appoint more than one General Manager.

The General Manager holds the senior management function in the company and is responsible for the ongoing management thereof, within the framework of the policies established by the Board of Directors.

The General Manager is subject to the supervision of the Board of Directors and is appointed and dismissed by it.

The Companies Law grants the General Manager residuary management authority, that is, any managerial and operational authority that was not granted by the Companies Law or the Articles of Association to another organ is within his authority.

The Law permits a company to provide in its Articles of Association provisions according to which the authority given to the General Manager may be transferred to the authority of the Board of Directors, either for a particular matter or for a particular period of time.

  1. A Foreign Company

As stated above, a company that was incorporated outside of Israel can maintain a place of business in Israel, but only if it was registered with the Registrar of Companies as a foreign company. A foreign company is defined in the Companies Law as a legal entity, other than a partnership, that was incorporated outside of Israel.

A company that seeks to be registered in Israel as a foreign company with a place of business in Israel must submit a request to the Registrar of Companies within a month from the date of the establishment of the place of business, together with the documents specified below:

°               a copy and translation into Hebrew of the documents under which the company is incorporated or pursuant to which it operates, as required under the laws of the country in which it is incorporated, including its Articles of Association, if any;

°               a certified copy of the Certificate of Incorporation or Registration of the company in the country in which the foreign company was incorporated, together with a certification of the existence of the company at that time, certified as stated above;

°               a list of the directors of the company;

°               the name and the address of a person resident in Israel who is authorized to receive judicial documents on behalf of the company and to receive notices issued to the company;

°               a copy certified in the manner that has been approved by the Minister of a power of attorney authorizing a person normally resident in Israel to act on behalf of the company in Israel;

°               a receipt for the payment of the registration fee. The amount is identical to that required for the establishment of an ordinary company.

After the registration of the company as a "foreign company", the provisions of the Companies Law shall apply to it, with obligatory changes. The company must pay an annual fee, the same as any company.

The company must notify the Registrar of Companies of any change in a document or of directors or in the name or address of the attorney or the person who acts in the name of the company in Israel within 14 days from the date of the change.

  1. Conclusion

The formation of a company in Israel is not a complicated procedure, but one must pay attention to the requirements of the law in order to ensure the fast registration of the company.

In addition to the procedure involved in setting-up a company, and alongside it, one must take into account business considerations and seek legal counsel in order to ensure the clear establishment of the objectives, terms and rights that the founders of the company seek to achieve.

Balter, Guth, Aloni & Co.



Corporate Law in Italy

  1. Compliance with regulations concerning foreign investments in Italy

General:

Foreign investments in Italy are free of any administrative restrictions although mandatory declarations or permits are required in special cases. In general, investors are able to acquire Italian companies or create their own legal entity, buy or rent property, with no minimum investment requirement or responsibility to create a minimum number of jobs. They do not have to comply with specific undertakings or commitments just because they are foreign investors.

Prior authorizations:

In certain business sectors, for example, gambling, private security services, trade in weapons and other military equipment, insurance and banking, an authorization is required to carry out such activities, or in order to acquire a controlling interest and the direct or indirect acquisition of all or part of a business line.

Regulated activity:

Certain professions, such as lawyers, accountants, real estate agents, doctors are regulated and the participants must satisfy the required conditions in order to carry out this activity.

  1. Procedures and formalities

Competent authority:

The formalities for setting up a new company must be administered in various public offices: the deed of constitution of a company must be drafted by a Notary Public and executed at the Companies Register (“Registro delle Imprese”); taxation documents are filed at the Incomes Agency (“Agenzia delle Entrate”); social security and social insurance information at the relative public offices: Istituto Nazionale della Previdenza Sociale – INPS - and Istituto Nazionale Assicurazione Infortuni sul Lavoro – INAIL. All these offices are located in the principal cities in Italy and present throughout the Italian territory.

Formalities:

The formalities for setting up a company in Italy include the following: (i) opening a bank account (ii) obtaining an Italian fiscal code and VAT number, (iii) registering the company in the Companies Register.

Research will be conducted into the choice of a company name and ensuring that it can be used.

When one or more shareholders are legal entities, a resolution from their competent managing body is required pursuant to which the legal entity has determined to incorporate the new company or take a participation in the same.

A proxy or authorized attorney will be required for each shareholder who will not personally attend the meeting with the Notary Public for the purpose of drawing up the Deed of Incorporation.

