Fall 08
Fall 15 INTERNATIONAL LAWYERS NETWORK
ESTABLISHING A BUSINESS ENTITY: AN INTERNATIONAL GUIDE
ILN CORPORATE GROUP [ESTABLISHING A BUSINESS ENTITY] 2
This guide offers an overview of legal aspects of establishing an entity and conducting business in the requisite jurisdictions. It is meant as an introduction to these market places and does not offer specific legal advice. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship, or its equivalent in the requisite jurisdiction.
Neither the International Lawyers Network or its employees, nor any of the contributing law firms or their partners or employees accepts any liability for anything contained in this guide or to any reader who relies on its content. Before concrete actions or decisions are taken, the reader should seek specific legal advice. The contributing member firms of the International Lawyers Network can advise in relation to questions regarding this guide in their respective jurisdictions and look forward to assisting. Please do not, however, share any confidential information with a member firm without first contacting that firm.
This guide describes the law in force in the requisite jurisdictions at the dates of preparation. This may be some time ago and the reader should bear in mind that statutes, regulations and rules are subject to change. No duty to update information is assumed by the ILN, its member firms, or the authors of this guide.
The information in this guide may be considered legal advertising.
Each contributing law firm is the owner of the copyright in its contribution. All rights reserved.
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Table of Contents CHAPTER CONTRIBUTORS & FIRMS ...... 4 ESTABLISHING A BUSINESS ENTITY IN AUSTRALIA ...... 8 ESTABLISHING A BUSINESS ENTITY IN BRAZIL ...... 19 ESTABLISHING A BUSINESS ENTITY IN CANADA ...... 26 ESTABLISHING A BUSINESS ENTITY IN CHINA ...... 35 ESTABLISHING A BUSINESS ENTITY IN THE CZECH REPUBLIC ...... 43 ESTABLISHING A BUSINESS ENTITY IN ENGLAND ...... 53 ESTABLISHING A BUSINESS ENTITY IN ESTONIA ...... 62 ESTABLISHING A BUSINESS ENTITY IN HUNGARY ...... 70 ESTABLISHING A BUSINESS ENTITY IN INDIA ...... 78 ESTABLISHING A BUSINESS ENTITY IN IRELAND ...... 84 ESTABLISHING A BUSINESS ENTITY IN ISRAEL ...... 92 ESTABLISHING A BUSINESS ENTITY IN ITALY ...... 102 ESTABLISHING A BUSINESS ENTITY IN LATVIA ...... 115 ESTABLISHING A BUSINESS ENTITY IN LITHUANIA ...... 124 ESTABLISHING A BUSINESS ENTITY IN MALAYSIA...... 134 ESTABLISHING A BUSINESS ENTITY IN MEXICO ...... 141 ESTABLISHING A BUSINESS ENTITY IN NORWAY ...... 153 ESTABLISHING A BUSINESS ENTITY IN PANAMA ...... 161 ESTABLISHING A BUSINESS ENTITY IN THE PHILIPPINES ...... 165 ESTABLISHING A BUSINESS ENTITY IN PORTUGAL ...... 174 ESTABLISHING A BUSINESS ENTITY IN RUSSIA ...... 185 ESTABLISHING A BUSINESS ENTITY IN THAILAND ...... 205 ESTABLISHING A BUSINESS ENTITY IN TURKEY ...... 212 ESTABLISHING A BUSINESS ENTITY IN UKRAINE ...... 217 ESTABLISHING A BUSINESS ENTITY IN THE UNITED STATES ...... 225
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CHAPTER CONTRIBUTORS & FIRMS
“Establishing a Business Entity in “Establishing a Business Entity in Australia” China” Mr. Charles Cowper Mr. Evan Sun Partner Partner Gadens - Sydney Zhong Lun Law Firm - Shanghai
“Establishing a Business Entity in “Establishing a Business Entity in Brazil” the Czech Republic” Ms. Iva Chiabrando Ms. Adéla Krbcová Partner Partner Nehring e Associados Advocacia – São PETERKA & PARTNERS – Prague Paulo
“Establishing a Business Entity in “Establishing a Business Entity in
Brazil” England” Mr. João Burke Lawyers at Partner Fladgate LLP – London Nehring e Associados Advocacia – São Paulo
“Establishing a Business Entity in “Establishing a Business Entity in Canada” Estonia” Ms. Sharon G. Druker Mr. Tanel Küün Partner Senior Associate Robinson Sheppard Shapiro LLP - Tark Grunte Sutkiene – Tallinn Montreal
“Establishing a Business Entity in “Establishing a Business Entity in Canada” Hungary” Mr. Michael Slan Ms. Katalin Perényi Partner Attorney Fogler, Rubinoff LLP - Toronto Jalsovszky Law Offices – Budapest
“Establishing a Business Entity in “Establishing a Business Entity in China” Hungary” Mr. Steven Huang Mr. Gábor Kerekes J. Partner Trainee Lawyer Zhong Lun Law Firm - Shanghai Jalsovszky Law Offices – Budapest
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“Establishing a Business Entity in “Establishing a Business Entity in India” Latvia” Mr. Alishan Naqvee Ms. Andra Rubene Partner Partner LexCounsel Law Offices – New Delhi Tark Grunte Sutkiene – Riga
“Establishing a Business Entity in “Establishing a Business Entity in India” Latvia” Mr. Himanshu Chahar Mr. Nauris Grigals Senior Associate Senior Associate LexCounsel Law Offices – New Delhi Tark Grunte Sutkiene – Riga
“Establishing a Business Entity in “Establishing a Business Entity in Ireland” Lithuania” Lawyers at Mr. Agnius Pilipavičius Holmes O’Malley Sexton – Limerick Partner Tark Grunte Sutkiene – Vilnius
“Establishing a Business Entity in “Establishing a Business Entity in Israel” Lithuania” Mr. Joseph Shem-Tov Ms. Irma Juškauskaitė Partner Associate Glusman & Co. – Tel Aviv Tark Grunte Sutkiene – Vilnius
“Establishing a Business Entity in “Establishing a Business Entity in Italy” Malaysia” Mr. Antonello Corrado Ms. Tan Wan Yean Partner Senior Legal Assistant EXP Legal – Italian & International Law Anad & Noraini – Kuala Lumpur Firm – Rome, Milan
“Establishing a Business Entity in “Establishing a Business Entity in Italy” Mexico” Mr. Andrea Pedeferri Mr. Luis Lavalle Moreno Partner Partner Ferrari Pedeferri Boni Studio Legale Martínez, Algaba, De Haro, Curiel y Associato - Milan Galván-Duque, S.C. – Monterrey
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“Establishing a Business Entity in “Establishing a Business Entity in Norway” Russia” Mr. Tom Carsten Troberg Mr. Vadim Konyushkevich Partner Counsel Økland & Co DA - Oslo Lidings Law Firm - Moscow
“Establishing a Business Entity in “Establishing a Business Entity in Norway” Russia” Mr. Tor Erlend Framstad Ms. Ksenia Stepanischeva Partner Associate Økland & Co DA - Oslo Lidings Law Firm - Moscow
“Establishing a Business Entity in “Establishing a Business Entity in Norway” Thailand” Mr. Hans-Petter Benth Mr. Dej-Udom Krairit Associate Partner Økland & Co DA - Oslo Dej-Udom & Associates - Bangkok
“Establishing a Business Entity in “Establishing a Business Entity in Panama” Thailand” Ms. Carla Rojas Mr. Worawut Krairit Partner Partner Quijano & Associates - Panama Dej-Udom & Associates – Bangkok
“Establishing a Business Entity in “Establishing a Business Entity in the Philippines” Thailand” Ms. Nipa Pakdeechanuan Ms. Irene Joy Besido-Garcia Partner Partner Dej-Udom & Associates – Bangkok Kapunan Garcia & Castillo Law Offices
– Manila
“Establishing a Business Entity in “Establishing a Business Entity in Portugal” Turkey” Ms. Helga Lopes Ribeiro Ms. Aytül Öztürk Partner Associate MGRA & Associados - Lisbon Özcan & Natan Attorney Partnership - Istanbul
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“Establishing a Business Entity in Ukraine” Lawyers at Lavrynovych & Partners – Kiev, Ukraine
“Establishing a Business Entity in the United States” Lawyers at Davis Malm & D’Agostine – Boston, Massachusetts, USA
“Establishing a Business Entity in the United States” Lawyers at Lewis Rice LLC - St. Louis, Missouri, USA
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Fall 08
Fall 15 INTERNATIONAL LAWYERS NETWORK
GADENS ESTABLISHING A BUSINESS ENTITY IN AUSTRALIA
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ESTABLISHING A BUSINESS ENTITY IN AUSTRALIA
1. Types of business entities Australia A business enterprise in Australia may be must have a registered office in Australia operated by an individual, a company, a trustee of must have a public officer for tax purposes a trust, a responsible entity of a managed investment scheme, a joint venture, a partnership, may have a company secretary, but does or a branch of a foreign company. A foreign not need to investor may conduct business in Australia has fewer fundraising options available, through any of these structures. compared to a public company. Companies are regulated by the Corporations Act, A public company (Limited): under which directors have substantial and wide- ranging obligations. The common law also must have at least one shareholder, with imposes significant responsibilities on directors. no upper limit on the number of shareholders Although companies have limited liability, the directors may be personally liable for breaches of must have at least three directors, two of their duties. whom must ordinarily reside in Australia Australian companies must have a registered office in Australia A foreign investor can register an Australian must have a public officer for tax purposes company under the Corporations Act. Companies must have at least one secretary who may be either proprietary (private) companies ordinarily resides in Australia (if it has that are limited by shares, or public companies more than one secretary, only one needs limited by shares or guarantee. to ordinarily reside in Australia) A company must have a registered office in must appoint an auditor Australia. If it is a proprietary company, it must also have at least one director (at least one of may raise capital by issuing a disclosure whom must be ordinarily resident in Australia). If document to offer shares and other it is a public company, it must have at least three securities to the public. directors and at least one secretary (and at least Joint ventures two of the directors and one secretary must be ordinarily resident in Australia). Two or more individuals or corporations may carry on business as a joint venture. Joint There are no minimum capital requirements for venturers may take the proceeds of the venture an Australian company. in output or product. The ‘limited liability’ company is the most popular Partnerships form of business structure adopted by foreign investors carrying on business in Australia. A partnership is an agreement between two or more people or companies who decide to carry A proprietary company (Pty Ltd): on business together with a view to profit. must have at least one but no more than 50 non-employee shareholders
must have at least one director residing in
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Sole proprietors A foreign investor may choose to carry on business in Australia as a sole proprietor trading under their own name, or under another business name. Trusts A trust is a relationship where one person (the ‘trustee’) holds the legal title to property on behalf of and for the benefit of others (the ‘beneficiaries’). A trustee may be an individual or business structure include: a company. who can make important decisions Managed investment schemes tax advantages and disadvantages A managed investment scheme is a structure which allows individuals or companies to pool cost and ease in setting up funds for a common purpose to make a profit. how profits and losses are shared The manager of the scheme is a company called the ‘responsible entity’ and requires an Australian the legal obligations, e.g. what records Financial Services Licence (AFSL). you have to keep Australian branch how easy it is to expand attract/investors A foreign company directly carrying on business Important factors to consider for each structure in Australia (other than through a subsidiary), Sole Trader: A sole trader is a simple business must register as a foreign company with the structure and gives the owner all the decision Australian Securities and Investments making power and can hire staff if he/she wants Commission (ASIC) to: to. carry on business in Australia low registration fees apply, if you are establish or use a share transfer office or trading under your business name. Fee is share registration office in Australia, or payable to the Australian Securities & Investments Commission (ASIC) administer, manage or deal with property in Australia as an agent, legal personal simple business structure and representative or otherwise. documentation A branch office operated by a registered foreign full control and ownership of the business, company is not a separate legal entity. Liabilities including profits and capital will be those of the foreign company. taxation advantages when profits are low 2. Choosing the right business structure comparatively a simpler process to close The most popular business structures for new down businesses are sole trader, partnership and business losses can be written off your company. The structure chosen will identify the PAYG tax from another job operation of a trading business; important elements to consider when deciding on a
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Partnership: A partnership is formed when two or which may be adopted voluntarily, and guidance more people (up to 20) go into business together issued by regulatory authorities (such as APRA’s with a view to making profits. It's recommended prudential standards). that Partnership Agreements be drawn up to set The ASX Corporate Governance Council’s out each partner's assets and liabilities in case of Principles and Recommendations set out the disputes. following eight principles as underlying good limited partnerships and incorporated corporate governance: partnerships are subject to registration lay solid foundations for management and fees with consumer affairs departments in oversight each Australian state structure the board to add value you have pooled knowledge, experience and skills promote ethical and responsible decision making there are certain tax benefits where partners are in the same family, e.g. safeguard integrity in financial reporting husband and wife make timely and balanced disclosure Company: A company has shareholders who own respect the rights of shareholders the company and directors who run it. Shareholders may also be officeholders recognise and manage risk, and a company with limited share capital is remunerate fairly and responsibly. subject to registration costs payable to Duties of company directors and officers ASIC. Other fees apply if you register as a public company limited by guarantee or Officers (which include directors) of Australian as a proprietary company companies are subject to a range of duties imposed by the Corporations Act and at common can be owned and run by one person law. shareholders are not responsible for The duties of directors and other officers include: company debts unless they sign a a duty to act with due care and diligence personal guarantee easier to attract capital because of limited a duty to act in good faith and not liability recklessly or dishonestly companies can operate globally and own a duty not to improperly use their position properties or information obtained during the course of their role 3. Governance, regulation and maintenance a duty to prevent insolvent trading Australian law imposes a high standard of (directors only), and corporate governance. For entities listed on the ASX, there are numerous corporate governance fiduciary duties. requirements and guidelines. These include the Directors and officers are also subject to duties Corporations Act, the ASX Listing Rules, the ASX under other laws. These include: Corporate Governance Council’s Principles and to carry out due diligence regarding Recommendations, various industry standards compliance with occupational health and
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safety laws regarding having appropriate financial products. The ASX requires that entities systems in place, and have policies in place. These often have trading windows for directors, executive management to ensure that the entity conducts a and staff. proper review of its finances and reports these to the regulators. To keep the market fully informed, directors of listed vehicles are required to disclose their Disclosure obligations holdings in the entities and any trades that they Financial and other reporting undertake within a short period of the trade Certain Australian entities are required to lodge being done. financial information with ASIC and, if listed, with Related party transactions are monitored by the the ASX. The level of reporting depends on the law and the ASX applies further rules in addition size of the entity; for larger and listed vehicles, an to the Corporations Act. In certain circumstances, annual audited financial report and a half-yearly if the transaction is on commercial arm’s-length audit reviewed report are required. terms, security holder approval is not required. There are rules surrounding the delivery of these Australia has strict rules regarding insolvent reports to security holders and providing them trading. Directors need to be cautious not to electronically. For smaller companies, there are breach these laws if an entity is in financial certain financial disclosures that need to be made distress. Directors may face personal liability if to ASIC. they allow their company to continue to trade if it Australia applies accounting standards which are cannot pay its debts as and when they fall due. consistent with international accounting 5. Foreign investment standards. The directors are responsible for the Introduction to Australia’s Regulatory financial reports. framework for foreign investment Continuous disclosure The Australian Government welcomes foreign All listed entities have an obligation to investment that is consistent with the national continuously disclose price sensitive information interest, and recognises the substantial to the market. These announcements are made contribution it makes to Australia’s economic as soon as the entity becomes aware of the growth and prosperity. information. Foreign investment in Australia is regulated by There are a number of rules relating to whether the Foreign Acquisitions and Takeovers Act (FATA), information needs to be disclosed, including the its related regulations, and Australia’s Foreign carve-outs from the obligation to disclose (e.g., Investment Policy (FIRB Policy). The Australian no need to disclose if the information is Federal Treasurer administers FATA and FIRB incomplete and remains confidential). Policy, assisted by the Foreign Investment Review Some unlisted entities are also required to follow Board (FIRB). a similar disclosure regime with ASIC. There are a The Treasurer has the authority to refuse number of ways to comply with this regime. proposals for certain foreign investment in Other governance issues Australia, if the Treasurer considers the proposal to be contrary to the national interest. Australia has insider trading policies that prohibit insider trading in listed and unlisted securities and The Treasurer may also apply conditions to a
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proposal to ensure that it is implemented trust, or according to the national interest. When making the trustee of a trust in which two or more those decisions, the Treasurer relies on advice people (each of whom is either a non- from FIRB, which examines foreign investment Australian citizen not ordinarily resident in proposals and makes recommendations. Australia, or a foreign corporation), Certain foreign investment proposals require together hold at least a 40% beneficial notification to FIRB and the Treasurer’s approval interest in the assets or income of the before being implemented. This approval should trust. not be viewed as a barrier or impediment to Proposals by ‘foreign persons’ requiring FIRB foreign investment in Australia, but rather as a notification include acquisitions of: step in the overall process. In practice, most applications do not raise national interest a substantial interest (15% or more) in, or concerns and generally receive approval. control of, an existing Australian corporation or business valued above In addition to FATA and FIRB Policy, there is state A$248 million. For US, New Zealand, and other federal legislation that regulates Japanese, and South Korean investors, the foreign investment in particular states or in threshold is A$1,078 million, unless the particular industries. investment is in a prescribed sensitive Foreign investors sector (for example, media, FATA and FIRB Policy apply to foreign investors telecommunications or aviation), in which who are considered ‘foreign persons’. For the case the A$248 million threshold applies purposes of FATA and FIRB Policy, a ‘foreign a substantial interest in an offshore person’ is: company whose Australian subsidiaries or a natural person who is not an Australian Australian assets are valued above A$248 citizen and not ordinarily resident in million. For US, New Zealand, Japanese, Australia and South Korean investors, the threshold is A$1,078 million, unless the investment a corporation in which either a non- is in a prescribed sensitive sector, in which Australian citizen not ordinarily resident in case the A$248 million threshold applies Australia, or a foreign corporation, has at least 15% of the voting power any interest in Australian urban land (being all land in Australia except land a corporation in which two or more used for primary production), unless an people (each of whom is either a non- exemption applies, and interests in real Australian citizen not ordinarily resident in estate (including interests arising under Australia or a foreign corporation), leases, financing and profit-sharing together hold at least 40% of the voting arrangements) that involve the acquisition power of an interest in: the trustee of a trust in which either a o developed commercial real estate, non-Australian citizen not ordinarily where the property is not heritage resident in Australia, or a foreign listed, valued at above A$54 million. corporation, has at least a 15% beneficial For US, New Zealand, Japanese, and interest in the assets or income of the South Korean investors, the threshold
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is A$1,078 million are considered a ‘direct investment’. Investments o vacant land for commercial or that involve interests of less than 10% may also residential development (irrespective be considered a ‘direct investment’ in certain of value) circumstances. o an exploration or production mining National interest tenement that provides the right to A wide range of factors are considered when occupy Australian urban land and the determining if a foreign investment proposal is term of the tenement (including contrary to Australia’s national interest. These extensions) is likely to exceed five factors include the nature of the target entity or years asset, the effect the proposal has on national security and a competitive market, the impact of o an exploration or production mining tenement that provides an the proposal on the economy and tax revenue, arrangement involving the sharing of and the transparency and character of the profits or income from the use of, or investor. dealings in, Australian urban land Review timing o residential real estate (unless an Once a formal application is lodged, FIRB has 30 exemption applies), and days to review the application and an additional o any interest in a corporation or trust 10 days to notify the applicant of the decision. where the value of its interest in FIRB can extend the review period by up to 90 Australian urban land exceeds 50% of days. the value of its total assets. If the sole reason that a foreign investor is seeking All monetary thresholds specified above are approval is that the proposal is an investment by current as at 1 January 2014. These thresholds a foreign government or its related entities, no are indexed annually on 1 January. time limits apply. Foreign government investors Business or investment visa issues All foreign governments and their related entities Visas (including state-owned or controlled entities and Although there are a number of ways that sovereign wealth funds) must obtain FIRB international business people can enter Australia, approval before making a ‘direct investment’ in all are required to have a visa. Australia, establishing a new business or Eligibility for any visa is determined by strict obtaining an interest in Australian urban land, criteria, which must be met for the application to irrespective of the value of the investment or succeed. In addition, anyone seeking permanent asset. entry to Australia must meet rules on health and ‘Direct investment’ is considered an investment character. In some visa categories, temporary with the intention of instituting a lasting interest entrants to Australia must also meet these rules. in, and strategic long term relationship with, the There is a wide range of visa categories regulating target entity or asset. This includes investments temporary and permanent entry into Australia, which provide the investor with the potential to including sponsored business visas. influence or control the target. Australian and international businesses seeking to Investments that involve interests of at least 10% recruit overseas employees to work in Australia
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can sponsor the employee to enter Australia to the employer making the contributions, if they either as a temporary or a permanent resident. are made to a fund which complies with federal Significant Investor Visas legislation and do not exceed a maximum threshold. Income derived by a complying fund, The Significant Investor Visa is an alternative path including the contributions it receives, is taxable to permanent residency. It is for investors who at the rate of 15%. comply with residency and nomination requirements, and also wish to invest A$5 million Medicare levy over four years in certain investments. Eligible A health care levy (known as the Medicare levy) is investments include federal, state or territory payable by individuals at rates of up to 1.5% of government bonds, certain ASIC regulated the individual’s assessable income. High income managed funds, and direct investment into taxpayers without private patient hospital Australian proprietary companies. insurance are liable to pay an extra 1% surcharge Depending on the state or territory of nomination, in addition to the general levy. applicants may be required to comply with Goods and services tax (GST) proportionate investment requirements (for GST applies at a flat rate of 10% on the supply of example, in New South Wales, 30% of the A$5 most goods and services. GST is a multi-staged tax million must be invested in NSW government payable by suppliers (similar to a value added bonds). tax), where each stage in a supply chain is International business people have, over the potentially taxable, but with registered entities years, considerably boosted the skills base of the being entitled to refunds of GST incurred on their Australian economy, expanded local business and business inputs (referred to as ‘input tax credits’). export activity, and maximised employment Importantly, GST is not applied to most exports of opportunities for Australians. goods and services. Common tax issues for foreign investors Businesses must register for GST if they make Australian Business Numbers taxable supplies of more than A$75,000 per year, If you carry on an enterprise in Australia, you will regardless of whether the business in Australia is need to apply for an Australian Business Number conducted through an Australian company or an (ABN). If you don’t have an ABN and you are Australian branch. required to, then Australian businesses may need The liability to pay GST is generally imposed on to withhold 46.5% of any amounts payable to the supplier. Most registered entities are required you. to account for GST either monthly or quarterly. Fringe benefits tax Some supplies are classified as GST-free. These Fringe benefits tax is a tax payable by employers include certain supplies relating to health, aged on the value of certain benefits that have been care, education and food, as well as sales of farm provided to their employees or to associates of land and supplies of businesses as going concerns. their employees. It typically applies to ‘in kind’ Other supplies may be exempt so that no GST benefits and is payable at the top personal tax liability arises, but the supplier may be denied rate based on the taxable value of the benefit. input tax credits on business inputs relating to Superannuation contributions that supply. Exempt supplies may include certain financial supplies (e.g., loan, currency and Superannuation contributions are tax deductible
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derivative transactions and share transfers), cost base of the asset from the capital proceeds residential rents and sales of established for the event. Gains are generally assessed on residential premises. realisation or another specified event (such as Payroll tax ceasing to be an Australian resident), not on an accruals basis. Each state and territory has payroll tax legislation under which an employer is liable to pay tax on The ordinary income tax rates apply to capital the employer’s annual payroll. The tax is only gains; however individuals are generally eligible payable where the employer’s annual payroll for a 50% discount on CGT if they have held the exceeds a minimum threshold. asset for at least 12 months. There are a range of concessions and deferral mechanisms for Stamp duty businesses and individuals. Each state and territory imposes its own stamp Non-residents are generally taxed only on capital duties. Stamp duty is a tax on transactions and gains derived from ‘taxable Australian property’ certain instruments (including conveyances of such as land, indirect interests in land along with real property and business assets). The rates vary mining or prospecting rights. among the states and territories and depend on the nature of the transaction. Withholding tax The duty is generally payable by the purchaser or The general rule that non-residents are liable for transferee. Australian tax on all Australian source income is modified in relation to dividends, interest and Land tax royalties. Land tax is an annual tax levied on the owner of Payers are required to withhold tax from interest, land in Australia, based on the unimproved dividends and royalties paid to non-residents. capital value of the land (which excludes the Trustees, agents or others who receive interest, value of the building or capital improvements). dividends or royalties on behalf of a non-resident Superannuation guarantee levy where withholding tax has not been withheld by the payer, are also required to withhold tax. All employers must make superannuation contributions for the benefit of all their The tax rates of withholding tax vary, depending employees. The minimum contribution is 9.25% on whether a ‘Double Tax Treaty’ applies, among from 1 July 2013, with incremental increases over other things. The dividend, interest or royalty the next seven years to 12% from 1 July 2019. does not need to be actually paid to the non- resident to be subject to withholding tax. The Death, inheritance and gift taxes liability can also arise where the income is re- There are no specific death, inheritance or gift invested, accumulated, capitalised or otherwise taxes in Australia, although each of these events dealt with on behalf of the non-resident. can have significant tax implications. Certain other payments to non-residents by a Capital gains tax (CGT) resident business are subject to foreign resident withholding tax rules. However, the recipient of a CGT applies to a wide range of events (such as an payment subject to withholding under the foreign asset disposal) affecting most forms of property resident withholding tax rules is generally entitled or enforceable rights. to a credit for that amount, once it is determined The CGT liability is determined by subtracting the that no income tax is payable.
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Thin capitalisation consumers, businesses and the community. It Australia’s thin capitalisation rules are designed addresses anti-competitive and unfair market to prevent entities with cross border operations practices, company mergers and acquisitions, from funding their operations with excessive product safety and product liability, and third levels of debt to procure a more favourable party access to national infrastructure services. Australian tax result. Australian Prudential Regulation Authority Tax deductions on interest payments are limited (APRA) by reference to a statutory debt/equity ratio (i.e., APRA is the prudential regulator of the Australian a 3:1 debt to equity ratio) assessed on the total financial services industry. APRA supervises all debt of the Australian operations. bank and non-bank financial institutions (such as banks, insurers and superannuation funds) to Transfer pricing rules ensure that prudential standards and practices Transfer pricing rules seek to counter are met to maintain a stable and competitive international profit-shifting techniques by financial system. ensuring that related parties to international transactions determine their pricing based on Australian Securities and Investments arm’s length methodologies. Commission (ASIC) These rules allow the Tax Commissioner to ASIC is an independent Australian Government reallocate income or adjust deductions to reflect statutory authority which regulates Australia’s an arm’s length arrangement. The rules extend to corporate markets and financial services sectors. branches or divisions of the same enterprise, ASIC regulates Australian companies, financial where non-arm’s length transactions are made services organisations and professionals who deal between an Australian permanent establishment and advise in investments, superannuation, and an overseas permanent establishment of the insurance, deposit taking and credit. same enterprise. ASX Limited (ASX) Tax consolidation regime The ASX (also known as the Australian Securities The consolidation regime allows qualifying groups Exchange) provides the platform for the major of entities to be treated as a single entity for Australian market trading in equities, derivatives, income tax purposes. futures and fixed interest securities. Once part of a consolidated group, intra-group The ASX functions as a market operator, clearing transactions will be ignored for tax purposes. The house and payments system facilitator. It also consolidated group will generally be required to oversees compliance with its operating rules, lodge only one income tax return and one promotes standards of corporate governance franking account. among Australia’s listed companies, and helps to 6. Key regulatory bodies educate retail investors. Australian Competition and Consumer Australian Taxation Office (ATO) Commission (ACCC) The ATO is the statutory body responsible for The ACCC is an independent Australian administering the federal tax system. The current Government statutory authority. The ACCC seeks income tax system involves taxation of income to promote competition, fair trading and to and capital gains of individuals and businesses. It provide for consumer protection to benefit is governed by legislation, ATO administrative
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taxation rulings and court decisions. IP Australia The ATO also regulates Australia’s IP Australia is a Federal Government agency superannuation system, collects excise on which receives and processes patent, trade mark, tobacco, petrol and alcohol, and administers the design, and plant breeder’s rights applications, goods and services tax. conducts hearings and decides on disputed Foreign Investment Review Board (FIRB) matters relating to granting or refusing Australian intellectual property rights. The main functions of FIRB are: Reserve Bank of Australia (RBA) to examine proposals by foreign interests The RBA is an independent statutory authority for investment in Australia and, against performing Australia’s central banking functions. the background of the government's foreign investment policy, It has two broad areas of responsibility: to make recommendations to the monetary policy (primarily directed at government on those proposals-to advise maintaining inflation rates), and the government on foreign investment financial stability (to prevent excessive matters generally, and risks in the financial system and to limit to monitor and ensure compliance with the effects of financial disturbances when foreign investment policy. they occur). FIRB’s functions are advisory only. The Treasurer The RBA plays an active role in maintaining the is ultimately responsible for the government’s efficiency of the payments system and is foreign investment policy and for making responsible for issuing Australian currency. It also decisions on proposals. manages Australia’s gold and foreign exchange reserves.
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Fall 08
Fall 15 INTERNATIONAL LAWYERS NETWORK
NEHRING E ASSOCIADOS ADVOCACIA ESTABLISHING A BUSINESS ENTITY IN BRAZIL
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ESTABLISHING A BUSINESS ENTITY IN BRAZIL
I. Types of Business Entities required for corporations, with few legal Brazilian legislation provides for several types of exceptions. legal entities through which interested parties With some exceptions, corporations are obliged may conduct business in the country. to publish all their corporate acts and their Due to the unlimited liability inherent to some of financial statements in the Official Gazette and in them, the most attractive and used forms for another newspaper of great circulation. commercial/services/industrial purposes are sociedade anônima (corporation) and sociedade limitada (limited liability company).
1. Corporation
Corporations are regulated by Law N. 6.404/1976 and its further amendments. The corporation name must be followed by the expression “Sociedade Anônima” (S.A.), or preceded by the word “Companhia” (Cia.).
