Why should a German business want to set up as an English limited company? Is there a message for us all? asks solicitor Kevin Byrne.
More and more Germans are choosing to incorporate private limited companies in England rather than doing the equivalent in Germany.
Several factors have led to this trend, and a major one is cost. In the UK, the paid-up share capital for a limited company need only be £1, whereas in Germany the minimum amount to establish the equivalent GmbH (‘Ltd’ in the UK) is €25,000 (approximately £17,266).
There are also incorporation costs, including notary fees, in Germany that are not applicable in the UK. Keeping costs low at the outset is important for any business, so if it’s possible to decrease company formation costs, then why not?
Trading within hours
Time and hassle are other important issues. Entrepreneurs usually want to get going as quickly as possible. In England, you can buy an ‘off the shelf’ company. The name can be changed on the same day, so that the company can be ready to trade within hours.
In Germany, companies have to be formed from scratch, and registered in the appropriate commercial register of the applicable ‘Land’ (state) before the company can start trading. In some cases this can take weeks rather than days.
An English limited company can be established by simply completing on-line forms and paying the requisite fee. A UK registered office address must be used, however, to comply with UK Companies Act, even though trade may only be conducted in Germany. For this purpose, formation agents often make a P.O. Box number available.
German entrepreneurs make the leap
The benefits of the cost-effective English incorporation model are attracting a broad range of German entrepreneurs from software companies to hairdressers.
In a recent study by Go-Ahead, a German consultancy service, the sectors commonly using the English incorporation model are commercial traders (22%), general services (15%), building and handicrafts (13%), and consulting/IT (9%).
From a legal perspective, the English incorporation model offers the same limited liability protection as is afforded by the German GmbH. This protects individuals from personal liability should their business default, subject to compliance with the English Companies Act.
That said, personal liability can still attach to individual directors where they have been involved in wrongful or fraudulent trading.
Meanwhile, a number of German and European court decisions have paved the way for Germans to use the English incorporation model rather than the GmbH. In March 2003 a German court decided that, where a non-German company was established with its administrational activities solely in Germany, such a company was legally valid in Germany and should be recognised as such.
This decision was based on one of the fundamental European freedoms, the freedom of establishment by an EU citizen in any other EU country. It prepared the ground for many Germans to use the English incorporation model.
Once German nationals establish an English limited company, they need to comply with the requirements of the English Companies Act, including filing annual returns and company accounts.
Filing accounts is necessary even if the company is not trading in the UK; the obligation to file accounts is based on whether the company is trading, not where it is trading.
However, if the company does not have a British bank account, and if all of its monies are paid through non-UK bank accounts, then a company may file a dormant set of accounts rather than trading accounts. A dormant set of accounts can be simply one page, with the balance sheet signed by a director.
Furthermore, even though a company is only trading in Germany, it will still need to file tax returns in the UK as well as in Germany. On the other hand, a double taxation agreement between the two countries means that any tax paid in the UK will receive a credit in respect of tax due in Germany.
Forming a European model
In the wider perspective, EU nationals could adopt any other EU country’s legal model instead of their own. For example, some company formation agents are advertising Irish entities, which are similar to the English limited company model.
One drawback here, though, is that Ireland does not operate a system of ‘off the shelf’ companies comparable to the UK system, so that there can be a greater delay between requesting the required legal entity and obtaining it.
Also, many Germans speak English and they are likely to be more comfortable dealing with UK authorities and/or UK professionals if difficulties arise. As a result, the UK incorporation model is the most popular in Germany, with 15,000 such companies now operating this way.
And, with revisions to German company laws some time off, the UK incorporation model is likely to continue to be used. Over the coming year, German nationals who have recently incorporated UK companies will need to file accounts both with Companies House and with the Inland Revenue for the first time. If the work entailed in this is minimal, then there is likely to be even greater demand for use of the UK incorporation model.