Timeframe:

The company will officially come into existence when it has been duly registered with the Companies Register (the time required from when the documents are ready for filing at the Companies Register is approximately 10 days, plus time beforehand to prepare all the documents). Upon registration a certificate is issued. It is possible to carry out the registration formalities on-line.

Legal expenses:

The expenses for setting up a company vary depending on the amount of company capital and will include registration expenses with the Companies Register, as well as the Notary Public’s fees.

Required documents to be registered:

For all companies carrying out a commercial activity, the following documents have to be prepared in Italian and registered with the Companies Register:

  • the Articles of Association and by-laws drafted by a Notary Public;
  • shareholders’ and directors’ details (date and place of birth, residence address, photocopies of their passports or identity cards) - foreign shareholders and directors must have an Italian VAT or fiscal code number;
  • Statutory Auditors’ details (if appointed);
  • all documents in a foreign language must be translated into Italian with a certified translation or consular legalization; the preparation of the Articles of Association is an important act which may have legal and tax consequences. Therefore the assistance of an Italian lawyer and an accountant for advice on legal and tax matters is recommended.
  • Business structures

The choice of the business structure will depend on the kind of business, the investor’s strategy and the degree of independence that the Italian operations will be given by the parent company or by the shareholders.

A foreign company may choose between establishing a branch or a subsidiary to conduct business in Italy.

  1. Branch («sede secondaria»)

A foreign company can perform business in Italy directly under its own name. A branch does not have its own legal personality. Therefore, the foreign company is responsible and if the branch encounters financial problems, the foreign company has unlimited liability for its debts. Nevertheless, the branch must be registered with the Italian Companies Register and must make an application for its own Italian VAT number and fiscal code. The foreign company has to appoint a permanent representative of the Italian branch and file his name with Italian Companies Register.

In addition to the aforementioned documents, the following documents have to be translated in Italian (certified translation or consular legalization) and supplied:

  • a copy of the certificate of good standing of the foreign company;
  • a copy of the foreign company’s managing body’s resolution resolving to open a branch in Italy and to appoint a branch manager with the power to represent the foreign company in Italy.

The branch must file its own accounts with the Italian Companies Register on an annual basis. It must also file the accounts of the foreign company translated into Italian.

From a tax point of view, the branch which conducts active business constitutes a permanent establishment and is subject to Italian corporate income tax and VAT and may be subject to withholding tax on the branch’s profits (depending on the residence of the parent company and the relevant tax treaty, if any; no branch withholding tax applies to branches of EU companies).

Branches that only conduct a preparatory activity (e.g. representation, liaison offices) and/or an auxiliary activity (e.g. storage) are not regarded as constituting a permanent establishment and are not subject to corporate tax.

There are provisions in the corporate and tax regulations which will permit subsequent incorporation of the branch as an Italian company through the branch contributing it business (as a contribution in kind) to the new subsidiary company. Subject to certain conditions, this can be performed under a favorable tax regime.

Merger of an Italian company into its EU parent can also occur, thus transforming the subsidiary into a branch. Subject to certain conditions, this can be performed under a favorable regime.

Pros and cons

  • Pros : one legal entity
  • Cons : reporting and administrative requirements (for tax, social, accounting, commercial and corporate purposes similar to a subsidiary);
  • unlimited liability for the foreign company with an Italian branch.
  1. Subsidiary – Creation of an Italian company

2.1. Joint Stock Company («Società per Azioni» - S.p.A.)

  1. General requirements
  2. Minimum capital stock: € 120,000 (NB: the capital of all Italian companies must be denominated in Euros); contribution in kind in the form of assets or credits balances, are permitted.
  3. Down payment of stock capital before the incorporation: 25% minimum and 100% in case of sole shareholder.
  • Minimum number of shareholders: one. Shareholder participation in the company’s capital is represented by stocks.
  1. Liability of the shareholders: limited to shareholder’s participation in the company.
  2. Directors can also be shareholders.
  3. Directors do not have to be Italian citizens.
  • Directors may be removed at any time; however, directors may have a claim for damages against the company if removed without just cause. Appointment of an external auditor or a firm of external auditors, each of them qualified to act in such capacity under Italian law that verifies during the fiscal year that (i) the company’s accounting records are correctly kept and accurately reflect the company’s activities, (ii) the financial statements correspond to the accounting records.
  • The transfer of shares, bearer and nominative, is free of restrictions, unless otherwise stated in the by-laws. Registration duties and notary fees are due upon the transfer of nominative shares. Specific rules apply to listed public companies.
  1. Corporate governance / management

b.1. There are three types of governance models for Joint Stock Companies; the choice among one of them is decided by the shareholders upon incorporation or subsequently by shareholders’ resolution.