There are two kinds of corporations: a publicly- held company, which obtains funds through public offers and subscriptions, and a closed company, which obtains capital from its own shareholders. 2. Limited Liability Company A corporation may be managed by a Board of Directors (“Administrative Council”) and by at Limited liability companies are regulated by the least two officers (managers) or only by these Brazilian Civil Code and are organized through officers, depending on what its By-laws or the law their Articles of Association, having limited determine. The officers must be residents in liability partners. Brazil. The limited liability company’s name must The Board of Directors is a collegiate body, indicate the company’s main purpose and must mandatory in publicly held and authorized capital be followed by the expression “LTDA.” corporations and optional in closed companies. A limited liability company must have at least two The Board of Directors must have at least 3 partners and its corporate capital is divided into members, individuals, residing or not in Brazil. quotas (parts), which are not represented by any Corporation may also have an Audit Committee certificate or security. Their property is evidenced The corporation stock capital is represented by in the Articles of Association. Since every partner shares (stocks). The shares may be common, has its responsibility limited to the value of its preferred or fruition shares, depending on the quotas, all of them are jointly liable for the advantages conferred to their holders (a payment of the corporate capital. corporation must have at least two shareholders). A limited liability company must have at least one There is not any minimum capital amount manager, residing in Brazil. However, like a
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corporation, it can also be managed by a Board of for the representation before the Brazilian Directors and may have a Consulting or Audit Internal Revenue Services (the foreign investor Committee. must be enrolled with the Taxpayer’s Registry); However, the company’s decisions shall be taken iii. a sworn translated power-of-attorney, duly by its partners and those resulting in notarized and legalized, giving powers to a resident in Brazil to represent the foreign investor amendments to the Articles of Association as shareholder/partner of the corporation/limited depend on favorable votes representing at least ¾ liability company; of the corporate capital. iv. duly notarized/legalized copy of the By-laws or There is not any minimum capital amount Articles of Association of the investor residing required for limited liability companies, with few abroad, evidencing its legal representative, or duly legal exceptions. notarized/legalized copy of personal documents of the foreign individual investing in Brazil, to be With some exceptions, limited liability companies translated by a sworn translator in Brazil, are not obliged to publish their financial statements in the Official Gazette and in another v. discussion of the draft of the By-laws/Articles of newspaper of great circulation. According to the Association, defining the purpose of the company, prevailing rules, there is not any obligation of its capital, rules etc. publishing their corporate acts. vi. finding of an address to locate the company, which must be adequate to its business purposes; Considering that limited liability companies are (i) with few legal exceptions, entitled to perform the vii. nomination of Brazilian resident(s) for the same commercial/industrial or services rendering assumption of managerial duties; activities permitted to corporations; (ii) less viii. finding a Brazilian accountant; expensive to maintain in comparison to ix. execution of the By-laws/Articles of Association by corporations; (iii) permitted to have only one all partners, represented by their respective manager residing in Brazil and not two as attorneys-in-fact referred to in item (iii) above, required for corporations; and (iv) more flexible and by a Brazilian lawyer; than corporations, in terms of legal formalities, x. registration before the Commercial Registry, most of Brazilian companies adopt the limited together with the enrollment of the Brazilian liability company form, even huge companies. company with the Taxpayer’s Registry and the II. Steps and Timing to Establish State Revenue Service, if applicable; Steps for the organization of a corporation and a xi. registration of the foreign investment before the limited liability company differ a little bit. Central Bank; xii. (xii) registration of the Brazilian company before The incorporation of a corporation is more another Brazilian competent authorities, usually complex, especially because 10% of its stock incumbent to its accountants. capital must be deposited in the Official Brazilian Bank Banco do Brasil at the date of its formation. Timing for the accomplishment of the steps up to item xi is usually estimated in 3 months. Step xii In any way, the organization of both kinds of depends on specificity of each company. companies will basically require: III. Governance, Regulation and Ongoing i. indication of the shareholders/partners, with their Maintenance complete qualification; Limited liabilities companies and closed ii. a power-of-attorney given to a resident in Brazil
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corporations do not have to follow any special companies. rule in what refers to corporate governance. In what refers to the minority partners’ rights in However, they can establish internal policies in limited liability companies, Civil Code provides this sense, similar to the policies usually adopted for some protection to them, like the right of first by public- held corporations. refusal in cases of capital increases and sales of Public-held companies, according to their quotas, the right of receiving profits, even if on differentiated level of Corporate Governance disproportional basis, and the rights of (i) issued by BOVESPA (São Paulo Stock Exchange) withdrawing from the company in cases of are obliged to follow some corporate governance amendments to the Articles of Association not rules inspired in several corporate governance accepted by them or in case of the company’s codes prepared with this purpose, by merger (Civil Code, article 1.077); and (ii) to independent entities such as IBGC (Corporate separately elect one member of the Audit Governance Brazilian Institute). The basic Committee (Civil Code, article 1.066, second principles to be followed are: disclosure, fairness, paragraph - minority partners representing at accountability and compliance. least 1/5 of the corporate capital). Such differentiated levels of Corporate Minority shareholders representing at least 5% of Governance are a set of rules of conduct for the stock capital, and in some cases 10%, are also companies, their managements and their protected by the Corporation Law in several controlling shareholders that BOVESPA considers aspects. Depending on the case, we can say that crucial for increasing the shares’ value. the main minority shareholders are the rights of There are currently four special list segments on (i)receiving profits; (ii)auditing the company and BOVESPA for securities issued by publicly-held receive information; (iii) first refusal, in case of companies. capital increase; (iv)withdrawing from the company in certain cases; and (v)right of TAG i. Level 1 Corporate Governance; ALONG in a public offer for the sale of the ii. Level 2 Corporate Governance; company’s control. iii. BOVESPA’s New Market; and IV. Foreign Investment, Thin Capitalization, iv. the New Entrants Market (BOVESPA MAIS) Residency and Material Visa Restrictions A public-held company may enter any of the According to the Brazilian legislation, foreign BOVESPA listing levels by signing a contract that capital is considered to be any goods, machinery binds it to comply with the set of corporate and equipment that enter Brazil with no initial governance rules for the selected level. For every disbursement of foreign exchange, and intended level, the company has to accomplish a list of for the production of goods and services, as well certain specific requirements. as any funds brought into the country to be used in economic activities, provided that they belong In any way, it is provided by the law that the to individuals or companies resident or controlling shareholder/partner of a company headquartered abroad. cannot vote in any matter of his/its own interest. He must exercise his/its voting rights always in The registration of foreign capital must be made the interest of the company, no matter if it is a through the RDE-IED (Registro Declaratório corporation or a limited liability company. The Eletronico - Investimento Externo Direto) Mode, same applies for the managers of such kind of which is part of the electronic system controlled
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by the Brazilian Central Bank (SISBACEN). Brazilian company, being them directly employed or not by said company. Prior to the obtainment Such registration must be obligatorily made of this type of visa, the Brazilian company must within 30 days counted as from the date of the submit a request for the respective work exchange contract, executed to convert the funds authorization, before the Brazilian Ministry of remitted into Reais. Labor and Employment. Its validity may be up to 2 This registration is essential for capital years, with the possibility of one extension for equal period, after which it is possible to request repatriation, remittance of profits and its conversion to a permanent visa; registration of profit reinvestments. iii. Permanent Visa: indicated for professionals who The activities below are forbidden for foreign intend to immigrate to Brazil, establishing a investors: permanent residency in the country. It is granted - the development of activities involving by the Brazilian consulate in the country of origin nuclear energy; of the relocating person. - post office and telegraph services; and A permanent visa is required for a foreigner to be named as the Officer of a Brazilian company, - the aerospace industry, i.e., the launch of since it is a position which requires a permanent aircrafts and satellites and related activities, residency in Brazil. Although there is no minimum excluding the manufacture or marketing of requirement to invest in a Brazilian company, the said items and their accessories. granting of a permanent visa to a foreigner who Besides that, there are certain limitations imposed intends to assume the Officer position depends on residents abroad, in what refers to: on the amount of foreign investment made in the Brazilian company. The minimum capital - acquisition of rural lands; requirement, in order to allow a Brazilian - acquisition of real properties alongside company to indicate a foreigner to an Officer frontier areas; position, conditioned to the obtainment of the relevant permanent visa, must be equal to R$ - participation in financial institutions; 600.000,00 or R$ 150.000,00 per each foreigner - development in the public air services, for the to be nominated. In this last case, in addition to operation of regular transportation. the investment, the company shall also generate Regarding visa requirements, the most common 10 new employment positions within two years. types of visa are: There is no minimum capital requirement to i. Temporary Business Trip Visa: indicated for invest in a Brazilian company, except for financial professionals who come to Brazil, on a business institutions, for which there is a range from trip, with no intention of immigrating. Its validity R$350.000,00 to R$17.500.000,00, depending on may be up to 5 years, depending on the the activities to be developed. However, nationality of its carrier. However, it permits a participation of foreigners in financial institutions maximum stay of 90 days, within six months, with is subject to several restrictions, as mentioned the possibility of one extension for equal period, above. totalizing a maximum stay of 180 days, per year. This type of visa does not permit a formal hiring For Brazilian purposes, thin capitalization can be by any Brazilian company; defined as a high ratio between foreign loans and ii. Temporary Work Visa: indicated for professionals net worth. Whenever this ratio is above legal who come to Brazil to work together with a limits, the applicable consequence is the non-
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deductibility of loan interests, in the same related creditors, or twice the whole net worth, in proportion trespassing legislation frontiers. the absence of related creditors. Interests paid to related parties or to entities A few clarification rules: located in ‘tax haven’ jurisdictions must be - limits above are not affected by the existence proved necessary for the activities of the Brazilian or not of the registration of the loan before company, in accordance with article 47 of Federal Brazilian Central Bank; Law 4.506/64. - limits are also applicable if the foreign related Legislation makes a distinction between creditors party acts as guarantor, proxy or intervening who are related parties, not established in ‘tax party in the loan contract executed by the havens’, and creditors located in ‘tax havens’, Brazilian company; being them related parties or not. - debt and net worth ratio will be calculated by Based on such distinction, Brazilian legislation the monthly weighted average; establishes three limits: - transfer pricing rules remain valid; - Loans and interests with a foreign related party holding equity in the Brazilian company - limits are not applicable to financial cannot exceed twice the net worth institutions which collect funds abroad and proportionally held by this foreign related transfer them to Brazil, in accordance with party; Law 8.212, art. 22, first paragraph. - Loans and interests with all foreign related Although interests exceeding those limits will be parties which do not hold equity in the deemed to be non-deductible for the Brazilian Brazilian company cannot exceed twice the company, they can still be paid, provided that the whole net worth of the Brazilian company withholding income tax of 15% is duly paid in (provided that there are no related parties Brazil (or 25%, to beneficiaries in ‘tax havens’). holding equity); Usually, other countries recognize this withholding income tax as a tax credit, for - If a foreign related party holds direct equity purposes of calculating the income tax of the from the Brazilian company, the sum of loans grantor of the loan. and interests owed to related parties (i.e. parties holding or not equity) is limited to Basically, the same rules concerning interests, twice the net worth proportionally held by applicable to related parties, are also valid to tax foreign related parties1. favorable jurisdictions’ entities. The main difference is that, in order to be deductible, In other words, there is an individual limit rule for principal and interests of loans, owed to ‘tax each party owning equity, which must compare haven’ entities, are limited to 30% of the net its credit to twice its participation, and a general worth of the Brazilian company. Withholding limit for all the related parties, for which the joint income tax is 25%, instead of 15%. This limit is not limit is twice the proportional equity held by affected by the limits applicable to related parties, mentioned above, and vice versa. In conclusion, loan interests and other expenses, 1 Legislation also stated the obvious point that such limit is whenever paid to tax favorable jurisdictions not applicable if the Brazilian company is not held by entities, are not deductible, unless one proves foreigners. them needed for the activities of the Brazilian
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company, a situation in which they are subject to except for beneficiaries located in ‘‘tax haven’s’, the 30% limit described in the item above. whose applicable withholding tax rate is 25%. It is important to mention that all the new Dividends paid from a Brazilian company to a regulation concerning interests do not affect the beneficiary, individual or company, in Brazil or deductibility of interests that can be paid on net abroad, based in a tax haven or not, are exempt worth of the Brazilian company (‘juros sobre from withholding income tax in Brazil. There is no capital próprio’) to the shareholders. Provided restriction on the remittance of funds, provided that calculation is correct and limits are obeyed, that the net worth of the company is not there is no obligation to prove the need for such negative. expense, and withholding income tax is 15%,
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Fall 08
Fall 15 INTERNATIONAL LAWYERS NETWORK
ROBINSON SHEPPARD SHAPIRO LLP
FOGLER RUBINOFF LLP ESTABLISHING A BUSINESS ENTITY IN CANADA
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ESTABLISHING A BUSINESS ENTITY IN CANADA
INTRODUCTION TYPES OF ENTITIES AVAILABLE IN CANADA Bilingual and Bi-Juridical THROUGH WHICH TO CONDUCT BUSINESS Canada is bilingual, bi-juridical and multi-cultural. Corporations English and French are federally mandated official In Canada, one may incorporate federally under languages pursuant to the Official Languages Act the Canada Business Corporations Act (the (Canada). French is the official language in the “CBCA”), or under the corporate statute of a Province of Québec pursuant to the Charter of the particular province or territory. Most provinces, French Language (Québec). The legal system of all including most recently the Province of Québec, provinces and territories (other than the Province have adopted Business Corporations Acts which of Québec) is based upon the Common Law, largely mirror the CBCA. derived from England. Québec (like the American Generally speaking, one would incorporate under State of Louisiana) is governed by the Civil Law the CBCA if one expects to carry on business in system, derived from the French Napoleonic more than one Canadian province or territory. Code, as reflected in the Civil Code of Lower Alternatively, one would consider provincial Canada adopted in 1866 (one year prior to st incorporation if it is anticipated that the Confederation) and replaced as of January 1 , operations will be limited to that jurisdiction, as 1994 by the Civil Code of Québec (the “CCQ”). there are savings to be achieved by making Levels of Government and Jurisdiction corporate filings and otherwise complying only Canada has several levels of government: federal, with the provincial rules, rather than filing annual provincial and municipal. The allocation of returns and other notices at both the federal and provincial (or territorial) levels. exclusive jurisdiction between the federal and provincial governments was established under Canada also has statutes governing the formation the British North America Act of 1867 at the time and operation of non-profit entities at both the of Confederation. federal and provincial levels. Generally speaking, most matters regarding ULC private property, commerce and business fall Unlimited liability companies (ULC’s), which are under provincial or territorial jurisdiction, with similar to the U.S. limited liability companies the exception of industries such as airlines, (LLC’s), can currently be formed only in the marine transportation and pollution, railways and Provinces of Nova Scotia, British Columbia and cross border and extra-provincial transportation Alberta. These entities permit flow-through and telecommunications, all of which are treatment for profits and losses to their federally regulated. shareholders under U.S. tax law (and are The federal government also deals with sometimes known as “check the box” entities, on bankruptcy, competition, foreign investment, the basis of the election they can make to retain criminal and family law, as well as an array of their corporate identity but be taxed as if they other matters where it is deemed to be acting “to were partnerships). However, the Canadian the general advantage of Canada”, which is an versions do not provide limited liability ongoing source of friction between the federal protection, and it is therefore common practice government and the various provinces and to interpose a single-purpose holding corporation territories. between the ULC and the ultimate shareholder(s).
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Partnership / Limited Partnership copyright and industrial designs) is also a matter These are formed under provincial law in each of federal jurisdiction in Canada. An expanded case and generally governed by such laws and the search which includes trademarks and may also particular partnership or limited partnership extend to domain names is not required in other agreement (as the case may be). Typically in a jurisdictions, but is advisable to ensure that a limited partnership, the general partner (which is business does not need to later change its name often a shell corporation) is responsible for all the after having built up a brand. obligations and liabilities of the limited Once incorporated by the issuance of a certificate partnership. The liability of the limited partners is of incorporation by the applicable government restricted to the amount of their respective authority, the corporation or ULC must then be contributions, provided that they do not become “organized” by: (i) the issuance of shares, (ii) the involved in the management of the limited adoption of general, banking and borrowing by- partnership. To retain limited liability protection, laws, (iii) the confirmation, replacement or the limited partner must remain a passive addition to the board of directors by the new investor rather than an active participant in the shareholders and their ratification of the by-laws operation of the limited partnership. and (iv) the nomination by the directors of the various officers. Multiple shareholders may enter into an agreement governing the operations of the corporation or ULC. They may also shift some or all of the powers and related liabilities of the board to the shareholders (known as a “unanimous shareholders’ agreement,” not because all of the shareholders are party to it, but because of its effect on the decision-making
process).
Partnerships / Limited Partnerships BRIEF OVERVIEW OF STEPS TO These are generally formed by the agreement of INCORPORATE/CONSTITUTE EACH TYPE OF the partners in the case of a general partnership, ENTITY or the general and limited partners in the case of Corporations / ULC a limited partnership. Partnerships do not Both federal and provincial corporations and ULCs generally require any other formality in order to (where permitted) are formed by filing articles of be created, whereas a limited partnership incorporation and notices of directors and head generally exists only from its registration date. office with the applicable government authority. The partnership agreement or limited partnership agreement, as the case may be, takes the place of Unless an automatically assigned numbered the certificate and articles of incorporation and corporation is desired, the proposed name must by-laws, and will govern the issuance of be searched to ensure it would not result in partnership units and the operations of the confusion with already existing entities. In the entity. case of a CBCA incorporation, the name must also not create confusion with any registered trademarks or pending trademark applications, as intellectual property (patents, trademarks,
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BRIEF SUMMARY OF REGULATION OF EACH TYPE and dealer registration requirements and Provincial registration exemptions, and replaces the exemptions previously found in the provincial securities Any business incorporated under the laws of legislation. The national rules extend the Canada, or a particular province or territory, that application of the provincial and territorial wishes to carry on business in another jurisdiction securities legislation beyond shares in the capital must be registered or licensed in that jurisdiction. stock of companies to all securities, excluding While the definition of "carrying on business” only non-convertible debt securities. Thus, varies slightly from one jurisdiction to another, warrants, options and convertible debentures are there are usually factual tests based on having a covered by the securities rules, as opposed to physical presence in the jurisdiction, including only the underlying shares if and when they are having an office, employees who report to work exercised. there, or a local telephone listing, without the In order to qualify for an exemption from the mind, management and control of the entity necessarily being there. A partnership or limited prospectus requirement under NI 45-106, either partnership generally must be registered as the charter documents of the corporation or an carrying on business in the jurisdiction and file agreement among all security holders must: (i) annual and updating returns or reports. permit a maximum of 50 shareholders (not counting former or current employees, directors Securities Law or officers); (ii) impose restrictions on the free Securities law is a matter of provincial jurisdiction transfer of all securities (such as board or and each province or territory therefore has its shareholder approval); (iii) prohibit any own regulator. Unlike the other G7 countries, distribution of securities other than to the there is no federal regulator akin to the U.S. permitted categories of potential security holders Securities and Exchange Commission. It should be (generally the founders, directors and officers and noted, however, that the federal Minister of their respective family members, close personal Finance strongly supports the adoption of a single friends and close business associates); as well as national securities regulator, as does the those who qualify as accredited investors International Monetary Fund and the Ontario (generally institutions or high net worth Securities Commission (Ontario being Canada’s individuals or entities). largest capital market). Instead of being obliged The accredited investor exemption will apply to to make up to 13 separate requests to the various individuals in several circumstances, including: (i) provincial and territorial securities regulators individuals, either alone or with a spouse, having (depending on the location of their shareholders), financial assets (generally cash or securities but the regulatory authorities in the Provinces of not real estate or non-financial personal Québec, British Columbia, Alberta and Manitoba property) with net pre-tax realizable value of over propose the creation of a “passport” system. This $1 million; (ii) individuals, either alone or with a would enable companies to issue a prospectus or spouse, having net assets of at least $5 million; request an authorization from a single jurisdiction (iii) individuals with net pre-tax income in each of and to have it recognized in the other the last 2 calendar years over $200,000, or jurisdictions. $300,000 together with a spouse, and a National Instrument 45-106 (adopted in Québec reasonable expectation of the same level in the and Ontario as Regulation 45-106, and current year. If the accredited investor hereinafter “NI 45-106”), sets out the prospectus requirements are not met, the corporation will
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not be a private issuer and must file a prospectus seniority, vacation and other benefits. There is no in order to issue shares and/or to obtain a dealer concept under Canadian law of “employment at registration in order to deal in (e.g., transfer) its will”. An employee's tenure with a predecessor shares, unless another exemption under NI 45- corporation will be considered for the purposes of 106 is available. determining termination pay required by the Most of the other exemptions require that a filing employment standards legislation and for be made with the securities regulators in each determining the amount of reasonable notice province or territory in which affected which must be given on termination of shareholders are situate, which can entail employment without cause. However, written significant fees being payable in the event of a contracts may reduce, but not entirely eliminate, large financing. This would also pose a serious the non-statutory notice and severance requirements. problem in the event that a potential purchaser or investor wishes to obtain an opinion that the Under Canadian law, non-competition and non- target company is indeed a private issuer, and solicitation undertakings are seen as a restraint of that all securities legislation and regulations have trade, and are more restrictively interpreted and been complied with as a pre-condition to applied in an employment context than in the concluding a particular transaction, as is context of the sale of a business. Non- customary in Canadian deals. competition undertakings will generally be Employment Law enforced if the scope of the activities covered, the geographical territory and the period of time for In general, Canadian employment law is much which the restrictions are to remain in force are more protective (if not overtly biased in favour) of all reasonable in light of the employer’s legitimate employees than its American counterpart. Both need to protect its business interests. Further, an provincial and federal privacy laws protect an ambiguous restrictive covenant is prima facie employee’s right to privacy and personal unreasonable and will be unenforceable. The information. Employee rights are enshrined in the Supreme Court of Canada also recently decided Canada Labour Code and the Canadian Human that non-solicitation undertakings are not subject Rights Act and their various provincial and to the same restrictions. territorial counterparts across Canada. This legislation prohibits any form of discrimination in The Canadian courts will not generally write down the hiring and treatment of employees. an invalid clause and will invalidate a non- compete undertaking where they find that a non- Acts and policies which are taken for granted in solicitation undertaking would have sufficed. In the United States (such as drug testing and video Québec, however, an employer cannot enforce a or other forms of electronic surveillance, non-competition undertaking if the employer including monitoring of electronic or telephone either terminated the employment without communications) must be carefully reviewed to “serious reason” or gave the employee “serious ensure compliance with Canadian laws, which are reason” to resign from the employment (CCQ more stringent in these regards. 2095). In many jurisdictions (including the Provinces of Consumer Protection Legislation Ontario and Québec), the purchaser of a business is deemed to be a continuing employer and Each province and territory has its own consumer inherits the employees and their current protection legislation, which must be carefully employment rights, including compensation, examined if a foreign business which deals with the consumer market wishes to establish a
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Canadian presence. Québec Charter of the French Language Depending on the nature of the business, certain French is the official language in the Province of permits may be required, and certain types of Québec, although other languages (such as contracts must be made in writing and in some English) may be used in certain circumstances and cases, in a prescribed form. Consumers have under certain conditions. Legislation and certain statutory rights of rescission (cancellation) regulations are published in both French and of many types of contracts within prescribed English, and both versions have equal ranking. delays, which compel the business to accept the Parties may use either language before the courts cancellation of the contract and refund any and may request a translation of any decision amounts already paid. rendered by any court or any quasi-judicial The types of businesses governed by the tribunal or body, at the government's expense. Consumer Protection Act of various provinces and However, French remains the official language of government, as well as all para-public territories include contracts of sequential performance (such as education services and organizations, including professional orders. fitness studios), contracts for the provision of Employees have the right to work in French, and credit, long-term leases of goods, contracts for knowledge of another language cannot be made a the sale or repair of automobiles and prerequisite of employment unless it can be motorcycles, and sales by itinerant vendors. justified by the nature of the person’s duties and Under the Competition Act, which applies to all of functions. Workplace communication must be in Canada, a person who promotes the supply/use French, although it may also be in other of a product or any business interest, or who languages as well. Businesses in Québec conducts any contest lottery, game of chance or employing 50 or more people must obtain a francization certificate attesting to their use of skill, or mixed chance and skill, will be considered to have engaged in reviewable conduct where: (i) French in the workplace, which must be adequate and fair disclosure is not made of the confirmed by triennial reports. Businesses number and approximate value of the prizes, the employing 100 or more people must establish a area(s) to which they relate and of any fact that francization committee composed of materially affects the chance of winning; (ii) management and employees, with the mandate distribution of the prizes is unduly delayed; or (iii) of ensuring French is used in the workplace. selection of participants or distribution of the Publicity and advertising must be in French. Other prize is not made on the basis of skill or on a languages may be used, provided that no random basis. inscription in another language is given greater Québec also has its own rules governing publicity prominence than that in French. For example: contests where the aggregate prize value exceeds signage on the sides of motor vehicles, such as $100. The contest rules must be translated into delivery trucks, which venture onto the territory French (although they can also be in another of the Province of Québec (even if they are language) and filed with the Régie des alcools, des licensed elsewhere) must be in French; markings courses et des jeux, along with payment of a fee on products intended to be sold in Québec must based on a percentage of the aggregate prize be in French but may be in another language; and value, and a report once the contest is closed software offered for sale in Québec must be confirming the prize awards. available in a French version upon no less onerous conditions. The web site of any business conducted in Québec must operate in French,
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regardless of its head office location or where the A foreign investor must consider the Competition web site is hosted or controlled, but may also Act (Canada), which is analogous to US antitrust operate in other languages, if so desired. There legislation, when seeking to acquire an interest in have been several recent decisions imposing fines a Canadian business, either by way of acquiring for contraventions of these rules, although the assets or shares. adverse resulting publicity arguably has a more The first step, in any acquisition, is to determine immediate impact. whether the acquirer and target, on a In order to obtain provincial registration to carry consolidated basis (including their respective on business in the Province of Québec, the entity affiliates), will have CDN $400 million or more in must register and operate under the French aggregate asset value or gross revenues after version of its name. If the English element is completing the transaction. If so, the second step trademarked and it can be demonstrated that the is to determine whether (a) in an asset deal, the name cannot be readily translated (for example, aggregate value of the Canadian assets to be “Second Cup” does not work quite as well as acquired or of the annual Canadian sales “Deuxième Tasse”), the English trademark may be generated by such assets exceeds the annual used but must be accompanied by a French threshold (set for 2015 at CDN $86 million), or (b) element (such as, “Café Second Cup”). Although in a share deal, the aggregate value of the certain case law holds that this exemption is Canadian company whose shares are to be available not only for registered trademarks but acquired or of the annual Canadian sales also those established by usage, the Office generated by such company exceeds the annual québécois de la langue française (the regulatory threshold (set for 2015 at CDN $86 million). If so, body charged with administering the Charter) has then in both cases pre-notification is required and recently adopted a new and much more the acquirer must receive the approval of the restrictive policy, which was successfully Competition Bureau before it may proceed with challenged before the Québec Court of Appeal by the transaction. some large American-based retail chains. Even if the financial threshold is not met, the Adhesion (non-negotiable) and standard form transaction will be reviewable if it is found not to contracts, as well as any annexed documents, be in the public interest or to create a must be drafted in French, unless the parties concentration which would unduly reduce expressly agree otherwise. It is for this reason competition. Furthermore, the Competition that one commonly sees a clause in any contract Bureau always retains the right under Section 92 involving one or more Québec parties, whether or of the Competition Act to review any transaction not it was in fact negotiable, to the effect that: where there is a lessening of competition; “The parties have requested that this Agreement however where the transaction is non-notifiable, and all documents ancillary thereto be drafted in the Competition Bureau will generally only learn English. Les parties ont exigé que la présente of it if a third party complaint is made. convention ainsi que tout document ancillaire The statutory exceptions to the application of the soient rédigés en anglais." Competition Act include acquisitions of public MATTERS TO BE CONSIDERED BY AN OFFSHORE companies or real estate, and transactions made PARTY WHEN SELECTING BUSINESS ENTITY TYPE in the ordinary course of business. BARRIERS TO ENTRY The approval may be conditional upon the Competition Act divestment by the acquirer and/or target of certain businesses, but generally speaking the
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Competition Bureau favours structural remedies to more stringent requirements. over behavioural ones. A "cultural business" is defined by Section 14.1 of Investment Canada Act the Investment Canada Act as the publication, A non-Canadian establishing a new business in distribution and sale of books, magazines, Canada or acquiring control of an existing periodicals or newspapers in print or machine Canadian business must also consider the readable form (other than merely printing or Investment Canada Act. Any investment by a non- typesetting them); the production, distribution, Canadian to establish a new business is subject to sale or exhibition of film or video recordings, notification, either prior to implementation or audio or video music recordings, music in print or within the following 30 days. The information machine readable form or radio communication required includes the identification of the in which the transmissions are intended for the investor, the projected number of employees at general public; and radio, television and cable television broadcasting undertakings, satellite the end of the 2nd full year of operation, the projected amount to be invested in the new programming and broadcast network services. business over the first 2 full years of operation, Pursuant to recent amendments to the and the projected level of annual sales or Investment Canada Act, the government has been revenues during the 2nd full year of operation. granted additional powers to block transactions The acquisition of control (as defined by certain involving national security issues, as well as to statutory formulae) of a Canadian business is review transactions involving state-owned reviewable if the assets of the entity or entities entities. being acquired exceed certain thresholds. Luckily Immigration for members of the World Trade Organization Under the Immigration and Refugee Protection (such as Americans), the usual thresholds of CDN Act (Canada), foreign nationals may work $5 million for direct investments and CDN $50 temporarily in Canada under certain conditions, million for indirect investments are replaced by generally being a formal job offer, confirmation an annually prescribed amount based on a thereof and a work permit. Once a foreign comparative of the Canadian GDP (gross domestic national receives a job offer, it must be approved product) in the current year to that of the by Employment and Social Development Canada. previous year. The prescribed amount for 2015 Upon approval of the job offer, an immigration has been set at CDN $369 million. Even though officer will decide if the foreign worker qualifies transactions are not automatically reviewable, for the work permit and will assess the person's notification of the transaction to the Canadian health and security requirements. A work permit government along with the filing of forms under is usually valid only for a specified job, employer the Investment Canada Act is required, either and time period. In most cases, applications must prior to or within 30 days after the completion of be submitted from outside of Canada. the transaction. Certain categories of temporary foreign workers Certain transactions are automatically reviewable do not require work permits, including: (i) some without consideration of any threshold, such as commercial speakers, seminar leaders and guest the acquisition of control by a non-Canadian of speakers; (ii) some performing artists, students, any Canadian business which is engaged in the athletes, sports officials, journalists and providers production of uranium, or is a cultural business. of emergency services; (iii) business visitors; (iv) Businesses involved in mining, oil, water and diplomats, consular officers and other defense and satellite technology are also subject
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representatives or officials of other countries; and to citizens of the three countries. Permanent (v) seasonal agricultural workers. Other residents of these countries who are not citizens exemptions exist and the applicable conditions are not covered by the NAFTA provisions. may vary. Additional procedures apply for foreign NAFTA applies to four specific categories of workers who intend to work in many jurisdictions, business persons: (i) business visitors, (ii) notwithstanding that immigration is a matter of professionals, (iii) intra-company transferees and federal jurisdiction. (iv) persons engaged in trade or investment It is a criminal offence for Canadian employers to activities, all of whom can enter Canada without hire anyone who is not authorized to work in meeting the labour market test (i.e., validation of Canada. If the employer fails to exercise its due their job offer is not required). NAFTA waives the diligence to determine whether or not his/her need for employers in Canada to obtain employee is authorized to work in Canada, the confirmation from Employment and Social employer will be deemed to have known that the Development Canada when hiring US or Mexican employee is an unauthorized employee under the businesspersons for a position in Canada. law. A person committing this offence may be CONCLUSION sentenced to a fine of up to CDN $50,000 and/or imprisonment for up to 2 years. As can be seen from this summary review, although the commercial considerations involved The North American Free Trade Agreement in establishing and operating a business in Canada Implementation Act (S.C. 1993, c. 34, hereinafter are substantially the same as in other jurisdictions, “NAFTA”) specific knowledge of the particularities of Under NAFTA, citizens of Canada, the United Canadian business law at the federal, provincial States and Mexico can gain quicker and easier and territorial levels is essential to carrying on temporary entry into the three countries to that business successfully in the “Great White conduct business-related activities or North.” investments. All provisions are equally available
ILN Corporate Group – Establishing a Business Entity Series
Fall 08
Fall 15 INTERNATIONAL LAWYERS NETWORK
ZHONG LUN LAW FIRM ESTABLISHING A BUSINESS ENTITY IN CHINA
ILN CORPORATE GROUP
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ESTABLISHING A BUSINESS ENTITY IN CHINA
I. General Introduction on Business Entities 1. Sino-foreign equity joint venture (“EJV”), a under PRC Laws limited liability company with both foreign The types of entities available in China through and Chinese investors; which to conduct business are divided into (i) 2. Sino-foreign cooperative joint venture (“CJV”), incorporated entities with legal person status, a joint venture with both foreign and Chinese including limited liability companies and joint investors. A CJV may be incorporated as a stock companies; and (ii) unincorporated limited liability company or may exist as an entities without legal person status, including unincorporated joint venture; partnership, some cooperative joint ventures 3. Wholly foreign-owned enterprise (“WFOE”), and representative offices. normally a limited liability company with 100% In the case of limited liability companies and foreign ownership; joint stock companies, companies’ liabilities to a 4. Foreign invested joint stock company (“FIJSC”), third party are generally limited to the a share issuing company with limited liability; registered capital (or share capital) contributed by the shareholders. While for partnership and 5. Foreign investment partnership (“FIP”), a some cooperative joint ventures, partners (or partnership where all or part of the partners part of them) are jointly liable for the entities’ are foreign investors; and liabilities to a third party. 6. Representative office (“RO”), which is not a company. A RO is permitted only to make business contacts and carry out promotion activities on behalf of its head office and is not allowed to directly engage in any profit- making activities. Matters to be considered when choosing a particular business entity type When choosing a particular type of business entity for investing in China, foreign investors should take into account various commercial, legal and policy considerations, which include II. Business Entities Available to Foreign Investors among others: Foreign investors may invest in China through 1. Foreign Investment Restrictions establishing green field operations or through China has long kept a market entry policy with acquiring equity interests in, or assets of, an the introduction of the Catalogue of Industries existing company. The resulting entities so for Guiding Foreign Investment (the established are commonly known as foreign “Industrial Catalogue”), according to which investment enterprises (“FIEs”). Currently, the foreign investment projects are divided into main types of investment vehicle available to four categories: (i) permitted investment, (ii) foreign investors are: encouraged investment, (iii) restricted investment; and (iv) prohibited investment. Pursuant to the Catalogue, foreign investment
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in many industries, particularly those that fall (“NDRC”) are the main approval authorities. within the category of restricted investment, Except for certain large projects, most approval must take the form of EJV or CJV. For certain powers are exercised by local counterparts of industries that are more sensitive to foreign MOFCOM and NDRC. investment, it is required that the Chinese Industry-specific approvals are also required in partners to the EJV or CJV must hold a various sectors. For example, a joint venture controlling interest. securities company requires the approval of China 2. Commercial Needs and Business Model Securities Regulatory Commission; a For those industries where there are no legal telecommunications joint venture requires restrictions on foreign ownership, the types of approval of Ministry of Information Industry; and investment vehicle will be determined, to a a joint venture formed by acquiring state-owned large extent, by the commercial needs and assets may require approval of State-owned business model of the proposed business. Assets Supervision and Administration Commission. A joint venture will be a good choice if the proposed business in China requires the Please see below a brief introduction to general support or resources of a local partner. On the requirements and procedures for setting up an other hand, if the investor wishes to have FIE in China: stronger control over the operation of its 1. To apply to local AIC for reserving the Chinese China subsidiary, it is advisable to incorporate business name of the proposed FIE; the subsidiary as a WFOE. The FIP was 2. If applicable, to apply to competent introduced to the PRC legal system only authorities for industry-specific approval; recently, and it is expected that it will be mainly used by venture capital and private 3. To apply to NDRC or its local counterpart for equity investors to form investment funds in project approval (although required by law, China. If a foreign investment company we note that this requirement is not strictly wishes to be able to issue shares to more enforced in some locality in China); shareholders, and eventually to go public and 4. To apply to MOFCOM or its local counterpart list its shares on a stock exchange in the PRC, for approval and issuance of foreign the company must take the form of FIJSC. If a investment approval certificate; foreign investor is not well prepared for a full exposure of business and financial risks faced 5. To register with the relevant local AIC and in China, a RO may be an appropriate choice obtain the business license of the proposed for it to tap into the Chinese market. FIE. Please note that upon obtaining the business license, the FIE is deemed as having Steps and Timing to Establish been formally established; and Most forms of foreign investment in China are 6. To go through the post-establishment subject to governmental approval and formalities / registrations with various local registration, with an exception for FIP. An FIP may government authorities (tax, foreign exchange, be established by registration with the local State customs, etc.). Administration for Industry and Commerce (“AIC”). The time required for establishing an FIE may vary depending on many factors such as: the location Ministry of Commerce (“MOFCOM”) and the where the FIE is to be established, the industry in National Development and Reform Commission which the FIE is to engage, the proposed
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investment scale, assistance of local partners etc. For a WFOE, the shareholder has the highest In general, large scale investment which requires authority in determining the most significant approval at a higher level takes longer than those matters of the company, while all other matters that can be approved locally. Investment that can be delegated to the board of directors and / requires industry-specific approval takes longer to or the general manager. complete. Investment in smaller cities and towns FIEs are also required to have 1 to 2 supervisors where local governments are not familiar with (for FIEs of small scale) or to set up a board of foreign investment rules may take longer to supervisor consisting of at least 3 members with obtain approvals. In our experiences, an a primary function to supervise the acts of the investment in commercial centers such as directors and other management personnel, Shanghai or Beijing that is subject to local and to correct them if such acts are found to approval only and does not require industry- have violated the laws, administrative specific approval normally take one to two regulations or the articles of association of the months to complete. company or have damaged the interests of the III. Governance, Regulation and Ongoing company. Maintenance It is common for FIEs to have a general manager, Brief summary of regulation of each type and who serves as its top executive. The general ongoing maintenance, reporting requirements manager, who may be a Chinese national or a Each type of the FIEs is subject to its own laws foreign national, is typically responsible for the and regulations providing for the legal day-to-day operations of the FIE. His or her requirement on various aspects of the FIEs, such particular responsibilities should be set out in as formation, organization, management and the FIE’s articles of association. officers, finances and accounting, merger and 2) Business Activities acquisition, dissolution and liquidation etc. In Under the PRC laws, all FIEs shall have a addition, the PRC Company Law (the “Company definitive “business scope” as approved by the Law”) also includes certain provisions that apply governmental authorities and shown on the to incorporated FIEs with respect to aspects companies’ business license. The business where the special FIE laws are silent. scope specifies the range of business activities 1) Corporate Governance in which an FIE is permitted to engage. The For an EJV, the board of directors is the highest description of such “business scope” is brief and authority for determining key matters of the quite standardized in line with the state’s company. Certain key matters such as industry categorization. Acts outside a increase/decrease of registered capital, company’s business scope may result in the dissolution of the company and amendments to company being fined. the articles of association of the company 3) Term of Operation require unanimous approval of the directors The operations of FIEs in China are typically who are present at a board meeting. limited to a fixed term as approved by the For a CJV, the board of directors (where the CJV government authorities. In practice, the usual has an independent legal person status) or a range is between 15 years to 50 years joint management committee (where the CJV depending on the size and nature of the has no legal person status) shall be the highest investment project. Such term of operation can authority for determining key matters of CJVs.