The Ordinary System. The joint stock company is managed by a Sole Director (“Amministratore Unico”) or by a Board of Directors (“Consiglio d’Amministrazione”), pursuant to the Company’s By-Laws. The board members (“Amministratori”) or the Sole Director are appointed by the shareholders, at the shareholder meeting, which also determines the number of directors and their remuneration. A chairman (“Presidente”) may be appointed by the Board of Directors or by the shareholder, depending on the By-laws. The chairman of the board of directors is the legal representative of the company. The board of directors may delegate certain powers to one or more managing directors (“Amministratori Delegati”), determining the nature and scope of powers of each managing director. The board of directors may also revoke such delegation at any time. The Board reports to the annual shareholder’s meeting the results of its activity and the results of the company operations. The board of directors may also appoint a general manager (“Direttore Generale”), who has powers for specific acts or categories of acts and for the day to day management of the company.

Statutory auditors (“Collegio Sindacale”): The company's shareholders elect a board of statutory auditors (composed of three or five effective members, pursuant to company's by-laws, plus two deputy members). The company’s board of statutory auditors is required to verify (i) that the company complies with applicable laws and its by-laws, (ii) respects principles of good governance, and (iii) the application of correct management principles in the conduct of business and the adequacy of the company’s organizational structure, internal audit system and administrative-accounting system. Furthermore, if so provided by the company's by-laws and the applicable Italian regulations, the Statutory Auditors could be required to carry out company audit activities, verifying the company's accounting records and financial statements, in lieu of external auditors (see, 2.1, a, vii, above).

The Dual System. The shareholders elect a Supervisory Board (“Consiglio di Sorveglianza”), formed by a minimum of three members; it is in charge of supervision and control of the executive board’s management and reporting to the shareholders’ meeting. The Supervisory Board appoints an Executive Board (“Consiglio di Gestione”) who is in charge of the management of the company. The executive board is composed of individuals (minimum of two). The executive board is appointed for no more than three fiscal years, and this appointment can be revoked by the supervisory board.

External auditor: The shareholders appoint an external auditor or a firm of external auditors, each of them qualified to act in such capacity under Italian law, that shall verify during the fiscal year that (i) the company’s accounting records are correctly kept and accurately reflect the company’s activities, (ii) that the financial statements correspond to the accounting records.

The Single System. The Shareholders elect a board of directors (“Consiglio d’Amministrazione”), formed by individuals, which is in charge of the management of the company. The board of directors appoints, among its members, a supervisory board (“Comitato per il controllo sulla Gestione”), in charge of the supervision and control of the board of directors’ management. It is chosen from members of the board of directors who do not take part in executive committees and have not been assigned with delegated roles or particular responsibilities or to perform management functions. At least one of the members of the supervisory board must be a statutory auditor.

External auditor: The shareholders appoint an external auditor or a firm of external auditors, each of them qualified to act in such capacity under Italian law, that shall verify during the fiscal year that (i) the company’s accounting records are correctly kept and accurately reflect the company’s activities, (ii) that the financial statements correspond to the accounting records..

b.2. Shareholders’ meetings («Assemblea dei Soci»)

There are two types of shareholders’ meetings:

  • The extraordinary shareholders’ meeting: in general, mandatory when a decision is required to modify the by-laws,
  • The ordinary shareholders’ meeting: when the decisions do not trigger a modification of the by-laws. These decisions are principally to appoint, dismiss or substitute the members of the boards, to approve the annual accounts of the company, to appoint the external auditors and the statutory auditors, the chairman of the company's board of statutory auditors and fix the remuneration of its members.

Shareholders are entitled to attend and vote at ordinary and extraordinary shareholders’ meetings. Votes may be cast personally or by proxy. The shareholders’ meeting must be convened at least once a year.

  1. Taxation of the company’s income:

Joint stock companies are subject to corporate income tax (IRES) and local/county tax (“Imposta Regionale sulle Attività Produttive” - IRAP).

  1. Pros and cons
  • Pros : A joint stock company (SpA) is suitable for large companies. An SpA structure is sometimes mandatory, such as for example when the company must be quoted on the stock exchange or in order to operate banking activities.
  • Cons : the SpA rules are less flexible and generally inadequate for medium sized and smaller companies.

2.2. Limited Liability Company («Società a Responsabilità limitata» - SRL)

  1. General requirements
  • Minimum capital stock: € 10,000.00.
  • The shareholders’ participations in the company’s capital is not represented by shares but by quotas..
  • Shareholders’ participations can also be paid with contributions in kind.
  • Down payment of capital stock before the incorporation: minimum of 25%. 100% in case of a sole shareholder.
  • Minimum number of shareholders: one – there is no limit on the maximum number of shareholders.
  • Liability of the shareholders: limited to shareholder’s participation in the company.
  • Directors can also be shareholders.
  • Directors do not have to be Italian citizens.
  • The transfer of quotas is free of any restrictions, unless otherwise stated in the by-laws; should the by-laws limit the transfer of quotas in case of death, the heirs of the deceased quota holder have the right to withdraw from the S.r.l. Registration duties and notary fees are due for the transfer of quotas.
  1. Corporate governance / management
  • The company is run by one (“Amministratore Unico”) or several directors (“amministratore(i)”). Each company director has the general power to represent the company, unless otherwise provided by the by-laws.
  • The Articles of Incorporation can state whether management must act collectively by board resolution or individually by each manager independently or by two or more managers with a joint signature. Most of the provisions relevant to the S.p.A.’s ordinary system of corporate governance are applicable to the SRL.
  • Board of Statutory auditors (“Collegio Sindacale”): not required as a rule, unless the company exceeds certain thresholds provided by the Italian legislation, with regard to assets, sales and employees.
  • Shareholders’ decisions. The following items are reserved to the exclusive decision of the shareholders and cannot be enacted by a directors’ resolution: decisions concerning modifications to the by-laws, decisions substantially altering the company’s purpose or a fundamental right of the shareholders, the approval of the annual accounts, appointment or dismissal of director(s) or statutory auditors.
  1. Taxation of the company’s income:

Limited Liabilities Companies are subject to corporate income tax (IRES) and local/county tax (IRAP).

2.3. Limited partnership by shares («Società in Accomandita per Azioni» – S.A.P.A.)

  1. General requirements
  2. Minimum capital stock: 120,000.00 euros;
  3. This type of company has two different kinds of shareholders:

-The limited shareholders who have a liability limited to their participation;

-The unlimited shareholders whose liability for the company’s liabilities is unlimited.

  • The company name must contain at least the name of one of the unlimited shareholders.
  1. The creditors of a company cannot claim payment from the unlimited shareholders without first requesting payment from the company.
  1. Corporate Governance / management
  • A S.A.P.A. has the same rules as an S.p.A., except for some compatibility provisions applicable to this kind of company.
  • The general shareholders meeting functions like that of an S.p.A., but the unlimited shareholders cannot vote on decisions concerning the appointment and the dismissal of auditors and any action for damages against them.
  • The unlimited shareholders are by right directors and are subject to the sameresponsibilities asdirectors of S.p.A.'s.
  1. Taxation of the company’s income:

SAPA’s are subject to corporate income tax (IRES) and local/county tax (IRAP).

The Italian juridical system provides for other types of companies):

2.4. Simple company («Società Semplice») :

  1. General requirements
  • Used for non trading activities such as holding of real estate, portfolio and real estate management, professional services.
  • Unlimited personal liability of the partners.
  • Each partner has the power to fully represent the company, unless differently provided by the Deed of Incorporation.

b.Taxation of the company’s income: Shareholders are subject to tax on their share of the company’s taxable income, while such companies are also subject to local/county tax (IRAP).

Pros and cons:

  • Pros: Good vehicle for holding real estate and for portfolio holding. No need to register this company or to file annual accounts with the Companies Register.
  • Cons: Restricted scope of activities; if the company is commercially active, risk of requalification for corporate tax. Personal unlimited liability of the partners.