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[ESTABLISHING A BUSINESS ENTITY IN CHINA] 39 be extended upon approval by the original are offered to the more dominating examination and approval authority. shareholders, including without limitation: Upon the expiration of its term, an FIE is to be 1. The right to register their names on the list dissolved, with the property remaining after of shareholders of the company. clearance of debts to be distributed in 2. The right to attend and vote at the accordance with the ratio of the investor(s)’ shareholders' meetings. capital contributions except where the joint venture contract or articles of association 3. The right to access to the articles of provide for otherwise. association, minutes of shareholders' meetings, minutes of board meetings,
4) Annual Inspection Requirement minutes of board of supervisors' meetings FIEs are subject to annual inspection jointly and financial and accounting reports of the conducted by various governmental authorities company. except for local AIC (e.g., MOFCOM, tax 4. The right of first refusal to purchase the authority, foreign exchange control authority, shares to be transferred by the other customs authority etc.). The application shareholder(s) of the company (in the case documents for such annual inspection include, of a joint venture, any share transfer is among others, the financial statements for the subject to the consent of all other joint preceding fiscal year audited by a qualified venture parties). accounting firm within the PRC. 5. The right to receive dividends. Also, FIEs are required to submit their annual report online to local AIC. The annual report 6. The right to receive the remaining property containing the capital contribution by the of the company once the company has been investors and the assets status of the FIEs will liquidated. be disclosed to the public. 7. The right to cause supervisors/directors to Requirements for local shareholding/directors initiate a lawsuit against the directors, supervisors and other management As introduced above, the Industrial Catalogue personnel who breached their fiduciary sets forth a list of the industries, where foreign duties and caused damages to the company; ownership is limited to a certain ratio. if no such action has been taken within Therefore, any foreign investment in such certain period, the right to directly sue the industries must be made by partnering with a responsible directors, supervisors or other Chinese party. In certain industries, the Chinese management personnel in court. party must hold 51% or more of the equity interests in the joint venture. 8. The right to file a suit against any person who caused harm to the legitimate interest There is no legal requirement on local directors. of the company. The shareholder(s) may choose and nominate their own director candidates. Furthermore, a dissenting shareholder (usually also being a minority shareholder) is entitled to Minority shareholders’ rights and protection request the company to repurchase its shares if Amendments to PRC laws in recent years have (i) the company has been profitable for greatly improved the protection of minority consecutive 5 years but has not distributed shareholders. Minority shareholders are dividends in the said period; (ii) the company entitled to the same shareholders’ rights that conducts merger/division or transfer its major
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assets; or (iii) the company should have expired (i) the aggregate global turnover of all or dissolved according to its articles of undertakings participating in the association, but the shareholder’s meeting concentration exceeded Rmb10 billion votes to amend the articles of association, during the previous financial year, with at making the company continue to exist. Failing least two undertakings each having a an agreement on the requested repurchase turnover of Rmb400 million or more between the dissenting shareholder and the within China during the previous financial company within 60 days following adoption of year; or relevant resolution of shareholder’s meeting, (ii) the aggregate turnover within China of all the dissenting shareholder has the right to bring undertakings participating in the a lawsuit to court. concentration exceeded Rmb2 billion IV. Foreign Investment, Thin Capitalisation, during the previous financial year, with at Residency and Material Visa Restrictions least two undertakings each having a Any significant barriers to entry for an offshore turnover of Rmb400 million or more party within China during the previous financial year. On top of the general industrial restrictions on foreign investment under the Industrial Catalogue, Upon its completion of the review process, if a foreign investor planning to invest in China there are anti-monopoly concerns with should also consider whether the proposed respect to the concentration, MOFCOM may investment may trigger anti-monopoly review or prohibit the concentration or grant its the national security review by Chinese approval with restrictive conditions. government. 2. National Security Review 1. Anti-Monopoly Review on Concentration of Not all M&A deals will be subject to a national Undertakings security review. The national security review Under PRC law, concentrations of process will apply only if a foreign investor is to undertakings must be reported to MOFCOM if obtain the de facto control over a domestic certain thresholds are met. The term company that is involved in a business that concentration of undertakings is defined as concerns either (i) national defense security (for any of the following: instance, the target company relates to the military or its location is adjacent to major and (i) merger of undertakings; sensitive military facilities); or (ii) national (ii) acquisition by an undertaking of control economic security (for instance, the target over one or more other undertakings by company involves major agricultural products, acquiring their equity or assets; or major natural resources and energy industries, important infrastructure projects, transportation (iii) acquisition by an undertaking of control services, key technologies, as well as major over one or more other undertakings, or equipment that are related to national security). of the ability to exercise a decisive influence over one or more other If the joint committee consisting of MOFCOM and undertakings, by contract or otherwise. NDRC or the State Council decides that a proposed transaction has or is likely to have a The general thresholds for merger control major impact on the national security, the notification are: transaction parties will be required to terminate the transaction, or to undertake certain measures
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[ESTABLISHING A BUSINESS ENTITY IN CHINA] 41 to eliminate the potential impacts on the national minimum portion and time frame for capital security. contribution. The current PRC Company Law has Any capitalisation obligations removed such statutory requirements in relation to registered capital and investors now have the Unlike in most common law jurisdictions, the right to decide on the registered capital of the concepts of authorized and issued capital are not company at their own discretion. adopted in the context of the PRC laws. In China, the capitalization requirement on an FIE is Another important concept relating to registered reflected on the concept of “registered capital”. capital is “total investment amount”, which represents the combination of both the equity Registered capital is defined as the total amount contribution (registered capital) and permitted of capital contribution subscribed by the investors. debt financing of the FIE. The difference between Capital contribution may take a variety of forms the registered capital and the total investment such as cash, industrial assets, land use rights, amount of an FIE represents the maximum intellectual property etc. Prior to the March 1, borrowing limit of the FIE. 2014 when the current PRC Company Law became effective, companies including FIEs are To avoid undercapitalized companies, China subject to minimum registered capital requires specific registered capital to total requirements and other requirements on the investment ratios:
Total Investment Ratio of Registered Minimum Registered Capital to Total Capital Requirement Investment ≤ US$3 million 70% N / A
> US$3 million and 50% US$2.1 million, if the total ≤ US$10 million investment is < US$4.2 million > US$10 million 40% US$5 million, if the total but ≤ US$30 investment is < US$12.5 million million > US$30 million 33% US$12 million, if the total investment is Any special business or investment visa issues Generally, the immigration and labor registration All foreign employees, except those with procedures for a foreign employee working in permanent resident status in China, may only China can be summarized as the following: work in China with Work Permits and Residence 1. Application for and issuance of a permit to Permits. employ a foreign national. ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN CHINA] 42 2. Application for a “work” visa in foreign In China, the most common way for FIEs to remit national’s home country. their profits out of China is through the 3. Registration with Public Security Bureau distribution of dividends. However, there are within 24 hours of arrival in China. conditions that have to be met for dividend distribution. Under PRC law, the after-tax profits 4. Medical examination in China. can only be legally distributed after making up for 5. Application for and issuance of a work permit. previous losses and allocating contributions to various enterprise reserves. Under PRC law, the 6. Application for and issuance of a residence dividends to be distributed will be subject to up permit. to 10% withholding tax. If the foreign investor is 7. Registration with the relevant tax bureau. a Hong Kong resident company which meets the required conditions set forth in the bilateral tax 8. Registration with customs, if personal items treaty between mainland China and Hong Kong, are being shipped from abroad. the applicable withholding tax rate may be The residence permit functions as a multi-entry reduced to 5%. Chinese visa, which will enable a foreigner to stay In case of liquidation of an FIE, excess cash can be in China for a certain period of time (normally one remitted to a foreign investor. Funds the remain year) and to exit and re-enter China for after paying off liquidation expenses, employee international travel within this period. wages, social insurance premiums, outstanding Any restrictions on remitting funds out of the taxes and the company’s debts can be converted jurisdictions (withholdings, etc.) into foreign currency and remitted to the foreign In general, funds of an FIE are normally remitted investor. Where the remaining funds are in by way of (i) profits distribution; or (ii) assets excess of the investment made by the investor, distribution upon liquidation. the part in excess will be treated as profits and therefore subject to the withholding tax at the same rates as applicable to profit distribution. ILN Corporate Group – Establishing a Business Entity Series Fall 08 Fall 15 INTERNATIONAL LAWYERS NETWORK PETERKA & PARTNERS ESTABLISHING A BUSINESS ENTITY IN THE CZECH REPUBLIC ILN CORPORATE GROUP [ESTABLISHING A BUSINESS ENTITY IN CZECH REPUBLIC] 44 ESTABLISHING A BUSINESS ENTITY IN CZECH REPUBLIC 1. Types of business entities value of in-kind contributions is subject to an Investors may choose from the following forms of official valuation. Generally, before applying corporate structure: for incorporating a company, the premium and at least 30 percent of each monetary Limited liability company contribution must be paid up. The outstanding Joint-stock company amount must be paid up upon agreement between the shareholders within five years at Limited liability partnership the latest. Contributions in-kind must be paid General partnership up in full before the company is incorporated. Cooperative The company is owned by one or more Branch individuals or corporations. Each shareholder holds an "ownership interest'' which 1.1 Limited liability company corresponds to a percentage of the total A limited liability company (LLC) is the most registered capital. As of 2014 an LLC with a sole frequent corporate structure used in the Czech shareholder can also be the sole shareholder Republic. An LLC is founded by a Memorandum or founder of another limited liability of Association, if there is more than one company. founder, or a Foundation Deed, if there is a The company itself is wholly liable for any sole founder. No minimum registered capital is breach of its obligations with all of its assets. required by law for an LLC; the law only The liability of a shareholder for the company's requires the minimum contribution of each obligations is limited to the unpaid amount of shareholder in the amount of CZK 1. However, the shareholder's contribution. Consequently, it is advisable to count on a reasonable starting shareholders in a limited liability company are amount for the registered capital for financing not liable for the company's debts provided the launch of the business and thus avoid the they have paid up their contributions in full. application of the insolvency test from the very The “qualified” shareholders may exceptionally beginning. become liable for a company’s debts by Monetary or non-monetary (in-kind) application of the rules on company groups, contributions are allowed, namely real or namely in insolvency, e.g., if they through their personal property, certain intangible assets, control or influence significantly affect the and existing and documented due debts. The conduct of the company to the detriment of the company. 1.2 Joint-stock company A joint-stock company (JSC) is established by adopting By-laws. From 1 January 2014 there is no distinction between private and public JSCs. The minimum registered capital is CZK 2,000,000, or EUR 80,000 if the company chooses to keep accounts in EUR. There are no requirements for a minimum shareholder contribution. The company is owned by one or ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN CZECH REPUBLIC] 45 more individuals or corporations. limited partner appears in the name of the Both monetary and non-monetary (in-kind) company, the limited partner’s liability for the contributions are allowed, namely real or company’s debts is unlimited. personal property, certain intangible assets, On the other hand, the other partners and existing and documented debts owed to (“general partners”) are not obliged to the founders. The value of in-kind contribute to the registered capital. However, contributions is subject to an official valuation. their personal liability for all the company’s Before incorporating a new JSC, the premium undertakings is unlimited. and at least 30 percent of the nominal value of 1.4 General partnership shares must be paid up. The outstanding amount must be paid up in line with the By- A general partnership must also be founded by laws within one year from the incorporation of at least two individuals or companies. the company at the latest. Registered capital is not created and all shareholders have an equal interest in the The company itself is wholly liable for any company, unless agreed otherwise in the breach of its obligations with all of its assets. partnership agreement. All partners are fully Shareholders in a joint-stock company are not and personally liable for all the company’s liable for the company's debts. Certain undertakings. “qualified” shareholders may exceptionally become liable for a company’s debts by Beside monetary and non-monetary (in-kind) applying the rules related to company groups, contributions, partners can also contribute to namely in insolvency, e.g., if they through their the company’s capital by providing work or control or influence significantly affect the services if agreed in the foundation document. conduct of the company to the detriment of 1.5 Cooperative the company. This legal form is not suited to the purposes of Every joint stock company must have a website commercial undertakings. It is a traditional providing information about the company’s legal form frequently used for the ownership name, registered seat, business identification of private residential property. number and incorporation data with the commercial register including the section and 1.6 Branch file, and publish various documents such as A branch, although it can be registered in the invitations to general meetings. Czech Commercial Register, is not a legal entity. 1.3 Limited liability partnership As it is not treated as a legal entity all legal acts taken by a branch are considered to be taken A limited liability partnership is a less on behalf of its founder, which may be a frequently used corporate form. It must be foreign company. This may complicate the founded by at least two individuals or branch’s operations and day-to-day business. companies, at least one of which (“limited partners”) must contribute to the registered A branch is established upon the execution of capital an amount set by the foundation a founding document known as the resolution document. Limited partners are liable for the of foundation. Its form depends on the company’s debts up to the unpaid amount of requirements set up by the law governing the their contribution. However, if the name of a founder. Having at least officially certified signatures on the document is always ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN CZECH REPUBLIC] 46 advisable. A branch must obtain the Before being established the company must corresponding trade licenses or other permits obtain a business license (such as a trade or other necessary to do business, which correspond to license). The trade license is certified by an the activities of the founder. extract from the Trade Register held by the Trade A branch must have a director who is an Licensing Office. The company acquires the trade individual generally registered in the license, in the extent of the registered scope of Commercial Register and who executes all business, from the date it was established. legal acts relating to the maintenance of the A newly founded company must be registered branch on behalf of the founder. There is no with the regional Commercial Register before it requirement under Czech law regarding a can become a legal entity. Commercial Registers branch's registered capital. in the Czech Republic are kept by Regional Courts 1.7 Entities under European law or the Municipal Court of Prague. Corporate information on existing companies such as The European Company or Societas Europea business name, address, authorised (SE) and European Economic Interest Grouping representatives, registered capital and certain (EEIG) are also considered as business entities, other information can be found in these registers which may operate in the Czech Republic. accessible online. 2. Steps and timing to establish In general, if an application to register a company Generally, a company is established in two steps: in the Commercial Register fulfils all the 1. founding the company by adopting a requirements and all necessary documents are foundation document, and 2. registering the supplied then the company will be registered company with the Commercial Register. within five working days of the application being filed. Founding a company does not mean it legally exists. In the period between its foundation and 3. Governance, regulation and ongoing establishment the company does not have legal maintenance personality (it cannot acquire rights or 3.1 Corporate governance obligations) and its statutory bodies do not yet exist. Company shareholders are only in the Corporate governance is vested in the position of founders and not shareholders. company’s bodies and varies by the type and size of company. The Company’s founders must authorise a person to administer the paid-up capital before For capital companies the supreme body is incorporating the company. The administrator, always the general meeting of shareholders. often one of the founders or a bank, is obliged to In a limited liability company the obligatory take custody of the founders’ contributions. In company bodies are the general meeting and addition, they are obliged to provide a written one or more executive directors or board of statement on how much capital has been paid up, executive directors if allowed by the foundation which must be attached to the application for documents; establishing a supervisory board is registration in the Commercial Register. Upon optional. Executive directors must act with due establishing the company, these deposits become diligence and care and follow the principles and the property of the company, which may from resolutions passed by the company's general that moment on freely dispose of them. meeting in compliance with law and the ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN CZECH REPUBLIC] 47 Memorandum of Association or Foundation and rigid from 2014. Members of statutory Deed. They may not disclose sensitive and bodies are obliged to perform their offices with confidential information to third parties. If they the required loyalty, knowledge and care – with breach these obligations they are personally due diligence. A corrective to the strict rules of liable for all damage caused by the breach. They due diligence, called the business judgment rule, must also respect the non-competition clause has been newly introduced. The rule states that envisaged by the Act on Business Corporations, a member of the statutory body is acting with which may be extended by the Memorandum of due care and with necessary knowledge if Association or Foundation Deed. Such ban can he/she can in good faith reasonably assume be however waived by all shareholders. when making his/her business decisions that Joint-stock companies may choose between the he/she has acted in a well-informed manner dualistic model and the monistic model of and in the defensible business interests of the corporate governance. The dualistic model business corporation. requires the establishment of a board of If a member of the statutory body breaches directors and a supervisory board, whereas the his/her obligations, he/she must return any monistic model means a board of profit obtained in connection with such breach administrators and statutory director. Business or as the case may be provide indemnification management is therefore executed either by a of material and non-material damage in cash. board of directors (in the dualistic model) or by A new feature is the obligation of the member a statutory director (in the monistic model), of the statutory body to return the profit who must follow the same rules as executive obtained under a contract on the performance directors in a limited liability company. In the of the office and all other profits from the monistic model, the supervisory board is company received in the two years preceding a substituted by a board of administrators, having decision on bankruptcy, if he/she was aware or mixed competences, which means that they should and ought have to been aware of the combine the rights and duties of the fact that the business corporation was under supervisory board in the dualistic model on the imminent threat of bankruptcy, and contrary to one hand and also decide on the strategic acting with due diligence did not take all the orientation of the business management and necessary and reasonable steps to avert supervise its execution by the statutory director bankruptcy. on the other. Under certain conditions a member of the The supreme body of a partnership (both a statutory body can be excluded by the court limited liability partnership and a general from his/her office in any business corporation partnership) is constituted of all partners, who in the Czech Republic, and during this exclusion are all equal and hold one vote each, unless cannot be appointed to any such position. stated otherwise in the partnership agreement. Business management is generally executed by If a statutory body member fails to settle either every partner in a general partnership, or damages to the business corporation caused by every partner with unlimited personal liability in breach of obligation in the performance of a limited liability partnership. Establishing a his/her duties, he/she is liable for the debt of supervisory board is voluntary. the business corporation towards the creditor to the amount of non-settled damages if the Corporate governance rules are more detailed creditor cannot satisfy its debt from the ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN CZECH REPUBLIC] 48 business corporation. Apart from liability for are fulfilled. damage pursuant to the Insolvency Act when 3.3 Requirements for local shareholdings/ failing to submit an insolvency petition or for its directors late submission, a member of the statutory body might be under certain circumstances For shareholders there are no requirements in liable for fulfilling all the obligations of the respect of their nationality - they may be either business corporation if a legal decision on Czech or a foreign individual or company. bankruptcy was issued. As for the executive directors and members of Members of a company’s bodies also have various boards, they may be either a Czech or several other obligations, such as notification foreign individual or a company (except for a duties. For example, they must inform the statutory director of a joint stock company or supervising or supreme body if their interest chairperson of the board of administrators, who conflicts with the company’s interests, or if they must be an individual). Individuals must meet intend to conclude a contract with the company. several requirements, for example, they must Special attention is to be attached to the be 18 years of age, have a clean criminal record, contract executed between the member of the consent with their registration, and fulfil other statutory body and the company in order to conditions imposed by law. Companies are in avoid a situation where his/her performance of the performance of their function in a the office will be for free. company’s body represented by an authorised individual representative who must fulfil the A company’s problem-free existence is also abovementioned requirements as well. ensured by what is known as an insolvency test which prohibits the company to pay out the Foreign nationals do not need a residence profit if it caused its own bankruptcy. permit in the Czech Republic to be registered with the Commercial Register in a Czech 3.2 Reporting requirements company, though this may subsequently be An existing company must regularly publish in required for non-EU nationals for living or the Commercial Register, in particular the working in the Czech Republic. following documents: 3.4 Protection of minority shareholders (i) annual reports, In a JSC, minority shareholders are those who (ii) annual, extraordinary and consolidated own at least 3 percent of the registered capital financial statements (if not included in the if the registered capital is more than CZK annual report), 100,000,000, 5 percent of registered capital if (iii) proposal for distributing profit and its final the registered capital is CZK 100,000,000 or less, form or settling losses, if not included in the or at least 1 percent of the registered capital if ordinary financial statement, the registered capital is CZK 500,000,000 or (iv) auditor’s report certifying the financial more. They are granted several minority rights, statement, and such as the right to ask the board of directors or the statutory director to summon an (v) report on relations between related parties. extraordinary general meeting to discuss issues The annual reports and financial statements proposed by them, or to have an issue must be certified by an auditor before being proposed by them included in an ordinary published if the conditions of the accounting act general meeting, and the right to ask the ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN CZECH REPUBLIC] 49 supervisory board to examine the performance 4.2 Related-parties’ transactions of the board of directors in matters determined Transactions between related parties must by request. comply with the arms-length principle (that is, They may, either through the board of directors by applying fair market prices). Otherwise, the or directly, require the payment of the tax administrator may adjust the tax base of the outstanding part of the issue price from party involved in the transaction by the shareholders in default, or seek compensation difference between the price actually charged for damage caused by members of the statutory and the fair market price, and may assess body who have not acted with due diligence. additional tax and impose related penalties They can also ask for the appointment of an (including late payment interest on the expert to examine the report on relations additionally assessed tax). Certain exceptions to between connected persons. this rule relate to the interest on credits and They also have several rights during loans. transformation procedures and squeeze-outs. According to the Guidelines of the Czech The minority shareholders’ position may also be Ministry of Finance, OECD Transfer Pricing strengthened during elections of company’s Guidelines apply in the Czech Republic. bodies by “cumulative voting”. For the purposes 4.3 Permanent establishment of the election, each shareholder’s vote is Income derived through a permanent multiplied by the number of elected members establishment of a foreign company located in of the company’s bodies. A shareholder may the Czech Republic is regarded as Czech-source then give all his/her votes to a single candidate income. or divide the votes among more candidates which gives minority shareholders a greater A permanent establishment is defined as a possibility of influencing the body’s composition. “fixed place of business through which the business of an enterprise is wholly or partly Additionally, shareholders in LLCs have similar carried on.” A place of management, a branch, rights, though the percentage limit may differ, an office, a factory, a workshop and a mine, an and in certain cases each LLC shareholder is oil or gas well, a quarry or any other place of entitled to act so. extraction of natural resources are always 4. Foreign investment, thin capitalisation, considered fixed places of business. residency and material visa restrictions Providing services such as consultancy or 4.1 Thin capitalisation rule management will create a permanent establishment if the services are rendered in Thin capitalisation rules govern the maximum the Czech Republic for more than six months in amount of tax deductible interest and other any consecutive 12-month period (unless a related financial costs (such as credit Double Taxation Treaty states otherwise). processing) paid on credits and loans in Similar rules generally apply to a construction situations where they exceed the limits site, an assembly line and other installation imposed by the Income Taxes Act (ITA). Thin projects (but Double Taxation Treaties often capitalisation rules apply to credits (loans) impose specific conditions as far as construction involving related parties. sites are concerned). A foreign company or individual who has a ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN CZECH REPUBLIC] 50 permanent establishment in the Czech Republic follow the wording of the OECD Model Tax is obliged to register with the Czech Financial Convention. Double Taxation Treaties, among Authority and to file annual income tax returns. other things, can reduce the withholding tax 4.4 Withholding taxes rate applicable to Czech tax non-residents’ income from Czech sources and stipulate the Withholding tax is applied to certain types of method for the avoidance of double taxation to income earned by Czech tax residents and to a be used with respect to particular types of number of Czech-sourced types of income income. The Double Taxation Treaties usually earned by Czech tax non-residents. The tax rate stipulate the application of either the is 15 percent. However, the withholding tax rate exemption (exemption with progression) or applicable to the Czech sourced income of simple credit methods. If no Double Taxation Czech tax non-residents as stipulated by the ITA Treaty has been concluded between the Czech may be reduced by the relevant Double Republic and the respective country, the Czech Taxation Treaty. In case of income from Czech sourced income of foreign tax residents will be sources paid to taxpayers who are tax residents subject to Czech taxation under Czech tax law. from countries that are not EU and EEA members, did not conclude a DDT with the 4.6 Harmonisation with EU tax legislation Czech Republic, and did not conclude a bilateral In relation to the accession of the Czech agreement on exchange of information Republic to the EU on 1 May 2004 EU Directives concerning income tax with the Czech Republic concerning direct taxation (income taxation) or a similar agreement on a multi-national basis, were incorporated into the ITA. the withholding tax rate is increased to 35 Based on the so called Parent Subsidiary percent. Directive (and related amending Directives), Tax payers and EU residents can file an income dividends and other profit share distributions tax return in which related expenses can be between Czech and EU companies which meet applied and withholding tax is considered an the definition of a parent company and its advance payment. However, this is only subsidiary are not subject to corporate income possible for certain types of income, namely tax. To qualify as parent and subsidiary royalties, interest, income from contractual companies, companies must fulfil the following penalties and remuneration for members of conditions: statutory bodies. the companies must take a legal form listed in No withholding tax is applied to dividends if the the respective EU Directives, payer and recipient qualify as a subsidiary and a the minimum capital holding in the subsidiary is parent company within the meaning of the EU 10 percent and is held by the parent company Parent Subsidiary Directive (for further details for an uninterrupted period of at least 12 see Harmonisation with EU Tax Legislation months (can be fulfilled subsequently), below) and in certain cases of interest the companies must be EU member state tax payments under the conditions stipulated by residents, the ITA. the companies must be subject to corporate 4.5 Avoidance of double taxation income tax as stated in the respective EU To date the Czech Republic has concluded Directives. about 80 Double Taxation Treaties which closely Similar conditions also apply if dividends are ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN CZECH REPUBLIC] 51 paid by a Czech subsidiary to its mother nationals. To commence work or to take up a company if it is a tax resident of the EU or position of a statutory body member with a Switzerland. Czech company, neither a work permit nor a 4.7 Further corporate tax exemptions visa is required for an EU member state national. If an EU national is employed with a Tax exemptions for dividends and other profit Czech employer only a notification form must share distributions have been extended to be filed and passed over for statistical profit share distributions paid to a Czech tax purposes to the local labour office. An EU resident (and also to a Czech permanent member state national does not need a establishment of a tax resident of another EU temporary or permanent residence permit to member state) by a subsidiary which is a tax reside in the Czech Republic. An EU member resident of a state which has concluded a state national is only obliged to register with Double Taxation Treaty with the Czech Republic. the Local Office of the Foreign Police if they Besides conditions similar to those already expect to stay in the Czech Republic longer stipulated for the tax exemption of share than 30 days. distributions paid between companies within the EU, subsidiaries from third states must also 4.8.2 Third country nationals meet the condition of being subject to a Council Regulation No. 539/2001 lists the minimum 12 percent tax rate in their home third countries whose nationals must be in country. possession of visas when crossing external Under similar conditions as for shares in profit borders and those whose nationals are the tax exemption further applies to the income exempt from that requirement. of a parent company which is a tax resident of Third-country nationals not subject to the visa the Czech Republic or a Czech permanent obligation may stay in Schengen states for up establishment of a Czech tax non-resident from to 90 days within a 180 day period from their another EU member state from the sale of a first entry. The duration of individual stays in share in the subsidiary (which is a tax resident different Schengen states cumulate. of the EU or a third state which has concluded a Third-country nationals subject to the visa Double Taxation Treaty with the Czech obligation may enter and stay in the Schengen Republic). area only on the basis of a uniform visa for 4.8 Residency and visas stays up to 90 days (short-term Schengen The majority of Czech immigration regulations is visa) which allows the holder to stay on the contained in the Act on the Residence of Aliens territory for the period stipulated in the visa, in the Czech Republic No. 326/1999 Coll., as which does not exceed 90 days within a 180 amended, and Regulation (EC) No. 810/2009 of day period. The 90 day period starts from the the European Parliament and of the Council of date of first entry into Schengen territory. 13 July 2009, establishing a Community Code on Those who have already stayed in Schengen Visas (Visa Code).The basic rules regarding EU states for 90 days within a 180 day period and non-EU nationals are as follows: must leave the Schengen area unless they are 4.8.1 Residency of EU nationals in possession of a Schengen visa with limited territorial validity or a national residency title All EU nationals who work or live in the Czech issued by a Schengen member state, such as a Republic enjoy equal treatment as do Czech ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN CZECH REPUBLIC] 52 long term visa or a long-term residence purposes whereas the blue card is intended permit. for highly skilled employees, as a university Long term visas are granted for the specific education and relatively high salary are period of the stay corresponding to the required. With certain exceptions, the purpose of the stay and the validity of the applications for an employment card or a blue submitted documents, but have a maximum card must be submitted personally by an duration of six months. Generally, a long term applicant at a Czech embassy. visa cannot be extended. However, third- In certain cases, such as when a non-EU country nationals who hold long term visas national intends to reside in the Czech are entitled to file an application for a long- Republic for fewer than 3 months or he/she is term residence permit at the earliest 90 days posted by his/her foreign employer to and at the latest 14 days before their long perform work in the Czech Republic, a work term visa expires, if the purpose of stay is the permit is required in addition to a Schengen same as indicated on their long term visa. A visa (residence up to 3 months) or an long term residence permit can be employment card (posting of an employee, continuously extended. Since 24 June 2014, other cases). In these cases, a non-EU national long term visas and long term residence applies for a work permit and subsequently permits for employment purposes are no for an appropriate residence permit. longer granted. Applications for a work permit are submitted Applicants can apply for a visa at the Czech by the applicant, or by an attorney authorised embassy in their country of origin (for certain under a power of attorney, to the relevant third-countries the application can be filed at Labour Office, generally before their arrival in any Czech embassy) and for a long term the Czech Republic. A work permit is usually residence permit, with certain exceptions, at issued within 30-60 days of the application the relevant department of the Ministry of being submitted. Under specific conditions, the Interior. The application should be such as when a non-EU national has decided within 30 days (short term Schengen completed his/her education in the Czech visa), 90 days (or 120 days in complicated Republic, the obligation to obtain a work cases) for a long term visa, or 60 days for a permit may be avoided. general long term residence permit. * * * All non-EU nationals applying for work in the This memorandum is for information purposes only and reflects the law on 30 September 2014. Czech Republic and intending to reside in the Under no account can it be considered as either a legal opinion or advice on Czech Republic for more than 3 months are how to proceed in particular cases or on how to assess them. If you need required to obtain either an employment card any further information on the issues covered by this memorandum, please contact Ms Adela Krbcova ([email protected]). or a blue card. These are specific residential PETERKA & PARTNERS is a full-service law firm operating in Central and titles allowing a non-EU national Eastern Europe providing one-stop access to an integrated regional service. simultaneously to reside and work in the The firm provides legal services to the multinational companies active in Czech Republic. The employment card is a the region as well as leading local groups, providing them with complex general residence title for employment legal solutions with an exceptional commercial value. ILN Corporate Group – Establishing a Business Entity Series Fall 08 Fall 15 INTERNATIONAL LAWYERS NETWORK FLADGATE LLP ESTABLISHING A BUSINESS ENTITY IN ENGLAND ILN CORPORATE GROUP [ESTABLISHING A BUSINESS ENTITY IN ENGLAND] 54 ESTABLISHING A BUSINESS ENTITY IN ENGLAND Foreword The attractiveness of the United Kingdom (UK) as a business location is unabated. There are many advantages to doing business in the UK. Investors can draw on a skilled workforce and access a large market; costs of labour and production are lower compared to many other western European countries; investors benefit from a business friendly environment as well as a high degree of legal certainty and political stability; its capital, London, is a world leading commercial and financial centre. These features make the UK an attractive place to do business, not just for large corporations but also for small and medium-sized businesses. Many foreign companies use the UK as a first stepping stone for expansion into Europe. Investing in a foreign country requires awareness of the pitfalls, and prospective investors will have many questions. It is important to have advisers who are familiar with both the legal and the practical issues. This guide offers an overview of legal aspects of conducting business in England and Wales. It is meant as an introduction to our market place and does not offer specific legal advice. Fladgate LLP accepts no liability for anything contained in this guide or for any reader who relies on its content. Before concrete actions or decisions are taken, you should seek specific legal advice. We remain at your disposal in relation to questions regarding this guide and look forward to assisting you. This guide describes the law in force in England and Wales as at 1 May 2015, but please bear in mind that statutes, regulations and rules are subject to change. ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN ENGLAND] 55 The United Kingdom (UK) comprises England, happy to give any advice which may be required Wales, Scotland and Northern Ireland. Great in connection with establishing an English Britain includes these countries, but not Northern operation and in dealing with the necessary legal Ireland. procedures. Within the UK there are three distinct legal This section sets out the requirements for jurisdictions, namely England and Wales, Scotland incorporating an English private limited company and Northern Ireland. Each has its own laws, as the wholly owned subsidiary of a foreign courts and lawyers. In most commercial areas the company. The public limited company form is law is the same or very similar, e.g. company law chosen only for a small number of companies. and tax, but in some, such as real property, it is Formation of a public limited company (a legal very different. This guide is about England and form mainly used for companies quoted on the Wales, which we generally refer to just as England. stock exchange) will not be considered further in Setting up a business in England is quite this guide. Fladgate LLP will, however, be pleased straightforward. A foreign investor is in exactly to assist with the formation or buying of such a the same position as his British counterpart. company, if required. Essentially, the legal basis for establishing an 1.1 Formation of a company incorporated business is the Companies Act 2006 There are two ways of doing this: either by (as amended). forming a new company or by buying a 1. Types of business entity company that has already been formed, known There are various ways for an overseas investor as a shelf company. Either way, the process is or entrepreneur to set up a business in England: very quick. by forming a private limited company (Limited) Articles of association or a public limited company (Plc); A company has to have articles of association, by establishing a branch (a so-called “UK which represent the constitution of the establishment”); company. Companies House (the UK central commercial register) has produced model by forming a partnership (limited partnership, articles for use where newly formed companies limited liability partnership, general partnership); have not drawn up their own articles of association. by entering into a joint venture; or Share capital by buying or acquiring an interest in a company. An English private limited company must have a In addition to the above possibilities, commercial share capital, but no minimum contribution is agents can be engaged or distributors appointed. laid down by law so that the nominal capital can The structure chosen for establishing a business be as little as £0.01 and is frequently just £1. in England is likely to be influenced by taxation The capital can be in any currency, for example considerations. This guide does not address euros (€), or it may be made up of various these issues, on which advice should be sought. currencies. The decision as to which structure to use depends Companies formed since the Companies Act on a whole range of taxation, company law and 2006 are not required to state any amount of other legal considerations. Fladgate LLP has a capital in the articles of association. All they wealth of experience in these matters. We will be have to do, when applying to register the ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN ENGLAND] 56 company with Companies House, is to notify Directors can be of any nationality. the initial capital and to send in a fresh There is no legal obligation for private limited notification if new shares are issued. companies to appoint a company secretary, Furthermore, there is no tax payable by although this is still allowed. The company reference to the level of capitalisation. It is secretary keeps the company’s records and possible to incorporate a subsidiary with a ensures that the company complies with the substantial capitalisation, in order to enable it main provisions of company law. Where to stand alone without the support of parent companies have foreign owners, it may be guarantees, and to avoid the need for advisable to appoint a company secretary in subsequent share issues, without incurring any England, and there are agents who offer this tax liability. service. There need only be one shareholder, which may Registered office be a company and which does not need to be The company must have a registered office in UK resident or incorporated in England. England or Wales for delivery of official Company name documents and correspondence, for instance If the subsidiary is a private limited company, from Companies House or HM Revenue & the corporate name must end with the word Customs. This address does not have to be the “Limited” or the abbreviation “Ltd”, unless a same as the business address. special exemption has been granted. However, Accounting reference period this exemption is only applicable for non- The accounting reference period is normally a commercial purposes. period of 12 months. It is calculated from the The name must not be the same as any existing date of incorporation to the last day in the corporate name. There are also restrictions on calendar month, one year from the date of names likely to mislead or cause offence, incorporation (the accounting reference date). criminal names, names that may suggest a This can be changed, subject to certain provisos. connection with the government or a local Accounting reference periods commonly authority, and names containing certain selected are either the calendar year or the year specified “sensitive” words, such as Insurance from 1 April to 31 March, which is slightly in or Trust. advance of the UK tax year. We can run a check of your chosen name for Special approval requirements for an English you, to ensure that it is available and capable of limited company being approved. It should be noted that running the business of Directors and company secretary a subsidiary or branch in England may require The company must have at least one director certain trading licences or other approvals. For who is an individual. There are very few example, the formation and the operating of a restrictions on the choice of directors, apart financial services business will require certain from a minimum age of 16. Persons who have, authorisations and different requirements. for example, been involved in a business However, few businesses require approval. insolvency or who have a previous conviction Fladgate LLP can advise you if authorisation may be debarred from holding directorships. requirements apply to your business. ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN ENGLAND] 57 legal form for new business start-ups outside 1.2 Establishing and operating a branch (UK these areas. establishment) 1.4 Partnerships and Limited Partnerships The concept of a branch should be regarded as Foreigners can also establish partnerships an extension of the parent company. An (general partnerships) in England, although the authorised person appointed to run the branch partners will potentially have unlimited liability. can enter into transactions with third parties in Another possibility is to form a limited the parent company’s name. The branch may partnership (LP). In contrast to the LLP (see be of the foreign company itself or one of its above), the LP has only a limited legal subsidiaries. In any case, under the English personality of its own. Its partners, provided system, the branch is not a legal entity in its they are not involved in managing the LP, will own right and therefore the parent company be protected by limited liability, but it must remains fully liable. have at least one general partner, whose No approvals are required to set up a UK liability is unlimited. The general partner can be establishment, but there are some registration a limited company. LPs are especially preferred requirements relating both to the foreign by investment funds. They are neutral for tax company and the branch that have to be purposes and therefore they are not taxed completed within one month from opening the separately. UK establishment. 1.5 Using commercial agents If smaller scale activities are planned then an As an alternative to forming a limited company overseas company can consider simply or establishing a branch, a foreign company registering a place of business. The distinction may also decide to work in the UK market between a place of business and a branch is a through a commercial agent. fluid one. The former will not normally be authorised to conduct the business of the Relations between a commercial agent and his foreign company in England. Examples of a principal are governed by the Commercial mere “place of business” are a warehouse and a Agents Regulations 1993. These regulations marketing office. contain a series of mandatory provisions designed to give the commercial agent greater 1.3 Limited Liability Partnership protection. It should be emphasised that It is possible to form a limited liability compensation is nearly always payable if the partnership (LLP) in England. LLPs have the contract is terminated. If agreed in the agency advantage of being taxed as a partnership but contract, an indemnity is payable. If nothing is at the same time having limited liability. The agreed in the agency contract, compensation is result is something of a hybrid. payable based on the notional value of the LLPs are particularly popular with professional agency at the date of the termination. service providers (e.g. lawyers and Fladgate LLP is one of the leading law firms in accountants). Whereas the limited company is the area of commercial agency law, and advises already quite user-friendly by international and represents both agents and principals. standards, the LLP is even more flexible from a 1.6 Joint venture company law and internal structure point of view. However, it is not yet widely used as a A foreign company can also form a joint venture ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN ENGLAND] 58 with a UK or another foreign corporation or an requirement if it qualifies as a “small company”. individual. Most commonly, the vehicle used At least two of the following conditions must be will be a private limited company, but it may met: annual turnover must be £6,500,000 or simply be a contractual joint venture. less; the balance sheet total must be 1.7 Buying or acquiring an interest in a £3,260,000 or less; or the average numbers of company employees must be 50 or fewer. As an alternative to forming a new company, Registers the foreign business can buy an established In addition to the filing of the information English company or purchase shares in it. This referred to above with the Registrar of is certainly the quickest way of gaining a Companies, English company law requires the business foothold in the UK. company itself to maintain a number of 2. Maintenance and reporting registers, such as a register of members (shareholders/stockholders). 2.1 Company Annual return Public filing requirements The company must deliver an annual return to The company will be subject to English company the Registrar of Companies each year. law relating to the filing of information that is available for public inspection with the Registrar Registration of charges of Companies at Companies House. Failure to Particulars of most charges or other security comply with these requirements is a criminal created by the company and any changes to offence. them must be notified to the Registrar of Annual accounts and reports Companies within 21 days of their creation or change. The company must keep proper accounting records which are sufficient to show and explain Other matters requiring registration its transactions, to disclose with reasonable The Registrar of Companies must also be accuracy the company's current financial notified within 14 days of any changes in the position and to enable the directors to ensure details and particulars of the company's that the balance sheet and profit and loss directors, secretary and registered office and, if account comply with the statutory a new director or secretary is appointed, his requirements. written consent to act must accompany the The accounts must be prepared in accordance notification. with a detailed format and contents specified Many resolutions passed by the company, for by the Companies Act 2006. example, any resolution amending its articles of In general, all accounts filed with the Registrar association, also have to be filed with the of Companies must be audited, although there Registrar. are exemptions available to small companies. Company name and stationery Auditors The company's name, place of registration, Auditors to a company must be UK-qualified or registered number and registered office, have UK-recognised overseas qualifications. including the word "Limited" or "Plc” must be set out legibly on all its business letters, notices, A company is entirely exempt from the audit cheques, bills of exchange, letters of credit and ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN ENGLAND] 59 other financial instruments and on all order and loans do not have to be disclosed (as would forms, invoices and receipts etc. The company's be the case if the company were incorporated VAT number should be shown on all accounting in the UK). Such accounts generally have to be forms such as invoices, orders and estimates. filed within 13 months of the end of the The company must display its name at each relevant financial period. place of business in easily legible characters and These rules are slightly modified in relation to in a conspicuous position. branches of credit and financial institutions and 2.2 Branch banks. Registration of security Company name and stationery Particulars of most charges or other security An overseas company which carries on business created over property or assets in the UK in the UK is required to state its name and owned by an overseas company with a branch country of incorporation and, if it has limited in the UK and any change to them must be liability, notice of that fact, on all business notified to the Registrar of Companies within 21 letters, notices and official publications and to days after their creation or change. Existing exhibit such information at every place where it charges relating to such property will have to be carries on business in the UK. registered when a branch is set up or charged Notification of changes assets are brought into the UK. The Registrar of Companies must be notified of Accounts any changes to the registered particulars of the Once a branch has been opened in the UK, the branch. This must be done within 21 days of the overseas company is subject to continuing event, if the change relates to the person(s) obligations to make disclosures of its accounting authorised to accept service, or otherwise documents. within 21 days of the date on which notice of the event could have been received in the UK, if If the overseas company is required by its local dispatched with due diligence. law to prepare, have audited and disclose accounts, the overseas company must deliver to 2.3 LLPs, LPs and general partnerships the Registrar of Companies copies of all the LLPs are registered by Companies House and accounting documents prepared, audited and have similar reporting obligations to companies, disclosed in accordance with its local law within and the forms used are typically variations of three months from the date on which the the forms prescribed for company use. The accounting documents are first disclosed as main and probably most important distinction is required by the company's local law. English that while the articles of association of a translations, where appropriate, are required. company must be placed on the public file at If the overseas company is not required to Companies House, the members’ agreement for prepare, have audited and publicly disclose an LLP is a private document. accounts, the overseas company is still required LPs are also registered by Companies House but to file accounts as if the overseas company only have certain limited reporting obligations. were subject to UK law, subject to extensive General partnerships are not registered by modifications in that the accounts do not need Companies House and have no reporting to be audited, directors' reports are not obligations. required and details of directors' remuneration ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN ENGLAND] 60 3. Competition rules and restrictions relatively lightly regulated. Significant barriers to UK competition and antitrust law (Competition entry are only likely to apply in the case of Act 1998) prohibits restrictive agreements or business areas that are themselves regulated, arrangements between enterprises that adversely such as banking, financial services, affect trade within the UK or which have an pharmaceuticals and gaming. appreciable impact on competition (mirroring the Regulation is typically intended for consumer provisions of the EU Treaty). Competition and protection. antitrust matters are supervised by the We will be happy to advise further on whether a Competition and Markets Authority (CMA). In particular sector is subject to regulation. determining whether an impact is “appreciable” the CMA is guided by the European Commission 7. Capitalisation Notice on Agreements of Minor Importance. Certain regulated sectors, particularly banking Competition and antitrust law also prohibits and financial services, have a requirement for abuse of a dominant position in the UK. An capital linked to their business and its potential enterprise is considered to have a dominant liabilities. position if it has a market share of 40% or more. 8. Special business or investment visa issues However, an enterprise with a market share of Generally, citizens of European Economic Area less than 40% could be considered dominant if countries (the European Union plus Iceland, the rest of the market is heavily segmented. Liechtenstein, Norway and Switzerland) have the Infringements are punishable by fines of up to right to live and work in the UK. There are some 10% of the enterprise’s turnover in the last restrictions affecting some countries, and advice financial year. should be sought before a commitment is made. Mergers in the UK come under the Enterprise Act There are restrictions on citizens of other 2002. In principle, the parties to a merger are not countries living and working in the UK, and required by English law to notify the authorities. specific advice should be sought prior to travel. However, in the absence of notification, the There is a category of investment visa which may authorities may intervene later if certain market be available to those investing more than £2m in share or turnover thresholds apply. The the UK. European Merger Regulation also applies in the 9. Restrictions on remitting funds out of the UK. It is therefore advisable to obtain early legal jurisdiction advice with regard to the consequences of a merger or takeover. 9.1 Distribution of profits 4. Local shareholding/directors Subsidiaries There are no such requirements. A withholding tax on dividends does not exist in the UK. 5. Minority shareholders’ rights and protections Dividends received by non-residents will be Members of companies and LLPs have protection taxable in accordance with the rules in their against being “unfairly prejudiced” and can bring country of residence, but will not be taxable in action in the courts to seek relief for this. the UK. An overseas company may be entitled 6. Barriers to entry to a credit for UK taxation borne by an English England, and indeed the UK as a whole, is company in which it is a shareholder on profits distributed to it. Pursuant to some double tax ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN ENGLAND] 61 treaties, a non-resident shareholder of an and include interest payments. This could lead English company may be exempt in its country to interim payments of thinly capitalised of residence on UK dividends. subsidiaries being disallowed. Careful record- Branches keeping may be required to provide evidence on which pricing is based. A UK branch of an overseas company will pay UK corporation tax on its profits. Since a branch Our firm is not treated, except for limited purposes, as a Fladgate LLP is one of central London’s leading law firms, providing legal advice of the highest quality in English law for a diverse portfolio of clients. separate legal entity from the foreign The firm’s client base has a strong commercial focus, comprising corporation, the branch will not pay a “dividend” multinationals, listed companies, banks and lenders. to the parent. The overseas company may be Fundamental to the firm’s philosophy is the belief that clients want a high standard of professional service and a high degree of personal attention, entitled to relief in its own jurisdiction for tax but at competitive rates. At Fladgate LLP, this is illustrated by the ability to paid in the UK. have immediate access to a partner and by the firm’s readiness to take the initiative in offering advice. Our fee earners have an in-depth knowledge of 9.2 Transfer pricing the industries in which they practise and extensive experience of delivering advice that is both commercial and technically expert. Anti-avoidance legislation exists to prevent In addition to advising a substantial UK-based client base, the firm provides arrangements under which the UK operation a proactive and efficient service for clients with international business through specialist groups which serve continental Europe (with an charges artificially low prices to, or is charged emphasis on the Germanic countries and France), Israel, India, the US, the artificially high prices by, foreign affiliates. The Gulf region and the Far East. Operating from London and comprising multilingual and multi-qualified lawyers, these groups facilitate cross- transfer pricing regime is in line with OECD border activities for a diverse range of companies. We can advise our guidelines and will broadly apply where the clients in many languages, including English, German, Hebrew, French, Portuguese, Romanian, Spanish, Hindi, Gujarati and Urdu. actual provisions in a transaction differ from the This document is for general guidance only. Specific legal advice should be provisions which would have been made at obtained in all cases. Fladgate LLP is regulated by the Solicitors Regulation arm’s length between independent enterprises Authority, number 484783. ©Fladgate 2015. This material is the copyright of Fladgate LLP and is not to be reproduced in whole or in part without as a result of which a potential advantage in prior written consent. relation to UK taxation is conferred. Transactions for this purpose are widely defined ILN Corporate Group – Establishing a Business Entity Series Fall 08 Fall 15 INTERNATIONAL LAWYERS NETWORK TARK GRUNTE SUTKIENE ESTABLISHING A BUSINESS ENTITY IN ESTONIA ILN CORPORATE GROUP [ESTABLISHING A BUSINESS ENTITY IN ESTONIA] 63 ESTABLISHING A BUSINESS ENTITY IN value of assets EUR 1.5 million, turnover ESTONIA exceeds EUR 3 million, or more than 45 employees; or two of the following criteria Types of business entities must be met: value of assets EUR 0.5 The most common types of companies in million, turnover exceeds EUR 1 million, and Estonia are the public limited liability more than 15 employees; to be subject to company (“AS”) and the private limited the audit requirement, there are higher liability company (“OÜ”). The OÜ may be thresholds); an examination by an auditor compared to a closed corporation: its may also be necessary because such a shares are not publicly traded and there are requirement has been stipulated in the usually rather few shareholders. The shares articles of association. of an AS, in contrast, are always in book- 2. Steps and Timing to Establish entry form and more easily transferable. It is possible to acquire an existing company, The main reason why most businesses opt but in order to establish a new company, for the OÜ form is that the minimum share the following steps must be taken: capital requirement is EUR 2,500 (does not concluding a notarised memorandum of have to be paid up on registration by an association to which articles of individual person), whereas for the AS it is association are annexed; EUR 25,000. opening a bank account in an Estonian A shareholder may be liable for damage credit institution, into which monetary caused to the company, another contributions are paid. As a general rule, shareholder or third persons by management board members are carelessness, gross negligence or an required to go to the bank in person for intentional act. A shareholder is not liable identification purposes. If the articles of for any damage caused if the shareholder association so prescribe, non-monetary did not participate in the adoption of the respective resolution or if the shareholder contributions may also be used. The voted against the resolution. If the valuation of non-monetary shareholders adopt a resolution on a contributions must be audited in case of matter that would normally be in the an AS and, in certain instances, in the capacity of the management or supervisory case of an OÜ; boards, they may be liable as if they were registering the shares in the Central members of the management or Register of Securities (not required in supervisory board. case of an OÜ, but it may be done); An AS must always have an auditor to audit submitting documents to the its annual reports. Whether an OÜ must Commercial Register. have an auditor depends on its turnover, In order to establish a branch, a notarised amount of assets and number of employees application must be filed by the director of (there are two different standards of the branch. Additional documents to be examination: an audit and review; to be filed with the application include a subject to the review requirement, one of certificate concerning the existence of the the following criteria must be met: the total company in its home country, a document ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN ESTONIA] 64 certifying the authority of the director (e.g. member of a directing body and to be a PoA or a board resolution) and a copy of loyal to the company. the articles of association of the company. The management board is the legal Companies and branches are usually representative of the company. The registered within five business days from company may be represented individually submission of their documents to the by each member of its management board Commercial Register. Please note that unless the law or the articles of documents regarding a foreign company association prescribe that the company establishing a branch or a subsidiary must may only be represented jointly by be officially certified and in most cases members of the management board. apostilled or legalized. Members of a management or supervisory Portuguese, Finnish, Belgian, Lithuanian and board who cause damage to the company Estonian citizens may establish a company by violation of their duties (e.g. by electronically through the Company breaching their duty of care) are jointly Registration Portal (“CReP”). It is not and severally liable to the company. A possible to establish a branch electronically. member of a management or supervisory Electronic establishment allows utilization board will not suffer liability if he or she of an expedited procedure, meaning that acts pursuant to a lawful resolution of the the Commercial Register will process the general meeting or any other competent petition during the next business day after body or if he or she proves that he or she receiving the application. There are no performed his or her obligations with due notary fees, but the state duty is a bit diligence. A claim for payment of higher: approx. EUR 190. Only monetary compensation to the company for damage contributions may be made in the fast-track may also be submitted by a creditor of the procedure. An Estonian credit institution company if the assets of the company are may open a bank account via CReP in the not sufficient to satisfy the claims of the name of the company being founded only if creditor. the monetary contribution is made through 3.2 Reporting requirements a bank account opened in another Member State of the European Economic Area and An annual report which consists of a the cash stands on the account until the management report and annual accounts company has been entered in the and which has been approved by the Commercial Register. shareholders must be submitted to the Commercial Register together with a 3. Governance, Regulation and Ongoing profit distribution proposal and auditor’s Maintenance report, if compulsory, not later than 6 3.1 Corporate Governance months after the end of the financial year. Members of management and supervisory 3.3 Requirements for local shareholding / boards must be natural persons with directors active legal capacity. They are required to Shareholders may be either Estonia or a perform their obligations with the foreign individual or company. diligence normally expected from a ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN ESTONIA] 65 A director must be a natural person with two weeks after the general meeting, a active legal capacity. A person with petition to a court by way of proceedings respect to whom a court has imposed a on petition in order to obligate the prohibition on acting as a member of the management board to give information. management board or a prohibition to Shareholders whose shares represent at engage in enterprise, a person who is least one-tenth of the share capital may prohibited from operating within the request the removal of a member of the same area of activity as the branch, or a supervisory board by a court. person who is prohibited to act as a If it is demanded by minority shareholders, member of the management board on the the management board shall call a special basis of law or a court decision shall not general meeting. They also may demand be a director. the inclusion of additional issues on the Directors of Estonian companies are agenda of the general meeting if the subject to a range of duties imposed by respective demand has been submitted no the Commercial Code and by the articles later than 15 days before the general of association of the Company. For meeting is held. Minority shareholders example the members of the may submit to the public limited company management board shall a) perform their a draft of the resolution in respect to each duties with due diligence; b) preserve the item on the agenda. business secrets of the company; c) At the general meeting of shareholders, represent and manage the company; d) in minority shareholders may demand a managing, adhere to the lawful orders of resolution on conduct of a special audit on the supervisory board; e)organize the matters regarding the management or accounting of the company. financial situation of the public limited 3.4 Protection of minority shareholders company, and the appointment of an Public limited company auditor for the special audit. If the general meeting does not decide on conduct of a Minority shareholders in public limited special audit, minority shareholders may companies represent at least 10% of the request that a special audit be conducted share capital, and in case of listed public and that an auditor for the special audit limited companies at least 20% of the be appointed by a court. Minority share capital. Minority shareholders are shareholders may request the change of protected by the Commercial Code in an auditor appointed by the general several aspects. meeting from a court if doubt exists Minority shareholder has the right to concerning the impartiality of the person receive information on the activities of the appointed by the general meeting. The public limited company from the minority shareholders may request of the management board at the general private limited company that the auditor meeting. If the management board who prepared the sworn auditor's report refuses to give information, the participate in the making of the decision shareholder may demand that the general to approve the annual report, and provide meeting decides on the legality of the explanations concerning the sworn shareholder's request or to file, within auditor's report if the shareholders have ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN ESTONIA] 66 submitted the corresponding written does not have a supervisory board, request at least five days before the shareholders whose shares represent at general meeting. least one-tenth of the share capital may, A court shall appoint the liquidators if this with good reason, request the removal of is requested by shareholders whose a member of the management board by a shares represent at least one-tenth of the court. share capital. Based on the demand of the Minority shareholders may demand a minority shareholders, a court may recall resolution on conduct of a special audit on a liquidator who is a member of the matters regarding the management or management board, or who has been financial situation of the private limited appointed in accordance with the articles company, and the appointment of an of association or by a resolution of the auditor for the special audit by a shareholders, and to appoint a new resolution of the shareholders. If the liquidator. shareholders do not decide on conduct of Private limited company a special audit, minority shareholders may request that a special audit be conducted Minority shareholders in private limited and that an auditor for the special audit companies represent at least 10% of the be appointed by a court. share capital. A court shall appoint the liquidators if this Minority shareholders may demand a is requested by minority shareholders. meeting of shareholders. They also may Based on the demand of the minority demand the inclusion of additional issues shareholders, a court may recall a on the agenda. Minority shareholders liquidator who is a member of the have the right to receive information from management board, or who has been the management board on the activities appointed in accordance with the articles of the private limited company and to of association or by a resolution of the examine the documents of the private shareholders, and to appoint a new limited company. If the management liquidator. board refuses to give information or refuses to allow documents to be 4. Foreign Investment, Thin Capitalization, examined, the shareholder may demand Residency and Material Visa Restrictions that the legality of the shareholder's demand be decided by the meeting of 4.1 Related-parties transactions shareholders or to submit, within two If the price of a transaction concluded weeks after receiving the refusal of the between a resident legal person and a management board or, within four weeks person associated with the resident legal after submission of the request if the person differs from the market value of management board has not responded to the above transaction, income tax shall be the request, a petition to a court in a imposed on the amount which the proceeding on petition in order to obligate taxpayer would have received as income the management board to give or the amount which the taxpayer would information or to allow documents to be not have incurred as expenses if the examined. If the private limited company transfer price had conformed to the ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN ESTONIA] 67 market value of the transaction. The natural person and remuneration paid to difference is taxed with CIT as if it was a members of the management and distribution of profit. All transactions with controlling bodies of a legal person. associated persons must be duly No withholding taxes on dividends or documented by the Estonian company interests. and in case the associated person is an off-shore entity there are additional 4.4 Further corporate tax exemptions requirements to such documentation. There are tax exemptions available for 4.2 Permanent establishment resident legal persons and non-resident legal persons acting through its Permanent establishment means a permanent establishment in Estonia. If the business entity through which the conditions in Income Tax Act are fulfilled, permanent economic activity of a non- the income tax (20/80) is not charged on resident is carried out in Estonia. A dividends or on payments upon a permanent establishment is created as a reduction in share capital or contributions, result of economic activity which is redemption of shares or liquidation of a geographically enclosed or has mobile legal person. nature, or as a result of economic activity conducted in Estonia through a 4.5 Corporate Income Tax representative authorised to enter into Resident companies and permanent contracts on behalf of the non-resident. establishments of the foreign entities When a non-resident carries on business (including branches) are subject to income in Estonia through a permanent tax only in respect of distributed profits establishment situated in Estonia, the (both actual and deemed), including income which the permanent dividends, liquidation proceeds, fringe establishment might be expected to benefits, gifts and donations, non- derive if it were a distinct and separate business expenses, etc. All distributions taxpayer engaged in the same or similar are subject to income tax at the rate of activities under the same or similar 20/80 of the net amount of the taxable conditions and dealing wholly distribution (i.e. 20% of the gross amount). independently of the non-resident of which it is a permanent establishment 4.6 Taxation of Non-Residents shall be attributed to the permanent Non-resident taxpayers are only liable for establishment. income tax regarding specific categories of 4.3 Withholding taxes Estonia-sourced income. Such taxable income includes business income, income Withholding tax is applied to certain types derived from commercial leases and of income earned by Estonian tax royalties, interest (if exceeding arm’s residents and by tax non-residents. The length interest), etc. No additional tax is income tax withheld is 20% or a lower rate levied on dividends received from of 10% for some types of income monthly. Estonian companies in Estonia provided For example income tax is withheld from that the shareholding exceeds 10%. salaries, wages and other remuneration subject to income tax paid to a resident ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN ESTONIA] 68 Income tax is charged on gains derived by subsidiaries, where company’s a non-resident from transfer of property shareholding is at least 10%. This dividend if: income is exempt from CIT when the sold or exchanged immovable is distributed further to shareholders (except for subsidiaries located in low tax located in Estonia; territories). Also, in case of subsidiaries the movable was subject to entry in located outside of the EU or Switzerland, an Estonian register prior to the “subject to tax” condition applies, i.e. transfer; dividends received from subsidiaries are the transferred real right or the right exempt, if income tax has been withheld of claim is related to an Estonian abroad or paid from the underlying profit. immovable; 4.9 Residency and visas the holding is transferred by a person who at the time of the transfer owned Estonia is a member of the European at least 10% of shares of votes in a Union and it is a Schengen country. The company, whose property directly or basic rules regarding EU and non-EU indirectly comprised at least 50% nationals are as fallows Estonian immovables, as of the 4.9.1 Citizens of the European Union transfer or during a certain period A citizen of the EU has the right to enter within two years immediately and stay in Estonia on the basis of a valid preceding the transfer. travel or identity document. Not later Permanent establishments of non- than after three months after entering residents are subject to corporate income Estonia, a citizen of the EU must register tax on the same grounds as resident with his or her local municipality. EU corporations (i.e., only profit distributions, citizens will obtain a right to reside in granted fringe benefits, gifts and Estonia for five years, a term which can donations, etc., are subject to income tax). be extended. An identity card must be applied for within one month after the Applicable tax treaties must be taken into registration of residence. account. Estonia currently has 50 tax treaties in force (the list may be found at: A citizen of the EU who has permanently http://www.fin.ee/index.php?id=11738). (at least 183 days during a year) resided in Estonia for a period of five 4.7 Harmonization with EU tax legislation consecutive years based on a temporary Estonia joined the European Union on 1 right of residence is entitled to a May 2004. In relation to that EU Directives permanent right of residence. concerning taxation were incorporated in 4.9.2 Visa Requirements to the Income Tax Act. Citizens of certain countries may enter 4.8 Restrictions on remitting funds out of Estonia without a visa (a list of these the jurisdictions (withholdings, etc.) countries may be found at www.vm.ee). There is no withholding tax on dividends If a visa is required, generally the visa in Estonia. Full participation exception for applicant must submit an application to dividend income received from ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN ESTONIA] 69 the appropriate Estonian embassy or should be submitted to an Estonian consulate in person. The application embassy or consulate. A decision on the package normally includes a valid travel issuance of the permit will be taken document, a photo, a health insurance within two months. policy valid in Schengen countries and an application form signed personally by the applicant. A state duty of between EUR 60-80, depending on the type of the visa, must also be paid. Visa types include e.g. a short-term visa for single- or multiple-entry stays up to 90 days during 6 months in Schengen area days during 6 months in Schengen area and a long-stay visa that is required for short- term employment. 