2.5. Commercial partnership (« Società in nome collettivo » - S.N.C.) :

  1. General requirements:
  • Shareholders are natural persons and, subject to certain conditions, may be legal entities.
  • Shareholders are all eligible to be directors.
  • Unlimited joint liability of all partners.
  • The company name must contain at least the name of one of the shareholders.
  • Used for trading activities.
  1. Taxation of the company’s income : Shareholders are subject to tax on their share of the company’s taxable income, while such companies are also subject to local/county tax (IRAP)

Pros and cons :

Pros: Adequate structure for joint-ventures and for achieving a form of tax consolidation when the parent has a substantial control over the subsidiary.

Cons : Risky structures when the partners are not legal entities subject to limited liability due to the joint unlimited liability.

2.6. Limited partnership («Società in Accomandita Semplice» - S.A.S.) :

  1. General requirements
  • This type of company, like the SAPA, has two different kinds of shareholders:

- the limited shareholders who have a liability limited to their participation;

- the unlimited shareholders whose liability for the company’s liabilities is unlimited.

  • The unlimited shareholders are only eligible to be appointed as directors.
  • The company name must contain at least the name of one of the unlimited shareholders.
  • The creditors of a company cannot claim payment from the unlimited shareholders without first requesting payment from the company.
  1. Taxation of the company’s income: portion of profits related to limited shareholders’ rights (“Accomandanti”) are taxed according to tax transparent rules. Unlimited shareholders (“Accomandatari”) are subject to tax on their share of the company’s taxable income.

2.7. European Economic Interest Group («EEIG»): this corporate entity’s main purpose is        to achieve savings for its members. Suitable for joint ventures which have such goals.

Taxation of the company’s income: Tax transparent entities.

2.8. European Company: Close to SpA but with the focus to operate in several EU jurisdictions. Recently enacted into Italian corporate law.

Taxation of the company’s income: The company’s income is subject to corporate income tax.

  1. Relevant tax aspects linked to corporate law

3.1. Corporate tax

The standard corporate tax rates are: 27.5% IRES and 3.9% IRAP. The IRAP tax rate could vary pursuant to regulations adopted by the Italian regional Public Administrations. Taxable income is almost always higher than the income resulting from the financial statement, because there are several limitations to the deductibility of certain costs.e.

Tax losses can be carried forward for no more than 5 years. However, tax losses in the first 3 fiscal years following incorporation can be carried forward indefinitely. An optional tax consolidation regime applies to companies subject to Italian corporate income tax when the parent has substantial control over the subsidiary.

3.2. Transfer taxes on the sale of shares

A gain on the sale of company’s shares is taxed as set out below:

If a share is deemed as “unqualified” (which normally is “less than 25% of share capital”), the gain is subject to fixed proportional taxation at a rate of 20%.

If a share is deemed as “qualified”, 49.72% of the gain concurs to the shareholder’s personal taxable income and consequently is taxed at the progressive personal income tax (IRPEF) rate.

If the share is held by another company, under certain conditions, the “participation exemption” rule applies, whereby only 5% of the gain is subject to taxation.

Dividends are normally taxed pursuant to the same rules applicable to capital gains.

Capital gains arising from the sale of shares in a start-up company (7 years or younger) are not taxed when the proceeds are promptly injected into another start-up (3 years or younger) operating in the same business.

  1. Ongoing requirements

For accounting and tax purposes, the book keeping should be kept in Italian under Italian accounting principles and following Italian tax rules.

Annual financial statements in Italian should be prepared, and audited when so requested by applicable regulations.

For all entities (except Simple Companies, and GEIE’s) the financial statements, (the statutory auditor’s report when requested), the management’s (or board’s) report to the shareholders’ meeting, and extracts of the shareholder’s resolution approving the financial statements must be filed with the local companies register. For the SpA, SRL and SAPA the financial statements must be filed no later than 120 days, or 180 days in exceptional cases after the closing of the financial year. Failing to do so triggers civil penalties. Anyone can have access to this information, as published on the website of the Companies Register.

The initial by-laws as well as all its subsequent amendments, and changes in management of the company, should be filed with the Companies Register, this information being accessible to anyone, including via the internet.

  1. Trust companies. Anonymity/Transparency

Trusts do not specifically exist under Italian law but Italy has signed the Aja Convention on the Recognition of Trusts dated 1 July, 1985, entering into force in Italy by the Law L.364/89. Accordingly, the Italian juridical system recognizes the legal and tax aspects of trusts lawfully set up and governed by the law of a relevant jurisdiction.

For all types of companies, except for Simple Companies, the list of shareholders is publicly registered with the companies register. Shareholders are also known by the tax authorities through returns disclosing the recipients of dividend income.

Regulations on the use of cash and securities are contained in the legislative decree N.231 of November 21, 2007, which implemented the anti-money laundering directives n.2005/60 and 2006/70 of the European Union. Such legislation requires that transfers into or out of Italy of cash or securities in excess of €12,500 be reported in writing to the Bank of Italy by residents or non-residents that effect such transfers directly, or by credit institutions and other intermediaries that effect such transactions on their behalf and who all have a disclosure obligation.

There are currently no exchange controls, as such, in Italy restricting rights derived from the ownership of shares. Residents and non-residents of Italy may hold foreign currency and foreign securities of any kind, within and outside Italy. Non-residents may invest in Italian securities without restriction and may transfer to and from Italy cash, instruments of credit and securities, in both foreign currency and Euro, representing interest, dividends, other asset distributions and the proceeds of any dispositions.

Individuals, non-profit entities and partnerships that are residents of Italy must disclose on their annual tax returns all investments and financial assets held outside Italy, as well as the total amount of transfers to, from, within and between countries other than Italy relating to such foreign investments or financial assets, even if at the end of the taxable period foreign investments or financial assets are no longer owned. Generally, no such tax disclosure is required if the total value of the foreign investments or financial assets at the end of the taxable period or the total amount of the transfers effected during the fiscal year does not exceed €10,000.

MCM Avvocati

Studio Legale Campanale



Corporate Law in Malaysia

  1. General Introduction

Malaysia operates a market economy. It welcomes and encourages foreign investments. It has a developed legal system based largely on English law. English is widely spoken and remains the primary language of commerce and law. And like most other developing nations in the Asian region, it is undergoing structural changes as it attempts to transform its economy into a knowledge- and service-based economy by moving away from its traditional manufacturing and export oriented outlook. In the process, the Government has invested heavily in education and training a work force better prepared to face the challenges of the market economy of the 21st century.

Malaysia, as a former British colony, has inherited a legal system that is based on the English common law. English is the lingua franca of business and commerce in Malaysia.

The Companies Act of Malaysia is largely based on the Companies Act, 1961 of the State of Victoria, Australia, which in turn can trace its roots to the English Companies Act 1948. Although there have been significant changes to the Malaysian Companies Act over the years, the underlying principles of company law remain the same. English cases decided on pari materia provisions to the Malaysian Companies Act are, although not binding on Malaysian Courts, regarded as persuasive and seldom departed from.

  1. Types of Companies

The Companies Act, 1965 recognises three types of companies that can be incorporated in Malaysia:

  • a company limited by shares;
  • a company limited by guarantee; and
  • an unlimited company.

A company limited by shares is the most appropriate legal vehicle to be incorporated for purposes of trade and commerce.

  1. Company Limited by Shares

A “company limited by shares” refers to a company where the liabilities of its shareholders are limited to the capital committed by the shareholders, whether at the time of incorporation or thereafter.

In Malaysia, all shares still carry a nominal or par value (“par value”). The par value of a share could be in any amount, the minimum being 1 sen [100 sen makes RM1.00]. The par value sets the limit or extent of personal liability of shareholders. For example, if a share carries a par value of RM1.00 each (this is the typical par value of shares issued in Malaysia), then the shareholder is liable to contribute up to RM1.00 on the share subscribed or purchased. Typically, shares are credited as fully paid up at the point of issuance, i.e., the entire par value is paid up. But that is not always the case. A shareholder can contribute in stages towards its full capital commitment. In such a situation, the shareholder can be called upon by the company, or if the company is liquidated, by its liquidator, to pay up the balance unpaid.

The minimum capital of a company limited by shares is RM2.00 comprising 2 ordinary shares which must be held by at least 2 persons if both shareholders are individuals but may be held by one person if the shareholder is a company. The process of incorporating a company may take up to 2-3 weeks, but if time is of the essence, a shelf company can be acquired within a day or two depending on the ability of the acquirer to provide replacement directors and shareholders. A shelf company is essentially a ready made company that has never transacted any business and which has been incorporated specifically to be sold to anyone who want to bypass the lengthy registration or incorporation process.

The cost of incorporating or acquiring a shelf company is in the region of RM3,500.00.