4.9.3 Residence Permits There are no general restrictions for foreigners to own a business in Estonia. Although a residence permit is not required in order to own a business, it is possible to apply for a temporary residence permit to operate a business. Such residence permit may be issued to a foreigner who owns shares in an Estonian company if the business is necessary for the national interest of developing the Estonian economy and the foreigner has invested in Estonia a capital sum in the amount of at least approx. EUR 65,000. A foreigner is required to have a residence permit to gain employment in Estonia or a work permit issued on the basis of an employment contract or other similar contract. The state duty for processing an application for a work permit is approx. EUR 50, for a residence permit for employment approx. EUR 100 and for a temporary residence permit for business approx. EUR 160. As a general rule, an application for a residence permit ILN Corporate Group – Establishing a Business Entity Series Fall 08 Fall 15 INTERNATIONAL LAWYERS NETWORK JALSOVSZKY LAW FIRM ESTABLISHING A BUSINESS ENTITY IN HUNGARY ILN CORPORATE GROUP [ESTABLISHING A BUSINESS ENTITY IN HUNGARY] 71 ESTABLISHING A BUSINESS ENTITY IN HUNGARY and the ‘zrt.’ forms are the most popular forms of companies. 1. Introduction According to the provisions of the Civil Code, Since 1990, the Hungarian economy is based on establishing public companies limited by shares the principles of market economy and considers (‘nyrt.’) upon foundation is no longer possible. the freedom of economic competition as a Such companies may only be created by the priority. On such basis, the regulation of business transformation of private companies limited by associations went through significant changes shares since March 2014. before evolving into its current form in Act V of As the kft. and zrt. forms are the most commonly 2013 on the Civil Code („Civil Code”). The current used forms of business entities in Hungary, in the regulations entered into force on 15 March 2014, forthcoming sections we give a general overview replacing the provisions of Act IV of 2006 on the and comparison of these two company types. business associations. Both pieces of legislation present a set of rules that is reliable and enables 3. Limited liability companies market participants to customise their companies 3.1 Company name to their respective needs. The designation „korlátolt felelősségű társaság” Generally, the Civil Code allows greater flexibility (limited liability company) or its abbreviation for the founders of Hungarian companies when „kft.” must be indicated in the company’s determining the contents of the company’s name. establishing documents. This is so because, as 3.2 Capital requirements opposed to the compulsory provisions of the previous regulations, deviation is generally The current minimum amount of the registered allowed from the relevant rules of the Civil Code, capital of a kft. is HUF 3,000,000 (approximately subject to certain limitations. EUR 10,000) which can be provided as a cash or as an in-kind contribution. An in-kind The purpose of this summary is to outline a high- contribution may be any marketable thing of level overview of the main aspects that need to value or intellectual work, any intangible be considered in case of establishing a Hungarian property or any claim that is recognised by the business entity or acquiring a shareholding debtor or that has been granted by a final and interest in a Hungarian company. definitive court decision. 2. Company forms in Hungary The Civil Code has raised the minimum registered capital for limited liability companies Companies may only be founded in the forms from HUF 500,000 (approximately EUR 1,700) regulated in the Civil Code. The available to HUF 3,000,000 for creditor protection company forms are the following: reasons. This created an obligation for already general partnership (‘kkt.’) operating limited liability companies to resolve limited partnership (‘bt.’) on the increase of their registered capital not limited liability company (‘kft.’) later than 15 March 2016. private company limited by shares (‘zrt.’) The contribution of each member may not be While the liability of the members of partnerships less than HUF 100,000 (approximately HUF for the debts of the company is, in general, 340). The Civil Code supersedes the previous unlimited, the other two company forms offer regulation thus the contribution may not limited liability to the shareholders. As a necessarily be divisible with HUF 10,000 since consequence, in the business practice, the ‘kft.’ March 2014. ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN HUNGARY] 72 3.3 Membership rights Business quotas may be transferred via a The membership rights in limited liability written contract between the seller and the companies are represented by so-called purchaser. The purchase of the business quota „business quotas.” The business quota is a must be notified to the managing director of notional concept as it is not embodied in the company which, upon such notification, physical or electronic form, but is solely register the new quotaholder in the members’ registered in the members’ list of the company. list of the company. The business quota represents membership 3.6 Supreme body rights and obligations of each member of the The supreme body of the limited liability company. company is called the members’ meeting which Each quotaholder has one business quota. The must be convened by the managing director. size of the business quotas of the different The members’ meeting has a quorum if at least members can, however, be different. half of the eligible votes are represented. If the Furthermore one business quota may be held articles of association permit so, the members’ by more than one quotaholder. In such case, it meeting may be held by electronic means of is considered as a joint business quota and the communication. The decisions falling within the relating rights may be exercised by the joint scope of the members’ meeting may also be representative of the quotaholders. made in a written form, without holding a If not provided otherwise, the extent of voting meeting. rights, rights to dividend and other membership Generally, the decisions of the members’ rights are linked to the capital contribution meeting are passed with simple majority of made by the respective quotaholder. votes, although the Companies Act also requires 3.4 Special rights that certain strategic decisions must be Special rights can be attached to the business resolved with a qualified (75%) majority. The quota of any of the quotaholders. Such special members may adopt higher majority right can, for instance, offer the quotaholder requirements for certain decisions in the voting preference, dividend preference, articles of association of the company. liquidation proceed preference or other 3.7 Executive officers preferences relating to the transfer of business The executive officers of a kft. are called quotas. There are no limitations or restrictions managing directors. The managing directors on the extent of such special rights, they are are, generally, elected by the members’ merely subject to the agreement of the meeting. The current regulations enable the quotaholders. companies to decide whether the managing 3.5 Transfer of ownership rights directors should act individually concerning the Business quotas are freely transferable among operative day-to-day decisions of the company the members of the company. However, the or to form a body of the managing directors. members may decide on various restrictions The Civil Code also allows legal entities and not relating to the transferability of the business just natural persons to be elected as managing quotas to third parties, such as pre-emption directors. rights or the requirement for the members’ 3.8 Supervisory board meeting’s consent. The election of a supervisory board is only mandatory if the number of full-time ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN HUNGARY] 73 employees of the limited liability company 4.4 Special rights exceeds 200 on annual average. Preferred shares may be issued by the company 3.9 Auditor to its shareholders. The total nominal value of The appointment of an auditor is only the preferred shares may currently not exceed mandatory if the company’s yearly revenues 50% of the capital of the company. The Civil exceed HUF 300 million or the company Code does not set out such an exhaustive list of employs more than 50 employees. preferential rights, enabling the shareholders to resolve on issuing preferred shares with any The auditor is elected by the supreme body of desired preferential rights, without any the company. restriction. 4 Private companies limited by shares (zrt.) In addition to preferred shares, other special 4.1 Company name types of shares (e.g. employee shares, interest bearing shares, redeemable shares, etc.) may The designation „zártkörűen működő be issued by the company. részvénytársaság” (private company limited by shares) or its abbreviation „zrt.” must be 4.5 Transfer of ownership rights indicated in the company’s name. Shares are freely transferable, however certain 4.2 Capital requirements restrictions may be imposed on the transferability of the shares by the The minimum amount of the registered capital shareholders. Such restrictions are only valid if is HUF 5,000,000 (approximately EUR 17,000) indicated on the share certificate itself. which can be provided as a cash or as an in-kind contribution. An in-kind contribution may be Physical shares may be transferred by physical any marketable thing of value or intellectual delivery, together with a written endorsement. work, any intangible property or any claim that Dematerialised shares are transferred via is recognised by the debtor or that has been debiting and crediting the securities accounts of granted by a final and definitive court decision. the respective shareholders. There are no restrictions on the nominal value 4.6 Supreme body of the shares. The supreme body of a private company limited 4.3 Membership rights by shares is the general meeting which is The membership rights in a zrt. are represented convened by the board of directors or the chief by shares. The shares are considered as executive officer. securities and may exist in physical (printed) or The general meeting has a quorum if at least in dematerialised form. In the latter case shares half of the eligible votes are represented. If the are recorded on the securities account of the statutes permit so, the general meeting may be shareholder. held by electronic means of communication. If not provided otherwise, the extent of voting The decisions falling within the scope of the rights, rights to dividend and other general meeting may also be made in a written shareholder’s rights are linked to the nominal form, without holding a meeting. value of the share. Generally, the decisions of the general meeting are passed with simple majority, although the Companies Act require that certain strategic decisions must be resolved with qualified (75%) ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN HUNGARY] 74 majority. The shareholders may stipulate higher by an attorney or a legal counsel in the course of majority requirements for certain decisions in the court of registration procedure); the statutes. • declaration of acceptance of the executive 4.7 Executive officers officers / supervisory board members / auditor (the appointments will only become effective if The executive body of a private company the elected persons declare their acceptance); limited by shares is its board of directors which • specimen signature of the persons signing on consists of a minimum of three natural person behalf of the company; members. • in case of a limited liability company: a members’ If the statutes so provide, the company can list indicating the members / quotaholders of the elect a single chief executive officer instead of a company and limitations on the transfer of the board of directors. business quotas; and 4.8 Supervisory board • other ancillary documents set forth by laws. The election of a supervisory board is only 5.2 Documents to be provided by the mandatory if it is requested by the shareholders founders are: controlling at least five per cent of the total votes or if the number of full-time employees of • in case the founder of the company is a foreign the company exceeds 200 on annual average. entity: the certificate of incorporation of the 4.9 Auditor founder (such certificate must not be older than 3 months and signing authority on behalf of the The appointment of an auditor is only entity must be apparent from it) and its official mandatory if the company’s yearly revenues translation; exceed HUF 300 million or the company • certificate on the valid use of the registered seat employs more than 50 employees. / branch office of the company – a land registry The auditor is elected by the supreme body of extract or a statement of the lessor is sufficient; the company. • verification of payment of the registered capital 5 Documentation for company of the company – a bank certificate or the establishment declaration of the executive officer of the company on the payment of the contributions; In this section we give a practical overview of the and required documents for the incorporation of a • tax identification number of the quotaholders / company in Hungary. shareholders and the executive officers – if 5.1 Documents prepared by legal counsel and individuals are reluctant to provide their home to be signed by the founders or the executive tax number, a Hungarian tax number can be officers of the companies are: obtained. • constitutive document (Articles of association / 6. The establishment process Statutes / Deed of foundation – depending on the respective company form); A company is considered as formed, if it is • power of attorney given to the attorney entered into the register of companies. The date of incorporation of the company is considered to representing the company in the court of be the date when the registration takes place. registration procedure (this is an obligatory The company may start its operations as a „pre- document as the company must be represented company” as of the date of the countersignature ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN HUNGARY] 75 of its constitutive document and engage in limited liability companies and for companies business operations after having received its tax limited by shares. identification code. Act C of 2000 on accounting regulates the A simplified registration procedure may be accounting, audit and reporting requirements applied, if the company’s constitutive document and contains the rules for the financial is based on a standard form prescribed by the statements to be prepared by the companies. laws. The use of standard forms provides less The company needs to keep an on-going record flexibility but leads to lower registration fees and on its financial status during the financial year. quicker registration. The company has to take into account the basic An estimated timeline of a company registration principles of accounting when preparing its is the following: records. Such basic principles contain rules for i. day 0: all the required information on the the invoices and accounting documents issued company given to the attorney; or received and the method of the accounting. ii. between day 0 and day 4: preparation of the 7.2 Reporting requirements required documents by the attorney; The company needs to prepare at the end of iii. between day 4 and day 11: signing of the each financial year a financial statement. A documents by the founders and executive company needs to prepare and submit a officers; it is to be noted that some of the simplified financial statement if (i) the documents need to be notarised and apostilled company’s balance sheet total does not exceed (or attested by the Hungarian consulate) if HUF 100 million (approximately EUR 335,000), signed outside Hungary; (ii) its annual net turnover does not exceed HUF iv. day 11: countersignature by the attorney; 200 million (approximately EUR 670,000) and v. day 12: filing the application with the (iii) the company employs less than 10 competent Court of Registration; employees in average. Companies not fulfilling vi. day 15: receipt of VAT number of the company; the above requirements need to prepare and and submit a business report in addition. vii. between day 16 and day 30: registration of the Companies considered to be parent companies company by the Court; it must be noted that are required to prepare and submit the Court shall register the company within 1 consolidated reports. business day of the receipt of its VAT number The companies’ financial statements need to be in case of a simplified procedure. uploaded to the Electronic Financial Statement 7. Governance, Regulation and Ongoing Website and these documents are available to Maintenance the general public. 7.3 Audit requirements 7.1 Accounting requirements The appointment of an auditor is only The companies incorporated in Hungary need to mandatory if the company’s yearly revenues comply with various Hungarian accounting and exceed HUF 300 million or the company filing requirements. employs more than 50 employees. The Hungarian accounting rules are in line with EU and International Accounting Standards. Double-entry bookkeeping is required for ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN HUNGARY] 76 7.4 Registers There are no general barriers to entry for Hungarian companies need to maintain offshore companies. Restrictions may apply in different registers themselves, e.g. register of the sectors where a permit for the beginning of the company’s members. the company’s activity is required. 7.5 Annual return 8.2 Any capitalisation obligations Hungarian companies need to submit The capital requirements for the limited liability concerning each financial year an annual return. company are set out under Section 3.2 of this summary and the capital requirement for 7.6 Requirements for local private companies limited by shares are set out shareholding/directors under Section 4.2. There are no requirements for local In case the company does not fulfil according to shareholding or directors, but in regulated its balance sheet data the minimum capital sectors some restrictions may apply. requirement determined for its company form 7.7 Minority shareholders’ rights and in two successive financial years, then the protection supreme body of the company needs to decide either on the provision of the necessary capital The protection of minority interests is or the reorganisation to another company form. guaranteed in the Civil Code. 8.3 Any special business or investment visa The members (shareholders) of a company issues having at least 5% of the voting rights can request that the meeting of the supreme body The citizens of the European Economic Area is convened. If the executive body does not countries do not need any permit to live and comply with such request, the minority can work in Hungary. Some restrictions may apply enforce its right in the court. to employees from Romania, Bulgaria or Croatia. Third country citizens need to apply for a Minority shareholders has various additional residence permit and a work permit in order to protective rights, such as they can request that live and work in Hungary. an auditor examines the last financial statement of the company or a given act of the executive A third country citizen may apply for a officers of the company from the last two years. Hungarian residence permit for maximum 5 Also, minority shareholders can enforce the years if he/she can prove to own, or if a claim of the company against its members company in his/her majority ownership owns (shareholders), executive officers, supervisory treasury bonds of a nominal value of at least board members or the appointed auditor of the EUR 250,000 specifically issued by the company if the supreme body of the company Hungarian State for this purpose. decided not to do so, or the supreme body did 8.4 Any restrictions on remitting funds out of not decide on this point even though it was on the jurisdiction the agenda of the meeting. Hungary does not levy withholding tax on 8 Foreign Investment, Thin Capitalisation, dividend payments made to non-resident Residency and Material Visa Requirements enterprises. 8.1 Any significant barriers to entry for an 9 Our firm offshore company Jalsovszky Law Firm is a leading independent commercial law firm with unrivalled expertise and ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN HUNGARY] 77 experience in tax, mergers & acquisitions and standards of ethics with practical local experience, corporate finance. We are international in quality with a clear focus on identifying potential issues and perspective, we are independent in the and providing real-world solutions. personal nature of our delivery of legal services We work with leading companies and investors, and we are local in the sense we understand how both domestic and regional, across a range of things work locally and we can use that to our sectors, helping each of them to manage legal, clients’ advantage. regulatory and tax risk, thus allowing them to We are a young, but experienced and innovative optimise their business performance. team of lawyers, combining international ILN Corporate Group – Establishing a Business Entity Series Fall 08 Fall 15 INTERNATIONAL LAWYERS NETWORK LEXCOUNSEL LAW OFFICES ESTABLISHING A BUSINESS ENTITY IN INDIA ILN CORPORATE GROUP [ESTABLISHING A BUSINESS ENTITY IN INDIA] 79 ESTABLISHING A BUSINESS ENTITY IN INDIA 1. Types of Business Entities establishment of a wholly owned subsidiary, or strategic alliances through joint ventures, 1.1 Description of the types of entities available in technical collaborations or distributorship India through which to conduct business arrangements with existing Indian companies by A foreign entity may establish a business presence and large remain the preferred options for foreign in India by: entities to establish a long term presence in India. • opening a liaison office, branch office or project 2. Steps and Timing to Establish office; 2.1 Brief overview of steps to incorporate/constitute • appointing a distributor or franchisee; each • commencing its own operations in India; Companies incorporated outside India, desirous of • forming a joint venture with an Indian entity; or opening a Liaison/Branch office in India have to make an application in form FNC-1 to the RBI, • acquiring an existing business in India. along with the English version of the certificate of 1.2 Matters to be considered when choosing a incorporation / registration or Memorandum & particular business entity type Articles of Association attested by Indian Embassy/ Notary Public in the country of A liaison office can only be established to primarily registration and latest audited balance sheet of explore and understand business opportunities the applicant entity. and climate in India for the foreign parent entity. A liaison office is not permitted to earn any Incorporation of a company in India is an income in India by conducting any business or administrative process which takes approximately commercial activities in India. 15 (fifteen) to 20 (twenty) working days from filing of incorporation related documents (“off the shelf” A branch office can carry on business activities companies are not recommended in view of while a project office can be established to related due diligence issues and liabilities). The execute a specific project. However, since a MCA21 e-Governance programme by the branch office or a project office would not be Government of India has simplified the entire considered a legal entity separate from its parent incorporation process and the process may be company, the business income generated by them completed online. For the purpose of e-filing would be taxable at the rate of tax applicable to forms, a digital signature certificate has to be foreign companies (40% plus surcharge and cess) obtained from the concerned authority without which is higher than the rate of tax applicable to which e-filing cannot be done. The purpose of the companies incorporated in India (30% plus digital signature is to ensure the security and applicable surcharge and cess). authenticity of documents filed electronically. It A liaison or branch office can be established in generally takes only 1 (one) working day for India pursuant to prior approval of the Reserve obtaining a digital signature. Also, persons seeking Bank of India (“RBI”). No prior RBI approval is appointment as directors of an Indian company however necessary for a banking company that are mandatorily required to obtain director has obtained necessary approval from the identification number (“DIN”) without which such Department of Banking Operations and appointment would be invalid. Allotment of DIN Development (“DBOD”), RBI or for liaison office of takes approximately 3 (three) to 4 (four) working an insurance company which has obtained prior days. The DIN is specific to each individual and approval from the Insurance Regulatory and there is no requirement of a fresh DIN for Development Authority. appointment as a director of other Indian company/ies. A company incorporated anywhere In view of restrictions on the activities and tax in India is entitled to carry on business activities implications for liaison, branch and project offices, ILN Corporate Group – Establishing a Business Entity Series 80 [ESTABLISHING A BUSINESS ENTITY IN INDIA] throughout India. B. Board Meetings/Annual General Meeting Joint ventures other than by way of incorporating (“AGM”)/ Resident Director – Every company a new company (i.e. other than by way of is mandatorily required to hold 4 (four) Board investment in a new company jointly with the meetings and 1 (one) AGM in a year. Indian partner) may be formalized by way of a C. Every Listed Company /Public Company with simple transfer of shares. However, in case of paid up capital of Rs 100 Crores (Rupees transfer of shares between Resident and Non- Hundred Crores) or more / Public Company Resident some reporting will need to be made with the RBI, which may take a few weeks to a few with turnover of Rs 300 Crores (Rupees Three months to be acknowledged, thus, delaying the Hundred Crores) or more shall have at least 1 overall share transfer process. (one) woman director. Other contractual arrangements such as D. Listed Company and certain Public Companies distributorship/franchise agreements or are also required to appoint at least 1/3 (One trademark/brand licensing agreements etc. for third) of total number of directors on their doing business in India can be formalized in 1 Board of Directors as independent directors. (one) to 2 (two) days, except where sector specific licenses are involved. 3.3 Filings with the registrar/reporting requirements: 3. Governance, Regulation and Ongoing Maintenance Example: 3.1 Brief summary of regulation of each type and A. Annual Filing e-Forms: Form for filing annual ongoing maintenance, reporting requirements return by a company having a share capital, Particulars of annual return for the company Primary regulations under Indian laws: not having share capital, Form for filing i. Companies Act, 2013; balance sheet and other documents, Form for ii. Foreign Exchange Management Act, 1999 and filing Profit and Loss account and other RBI regulations governing establishment and documents, Form for submission of operations of Branch Office/Liaison compliance certificate have to be filed with Office/Project Office (as updated from time to the concerned Registrar of Companies time); annually; iii. Income Tax Act, 1961; and B. Return of Particulars of Directors and Key- iv. In addition, an Indian company would also Managerial Personnel’s (“KMP”) – Return require obtaining common licenses and containing such particulars and documents of registrations, such as Service Tax, Value Added the director and other KMP shall be filed with Tax and Central Service Tax registrations. the Registrar within 30 (thirty) days from the 3.2 Immediate Requirement: Setting Up – date of appointment of every director and Compliances usually on-going/time based: KMP and also within 30 (thirty) days of any A. Under the Income Tax Act, 1961, every entity change taking place; is required to have a Permanent Account C. Return of appointment of Managing Director Number (“PAN”), Tax Deduction and (“MD”), Whole Time Director (“WTD”) and Collection Account Number (“TAN”) and Manager – Company is required to file a deduct tax at source (“TDS”) for all the return within 60 (sixty) days of the payments made to its employees at the appointment of a MD, WTD or Manager; percentage given under the relevant D. Filing of Income Tax returns is required to be provisions of the Income Tax Act, 1961. done every year by the entity operating in ILN Corporate Group – Establishing a Business Entity Series 81 [ESTABLISHING A BUSINESS ENTITY IN INDIA] India in addition to the TDS return which is in force. also required be submitted with the tax authorities annually. 4. Foreign Investment, Thin Capitalisation, Residency Relatively, the operational on-going and and Material Visa Restrictions maintenance requirements with respect to 4.1 Any significant barriers to entry for an offshore companies incorporated under Indian laws are party quantifiably more than Liaison Office/Branch Office/Project Office. That said compliances for The Foreign Exchange Management Act, 1999 and companies also defer based on their classifications. the rules and regulations framed thereunder For example: Public Limited companies have more provide the basic legal framework for foreign compliance in general as compared to Private investments in India. The Foreign Investment companies. Small companies and one person Promotion Board (“FIPB”) and the RBI are the Companies do not have so many compliances, as nodal Government authorities that permit, compared the larger/more traditional forms of regulate and supervise foreign investments in companies etc. India. In addition, the Ministry of Commerce and Industry and various other ministries and 3.4 Requirements for local shareholding/directors departments of the Central Government After the recent change in company law regime, contribute to framing and modifying sector now it is mandatory for every company to have at specific regulatory framework. least 1 (one) resident director i.e. a person who 4.1.1 Financial Collaboration has stayed in India for a total period of not less than 182 (one hundred and eighty two) days in the In terms of the current Foreign Direct Investment previous calendar year (“FDI”) policy, foreign investment up to 100% (hundred percent) of the securities (including However, there is no such requirement in the case shares and fully and mandatorily convertible of shareholders, and all the shareholders can be preference shares and debentures) of Indian non-resident. companies is freely permitted in most sectors 3.5 Minority shareholders’ rights and protection (“Unregulated Sectors”). However: Companies Act, 2013 has sought to empower the • Foreign investment beyond prescribed minority shareholders in many ways including the percentages is not permitted without prior class action suit. Under the concept of class action government approval in a few suit, a suit may be instituted against the company sectors/activities, such as insurance, aviation, as well as the auditors of the company by the minority shareholders. Companies Act, 2013 banking, telecom, defense, and in entities further provides for provisions relating to manufacturing items reserved for production oppression and mismanagement which empowers by micro and small enterprises, etc. minority shareholders to file an application for (“Regulated Sectors”). A financial collaboration relief to the Tribunal in case of oppression and in the Regulated Sectors ordinarily requires mismanagement. Under Companies Act, 2013, the presence of an Indian equity partner to hold Tribunal may also waive any or all of the the remaining equity and compliance with the requirements given under Companies Act, 2013 and allow any number of shareholders and/or relevant sectoral conditions on entry route, members to apply for relief. conditionalities and caps. • Foreign investment is prohibited in certain However, the provisions relating to rights of minority shareholders under the Companies Act, sectors including retail trading (except single 2013 have not been notified till date and thus not brand product retailing), E-commerce, atomic energy, lottery, gambling, trading in ILN Corporate Group – Establishing a Business Entity Series 82 [ESTABLISHING A BUSINESS ENTITY IN INDIA] transferable development rights, of India latest guidelines, employment visas are manufacturing of tobacco products or only granted to foreign nationals drawing salaries substitutes, railway transport (except mass in excess of USD 25,000.00 (USD Twenty Five Thousand) per annum. The minimum salary rapid transit systems), etc. stipulation however does not apply to chefs, • FDI in limited liability partnerships (“LLPs”) is translators and language teachers brought for permitted, subject to certain conditions e.g. the project related work in India. The employment FDI is allowed, through the Government visa has to be issued from the country of origin or approval route, only in LLPs operating in domicile of the foreigner. Foreign nationals may sectors/activities where 100% (hundred also use the ‘Project’ visa regime for coming to percent) FDI is permitted, through the India for execution of specific projects in the power and steel sectors. automatic route and there are no FDI linked performance conditions. Investment in LLPs Persons travelling to India on long term either by Foreign Portfolio Investors (“FPIs”) or employment visas need to register themselves with the jurisdictional Foreigners Regional Foreign Venture Capital Investors (“FVCI”) is Registration Office within specified time not permitted. LLPs are neither permitted to (ordinarily fourteen days) of arrival in India. avail External Commercial Borrowings (“ECBs”). 4.4 Any restrictions on remitting funds out of India • A foreign investor can without prior (withholdings, etc.) government approval invest in unlisted securities of an existing Indian company in Foreign investors can repatriate funds out of India through a number of options including dividends, Unregulated Sectors, in accordance with the fees for technical and administrative services, pricing guidelines, and subject to overall royalties, interest, capital appreciation, etc., after compliance with the FDI policy, and accordingly payment of applicable taxes. India also has such securities can also be issued/transferred double taxation avoidance agreements (“DTAA”) to it by Indian or foreign shareholders. with all major economies of the world including Australia, China, Germany, France, Spain, 4.2 Any capitalisation obligations Singapore, USA, UK and Japan to name a few. To incorporate a private company limited by 4.4.1 Repatriation of Profits shares in India, the minimum capital requirement is INR 1,00,000 (Rupees One Lac) and in case of Indian companies can remit their profits to a public company the minimum capital requirement foreign collaborator by way of dividends subject to is INR 5,00,000 (Rupees Five Lac). In addition to dividend distribution tax @ 17.00% (seventeen that foreign investment beyond prescribed percent) approx. including applicable surcharge percentages is not permitted without prior and cess. There is no limit on the rate of dividend government approval in Regulated Sectors. on equity shares that can be distributed or repatriated out of India. However, there are 4.3 Any special business or investment visa issues certain conditions with regard to computation of Foreign nationals are allowed to come to India on profits and transfer of up to 10% (ten percent) of business or employment visas, depending on the profits of the company to its reserves before nature of their deployment and other similar declaring dividend. The rate of dividend on factors. preference shares issued by an Indian company to a foreign collaborator should not exceed 300 For reasons of taxation, deputation of employees (three hundred) basis points over State Bank of of foreign parent companies to their Indian India’s prime lending rate prevailing on the date of subsidiaries is ordinarily avoided. the meeting of the directors of the company in As per the Ministry of Home Affairs, Government which issue of the preference shares is ILN Corporate Group – Establishing a Business Entity Series 83 [ESTABLISHING A BUSINESS ENTITY IN INDIA] recommended. As discussed above, the lump sum technical know- how fee and/or royalty may also be converted into Branch offices of foreign companies can also remit shares of the Indian company, subject to business profits to their principals subject to regulatory compliances. withholding tax @ 40% (forty percent) plus applicable surcharge and cess (unless lower tax 4.4.3 Capital Gains rate is prescribed by the DTAA). In the absence of stipulation of a lower rate of tax 4.4.2 Repatriation of Fees and Royalties by the DTAA, capital gains can be repatriated out of India subject to withholding tax between 10% The royalty for transfer and use of technology, (ten percent) to 20% (twenty percent) (plus trademark and brand name, can be remitted to applicable surcharge and cess), depending on their foreign collaborators subject to withholding tax nature. @25% (twenty five percent) plus applicable cess (provided the agreement is executed on or after 4.4.4 Capital Repatriation on Disinvestment March 31, 1976 and unless lower tax rate is Repatriation of proceeds/capital on disinvestment prescribed by the relevant DTAA). If the foreign is permissible with prior RBI approval provided the collaborator belongs to a country having a DTAA security is held on repatriation basis and the with India, it can avail credit of withholding taxes disinvestment has been made with the approval of paid in India. Research and development cess the RBI. Further, the disinvesting foreign investor @5% (five percent) is also payable by the Indian must obtain and produce a tax clearance/’no importer of technology on payments towards objection’ certificate from Indian tax authorities. imported technology. Repatriation may be made through normal banking channels. ILN Corporate Group – Establishing a Business Entity Series Fall 08 Fall 15 INTERNATIONAL LAWYERS NETWORK HOLMES O’MALLEY SEXTON SOLICITORS ESTABLISHING A BUSINESS ENTITY IN IRELAND ILN CORPORATE GROUP [ESTABLISHING A BUSINESS ENTITY IN IRELAND] 85 ESTABLISHING A BUSINESS ENTITY IN IRELAND I. Introduction partnership in which some partners have limited Irish Law recognises various forms of business liability under the Limited Partnerships Act 1907 organisation, the majority of which are companies, but limited partners may not take place in the partnerships and sole traders. Each form of management of the business. Whereas the affairs business organisation carries with it its own of a company are managed by its directors and distinct advantages and disadvantages. not by the members by contrast, each partner is entitled to participate in all the partnership Companies activities. A company is a body formed and registered II. Types of Companies under the Companies Act 2014 which has legal personality separate and distinct from its There are a number of different types of members. We have focused on this form of entity company structures provided for under the in this paper. Companies Act. Companies can be broadly classified as either private or public companies Sole Traders with limited or unlimited liability. All Irish A sole trader may be defined simply as an Companies are governed by the recently enacted individual who sets him or herself up in business. Companies Act, 2014. Sole traders do not enjoy separate legal Companies Act 2014 personality and are therefore liable for any losses accruing to their business. Persons engaged in The newly commenced Companies Act 2014, the business as sole traders may protect themselves “Act,” condenses the previous 17 companies acts to some extent from certain categories of loss and related company law provisions into a single which the business might incur through the comprehensive code of company legislation. The purchase of insurance. design of the new Act focuses on simplification and modernisation of company law. It has Partnerships created new forms of company and has The Partnership Act 1890 defines a partnership introduced a number of changes to the roles of as a “relation which subsists between persons various persons in the corporate structure. carrying on a business in common with a view to A significant portion of the legislation is profit.” A “business” is defined in the Partnership dedicated entirely to the company limited by Act of the Act to include “every trade, occupation shares, “LTD” or “CLS.” It is intended that the LTD or profession.” A partnership is the coming will become the company model of choice for the together of two or more persons and in return vast majority of private companies in Ireland. The for the benefits received, such as extra capital remainder of the legislation sets out the law and expertise from the others engaged jointly in applying to other company types, namely public the venture. Partnerships in contrast are not legal limited companies, guarantee companies, entities: there may be a name attached to the unlimited companies, investment companies and firm but the partnership consists solely of the designated activity companies (or DACs). individual partners and the firm has no independent legal existence. 1. Private Company Limited by Shares (LTD) The partners share the profits of their venture, The LTD is a private company limited by the assets and liabilities are those of the shares formed for a lawful purpose where partners. It is possible to register a limited the liability of the shareholder/member is ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN IRELAND] 86 limited to the amount, if any, unpaid on the • Company name must end with shares registered in their name at that time. "designated activity company" or DAC; Key features • Can have between 1 and 149 • No requirement for the LTD to have an shareholders; authorised share capital. • Must have at least two directors and • A LTD will be able to dispense with where there is more than one member it holding a physical AGM, irrespective of cannot dispense with AGM’s. the number of shareholders. 