Separate Legal Entity

Once a company is incorporated, it is regarded as a separate and perpetual legal entity and can sue and be sued.

Memorandum and Articles of Association

A company's constitution and the rules governing its administration are set out in its Memorandum of Association and its Articles of Association. The Memorandum of Association essentially sets out the objects and powers of the company, i.e., the types of businesses that it can engage in whilst the Articles of Association sets out the rules governing the running of the company.

A company’s Memorandum and Articles of Association can be tailored for specific needs, but the Companies Act, 1965 does provide a model Memorandum of Association and a model set of Articles of Association, both of which are usually adopted by companies at the point of incorporation.

Directors

The Malaysian Companies Act requires every company to have at least two resident directors. A “resident” is not defined in the Companies Act, but is generally taken to mean a person who resides in Malaysia and is a tax resident in Malaysia. A resident is distinct from a citizen. Hence, a foreigner can qualify as a resident if he physically resides in Malaysia whilst a Malaysian citizen who does not reside in Malaysia cannot qualify as a resident director.

There are no specific legal qualifications or requirements to be a director of a Malaysian company save and except that the person must be of full age, meaning at least 18 years of age. A director must be a natural person.

The Malaysian Companies Act does however disqualify certain persons from being a director of a company, i.e., any person who:

  • is an undischarged bankrupt or subsequently becomes a bankrupt;
  • is prohibited by the Companies Act from being a director, for example, a person who was a director of a company that went into involuntary liquidation and was ordered or restrained by the Court from acting as a director in other companies;
  • is convicted of certain offences including (but not limited to) offences involving fraud or dishonesty; or
  • is convicted of certain offences under the Companies Act or in connection with the promotion, formation or management of a company.

Duties of Directors

The duties and obligations of directors are quite extensive and have become increasingly so as the rise of corporate governance has resulted in the Malaysian Companies Act being amended over the years to reflect such a trend.

The extent of a director’s duties and obligations merits a paper on its own but briefly the duties and obligations of a director fall into 2 general categories:-

  • statutory duties, as expressly created under the Malaysian Companies Act and other legislations; and
  • common law duties.

In reality there is a degree of overlap between the statutory duties and common law duties imposed on a director as the former is often a codification and an extension of the latter. The common law duties of directors are also known as fiduciary duties. The exact and comprehensive definition of a fiduciary duty is problematic as it has many facets to it, but one of the primary aspects is the duty to “act honestly”.

In acting honestly, the law expects a director to put the interests of the company over and above his own. Where a situation of potential conflict arises, a director is obligated to make the appropriate disclosures. The standard Articles of Association prohibits a director from voting on a contract with the company in which he is interested and should he have voted, his vote would not count.

Power of Management

In Malaysia, the general power of management of a company resides with its board of directors. The CEO is usually made a member of the board of directors, otherwise he would only be able to attend board meetings at the invitation of the board of directors.

Although the power of management vests in the board of directors, the Malaysian Companies Act imposes on the directors statutory obligations to seek the approval of the company’s shareholders before undertaking certain transactions. Examples include:-

  • issuance of new shares;
  • substantial transactions; and
  • connected party transactions.

Substantial Transactions

Section 132C of the Malaysian Companies Act prohibits a director from carrying into effect any arrangement or transaction for:-

  • the acquisition of an undertaking or property of a substantial value; or
  • the disposal of a substantial portion of the company’s undertaking or property

Any transaction of the foregoing nature undertaken without securing the company’s shareholders’ approval would be void except in favour of any person dealing with the company for valuable consideration and without actual notice of the contravention.

A “substantial value” or “substantial portion” of a company’s undertaking or property is defined to mean[1]:

  • a value exceeding 25% of the total assets of the company;
  • the net profits (after deducting all charges except taxation and excluding extraordinary items) attributed to it amounts to more than 25% of the total net profit of the Company; or
  • a value exceeding 25% of the issued share capital of the company,

whichever is the highest.

As most private companies are incorporated with fairly low paid up capital, the effect of Section 132C is that many transactions would require the prior approval of the shareholders; otherwise they will be void and the directors would have inadvertently contravened the Act.

Connected Party Transactions

Section 132E(1) of the Companies Act prohibits a company from carrying into effect any arrangement or transaction where a director or a substantial shareholder of the company or its holding company, or a person connected with such a director or substantial shareholder:

(a)           acquires or is to acquire shares or non-cash assets of the requisite value, from the company; or

(b)           disposes of or is to dispose of shares or non-cash assets of the requisite value, to the company.