3. The Public Limited Company (PLC) • Can have between 1 and 149 Key features shareholders; A public limited company (PLC) is a company • Can have 1 or more directors; limited by shares and having a share capital • Must have a company secretary; which is not less than the authorised minimum of €25,000. A PLC’s constitution is • Must have a one-document constitution; in the form of a memorandum and articles of • Name must end in “Limited” or “Ltd”; association and contains an objects clause. It has the capacity to offer, allot and issue • Cannot have an objects clause because it securities to the public. has full unlimited capacity • The format of a Public Limited Company • The board (including a sole director), and (PLC) can be either: any person registered with the CRO as having authority, will be deemed to have a) an investment company with its authority to bind the company. sole objects of collective investment of funds, or 2. The Designated Activity Company (DAC) b) a public company other than an A DAC has the status of a private company investment company; and can be formed for any lawful purpose by any person or persons subscribing to a • The main feature of a PLC is that it can constitution and complying with relevant establish with a minimum of one sections of the Companies Act. member and no maximum limit. It must have a minimum of two directors and the The format of a DAC can be either: directors have a duty to ensure that the a) a private company limited by shares, person appointed as company secretary or has the skill necessary to carry out his/her statutory duty. A PLC is required b) a private company limited by to hold an AGM and have its financial guarantee and having a share capital. statements audited and a traded Key features company is required to include a • Constitution is in the form of a “corporate governance statement” in its memorandum and articles of association director’s report; and contains an objects clause detailing • A Societas Europea (SE) is the European its permitted activities; equivalent of a PLC and similar rules also • Can list any debt securities for offer to apply; the public, unlike the LTD; ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN IRELAND] 87 • PLCs are the chosen form of corporate 5. Guarantee Companies structure where companies wish to list A Company Limited by Guarantee or “CLG” is their shares on a stock exchange and a company which does not have a share offer them to the public, this being their capital and where the member’s liability is key distinguishing feature; limited by its constitution to such amount • Can be incorporated with just one the members undertake to contribute to the member; assets of the company in the event of it • Must have an objects clause (although being wound up. A CLG is required to have a the Act seeks to oust the operation of minimum of 2 directors, it is required to hold the doctrine of ultra vires by providing AGM’s and a CLG that is not a credit that the validity of an act done by a PLC institution or an insurance undertaking may shall not be questioned on the ground of avail of audit exemption if they satisfy the lack of capacity; conditions specified. • Must have a minimum issued share Key features capital of €25,000 and obtain a trading • Cannot have a share capital; certificate which confirms this; • Can have just one member, and no • Must have at least two directors; maximum number of members; • Unless constitution provides otherwise: • Can have an objects clause (although the Act seeks to oust the operation of the the directors shall retire by rotation; doctrine of ultra vires by providing that directors’ remuneration (if any) must the validity of an act done by a DAC shall be determined by the members in not be questioned on the ground of lack general meeting; of capacity); • Supplementary rules for meetings • Its name must end with “company (notice, proxies, equality etc); limited by guarantee” (or “CLG”, “C.L.G”, 4. Private Unlimited Company (ULC) “clg” or “c.l.g.”) or the Irish equivalent, save where application made to dispense A ULC is a private unlimited company with a with this requirement; share capital formed for any lawful purpose by the subscribers to the constitution and • Is not prevented from having its complying with relevant sections of the debentures admitted to trading or listed; Companies Act. Unlimited companies are not • Must have at least two directors; generally used as trading companies as the • Unless constitution provides otherwise: liability of the members is not limited and in a winding up situation the members are directors shall retire by rotation; obliged to pay all the debts of the company. directors’ remuneration (if any) Some of the features of a ULC are that it may must be determined by the be formed with just one member, it must members in general meeting; have a minimum of two directors, it must • CLG may not dispense with holding an hold AGMs, and it is not required to attach AGM where it has more than one financial statements to its annual return. member; ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN IRELAND] 88 • Key feature is that it does not have a requirements in relation to the form of the share capital i.e. it has members, not constitution under the Companies Act have been shareholders; complied with. • Likely to be the legal form of choice for The constitution of the company must state: the many charities, sports and social 1. the company’s name; clubs and management companies which are currently incorporated as public 2. the type of company to be registered (i.e. companies limited by guarantee without LTD, DAC, PLC, etc.); a share capital. 3. the objects (if required) depending on 6. External Companies company type; An external company means an EEA 4. the liability of members; company or a non-EEA company that 5. the share capital of the company divided establishes a branch in Ireland. An external into numbers and value of each share; company wishing to establish a branch in Ireland is obliged to deliver to the Registrar 6. details of where the company proposes to of Companies within 30 days of conduct its business and the company’s establishment a certified copy of its Registered Office i.e. the place where the constitutive documents central administration of the company will normally be carried on; • The only external companies required to register and file in the CRO are those 7. confirmation that the company will have whose members have limited liability, at least one director who is resident in the and which establish a branch in Ireland; European Economic Area (EEA) • Accordingly, unlimited companies and 8. where the company has no director companies whose presence is less than resident in the EEA it is required to deliver that of a “branch” do not register; for registration a bond to the value of €25,000(at an annual cost of approx. • A presence that constitutes a “place of €1,000). The purpose of the bond is to business” but not a branch does not give provide for certain fines or penalties that rise to a requirement to register. might be imposed as a result of the III. Steps and Timing to Establish company’s non-compliance with company and/or tax law; The process of incorporation and registration of a company commences with the delivery of a 9. a completed Form A1, which is available constitution together with a statement of consent from the Registrar of Companies (this and declaration in accordance with the provides details of the company name, its Companies Act to the Registrar of Companies. On registered office, details of secretary and the registration of the constitution, the Registrar directors, their consent to acting as such, will certify in writing that the company is the subscribers and details of their shares. incorporated and issue a certificate of It incorporates a declaration that the incorporation. The certificate of incorporation is requirements of the Companies Act have conclusive evidence that the Company is been complied with, and as to the activity registered under the Companies Act. which the company is being formed to engage in) The Registrar will not register a constitution unless he or she is satisfied that all the ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN IRELAND] 89 IV. Governance, Reputation and Ongoing carry out the statutory and legal duties of the Maintenance company secretary. Registered Office General Meetings A registered office address in Ireland is required. Duty to Hold General Meetings of the Company The Registered Office is the official address for A company is required to hold an annual general the limited company, where legal documents and meeting (AGM) every calendar year. Certain letters from Revenue, The Companies companies (such as a “single member company” Registration Office etc. may be served. All and a LTD) may dispose with the holding of an "official" correspondence is sent to the registered AGM in the case of a LTD where all the members office. entitled to attend and vote at the meeting sign a Company Officers written resolution to that effect before the latest 1. Directors date for holding the meeting. The AGM will normally be held in the State, unless all of the Companies must have one secretary and a members entitled to attend and vote consent in minimum of two directors. The LTD can have one writing to its being held outside the State. Not director if it chooses. It must have a separate less than 21 days’ notice is required for the calling secretary though. of an AGM. One of the directors is required to be resident in a The directors of a company may convene an EGM member state of the European Economic Area or “extraordinary general meeting” whenever (EEA). There is an exemption from the they consider it appropriate. A member or requirement to have an EEA-resident director. members holding 50% or more of the paid up The requirement to have at least one resident share capital of the company may also convene director from a member State does not apply to an EGM (this number may be varied in the any company which for the time being holds a company’s constitution). Members holding 10% bond, in the prescribed form, in force to the value or more of the paid up share capital of the of €25,000. company may request the directors to convene A person must have reached the age of 18 years an EGM. Normally, EGM’s are convened to deal to be eligible for appointment as a director. Any with special business of the company. Not less change among directors is required to be notified than 7 days’ notice is required for the calling of an to the Registrar within 14 days. EGM. 2. Company Secretary Members and Shareholders The company secretary is the person or company Rights and Powers of Members and appointed in accordance with the company’s Shareholders constitution. Every company is required by law to The Companies Act and the constitution of a have a company secretary. The function and company normally set out the powers of duties are a mix of legislative provisions and those members and those powers which are delegated duties delegated to the company secretary by the by the members to the directors of the company. board of directors. They are essentially The Companies Act provides that the business of administrative and are limited to ensuring that the company is managed by its directors, who the company’s filing obligations under company may exercise all such powers of the company that law are complied with. It is the responsibility of are not required by the Companies Act or by the the company directors to ensure that the person appointed as secretary has the skills necessary to ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN IRELAND] 90 constitution to be exercised by the company section take their directions from, and report to, members in a general meeting. the Court. Members’ Powers where the Company is in Right to Petition for the Winding-up of a Default Company Where a company or any of its officers is in A member of a company has the right to petition default in complying with any provision of the the Court for the winding-up of a company on a Companies Act, a member can serve a notice on number of grounds (subject to certain exceptions). the company or officers requiring the company or A member will usually exercise this right where, officers to remedy the default within 14 days. If for example: the company or officer fails to remedy the default, • there is a deadlock in the management of a member can apply to the High Court, for an the company; order directing the company or officer to make good the default. • where the objectives of the company can no longer be achieved; Members’ Right to Seek an Investigation of a Company • where the company has illegal objects; On the application of certain persons, the court • where the company is being used as an may appoint one or more competent inspectors instrument of fraud; to investigate the affairs of a company in order to • where the company has a small number of enquire into the matters specified. The members who no longer wish to conduct application to the court can be by any of the business with each other. following persons: Right to Petition for Relief in Cases of 1. the company; Oppression 2. not less than 10 members of the An application can be made to Court by any company; member of a company who considers the affairs 3. a member or members holding one- of the company are being conducted or the tenth or more of the paid up share powers of the directors are being exercised: capital of the company; a) in a manner oppressive to him or her or 4. a director of the company; or any of the members, or 5. a creditor of the company. b) in disregard of his or her or their interests as members, Any person intending to make an application to the Court should give the Director of Corporate Oppressive conduct has been defined as the Enforcement not less than 14 days’ notice in exercise of the company’s authority in a manner writing of his or her intention. The Director has an which is burdensome, harsh and wrong. The types entitlement to appear and be heard on the of conduct which might give rise to such an hearing of the application. Where the Court application include fraudulent and unlawful appoints an Inspector, it will specify the precise transactions, oppressive management and matters into which inquiries should be made. The exclusion of the member from the management Court may require the applicant or the applicants of the company. to give security for payment of the costs of the The order which a court can so make may include investigation. Inspectors appointed under this an order: ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN IRELAND] 91 • directing or prohibiting any act or The following are the consequences of cancelling or varying any transaction; incorporation and main advantages of registered • for regulating the conduct of the companies as business organisations: company’s affairs in future; i. Separate legal personality • for the purchase of the shares of any ii. Limited liability members of the company by other iii. Transferability of interests members of the company or by the company and, in the case of a purchase by iv. Perpetual succession the company, for the reduction accordingly v. Common seal of the company’s capital; and vi. Floating charges • for the payment of compensation. vii. Formation of large associations V. Advantages of Establishing in Ireland viii. Taxation - The standard corporate rate of There are many advantages to locating a business tax is currently 12.5% whereas the top in Ireland, not least the evolving tax system which personal rate of tax is 41%. is a key aspect of the Irish Government's support for industry. Ireland has a corporation tax rate of 12.5% on profits earned in the course of an active business. A key feature of incorporation is that the This together with its capital gains participation company becomes a separate legal entity, distinct exemption, generous foreign tax credit system, from its members, recognised in law as having a membership of the EU, ever expanding double tax separate identity and enjoying certain rights. treaty network, lack of CFC & thin capitalisation Registered companies may also benefit from rules makes Ireland an attractive destination for limited liability such that the assets, debts and the registration of a Company. obligations of company and not to its members. ILN Corporate Group – Establishing a Business Entity Series Fall 08 Fall 15 INTERNATIONAL LAWYERS NETWORK GLUSMAN & CO. ESTABLISHING A BUSINESS ENTITY IN ISRAEL ILN CORPORATE GROUP [ESTABLISHING A BUSINESS ENTITY IN ISRAEL] 93 ESTABLISHING A BUSINESS ENTITY IN ISRAEL Introduction Types of Business Entities The influence of British rule immediately prior to Companies the establishment of the State of Israel has left a Israeli companies generally limit the liability of lasting mark on Israeli corporate law. Even though the shareholders for the debts and obligations of Israel is commercially much closer to the U.S., the the company. The precise form of the limitation links to the English legal system remain strong. of liability is set out in the company’s articles of Therefore, Israel has companies rather than association. Normally, liability is limited to the corporations. The letters “Ltd.” follow the name subscription price of the shares held by the of companies with limited liability rather that the shareholders. It is possible for an Israeli company U.S. versions of “Inc.” or “Corp.” Israeli companies to decide not to limit the liability of its have shares rather than stock, they have articles shareholders, but this is very rare and will not be of association (but no memorandum of considered further. There are private Israeli association) rather than certificates of companies and publicly traded Israeli companies. incorporation and bylaws. Israel has a Registrar of The organs of an Israeli company are its Companies keeping records of companies very shareholders and directors. The main document similar in nature to England’s Companies House. of corporate governance for Israeli companies is Likewise, many of the characteristics of Israel’s the articles of association. Israeli companies partnerships remain similar to their English formed after 1999 do not have a memorandum of counterparts. Consequently, the considerations association. regarding the type of entity through which to conduct business in Israel, at least as far as Partnerships whether to form a company or a partnership, will Partnerships are formed when two or more legal be similar to the considerations in England and in persons decide to get together for the purpose of other jurisdictions remaining heavily influenced managing an enterprise in which they will share in by English law. the costs and profits of the enterprise. Israel has While there are a few different forms of two kinds of partnerships, general partnerships “corporate” entities in Israel, this guide will focus and limited partnerships. on companies and partnerships - even though General Partnerships - Apart from partnerships partnerships are not strictly corporate - as these formed for the purpose of providing legal or are the entities that the non-Israeli businessman accounting services, partnerships are limited to a is most likely to set up or invest in if they are maximum of 20 partners, whereas no similar inclined to penetrate the Israeli market directly limitation applies to a company. All the partners (rather than by working through an agent, of a general partnership are jointly and severally distributor, etc.). The end of the guide will take a liable to third parties for the debts and very brief look at the other kinds of entities that obligations of the partnership. Amongst each exist in Israel. other, the partners will be responsible to share in The information contained in this guide is only a the debts and liabilities and enjoy the profits brief summary and may not be used as actual equally, unless they agree to different shares. legal advice. Please approach us if you require Limited partnerships - consist of at least one legal advice on any specific matters that may arise. general partner (and limited to a maximum of 20 general partners), who is fully liable for the rights and obligations of the partnership and at least ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN ISRAEL] 94 one limited partner, whose liability to the and limited partners will normally have had to partnership is limited by the amount of capital pay into the partnership’s capital considerably they paid in to the partnership upon formation of more at the outset than their counterparts setting the partnership. up a new company. Limited partners may not participate in the Once a shareholder has sold his shares and is no management of the partnership and they do not longer a shareholder in the company, he no have the authority to bind the partnership. Any longer has any exposure for debts and obligations limited partner who does take part in the of the company. However, a partner leaving a management of the partnership will be liable in partnership will continue to be jointly and the same manner as general partners for the severally liable for the debts and obligations of period of time in which they participate in the the partnership that arose during the time that he management. A limited partner is authorized to was a partner, unless the remaining partners and review the books of the partnership, to examine creditors agree otherwise. its condition and risks and to consult on those It should be noted Israeli that the courts are matters with the other partners. Limited partners empowered to “raise the corporate veil” and hold also may not withdraw or receive directly or shareholders personally liable for actions taken indirectly any part of their investment in the and debts in the name of the company where the partnership capital during the life of the court determines that the corporate veil was partnership. exploited in order to unjustly deprive or defraud a Foreign Companies and Partnerships creditor or other third party or for the purpose of Rather than forming a new company or taking unreasonable risks. While the courts were partnership or investing into an existing entity, once hesitant to use this sanction, the trend has non-Israeli companies and partnerships may been increasingly to find reasons that justify raising the veil, though generally, an element of choose to register as a "Foreign Company" and simply open up office branches located in Israel. wrong doing is still required for the court to justify this decision rather than simple bad Matters to be considered when choosing a business choices. particular business entity type Taxation Exposure to Liability: The company is an entirely separate legal entity The fact that companies provide the owners with from that of its shareholders for tax purposes and the protection of the “corporate veil”, limiting its income is considered to be separate from the their personal exposure and protecting them income of its shareholders and directors. The against the full consequences of potential failure Israeli Income Tax Act imposes a two level of the business is a major selling point for taxation system for companies. The first level is at companies. The very first shareholders of a the corporate level and involves the payment of company normally have to pay very little in the corporate tax by the company itself on the profits way of subscriptions for their shares meaning that of the company. During the year, companies must their total exposure can be very limited. On the make monthly advance payments on the other hand, general partnerships provide no corporate tax, which will be finally calculated at protection for the partners against the debts and the end of the year. The monthly advance liabilities of the partnership. Limited partnerships payments are calculated on the bases of a must still have at least one owner who is at full percentage of the company’s monthly revenues. risk over the partnership’s debts and obligations The percentage is set on an ad hoc basis by the ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN ISRAEL] 95 Israeli Tax Authority and is based on past activity, its partners and the portion of the performance. Once the company’s accounts are partnership’s profits and losses that each partner completed at the end of the year, the company is entitled to. The Head Partner must be an Israeli will be required to make up any shortfall or will resident. Once a year, after a partner has received receive back any excess taxes paid. The current his part of the partnership income, he will report tax rate for Israeli companies in 2014 is 26.5%. his income to the Tax Authority. However, this is more like a starting point as Raising Finance there are a number of laws that provide tax benefits and incentives, which many companies The company format is more convenient for the are able to make use of in order to reduce the tax purposes of raising finance than that of rate. partnerships. Both companies and partnerships may borrow loans and lines of credit from banks, The second corporate taxation level is at the other lenders and suppliers, but the corporate shareholder level and charged to shareholders on veil of the company described above provides dividends and other shareholder distributions more protection to the company shareholder paid to them. This tax is paid by the company as a than the partner in the event of default. withholding tax and deducted from the amount actually paid to the shareholders. The tax rate for When looking to increase capital equity, adding dividend payments is set according to the new investors to a business as shareholders is an shareholder’s holding in the company, with easier process than adding new partners. Persons shareholders holding up to 10% in the company that do not have a particularly close relationship paying 25% of their dividends and shareholders with the owners of a business, but who are holding over 10% of the company’s shares pay nonetheless interested in investing in the 30% on the entire dividend. Dividend distributions business for its potential, are likely to find the paid to a shareholder that is an Israeli company is safety of the corporate veil more appealing than not taxed at source, but rather added to that the risks involved in buying into a partnership. company’s income for the purposes of calculating For the types of business that have the potential the corporate tax it must pay as described above. for a valuable “exit” for the founders, the Shareholders also have to pay tax on profits made company format is much more suitable than the on the sale of shares. The tax rate is as per the partnership for achieving mergers, acquisitions rates applied to dividend payments. and going public. Partners are then taxed on an individual basis in Liquidation accordance with Israel’s income tax rates for As will be discussed in more detail below, the individuals, currently a progressive tax rate steps required for forming and registering a varying from 10% to a maximum rate of 48%. The company, partnership or foreign branch of a partner is taxed based on the income earned both foreign company or partnership all have relatively within and outside the partnership. For a partner similar steps and costs involved. However, that is an Israeli company, the income derived liquidation and dissolution of an Israeli company from the partnership will be included in the is much more complex than liquidation of a calculation of its profits to be taxed in accordance partnership. with the corporate tax described above. Unless a partnership agreement provides The partnership must elect a "Head Partner" who otherwise, a partnership will dissolve upon a will be responsible for preparing and delivering to partner notifying the rest of the partners that he the Tax Authorities a report of the partnership wishes to leave the partnership. Generally, ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN ISRAEL] 96 partnership agreements will provide for a certain meetings, the filing of several notices and reports percentage majority vote of the partners for with the Companies registrar, in different stages liquidation of the partnership and this may be by of the process, as well as two publications in the simple majority. Upon liquidation of a partnership, official gazette (in Hebrew "Reshumot"). The the debts and obligations of the partnership vis-à- liquidation of a company as opposed to the vis third persons remain the debts of the partners, liquidation of a partnership, even a voluntary meaning that creditors still have a target for liquidation, is therefore more expensive, claims. Therefore, less regulation is involved in complicated and time consuming. liquidation of partnerships. Upon liquidation of a While the complexities of liquidation are not partnership, the assets and profits of the likely to be a major consideration when choosing partnership are first used to pay off creditors. If the type of entity through which to conduct there are not enough assets and profits for these business in Israel, the differing degrees of purposes, then the partners must dig into their complexity involved in the liquidation processes own pockets. Once all debts have been paid off, may be a determining factor where a business is any remaining amounts are used to refund intended to have a defined purpose or time limit partners for their contributions to the capital of following which it is intended to wind up the the partnership and any remaining surplus business. distributed to the partners according to the pro rata rights. Closing an Israeli branch of a foreign company or partnership is a simpler process as the company On the other hand, liquidation of a company, or partnership remains in existence and creditors even voluntary liquidation is a more complex continue to have a legal entity against which they process. Liquidation of a company is generally can make claims. Of course there may costs divided into two different procedures: liquidation involved in the event of early termination of by the court, also known as forced liquidation and existing contracts such as leases and non- a voluntary liquidation, in which case, the compliance with existing contractual obligations. company adopts a resolution for its own liquidation. A forced liquidation involves strict Shareholders and directors supervision of the Court and so it is a lengthy Israeli law provides for various standards, process and expensive one. The process usually requirements and duties that shareholders, commences with a motion with the competent officers, directors and partners must comply with. court filed by a creditor of the company, and is In certain cases, directors and officers can be held followed by appointment of a liquidator by the personally liable to their companies and court and the involvement in the process of the shareholders for failing to meet those duties and official receiver. Voluntary liquidation is suitable standards. In a private company (which did not to a solvent company and normally does not issue bonds to the public), the qualifications involve the court in the process (unless there is a required of a director are very minimal, the law reason for the court to take over and supervise provides that a person to be appointed as a the process). It is a process that is initiated by the director may not be a minor, incompetent or have company itself and supervised by the Registrar of declared bankruptcy. Companies. Although it is much simpler and less expensive than a forced liquidation, the entire Companies - Rights of Shareholders: process usually lasts approximately a year until Votes. Shareholders voting rights are the company is declared dissolved by the registrar. attached to their shares. Normally, the The process involves convening of two general shareholders have the right to one vote per ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN ISRAEL] 97 share, though the articles of association may amount for the dividend and the directors provide for shares that have no votes will then decide on the amount of the attached, shares with more than one vote distribution. attached and shares that have veto rights in Rights to Share in Assets Remaining on connection with certain decisions. Most Liquidation of the Company. Upon shareholder decisions are made on a simple liquidation of a company, the company’s majority (51%) basis, although the affairs and assets are to be managed by a company’s articles may provide that certain receiver whose task it is to liquidate the decisions require a special resolution with a assets and pay off all of the company’s bigger majority vote. The Companies Law creditors. Should there be any amounts left also requires that certain decisions require following payment of all a company’s debts, different voting majorities, for instance in those amounts are to be distributed to the the case of voting in favor of mergers. As shareholders in the same manner as division discussed above, the Companies Law also of dividend distributions described above. enables the court to overturn decisions of majority shareholders where the purpose of Steps and Timing to Establish the decisions was to unfairly deprive or Companies exploit the rights of the minority. Companies are principally governed by the Dividends. Dividends are payments to the Companies Law 1999 (the “Companies Law”) and shareholders arising by reason of their regulations promulgated thereunder. shareholding. Dividends may be paid in cash or in kind. All shareholders are entitled to a Israel has a Registrar of Companies, which is run share of the dividend distribution calculated by the Ministry of Justice. All Israeli companies in accordance with their pro rata must be registered with the Registrar of shareholding in the company. However, Companies. Therefore, a person wishing to form a where the company has different classes of company must file an application to establish the shares, the company’s articles of association company with the Registrar of Companies. The can provide that certain classes of shares application form is prescribed by regulations and have preferences to receive dividend may be downloaded from the Registrar’s website distributions prior to other classes. (http://www.justice.gov.il/MOJHeb/RasutHataagi Dividends may only be paid out of the dim/RashamHachvarot/). Non-Israeli persons may company’s profits as defined in the law and establish companies in Israel. Where the set out in the company’s audited financial application form requires an Israeli to enter their reports. The company’s board of directors Israeli ID number, non-Israelis are required to has the power to declare dividend provide their passport number, details of the distributions, unless the articles provide country of issue of the passport and a certified otherwise. Under the Companies Law, the copy of the passport. Non-Israeli corporate company’s articles may prescribe that (i) entities may also file applications with the dividends will be recommended to the Registrar to establish Israeli companies. This will shareholders by the directors and the require the foreign entity to provide a certified shareholders may then approve, reject or copy of its certificate of incorporation or other increase or decrease the dividend formal proof of incorporation from the country of distribution; or (ii) the shareholders in its incorporation, together with a notarized general meeting may prescribe a maximum Hebrew or English translation thereof. ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN ISRAEL] 98 Formation of a company also requires: 1. General Partnership Filing of the company’s articles of A general partnership comes into existence association, which set out the rights and automatically when at least two persons obligations of the shareholders, directors commence a relationship that they intend to and officers and the rules of corporate be in the form of a partnership. A governance of the company. Articles may be partnership that is formed in order to a simple one page document or extremely conduct business must provide notice of its detailed running into tens of pages. Any establishment to the Registrar of item of corporate governance that is not Partnerships within one month from the expressly prescribed within the articles will date of establishment. The notice must be determined by the Companies Law. The contain the following details: (a) Name of articles must contain at the least, the the partnership; (b) the business to be company’s name, the purposes of the ordinarily conducted by the partnership; (c) company (which is usually drafted very full name, address and definition of each widely to cover any legal activity), the partner; (d) names of the partners who are authorized share capital of the company, authorized to manage the interests of the detailing the number, classes and nominal partnership and to sign on-behalf of the value of shares, whether or not the liability partnership, unless all partners are so of the shareholders is limited and how it is authorized; (e) term of the partnership, if it limited, and the registered office address. A is to last for a defined period of time from company’s shares can be divided into its formation. A general partnership does different classes of shares, with the not require a written partnership agreement company’s articles describing the rights for its establishment, though it is normally attached to each class. The articles of recommended. For instance, without a association must be filed with the Registrar partnership agreement stating otherwise, in Hebrew. partners cannot join or leave a partnership without dissolving the existing partnership Filing of the Declaration of the First and forming a new partnership with the new Directors of the Company, in which they constitution of partners. Partnership declare their competence to serve as agreements, for both general and limited directors. partnerships must be filed with the Registrar Payment of the registration fee, which is of Partners in Hebrew. currently NIS 2,640. Registration of a general partnership in 2014 It normally does not take long to establish a new costs a fee to the registrar of NIS967 and company, with times from filing the documents payment of an annual fee of NIS 1,131 if with the Registrar of Companies being normally 3 paid up to 28.2.14 or NIS 1,503 if paid business days. thereafter. Partnerships 2. Limited Partnership Partnerships are principally governed by the Establishment of a limited partnership Partnership Ordinance 1975. The Ministry of requires a written partnership agreement. Justice also runs a Registrar of Partnerships. The Registrar of Partnerships must be sent a notice of the establishment of the limited partnership. In addition to those details that ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN ISRAEL] 99 must be contained in the notice concerning Non-Israeli Partnership Branch establishment of a general partnership, the Partnerships formed and existing abroad may notice must also state that the partnership open up a branch in Israel. In order to conduct will be limited, details of each limited business in Israel through a branch, the foreign partner and the amounts which each limited partnership must register with the Registrar of partner paid in to the capital of the Partnerships, providing the same details to the partnership and whether the amount was Registrar as are required for registration of Israeli paid in cash or details of the method of partnerships and the same fees must also be paid. payment. Foreign limited liability partnerships must also Registration of a limited partnership include in addition to the above a notification that currently costs a fee to the registrar of the partnership is limited with the details of the NIS2,591 and payment of an annual fee of limitation as well as attach the partnership NIS 1,110. formation agreement, submitted with a notarized It normally does not take long to establish a translation to Hebrew. The registrar will then new partnership, with times from filing the apply to the Minster of Justice for approval to be documents with the Registrar of Companies registered in Israel, and the Minister of Justice has being 14 days on average. sole and absolute discretion to determine whether or not to approve such requests. Non-Israeli Company Branch The fees payable to the registrar in order to A non-Israeli company may simply open up a establish a foreign partnership are the same as branch in Israel rather than establishing a the fees payable to establish an Israeli subsidiary. This requires the foreign company to partnership and described above in this section file an application with the Registrar to register as under "Partnerships." a foreign company within a month of the company establishing business premises in Israel. Governance, Regulation and Ongoing Certified copies of the company’s relevant Maintenance documents of incorporation from its home Brief summary of regulation of each type and country and its documents of corporate ongoing maintenance, reporting requirements governance such as articles, memorandum, etc. Companies will need to be attached to the application together with a notarized translation. The foreign Both private and public Israeli Companies are company would also need to provide a list of its principally governed by the Companies Law and directors and the name and address of an Israeli regulations promulgated thereunder. There are based person who is authorized to receive formal also various requirements of public companies notices and service of court pleadings on-behalf contained in the Securities Law of 1968 and of the company and a certified copy of a formal regulations promulgated thereunder. As Israel is a power of attorney authorizing a person normally common law jurisdiction, there is also a great residing in Israel to conduct business on-behalf of body of case law interpreting and applying the the company in Israel. requirements of the statutes. The fees payable to the registrar in order to Israeli companies have to comply with the establish an Israeli branch of a foreign company following requirements on an on-going basis: are the same as the fees payable to establish an Appoint an outside accountant as its Israeli company and described above. auditor. However, private companies with ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN ISRAEL] 100 annual revenue of less than NIS 610,509.92 maintenance and reporting. may vote in a general meeting of Israeli and foreign partnerships have to comply shareholders to waive the requirement to with the following requirements on an on-going appoint an auditor, provided that not more basis: than 10% of the votes attached to the issued shares of the company did not oppose the Similar to a company, pay an annual fee of vote. NIS 1,503 (in 2014). Pay an annual fee of NIS 1,503 (in 2014). Notify the Registrar within 14 days any Public companies must pay an additional fee changes to the information contained in the each year on August 1, the amount being documents delivered to the Registrar. determined by a proportion of its capital Requirements for local shareholding/directors. equity. The law does not provide any requirement for a Hold an annual general meeting (AGM) of minimum number of local shareholders, directors shareholders at least once a year with no or partners for either companies or partnerships. two AGMs being held more than 15 months apart. A private company may prescribe in Foreign Investment, Thin Capitalisation, its articles of association that it is