An arrangement or transaction carried into effect in contravention of the foregoing provision shall be void unless there is prior approval of the arrangement or transaction by the shareholders of the company.

non-cash assets” means any property or interest in property other than cash.

requisite valueinter alia means a value exceeding RM250,000 or if the value does not exceed RM250,000 but exceeds 10% of the company’s asset value provided it is not less than RM10,000.00.

The thresholds for triggering Sections 132C and 132E are fairly low and directors ought to be aware of these provisions in the management of companies incorporated in Malaysia.

Loans to Directors

In line with good corporate governance principles, subject to limited exceptions, the following related-party transactions are also prohibited under the Malaysian Companies Act:

  • The grant of loans by a company to a director unless the company is an *exempt private company.
  • The grant of loans by a company to a **person connected to a director unless the company is an exempt private company.

*      “exempt private company” means a private company which has no more than 20 individual shareholders, none of whom hold shares beneficially for any corporation.

**     “person connected” is a fairly complex definition but would generally mean the director’s family or companies owned or controlled by that director

Foreign Ownership of Malaysian Companies

There is no law that restricts or prohibits a foreigner from owning 100% of a Malaysian incorporated company. Prior to 30 June 2009, Malaysia’s Foreign Investment Committee (“FIC”), a special purpose committee set up under the Economic Planning Unit within the Prime Minister’s department, inter alia regulated and administered foreign equity participation in Malaysian companies. The FIC guidelines regulating the acquisition of equity stakes, mergers and takeovers were recently abolished.

However, the lack of formal legislation and the absence of the FIC does not mean that there is no control or policy restriction on foreign equity ownership in Malaysian incorporated companies.

Malaysia is a multi-racial country comprising 3 major ethnic groups namely, the Malays, Chinese and the Indians. Historically, the economy of Malaysia was dominated by foreign and local Chinese interests. The gross under representation of the Malays in the economic sector resulted in political instability which led to race riots in 1969. Arising from the race riots, the Government promoted a policy of affirmative action in favour of the Malays known as the New Economic Policy (“NEP”). The primary objective of the NEP is to eradicate poverty and also to economically promote the Malays whom the Government now refers to as the Bumiputeras.

The NEP, in spite of its many failings, is a general success in that hardcore poverty in rural Malaysia is largely eradicated and the economy has achieved a more balanced distribution of wealth amongst the races. This had led to social and political stability that paved the way for the country’s spectacular economic growth in the 1970s and 80s.

Although the NEP has officially expired, many of its affirmative action approaches favouring Bumiputeras continued and are found in the present policy. The new policy of the Government is intended to address some of the weaknesses of the NEP and at the same time minimise distortion to the Malaysian economy by encouraging competition and growth.

The applicability and the extent of applicability of the Government’s affirmative action policies in relation to a foreign investment in Malaysia will very much depend on the particular economic sector in which the investment is undertaken. There are, for example, no equity conditions imposed on foreign ownership in the manufacturing sector. This means, a foreigner can own up to 100% of the equity of a manufacturing based company. On the other hand, a company incorporated in Malaysia for the purpose of supplying goods and services to the national petroleum company (“Petronas”) may be required by Petronas to have a certain percentage of Bumiputera equity. Generally, companies wishing to undertake contracts with the Federal and State Governments, Government agencies, statutory bodies and Government-linked companies may be required to have a certain proportion of Bumiputera equity participation in its share capital.

[1] These definitions are only applicable to companies other than public listed companies. For a public listed company, it must comply with the same value prescribed by the provisions of the listing requirements of the Stock Exchange.

Cheah Teh & Su



Corporate Law in Mexico

Corporate Trading Vehicles

Restricted Activities and Prior Authorization

Certain restricted activities, including but not limited to national ground passenger and cargo transportation, radio transmission and television services, are reserved only for Mexican persons or companies. Other activities allow the possibility of limited participation of foreign investment, with percentages lower than those required to secure majority participation in the capital stock of a company with such purpose. And finally, certain other activities or levels of participation require authorization by Mexican authorities in order for the investor to secure majority participation. All other activities require that the foreign investor sign a waiver of the protection afforded by their home country, and accept treatment identical to a Mexic