not Residency and Material Visa Restrictions required to hold AGMs, but it must then Any significant barriers to entry for an offshore convene a general meeting of shareholders party anytime it is requested to do so by any There are no significant barriers. director or shareholder. Any capitalisation obligations File an Annual Report with the Registrar once a year within 14 days of the AGM There are no specific capitalisation obligations in unless the company is exempted from terms of minimum capitalisation ratios for either holding an AGM, as described above. This is companies or partnerships. not a financial report, but rather a report in Any special business or investment visa issues a form prescribed by regulations and downloadable from the Registrar’s website. There are no special business or investment visa It is intended to provide the Registrar with issues in terms of specific requirements for up-to-date details of the Company’s entities to conduct business or invest in directors, shareholders, share capital, businesses in Israel. There are work visa registered office and other such details. requirements for non-Israeli citizens for coming to Israeli Public companies have obligations to work in Israel. also publish financial reports in the manner Any restrictions on remitting funds out of the set out in the Securities Law 1968. jurisdictions (withholdings, etc.). Other reporting obligations to the registrar Dividend distributions paid by Israeli companies such as: change of the company's name, to their shareholders (see above for more details) purposes and AoA, share issuance or are deducted by the company at source before transfer, capital increase, liens, changes in payment of the dividend. the board etc. Other forms of Israeli Entities Partnerships Cooperative Society (in Hebrew "Agudah Shitufit") Israeli partnership law requires little ongoing ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN ISRAEL] 101 This is a form of entity that has many similar used for profit making enterprises, it will not be characteristics with a company, while having seen covered further in this work. through tax rules that are more closely related to Public Benefit Company partnerships. Cooperative society is a form of entity that was designed with certain types of This form of corporate entity (hereunder: "PBC") Israeli societies in mind such as a kibbutzim and in is as its name suggests, a company formed under fact, many Israeli kibbutzim are incorporated in a definitive set of purposes, for the benefit of the the form of cooperative societies. Businesses set public. It is formed with an application filed with up by kibbutzim are often also set up as the Registrar of Companies, and its method of cooperative societies. In most cases those formation is similar to that of the company cooperative societies are wholly owned or almost described above. As a company, it has a definitive completely owned by the kibbutzim. When share capital, shareholders and rights of outside investment is sought, they often first ownership. However, a PBC, by its nature, must convert into regular companies. strictly adhere to the specific standards and purposes for which and under which it was Voluntary Association (in Hebrew: "Amuta") formed. For example, the Company Law prohibits This form of corporate entity is usually any distribution of dividends to the shareholders established for non-profit purposes. Such of a PBC, as this would mean a personal gain to its associations are normally established in order to shareholders. For non-profit organizations run charities and other non-profit initiatives and wishing to employ the legal and organizational enterprises, such as the operation of schools and advantages of a company, this type of corporate colleges. As this type of corporate entity is not entity is thus a popular alternative to a Voluntary Association described above. ILN Corporate Group – Establishing a Business Entity Series Fall 08 102 Fall 15 INTERNATIONAL LAWYERS NETWORK EXP LEGAL – ITALIAN AND INTERNATIONAL LAW FIRM & FERRARI PEDEFERRI BONI STUDIO LEGALE ASSOCIATO ESTABLISHING A BUSINESS ENTITY IN ITALY ILN CORPORATE GROUP [ESTABLISHING A BUSINESS ENTITY IN ITALY] 103 ESTABLISHING A BUSINESS ENTITY IN ITALY 1. Types of Business Entities investments of higher significance and 1.1 Premises value, either by foreign and domestic investors. The Italian law provides multiple forms of organizational structures in order to do business A minimum capitalization of Euro 50.000 (fifty in Italy, which differ from one another due to the thousand) is in fact required to set up an S.p.A. extent of the liability undertaken by their The capital of the S.p.A. is subdivided into participants. In particular, certain business shares and is required to be fully subscribed, organizational forms allow the participants to although only 25% of its value may be paid in limit their personal liability (such as the “società at the time of incorporation. The remaining subscription price will have to be paid up per azioni” - a type of company similar to the Joint Stock Company - or the “società a upon request of the administrative body of responsabilità limitata” – similar to the Limited the company, in one or more installments. Liability Company -), as opposed to others which As mentioned above, the S.p.A. confirms the do not limit the liability of the participants general principle of the limited liability of its (among which the “società semplice” and the shareholders in case of insolvency of the “società in nome collettivo,” operating similarly company, which will be limited to the to a partnership) or which provide for limitations maximum amount of the share capital actually to the personal liability only for certain classes of subscribed by each shareholder. This principle stakeholders (i.e. the “società in accomandita finds an exception in the event that the S.p.A. semplice” and “società in accomandita per is set up, or is subsequently owned, by a sole azioni”). shareholder. In such cases, in fact, the sole Most foreigners investors generally enter the shareholder may be held personally and Italian market through the organizational unlimitedly liable, unless such sole structures that provide a limited liability shareholder does pay up in whole the entire for the participants. Discussed below are the share capital and fulfils certain publicity two most common types of corporate entities requirements disclosing to the public the sole that provides such limited liability, i.e. the ownership in the company. “Società per Azioni” (“S.p.A.”) and the “Società a The main provisions regarding the governance responsabilità limitata” (“S.r.l.”), including a and the capital of an S.p.A. are regulated by simplified type of the S.r.l., the “Società a the articles of association, which are responsabilità limitata semplificata” (“S.r.l.s.”). In approved by the shareholders at the time of each of these types of corporations, in fact, the incorporation and may be amended only by a maximum extension of the shareholders’ resolution of the extraordinary meeting personal liability is limited to the amount of their of the shareholders, requiring enhanced equity interest. voting majorities. 1.2 Description of the types of entities available In addition to the above, it should be in Italy, through which to conduct business. remarked that more strict legal provisions 1.2.1 “Società per Azioni” (S.p.A.) have been established by the Italian Civil Code with respect to those particular S.p.A.’s The Società per Azioni represents the main whose stock is traded on one of the official corporate vehicle generally utilized for regulated markets or is highly capitalized and ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN ITALY] 104 diffused on the market. capital, or to cover possible losses, and must 1.2.2 “Società a Responsabilità Limitata” be always replenished if reduced. (S.r.l.) 1.2.3 “Società a Responsabilità Limitata The Società a responsabilità limitata is the Semplificata” (S.r.l.s.) most commonly used form of limited The Società a responsabilità limitata liability company in Italy, with a minimum semplificata is a particular kind of S.r.l. that capitalization requirement of Euro 10.000 (ten has been introduced by the Legislative Decree thousand). n. 1/2012, under article 2463 bis of the Italian On the other hand, the equity participation in Civil Code. the S.r.l.’s capital is not represented by shares, The purpose of the introduction of such but by quotas. Such quotas are “immaterial”, company is to foster new enterprises and i.e. they cannot be incorporated into small business, by simplifying the certificates, with the result that the circulation incorporation proceedings and by reducing and the transfer of the same are subject to the capitalization requirement. more strictly formal requirements. The act of incorporation has to be drafted in In general terms, the S.r.l. is characterized by compliance with the standard model a greater freedom granted in favor of the approved by Decree of Justice and the quotaholders to set forth the internal equity contribution can be limited to the organizational rules of the company, and to minimum amount of Euro 1,00, that must be create a very flexible structure adaptable to completely subscribed and directly paid-in, in their peculiar needs. cash, to the administrative body at the time of incorporation. The flexibility of its structure, along with the sensibly lower costs required for the Further limitation in respect to the ordinary incorporation and the management of the S.r.l. structure are: (a) the founder S.r.l., as opposed to the S.p.A., makes the quotaholder(s) must be individual(s), (b) the former the most suitable and commonly inter vivos transfer of quotas can only be utilized corporate form to start and run executed with other individuals, and (c) the small/medium size businesses. capital can only be raised up to the maximum Pursuant to a recent modification to the limit of Euro 9.999,00. Italian Civil Code it is now allowed to 1.3 Groups of Companies constitute the S.r.l. with a corporate capital As one of the results of the reform of the lower than 10.000,00 Euro, save that the Company law approved with Legislative Decree following limitations will apply: 1) the equity January 17, 2003, n.6, (“Reform”), the Italian legal contributions must be paid only in cash and system now regulates certain aspects connected fully paid to the persons that are entrusted to the common practice of organizing business with the administration of the company; 2) an activities through the establishment of groups of amount correspondent to one fifth of the net companies. profits must be set aside as legal provision until the S.r.l.’s net assets will approach While the law does not directly define the term 10.000,00 Euro; 3) the legal provision can be “group of companies”, it makes reference to the only used for ascribing it to the corporate concepts of “activity of direction and co- ordination of companies,” of “coordinating ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN ITALY] 105 company” (i.e. the mother company) and of such practice. More precisely, the Italian Civil “coordinated company” (i.e. the controlled Code now provides, inter alia, for: (i) a specific company or subsidiary). Furthermore, the law liability of the coordinating company; (ii) the does not indicate or list the actual cases in which introduction of a specific “duty of transparency” the activity of direction and co-ordination of for the coordinated companies; (iii) specific cases companies is deemed to exist, but it sets forth in which the shareholders of the co- ordinated only a few general rebuttable presumptions of its companies are entitled to withdraw from such existence. More precisely, the activity of co- companies; and (iv) new dispositions concerning ordination and direction is presumed to be the practice of shareholders’ financing. exercised towards those companies subject to 1.3.1 Liability of the Co-Coordinating Company consolidation in the balance sheet of another company or subject to the control of another The coordinating company may be held liable vis- company pursuant to the definition of “control” à-vis the (minority) shareholders or the creditors indicated by the Italian Civil Code. Accordingly, a of the coordinated companies whenever: (i) the similar presumption of law applies when the coordinating company, while exercising the actual direction and co-ordination of companies is activity of direction and co-ordination, acts in its exercised by virtue of specific contractual own interests and in violation of any criteria of provisions among companies (i.e. domination correct and proper management; and (ii) such contracts, shareholders agreements), as well as of acts cause damages to the value of the clauses set forth in their respective articles of shareholding of the coordinated company or to association. its profitability, or otherwise cause damage to the integrity of the equity and of the overall assets of The approach of the legislator has been practical. the coordinated company representing the main Instead of construing a fixed definition of group guarantee for such company's creditors. of companies, it has taken in consideration the most typical effects connected to the relevant The aforementioned liability is in any case phenomenon (i.e. the co-ordination and direction excluded when: (i) said acts, and the of one company over another) and has left to the prejudices caused to the single coordinated case law and the scholars the task of interpreting company, are outweighed by the overall practical and updating from time to time the actual advantages arising from such acts in favour of the definition of such activity. At the same time, the entire group of companies; (ii) the damages to new provisions of law have had the merit to the shareholders or the creditors of the finally recognize the phenomenon of groups and coordinated company is fully eliminated by the to finally confirm that the activity of co-ordination coordinating company, also by means of and direction is lawful so long as it is practised instruments or measures adopted with this properly. Prior to the Reform, in fact, the specific purpose (e.g. cash injections in the lawfulness of such practice has been highly coordinated company for an amount equal to debated amongst the Italian scholars and case the - presumed - damage only in order to law. exclude the aforementioned liability). It should be noted that the new provisions of law The importance of the above provisions may be have restricted and sanctioned only any possible better appreciated considering that, in the event abuse of such activity, providing a specific duty that the coordinating company is found liable for the directors of the co- ordinated company to according to the above, such liability shall not supervise and control the proper conduction of be limited to the value of the equity interest ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN ITALY] 106 owned by the coordinating company in the 1.3.3 Rights of Withdrawal coordinated company, but will follow the ordinary In order to protect the minority shareholders of liability rules. Moreover, such liability may be coordinated companies from prevailing extended to any person who participates in the resolutions passed by the majority shareholder performance of the harmful act or otherwise expressing the will of the coordinating company obtains advantages by such act (within the limit and which may be prejudicial for the interest of of the actual benefit obtained). This latter the former, the Reform has introduced specific provision further extends the number of provisions entitling such minority shareholders to individuals/entities that could be found liable (e.g. withdraw from the coordinated company. Such coordinated company’s directors, auditors, other rights may be exercised when resolutions are shareholders, creditors, and the like). passed changing the corporate purpose of the 1.3.2 Duty of Transparency coordinated company or the actual business (and The Reform has introduced a special legal regime consequent financial risk) connected to its of publicity in relation to the groups of companies. activities, or when the direction and co-ordination In particular, it is now required to fully disclose to activity starts or ceases and such circumstances third parties the status of coordinated company, determine a change of such risk. by mentioning such status on any document and The above mentioned causes of withdrawal correspondence of the coordinated company. cannot be excluded by the by-laws (which in turn Furthermore, both the coordinating and the may provide for further causes of withdrawal). coordinated companies are required to be The terms and conditions of the exercise of the registered into a specific section of the Registrar withdrawal are regulated by the general rules set of Companies. forth for the withdrawal within the S.p.A. and the Directors not complying with the aforementioned S.r.l. duties can be held personally liable for the 1.3.4 Provisions Concerning the Financing from damages that the lack of knowledge of the Shareholders coordinated status has caused to the One of the most sensitive aspects of groups of shareholders or to any third parties (primarily the companies which may lead to abusive and company’s creditors). Moreover, the directors of fraudulent practices against creditors and third the coordinated company are further obliged parties relate to the financial relationships among to: (i) report the main financial data of the the companies belonging to such groups. coordinating company on the balance sheet of the coordinated company; (ii) indicate in the The inherent risk registered in this case is the directors’ report (to be attached to the balance attempt to abuse the corporate veil and to make sheet) all the relationships and transactions (and recourse to financing methods instead of their relevant business and economic effects) adequately capitalizing the coordinated company undertaken with the coordinating company in order for the mother-company to limit its and/or any other company belonging to its group; direct liability. (iii) justify the decisions taken by the With the aim of limiting this practice, the Reform managing body of the coordinated company has introduced general provisions aimed at every time the same are influenced by the guaranteeing higher protection of the third coordinating company. parties’ credit rights. The general rule introduced by the Reform in this regard states that: (i) any ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN ITALY] 107 reimbursements of financing made available by of the foreign company, and the profit and loss the shareholder(s) to the participated company account of the branch. The branch must file with are subordinated to the actual payment of any the Italian tax authority the tax return pertaining other debt of the company, and that (ii) any to the income produced in Italy. reimbursement of such financing occurred in the The branch has no minimum capital requirement, year preceding the declaration of bankruptcy of rather is generally provided by the foreign the participated company shall be revoked (by company with an endowment fund. the trustee of the bankruptcy proceeding). However, it should be pointed out that this 1.5 Matters to be considered when choosing a general rule shall apply only for those loans and particular business entity type financing granted to the company at a time in The S.p.A. equity participation represented by which there was an excessive difference between shares rather than quota makes this type of the net equity of the company and its company preferred to the S.r.l for confidentiality indebtedness (i.e. equity/debt ratio), or it would reasons, as the names of the shareholders are not have been more reasonable to execute a direct registered on the Corporate Register and for the equity contribution rather than granting loans. easier circulation of the ownership of the 1.4 Branches – Stable Organization property rights. Foreign companies that establish one or more The S.p.A. structure and functioning makes branch offices with permanent representation them more suitable also in case of within the Italian territory are subject - for each widespread corporate participation. of such branch offices - to file in the Corporate On the contrary, the S.r.l. are preferred for the Register legalized copies, furnished with sworn lower capitalization requirements, greater translation of (i) the Foreign Company’s governance flexibility, higher possibility of incorporation deed and articles of association (in participation of the business owner(s) in the case of EU foreign company, the articles of management of the company and in the conduct association can be substituted by a certificate of the business activity. Thus the S.r.l. is the most issued by the competent register of companies); suitable company structure for businesses when (ii) notarized copy of the minutes of the Foreign ownership and management responsibilities stay Company’s competent body that has resolved in the same persons. to establish the branch office(s), filed with an Italian Public Notary; (iii) the name, place and Higher capitalization requirements, more date of birth, residence in Italy of the person(s) sophisticated and less flexible governance who permanently represent(s) the company and provisions, need to appoint statutory auditors the power assigned to such person(s). (regardless the size and financial dimension of the company, as described below), make S.p.A. the Until the above mentioned formalities have been appropriate type of company for large size fulfilled the person(s) who act in the name and on business enterprises. Furthermore only S.p.A. behalf of the company are unlimitedly liable, qualifies for listing in the stock market. jointly and severally with the company for its obligations, despite the limited liability of the Thanks to the special regulations governing the company in the country of residence. S.r.l.s., this type of company represents the most suitable structure for the conduct of small The ongoing activity of the branch implies the businesses. duties of filing the annual financial statements Share capital represented by shares rather than ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN ITALY] 108 percentage quota participation in the value of the governmental authorization or other capital makes the S.p.A. preferable for condition, required by any applicable law in confidentiality reasons, circulation of property order for the company to validly carry out its rights and in case of large shareholders activities, have been obtained or met. The participation. documents attesting the incorporation of the Either than for the above reasons the S.r.l. is company shall then be filed with the usually considered the best company type for competent Registrar of Companies within 20 companies with one sole shareholder or where days from incorporation and, once it will be the shareholders are also active in the business filed, the company shall acquire full legal management. personality. S.r.l. is the usual type of companies chosen for 2.1.2 S.r.l. the incorporation of Italian subsidiaries of foreign The procedure for the incorporation of an S.r.l. companies. is very similar to the procedure described for 2. Steps and Timing To Establish the S.p.A. Likewise, same rules apply as regards the cases in which the company is 2.1 Brief overview of steps to incorporated, or is subsequently owned, by a incorporate/constitute each sole quotaholder. 2.1.1 S.p.A. 2.1.3 S.r.l.s. In order to incorporate an S.p.A., the The incorporation procedure of the S.r.l.s. shareholders - either in person or by proxy – differs from the other companies only for the shall appear before a Notary Public who will fact that the incorporation deed must meet be required to draft the public deed of the minimum standard content required incorporation. that must contain the pursuant to Chart A of the Ministry of Justice following main information (i) name of the Decree no. 138/2012. founding shareholders and respective equity; (ii) name of the company and municipality Moreover, the incorporation deed of the where the headquarter is located; (iii) S.r.l.s. is free of stamp and registry duties, and company’s object; (iv) amount of subscribed also of notary fees. and paid capital; (v) number and type of 3. Governance, Regulation and Ongoing issued shares; (vi) value of contributions in Maintenance kind; (vii) criteria for distribution of profits; 3.1 Brief summary of regulation of each type and (viii) governance rules and administrative ongoing maintenance, reporting body composition and powers to represent requirements the company; (ix) composition of the statutory auditor board and appointment of 3.1.1 S.p.A. its members; (x) duration of the company. a) Shareholders’ Meetings The Notary Public shall verify, inter alia, that The main decisions regarding the S.p.A.’s (i) the company’s capital has been fully activities, structure and governance, are subscribed; (ii) at least 25% of the capital has generally passed by resolution of the been paid up (unless it has been subscribed by shareholders’ meeting, which represent the a sole-shareholder, in which case the capital highest corporate body of this form of will have to entirely be paid up); and (iii) any ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN ITALY] 109 company. through three different systems: (i) the The shareholders’ meetings are classified as (i) “traditional” system, composed of a board ordinary or (ii) extraordinary, depending on of directors, or a sole director, and a board the resolution to be adopted and on the of auditors; (ii) the “monistic” system, relevant matter. composed of a board of directors and its internal body named control committee; or With the sole exception of the companies (iii) the “dualistic” system, composed of an adopting the dualistic system of governance, administrative board and a surveillance board. which will be illustrated below, the ordinary meeting shall resolve, inter alia, on the: b.1) The Traditional System 1. approval of the yearly financial The traditional system of corporate statements and the related decision on governance of an S.p.A. is based on the profits/losses destination; simultaneous presence of two separate bodies, i.e. (i) the administrative body 2. appointment and revocation of the (board of directors or a sole director), which directors and management body; is in charge of the management of the 3. appointment and revocation of the company, and (ii) the board of statutory auditors and of the chairman of the board auditors, which is mainly in charge of of auditors and, should this be the case, controlling the management of the the individual or the entity entitled to company and the compliance of the exercise the accounting control; company’s activities with the law and the 4. compensation of the directors and by- laws. auditors (unless this has already been set out in the incorporation deed); Directors are appointed by the shareholders’ meeting for a term not exceeding three 5. liability action against the directors and years. The appointment can be renewed. against the auditors. The directors are not required to be Italian The ordinary meeting of an S.p.A.’s citizens or permanent resident in Italy. shareholders must be held at least once a Furthermore, individuals who have been year (in order to approve the balance sheet of declared legally incapable or bankrupt, as the company). well as those who have been sentenced to a The extraordinary meeting shall resolve on penalty entailing interdiction from public matters of higher significance and relevance offices, even if temporary, or inability to for the life of the S.p.A., as the amendments exercise managerial functions, may not be to the articles of association or the appointed as directors. appointment (and determination of powers) The board of directors may delegate part of of the liquidators of the corporation. its own powers either to an executive Extraordinary meetings shall be held before a committee, composed of some of its notary public and require higher majority members, or to one or more of its members quorums than those required for ordinary (managing directors), or both. The directors meetings in order to validly pass the relevant so delegated are held to a periodical and resolutions. broad duty of information towards the b) Administrative Body board of directors and the board of statutory auditors, with respect to the The governance of an S.p.A. can be exercised ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN ITALY] 110 general performance and prospects of the occurred, had they supervised the directors’ company as well as to the most relevant activities in compliance with their duties. transactions entered into on behalf of the According to the law, the control on the company and of any subsidiary controlled accounts and on the financial statements of by the latter. Finally, it should be specified the company, is performed by an external that the delegation of powers to the auditor (either an individual professional or managing director/s or to the executive a company), exception made for those cases committee does not imply that the board of in which the company is not obliged to directors renounces to such delegated consolidate its balance sheets. In such cases, powers, but only that the principle of the in fact, the by-laws of the company may collegial exercise of said powers is waived. assign such duties to the board of statutory Thus, the board of directors will always auditors. retain a parallel competence and power in addition to those granted to the managing b.2) The Dualistic System director/executive committee. In the dualistic system, a relevant part of the As regards the board of statutory auditors, it corporate governance passes from the is composed of three or five statutory shareholders to an independent auditors, plus two alternate auditors. The professional body, namely the surveillance statutory auditors are appointed by the board. On the other hand, the management shareholders’ meeting and stay in office for of the company is entrusted to an a term of three years. They cannot be administrative board, which shall be revoked, except that for just cause. composed of at least two members, appointed by the surveillance board. The The main duties of the statutory auditors administrative board is the only body consist in the control of the company’s ultimately liable for pursuing the activities and their compliance with the law company’s purpose and, apart from only and the by-laws, as well as in the control few exceptions, it will be governed by the that the company is properly managed and same provisions set forth for the board of that the organizational, administrative and directors within the traditional system. accounting system of the company is adequate to its actual needs. With this aim, The surveillance board shall be composed the statutory auditors are entitled to of at least three members (among which proceed, also on an individual basis, with at least one effective and one substitute inspections and controls on the member must be enrolled in the management of the company, and they are professional registrars of auditors), to be also entitled to require information from appointed upon resolution of the the directors with respect to specific shareholders’ meeting. The surveillance transactions or to the actual performance of board is entitled, on one side, to supervise the company. and control the management of the company (function granted in the traditional The statutory auditors are jointly liable with system to the board of auditors), and, on the directors for the facts or omissions the other side, to exercise most of the carried out by the directors, provided that functions which in the traditional system are the adverse effect or damage caused by granted to the competence of the such facts or omissions would have not ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN ITALY] 111 shareholders’ meeting. b.3) The Monistic System Therefore, the surveillance board shall, inter The monistic system does not provide for a alia, appoint and revoke the administrative clear distinction between an administrative board, determine its remuneration, approve body and a surveillance body with duties of the balance sheets and exercise on behalf of control of the management of the company: the company any liability actions against the as a matter of fact, both the functions are administrative board, or any of its members. carried out by the board of directors, As to the shareholders, the dualistic system although through different bodies substantially limits the extent of their power established within such board. In fact, the to the appointment of the surveillance monistic system assigns the management board, as well as to the resolution upon the of the company to the board of main guidelines and the general objectives directors, while the supervision over such of the company’s activities and upon the management is granted to a different major material amendments to the corporate body named the audit committee, company’s by-laws or the major events to be appointed by the board of directors regarding the structure and the life of the itself, among its members. company (e.g. dissolution, mergers, de- The audit committee is entrusted with all mergers, change of the corporate form or of the powers and duties typically assigned to the company’s stock capital). the board of statutory auditors within the Finally, as opposed to the traditional system, traditional system, such as the control of the any S.p.A. adopting the dualistic system management of the company and the must be subject, without exceptions, to the control of the compliance with the laws and accounting surveillance of an external the company’s by-laws. Furthermore, as to auditor. the accounting control, also in the monistic system such control is not qualified as a Based on the above, it can be concluded duty of the audit committee and shall be that, among the three governance systems exercised by an external auditor. in exam, the dualistic system achieves the most significant separation between the It is worth being mentioned that, in case competence of the beneficial owners of the of adoption of the monistic system, at company and that of its governance bodies. least half of the members of the board of For these reasons, the dualistic system directors must meet the independence seems to be particularly suitable for those requirements provided for statutory companies in which the administration of auditors by the Italian Civil Code or by the codes of conduct issued by trade the company is to be granted to independent and professional managers associations or by the relevant market with no (or very few) interferences on the management companies. part of the shareholders. On the other side, 3.1.2 S.r.l. and S.r.l.s. the dualistic system does not seem to be The articles of association can establish the advisable for small-medium size companies, precise limits of the competence of each in which a strong participation of the corporate body, with significant differences shareholders in the day to day management from company to company. More precisely, of the company is generally registered. the quotaholders shall resolve on any matter ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN ITALY] 112 referred to them by the law or by the articles As a preliminary remark, it should be noted of association, as well as on any matter that no restriction and/or limitation exists in referred to them by the administrative body Italy with respect to foreign investments and or by part of the quotaholders. The matters in relation to the ownership of Italian reserved by the law to the exclusive decision companies’ equity by foreign investors and of the quotaholders are: (i) the yearly business operators. approval of the financial statements and the The same applies to foreign directors. related decision on profits/losses destination; (ii) the appointment and revocation of the 3.3 Minority shareholders’ rights and protection members of the administrative body; and (iii) The minority shareholders’ rights and protection the amendments of the articles of association are represented by the following instruments. (for which a quotaholders’ meeting before a notary public is mandatory). 3.3.1 Right of inspection and control The administrative body is the competent i) S.p.A. body for the ordinary and extraordinary In the S.p.A. the rights and duties of management of the company, and can be inspection and control are generally reserved composed of (i) a sole director, (ii) a plurality to the controlling body. of directors, with managing powers that can In addition, the shareholders have the right to be exercised either jointly or severally or both, report all the facts deemed to be in breach of or, alternatively (iii) of a board of directors. the company and /or shareholders’ interests No restrictions to the duration and to the Board of Auditors that will have to take renewability of the office of directors are such facts in consideration in its inspection. If provided by the law. the facts are reported to the Board of auditors Furthermore, the S.r.l. structure grants by a number of shareholders representing flexibility also with regard to the appointment 1/20 of the company’s equity, or 1/50 in case of the controlling body. The appointment of, of company admitted to the risk capital alternatively, a sole statutory auditor, a board market, the Board will have to investigate on of statutory auditors, or of an external auditor such facts, and present its conclusions and is not mandatory, unless: (A) the company proposals to the shareholders’ meeting, must consolidate its financial statements; (B) without delay. the company controls a company obligated to Moreover, the shareholders representing external audit control; (C) the company 1/10 of the company’s equity, or 1/20 in case exceeds, for two subsequent financial years, of company admitted to the risk capital at least two of the following minimum market, may ask for a judicial inspection and financial thresholds: (i) the total assets in the control on the management of the company, assets and liabilities statement exceed Euro in case of grounded suspect of serious 4.400.000; (ii) the total earnings from sales of irregularity carried out by the administrative goods and services exceed Euro 8.800.000; body, that may damage the company or one (iii) the average human resources employed or more controlled companies. during each financial year exceeds 50 units. ii) S.r.l. 3.2 Requirements for local Each quotaholder of the S.r.l. has a shareholding/directors personal and direct control on the ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN ITALY] 113 management activity as to them are Therefore, to offshore parties are applicable all conferred the rights to: (a) obtain from the the requirements generally provided for both directors information on the management, Italian and foreign investments, such as the and (b) examine, also by means of consultants compliance of the company’s purpose with the of trust, the corporate books and the Italian law provisions, compliance with documents relating to the management of the regulation provided for specific activities as, for company. In case of rejection to grant the example, banking, insurance, gold trading, right of control or in case such right is military and defense activities and preliminary thwarted by the directors, the shareholder issuing of any necessary clearance and can obtain appropriate court orders issued as administrative authorization. a matter of urgency. Some limitations may derive from the application 3.3.2 Right to appeal against shareholders’ of the state to state reciprocity principle. resolutions 4.2 Any capitalization obligations Absent, dissenting or abstained shareholders - The minimum capitalization requirement has representing 5/100 of the company’s equity, been described above under the incorporation or 1/1000 in case of company admitted to the proceedings paragraph. risk capital market for S.p.A. or without thresholds for the S.r.l. (or the different Specific rules are provided by the law with percentage set forth by the company’s by- regards to the compulsory actions to be taken in laws) - can appeal before the Court case the financial statement reports losses that against assembly resolutions and request absorb the company’s equity over a fixed their cancellation, in case of non-compliance debt/equity ratio. of the same with the law or the articles of If as a consequence of losses the company’s association/by-laws. Same right of appeal is capital has diminished by more than one third the granted in case of (a) missing convocation of shareholders’ meeting must be convened to take the meeting, (b) missing minutes of the the opportune actions. meeting, (c) impossible or illicit resolution, (d) resolution modifying the company’s object If the company is not recapitalized, or the loss is into an impossible or illicit activity. not reduced to less than one third within the following fiscal year, the company’s capital must The shareholders not reaching the above be reduced in proportion to the losses that have mentioned thresholds, or not having right of been ascertained. vote, are allowed to claim the reimbursement of the damages suffered as a consequence of If, as a consequence of losses accruing, the capital the illegitimate resolution. is reduced below the minimum required, the shareholders’ meeting must be immediately 4. Foreign Investment, Thin Capitalization, convened in order to resolve either the reduction Residency and Material Visa Restrictions of the capital for losses, and the immediate 4.1 Any significant barriers to entry for an increase of the capital to an amount not lower offshore party than the minimum required, or, the conversion of the company into a structure that is consistent No specific restriction or barrier are generally with the existing capitalization, or the winding up provided under the Italian Law for offshore of the company. business and investments. ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN ITALY] 114 dividends paid to receivers that are income tax 4.3 Any special business or investment visa payers in EU white listed member states (or in issues European Economic Area - EEA). Such receivers, pursuant to Art. 3 of Presidential Decree nr. 600 Pursuant to Art. 26 of Law July 25, 1998, nr. 286, of 1973, are in fact subject to a 1.375% the individual who either establishes a withholding tax. commercial, industrial, professional or artisan business in Italy, or is a shareholder of a Pursuant to the so called “Mother-Daughter commercial company or partnership, or is Directive” (i.e. 435/90/CEE), the distribution of appointed as member of the administrative body dividends is not subject to any withholding tax, in of a commercial company, is entitled to be case the following conditions are met: (i) both granted a VISA for independent work. payer and receiver are resident in two EU member States; (ii) the stockholding is not lower The Visa is issued by the consular authorities than 25%; (iii) the Italian company is a S.p.A or a competent for the residence of the applicant, S.r.l. (plus other minor and less used types of provided that; (i) the business activity or the company listed in the Directive); (iv) the company is duly registered with the competent companies are subject to income taxation; (v) the Corporate Register, is active and in good standing; stockholding belongs to the Mother Company for (ii) the individual has a yearly income higher than not less than twelve months. the income that qualifies for exemption to the social security contribution (as of today Euro Specific anti-elusive provisions exist in order to 8.400,00); (iii) the individual has a suitable and avoid that the Mother company constitutes a long term residential accommodation in Italy; (iv) fictitious entity that hides the ultimate a Police clearance is granted. stockholding of a non-resident entity. 4.4 Any restrictions on remitting funds out of the jurisdictions (withholdings, etc.) Fiscal earnings treatment on outgoing capital. Pursuant to Art 27 of the Presidential Decree nr. 600 of 1973, save any different provision contained in applicable international conventions to avoid double taxation, profits distributed by companies having their offices in Italy, to nonresident shareholders are subject to a withholding tax equal to 20%. Italy has signed with eighty-four countries double taxation conventions, pursuant to which the payment of dividends to a receiver resident in one of those countries (and subject to the receiver of the dividends is the actual beneficial owner) is subject to the maximum withholding tax indicated in the applicable convention, that, on a case by case basis, varies from 5% to 15%. The provisions above mentioned do not apply to ILN Corporate Group – Establishing a Business Entity Series Fall 08 Fall 15 INTERNATIONAL LAWYERS NETWORK TARK GRUNTE SUTKIENE ESTABLISHING A BUSINESS ENTITY IN LATVIA ILN CORPORATE GROUP [ESTABLISHING A BUSINESS ENTITY IN LATVIA] 116 ESTABLISHING A BUSINESS ENTITY IN LATVIA included in the list approved by the Enterprise Register. 1. Types of business entities Additionally as an incentive to start up business Foreign investors may choose from the types of there is a possibility to establish SIA with business entities: minimised share capital (the minimum share • Limited liability company capital is EUR 1), in case the founders are not • Joint stock company more than 5 individuals, of whom one or several simultaneously serve as management • Individual merchant board members, and the founders are not • General partnership shareholders in other such SIA with minimised • Limited liability partnership share capital. If share capital is less than EUR • Branch 2,800, only monetary investment can be made • Entities under European Law into the share capital. • Representative office SIA may be owned by one or more individuals The most common types of business entities in or legal entities. Latvia are limited liability company and joint stock company. The management bodies of SIA are the meeting of shareholders, the management board and 1.1 Limited liability company the supervisory board, if established, as SIA is Due to its closed composition of shareholders not required to have a supervisory board, but it and simple management structure, limited may have one, if the shareholders wishes to. liability company (“SIA”) is the most common The supervisory board, if established, shall type of a company in Latvia. The main reason consist of at least 3 members; the maximum why most businesses opt for SIA is that the number of supervisory board members is 20. minimum share capital requirement is EUR The management board shall consist of at least 2,800. 1 member. Members of the management board and the supervisory board may not be Before registration of the company, amount of the same persons. share capital not less than 50% of the subscribed share capital, i.e. at least EUR 1,400, 1.2 Joint stock company shall be paid in full. The rest amount of A joint stock company (“AS”) is more suitable subscribed share capital shall be paid up within type for a larger number of shareholders and a period of 1 year after registration of the has a more strict management structure. In company. addition AS may be established as a public or If share capital is at least EUR 2,800, both private company. In case of a public AS its monetary and non-monetary investments can shares may be publicly traded. be made into the share capital. A non- The share capital of a joint stock company may monetary investment includes assets that can not be less than EUR 35,000. In case the share be assessed in money, or a property right that capital of a joint stock company is EUR 35,000, can be claimed. If the share capital is paid up by it shall be fully paid-up before registration of non-monetary investment, a document the company. Alternatively, if the amount of certifying the value of each non-monetary the share capital is larger than EUR 35,000, not investment is necessary. The valuation of non- less than 25% of the share capital shall be paid- monetary investment and an opinion regarding up up to the submission of the application for it shall be provided by an expert who is registration. ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN LATVIA] 117 Shares in AS are securities, which may be • submitting documents to the Enterprise bearer shares, which are recorded in the Register; financial instruments account, and registered • after the registration of the company the shares, which are registered in the company’s management board shall visit the credit register of shareholders. institution and change the temporary bank AS may be owned by one or more individuals or account into a fully functioning current legal entities. bank account and register signature rights The management structure of AS is three-tier: a at the credit institution. general meeting of shareholders, a Where appropriate, the company is obliged to management board and a supervisory board. indicate to the Latvian credit institution and the The supervisory board shall consist of at least 3 Enterprise Register the shareholders of the members and at least of 5 members if the company as true beneficial owners (natural shares of AS are publicly traded; the maximum persons). number of supervisory board members is 20. All documents, which are in foreign language The management board shall consist of at least must be translated into the Latvian language and 1 member. Members of the management the translation shall be notarised. In some cases board and the supervisory board may not be documents regarding a foreign company or the same persons. There are no requirements individual establishing a business entity in Latvia for their place of residence. must be also apostilled or legalised. 2. Steps and Timing to Establish Business entities are usually registered within It is possible to acquire an existing company, but three business days from submission of in order to establish a new company (taking into respective documents to the Enterprise Register, account only the most common business entities however it is also possible to pay a state fee in SIA and AS, the following main steps must be triple amount in order to speed up registration taken: procedure and to register a business entity within • concluding simple form foundation one business day. decision or agreement, if there are several 3. Governance, Regulation and Ongoing founders, and simple form articles of Maintenance association; 3.1 Corporate Governance • signing a notarised application form for Members of the management and supervisory establishing of a company along with boards must be natural persons with active additional documents (e.g. notarised legal capacity. They are required to perform consent of each management board their obligations with the diligence of an honest member and simple form consent of each and careful manager and to be loyal to the supervisory board member (if the company company. has a supervisory board), etc.); The management board is the legal • opening a temporary bank account in a representative of the company. The decisions Latvian credit institution, into which are taken by all the management board monetary contributions are paid; members. However, the representation • signing a notarised shareholders register (signature) rights may be joint, all members folio (for SIA) and simple form shareholders jointly or by two together, or individual. The register (for AS); ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN LATVIA] 118 representation rights are set in the articles of 3.3 Requirements for local shareholding / association. directors Members of a management or supervisory For shareholders there are no requirements in board who cause losses to the company due to respect of their nationality - they may be either non-fulfilment of their duties (e.g. by breaching Latvian or foreign individuals or companies. their duty of care) are jointly and severally liable As for the members of management and to the company. A member of the management supervisory boards, there are also no special or supervisory board will not suffer liability, if requirements in respect of their nationality, he or she acts pursuant to a lawful resolution of except they have to be a natural person with the general meeting or any other competent capacity to act. body or if he or she proves that he or she performed his or her obligations with due Foreign nationals do not need a residence diligence. A claim for payment of compensation permit in the Latvian Republic to be registered to the company for damage may also be with the Enterprise Register in a Latvian submitted by a creditor of the company if the company, though this may subsequently be assets of the company are not sufficient to required for non-EU nationals for living or satisfy the claims of the creditor. working in the Latvian Republic. A shareholder is not liable for the liabilities of 3.4 Protection of minority shareholders the company and vice versa. If the shareholders The rights of shareholders depend on the adopt a resolution on a matter that would number of shares owned by the shareholder. normally be in the capacity of the management The main rights, granted to the minority or supervisory boards, they may be liable as if shareholders by the Commercial Law, are: they were members of the management or supervisory board. • rights to request convocation of the Additionally a person who influences a member shareholders’ meeting (shareholders that of a management or supervisory board to act in represent at least 10% of the share capital); a manner that is contrary to the interests of the • rights to request court to declare decision company, may be liable for compensation of the shareholder void, if such decision or damages. procedure for taking it is in contradiction to law or the articles of association, or a 3.2 Reporting requirements significant violation has been allowed in An annual report which consists of a the convening of the shareholders’ meeting management report and annual accounts and or the taking of the decision (at least one which has been approved by the shareholders shareholder); must be annually submitted to the State • rights to bring an action against Revenue Service together with an auditor’s management and supervisory board report, if compulsory. members (shareholders that represent at A company has to also register all changes with least 10% of the share capital or whose the Commercial Register (e.g. change of shareholding is at least EUR 71 100); registered address, changes to composition of • rights to request the acquiring company to the management board or shareholders etc.). redeem shares of a shareholder, who did not agree to the reorganization, for money (at least one shareholder); ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN LATVIA] 119 • rights to request postponing approval of • the actual amount of the interest divided by a annual accounts, disputing the correctness coefficient C. Coefficient C is calculated using of separate positions in the annual the following formula: accounts (shareholders that represent at least 10% of the share capital); • rights to request the institution convening the shareholders’ meeting of AS to include • the values of the items in the formula are the additional issues in the agenda of the following: meeting (shareholders that represent at D = average liabilities least 20% of the share capital). E = total equity R = amounts in long-term revaluation reserve Shareholders may conclude a shareholders’ and similar reserves that have not resulted agreement, regulating relationships between from profit distributions. the shareholders of the company, including but not limited to the agreement on voting in the The thin-capitalization rules do not apply to shareholders’ meeting. Such agreement of interest on loans obtained from the specific shareholders may include various provisions credit institutions specialising in the loans for beneficial for minority shareholders. It is also business development e.g.: possible to establish provisions that protects • credit institutions that are residents of the EU, minority shareholders in the articles of European Economic Area (EEA) or a country association. with which Latvia has entered into a double tax 4. Foreign Investment, Thin Capitalization, treaty Residency and Material Visa Restrictions 4.1. Thin Capitalization rule • Latvian Treasury • European Bank for Reconstruction and Taxable income is the income reported in a Development company’s profit and loss statements, prepared • World Bank Group, etc. and adjusted in accordance with the Latvian laws. The second calculation described above for calculating the limitation on the interest For corporate income tax purposes, companies deduction does not apply if the loans are may not deduct interest expenses that exceed obtained from financial institutions (defined in the lower of the following amounts: the Credit Institution Law) that are resident in • an amount equal to the average amount of the EU, EEA or a country which Latvia has liabilities multiplied by the annual weighted entered into a double tax treaty with and if such average interest rate for loans issued to financial institution provides crediting or domestic non-financial companies (calculated financial leasing services and is under the based on statistical indicators of monetary supervision of credit institutions or the financial financial institutions), which is multiplied by a monitoring agency. coefficient of 1.57. The annual weighted The thin-capitalization rules do not apply to average interest rate for loans issued to credit institutions and insurance companies. domestic non-financial companies is published The amount of interest that exceeds the on the website of the Bank of Latvia within a deductible amount may not be used to reduce month after the end of a tax period. taxable income in future tax years. ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN LATVIA] 120 4.2. Related-parties transactions 1) the non-resident (foreign merchant) uses a Latvian law requires the arm’s-length principle fixed place of business in Latvia; to be followed in all related-party transactions 2) the place of business is used permanently or (that is, by applying fair market prices). The tax has been established for the purpose of authorities may reassess transactions between being utilised permanently; related parties and recalculate the tax base if 3) the place of business is used for carrying on the prices applied in related-party transactions a business. are not fair market prices. A place of management, a branch, a factory, a The following transfer pricing methods: the workshop and a mine, an oil or gas well, a comparable uncontrolled price, resale price, quarry or any other place of extraction of cost-plus, profit-split and transactional net natural resources are considered fixed places of margin methods, may be used in order to assess business. whether the prices applied in controlled Providing consultancy, management or transactions are consistent with the arm’s- technical services will create a permanent length principle. establishment if the services are provided for Latvian taxpayers with annual net turnover the time period totally exceeding 30 days in any exceeding EUR 1 430 000 are required to consecutive six month period (unless a double prepare transfer pricing documentation tax treaty states otherwise). containing industry, company, functional and Non-resident companies operating through a economic analysis. The documentation permanent establishment in Latvia are subject requirements apply to all related-party to tax on income derived by the permanent transactions with an annual value over EUR 14 establishment in Latvia as well as on income 300. The generally accepted practice for independently derived abroad by the transfer pricing issues is based on the OECD permanent establishment. If a non-resident Transfer Pricing Guidelines for Multinational company engages directly in business activities Enterprises and Tax Administrations. in Latvia that are similar to the business Taxpayers can enter into an advance pricing activities performed by its permanent agreement (APA) with the tax administration on establishment or subsidiary in Latvia, income the establishment of an arm’s-length price for a derived from the non-resident company’s transaction conducted with a related foreign activities is included in the taxable income of company if planned transaction annual value the permanent establishment or the subsidiary. exceeds EUR 1 430 000. 4.4. Withholding taxes In case a taxpayer complies with an APA, the tax Latvia has concluded 56 double tax treaties administration during a tax review may not (DTT), which provide favourable withholding tax adjust the arm’s-length price established for the rates on payments made by entities also transaction. outside European Union. Most of the DTT 4.3. Permanent establishment ensures that withholding tax levied by the subsidiary does not exceed 5% on dividend It shall be considered that a non-resident payments provided that Latvian company owns (foreign merchant) has a permanent at least 25% of capital of another company. The establishment in Latvia if all of the following withholding tax rate on interest payments made conditions are met: to Latvian company shall not exceed 10% based ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN LATVIA] 121 on provisions of DTT, while withholding tax on 4.6. Harmonization with EU tax legislation royalties are limited to 10%. In relation to the accession of the Latvian No withholding tax is levied on dividends paid Republic to the EU on 1 May 2004 EU Directives by Latvian company to non-residents. However, concerning direct taxation (income taxation) this rule does not apply for dividend payments were incorporated into the ITA. to companies established in tax havens; these Based on the so called Parent Subsidiary dividends would be taxed with Corporate Directive (and related amending Directives), Income Tax of 15% rate. dividends and other profit share distributions As of 1 January 2014, withholding tax shall not between Latvian and EU companies which meet be applied for Latvian company’s interest and the definition of a parent company and its royalties paid to foreign companies, excluding subsidiary are not subject to corporate income the ones made in tax havens territory. tax. To qualify as parent and subsidiary Withholding tax of 10% is levied on companies, companies must fulfil the following management and consulting fees. It is possible conditions: to obtain exemption from 10% withholding tax • the companies must take a legal form listed under the provisions of DTTs, provided that in the respective EU Directives, certain administrative procedure is complied • the minimum capital holding in the subsidiary with before making the payment. is 10% and is held by the parent company for If not provided differently under DTT, 5% an uninterrupted period of at least 12 withholding tax is levied on payments for the months (can be fulfilled subsequently), use of property (both movable and immovable) • the companies must be EU member state tax situated in Latvia. residents, • the companies must be subject to corporate 2% withholding is levied on non-resident’s income from disposal of real estate located in income tax as stated in the respective EU Latvia. Latvian company is obliged to deduct Directives. withholding tax, meanwhile no withholding tax Similar conditions also apply if dividends are should be applied on disposal of real estate paid by a Latvian subsidiary to its mother when both contracting parties are non- company if it is a tax resident of the EU or residents. Switzerland. Under Latvian law if real estate constitutes 4.7 Residency and visas more than 50% of company’s assets (at the beginning of the financial year) it is considered Latvia is a member of the European Union and it as the disposal of real estate and therefore is a Schengen country. The basic rules regarding attracts 2% withholding tax. EU and non-EU nationals are as follows: 4.5. Further corporate tax exemptions 4.7.1 Citizens of the European Union Full tax exemptions for dividends and profit of Citizens of European Union, persons from the share distributions paid to a Latvian entity shall member states of the European Economic be applied. However, this rule does not apply if Area and the Swiss Confederation (Union company which shares are distributed is citizens) have the right to enter and stay in established in tax havens. Latvia on the basis of a valid travel document. Union citizens may enter Latvia without a visa and stay in Latvia for up to 90 days within a ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN LATVIA] 122 six-month period, counting from the day of and for transit. A transit visa entitles a person entry. If a Union citizen wishes to stay for a to stay in Latvia for a period not exceeding period exceeding 90 days, counting from the three days. A short term visa entitles a person day of entry, the citizen shall register with the to stay in Schengen area for up to 90 days Office of Citizenship and Migration Affairs within a six-month period, counting from the (OCMA) and shall receive a registration day of entry. However, if a person wishes to certificate. The registration is not required if stay for a longer period, a long term visa shall the citizen stays up to six months annually, if be acquired. the aim is to establish employment 4.4.3 Residence Permits relationship or a person is employed in Latvia, but actually resides in another member state, A residence permit is not required to own a where he or she returns at least once a week, business, it is possible to apply for a or a person is a student in one of the Latvian temporary residence permit to operate a educational institutions and his expected stay business. In any case a residence permit is in Latvia shall not exceed one year. necessary if the person wishes to reside in Latvia for a period of time exceeding 90 days Union citizens have rights to acquire within a six-month period counting from the permanent residence permits, if they have first day of entrance. continuously legally resided for a period of five years. Such temporary residence permit may be issued to a foreigner who is registered as an 4.7.2 Visa Requirements individual business person, is self-employed, Citizens of certain countries may enter Latvia or is registered as a management board without a visa and stay for a period 90 days member, supervisory board member, procura within a six-month period. A list of these holder, representative of a branch or countries may be found at representative office of a foreign merchant, it http://www.pmlp.gov.lv/en/home/services/vi the undertaking is performing active activity sas-and-invitations/. If a visa is required, and its activity provides economic benefit for generally the visa applicant must submit an Latvia or promotes the development of application to the appropriate Latvian economy of Latvia. embassy or consulate in person. A residence permit may be issued to a The application package normally includes a foreigner, if the person has invested EUR 150 valid travel document, a visa application form 000 in the share capital of a capital company, filled out and signed, a photo, a copy of a which employs more than 50 employees, the document confirming that the applicant has a yearly turn-over of which or annual report health insurance policy, documents verifying (balance sheet) is more than EUR 10 000 000 the reason for entry and the anticipated place (during such investment in the share capital, a of residence, or documents indicating that a residence permit may be require by no more letter of invitation has been approved by the than 3 foreigners) or no less than EUR 35 000 OCMA (the invitation is valid for six months in the share capital of a capital company, from the date of approval), a receipt which employs no more than 50 employees, confirming the fee payment. A state duty of the yearly turn-over of which or annual report between EUR 35 - 70, depending on the type (balance sheet) is less than EUR 10 000 000 of the visa, must be also paid. Visas may be and which accordingly pays in taxes (state and issued for a single, double or multiple entries municipality) no less than EUR 40 000, or if ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN LATVIA] 123 the person has acquired or owns one or several real properties with the transaction value of EUR 142 300 or EUR 71 150 depending on the location of the property, provided that all statutory conditions are met. A residence permit may be also issued to a foreigner who has made a financial investment in a credit institution of no less than EUR 280 000 in the subordinated capital. Consequently a temporary residence permit may be exchanged to a permanent residence permit by a foreigner who has continuously resided on the grounds of a temporary residence permit for at least five years in Latvia. Persons from countries of the visa regime with Latvia may apply for a residence permit in the respective Latvian embassy or consulate in person. 4.4.4 Work Permits If a Union citizen or his or her family members have established employment relationship or are self-employed in Latvia, no work permit is required. All other persons must obtain a work permit in such cases, which would include also a foreign person, who engages in operational management of a Latvian company. In the latter case the entry “Business” in a person’s visa or the entry “Commercial activity” in a residence permit confirms the existence of a work permit and it is not required to process a separate work permit. A work permit is issued to a foreigner by the OCMA on the basis of a visa or residence permit. If a business person wishes to employ a foreigner on the grounds of an employment agreement, a vacancy shall be announced in the Employment State Agency. If it is intended to engage the foreigner on the grounds of a service agreement, no vacancy shall be announced. ILN Corporate Group – Establishing a Business Entity Series Fall 08 Fall 15 INTERNATIONAL LAWYERS NETWORK TARK GRUNTE SUTKIENE ESTABLISHING A BUSINESS ENTITY IN LITHUANIA ILN CORPORATE GROUP [ESTABLISHING A BUSINESS ENTITY IN LITHUANIA] 125 ESTABLISHING A BUSINESS ENTITY IN LITHUANIA be audited, if at least two of the following three criteria are met: net sales revenue 1. Types of business entities during the reporting financial year exceeds Investors may choose from the following types EUR 3.5 m. asset balance value exceeds EUR of business entities: 1.8 m. average annual number of employees exceeds 50. The auditor is elected and his • Private limited liability company remuneration is set by the shareholders of • Public limited liability company the company; • Individual enterprise • bodies of the company: the head of the • Limited partnership company shall always be elected in UAB and • General partnership AB. The board (collegiate management • Small business body) is not a mandatory body in UAB, • Cooperative whereas in AB at least one collegiate body • Agricultural company shall be formed; • Branch or Representative office • public trade of shares and bonds: AB can be The most common types of business for foreign listed in a stock exchange and sell its investors in Lithuania are public and private securities publicly, whereas UAB cannot be limited liability companies and branch or listed. representative office. A licence / permit may be required for certain 1.1 Public and Private limited company regulated areas of activities. For instance, Public limited liability company (“akcine companies engaged in businesses such as bendrove” or “AB”) and private limited liability insurance, banking, pharmacy, construction, company (“uzdaroji akcine bendrove” or transportation, etc. must obtain “UAB”) are the most common types of licences/permits. In certain cases those companies in Lithuania. In the beginning of licences/permits are either issued before the 2015, there were almost 63,000 UAB and over establishment of a company (i.e. its registration 300 AB registered in the Register of Legal in the Register of Legal Persons) or before the Persons. actual commencement of activities. Also, permits / consents may be required upon The main differences between UAB and AB: carrying of certain corporate actions of the • capital requirements: the minimum share licensed companies, for example, upon capital requirement for UAB is only EUR increase of the capital, initiation of merger, 2,500, whereas for AB it is EUR 40,000; transfer of shares, etc. • number of shareholders: in AB is unlimited 1.2 Branch or Representative Office whereas in UAB it shall be limited to 250 shareholders; A branch and Representative Office, although it • auditing: AB must always have an auditor for can be registered in the Republic of Lithuania, are not considered as legal persons. A branch is the carrying out of the audit of its annual a structural subdivision of the legal person, financial statements. An UAB must have an having its own registered office and performing auditor when it is established in its articles of all or part of the functions of legal person. association or if required by law. For Representative Office is a subdivision of a legal example, the applicable law foresees that person, having its own registered office and the annual financial statements of UAB shall having a right to perform some actions on ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN LITHUANIA] 126 behalf of the legal person. Legal person • drafting of a Report on Establishment of a assumes all obligations of branch or Company (only in case of AB); representative office. • convening of a Founders’ Meeting; electing A branch and Representative Office performs of the management bodies (always in case their activities under the regulations approved of AB and with respect to UAB – if such by the legal person. decision is not taken upon signature of an A branch or Representative Office is established Act of Incorporation or Agreement); upon the decision of the founder (legal person) • notarizing the establishment documents at to establish a branch or a representative office. the notary; Also statutes of a branch or representative • registration of documents with the Register office shall be prepared. of Legal Persons. There is no requirement under Lithuanian law Please note that in case the founder of a regarding a branch’s or representative office’s company is a foreigner, in all cases documents of registered capital. the founder should be submitted to the notary 2. Steps and Timing to Establish (extract from the foreign register, in which the Generally, a company is established in two steps: date of the legal person is stored and copy of (i) adopting foundation documents and (ii) articles of association of the legal person). Such registering the company in the Register of Legal documents must be officially certified and either Persons. apostilled or legalized and translated into Lithuanian language. Taking into account only the most common corporate structures for foreign investors (AB and In order to establish a branch or representative UAB), the following main steps in order to office in Lithuania, the following main steps must establish a company are: be taken: • making an interim name reservation (if so • making an interim name reservation (if so decided); decided); • signing of an Act of Incorporation (or • adoption of a decision by a competent Agreement of Incorporation, in case there body of the founder to establish a branch are several founders). The Act of or representative office in Lithuania, to Incorporation of UAB may also incorporate appoint a manager of a branch or the decision of the founder(s) regarding representative office; election of management bodies.; • obtaining a consent of the owner for • obtaining a consent of the owner for premises wherein a branch or representative office shall be domiciled; premises wherein the company shall be domiciled; • preparation and approval of regulations of • opening of an accumulation account at a the branch or representative office by a bank; competent body of a founder; • transferring of initial contributions to the • notarizing the establishment documents at accumulation account; the notary; • signing of the Articles of Association; • registration of documents with the Register of Legal Persons. ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN LITHUANIA] 127 In addition to the above mentioned documents of The manager of the company shall be a single- the foreign founder the annual financial person management body of the company. The statements for the last financial year must be manager must be a natural person. Every submitted to the Register of Legal Persons in case candidate for the office of the manager of the of establishment of a branch or representative company must also inform the electing body office by a foreign company (officially certified where and what position he/she holds, how the and either apostilled or legalized and translated other activities are connected to the company into Lithuanian language). and to other legal persons related to the The registration of a company or a branch takes company. up to 3 business days as of submission of all The company is represented by the manager of documents to the Register of Legal Persons. it. However, there may be a rule of quantitative As of relatively recently the law provides a representation established in the articles of possibility to register UAB on-line. However, there association the company, whereas the company are certain requirements that must be met: only may be represented by more than one person, the natural person may by the founder, the acting together. founder must have a qualified e-signature (not According to it, the manager of the company available for foreigners yet), the articles of must in all cases act on behalf of the company association and the act of incorporation of UAB together with the member(s) of the are to be of the form approved by the management board. Government, the name of UAB must be reserved The management board member and the and not include a word “Lithuania” in it, there manager of the company who fails to perform must be a sole founder, the premises whereat or performs improperly his duties set in laws or UAB shall be registered must be solely owned by incorporation documents (e.g. duty of the founder and not arrested and the authorized confidentiality, care) must redress all damage capital (in case of UAB) must be paid by monetary incurred on the company. The member of the contributions. management body of the company who has 3. Governance, Regulation and Ongoing concluded the contract overstepping his Maintenance authority shall also take on subsidiary liability 3.1 Corporate Governance where a company fails to satisfy fully the claim of a third person, arising of such a contract. Members of the management board must be natural persons and members of supervisory 3.2 Reporting requirements board may be natural or legal persons. The The set of annual financial statements of a members of the management board must act in company together with the annual report of the good faith and reasonable manner in respect of company and the auditor’s report (if the company and members of other bodies of it. compulsory) must be submitted to the Register Furthermore, they have to be loyal to the of Legal Persons not later than within 30 days company and maintain confidentiality. Every after the annual general meeting of candidate to the position of the management shareholders of the company (it has to be held board or supervisory board member must within 4 months from the close of the financial inform the electing body where and what year of the company). position he holds, how his other activities are connected to the company and to other legal persons related to the company. ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN LITHUANIA] 128 3.3 Requirements for local shareholding / • shareholder or a group of shareholders directors owning not less than 1/10 of the For shareholders there are no specific company’s shares has a right to initiate requirements. In respect of their nationality, investigation of company’s activity. they may be either Lithuanian or a foreign Shareholders shall enjoy the right to individual or company. request the court to appoint experts who have to investigate whether a legal The applicable law does not provide for any person or legal person’s managing bodies specific educational requirements for the or their members acted in a proper way; director and members of the board, except for the requirement that they must be natural • shareholder or a group of shareholders persons. owning not less than 1/3 of the company’s shares has a right to force sale Regarding to employment of the Manager from of shares of a legal person’s member foreign countries please refer to the Article 4.4. whose actions contradict the goals of 3.4 Protection of minority shareholders legal person’s activities and where there are no grounds to expect any changes in The legislation of the Republic of Lithuania does the said actions; not provide any exceptional rights for minority shareholders. The rights of shareholders • shareholders owning not less than 1/10 depend on the number of shares owned by the of the company’s shares has a right to shareholder. initiate the convocation of general meeting of shareholders (Articles of Legal acts grant several rights for protection of Association of the company may establish minority shareholders, such as: a smaller amount of shares); • the right to take an action for declaring • shareholders owning not less than 1/20 the decisions of a company’s bodies of the company’s shares has a right to invalid, within 30 days of the day when propose questions for the general the plaintiff found out or should have meeting of shareholders; found out about the contested decision; Please note that shareholders of a legal person • company must at a shareholder’s written may conclude a shareholders’ agreement, request and not later than within seven regulating relationships of shareholders of the days from the receipt of the request, company, including but not limited to the grant the access to and (or) submit to agreement on voting in the general meeting of him copies of particular documents shareholders. Such an agreement of related to company (such as articles of shareholders may include various provisions association of the company, annual and beneficial for minority shareholders. interim financial statements, minutes of the general meetings of shareholders, There is also a possibility to establish a lists of shareholders, etc.). The protection for minority shareholders in the shareholder or a group of shareholders establishment documents of the company as owning or holding 1/2 and more of the well as in the agreements of shareholders. company's shares having undertaken a written obligation set by the company not to disclose trade secrets shall have access to all documents of the company; ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN LITHUANIA] 129 4. Foreign Investment, Thin Capitalization, follow the OECD Transfer Pricing Guidelines Residency and Material Visa Restrictions for Multinational Enterprises and Tax Administrations. These are: 4.1 Taxation • Comparable Uncontrolled Price (CUP) 4.1.1. Thin Capitalization rule method – compares the price charged for Thin capitalization ratio is 1:4. Interest and property or services transferred in a currency exchange loss on the capital controlled transaction to the price charged borrowed from the controlling creditor, which for property or services transferred in a exceeds the equity of the company more than comparable uncontrolled transaction. If 4 times, are non-deductible for corporate there is any difference in prices, this may income tax purposes. that the price in the uncontrolled transaction may need to be substituted for The controlling creditor is the one who: the price in the controlled transaction. • directly or indirectly holds more than 50% • Resale price method – the resale price of shares or rights (options) to dividends; margin (i.e. the gross margin) that the or reseller earns from the controlled • together with related parties, holds more transaction is compared with the gross than 50% of shares or rights (options) to margin from comparable uncontrolled dividends, and the holding of that creditor transactions. is not less than 10%. • Cost plus method – the mark-up on costs 4.1.2. Related-parties transactions that the manufacturer or service provider earns from the controlled transaction is Transfer pricing (TP) rules apply to compared with the mark-up on costs from transactions between a Lithuanian resident company and a person associated with the comparable uncontrolled transactions. resident company (a controlled transaction). If • The transactional net margin method – the price of a controlled transaction differs compares the net profit arising from from the market value of the above controlled and uncontrolled transactions transaction (arm’s length transaction), (after relevant operating expenses have corporate income tax (CIT) shall be imposed been deducted) instead of comparing a on the amount which the Lithuanian resident gross profit on resale or gross mark up on company would have received as income or costs. the amount which the Lithuanian resident • The transactional profit split method – company would not have incurred as splits the combined profits between the expenses if the transfer price had conformed associated enterprises on an economically to the market value of the transaction. valid basis that approximates the division The Lithuanian company (or a permanent of profits that would have been anticipated establishment of a foreign company) must between independent enterprises. prepare and have the transfer pricing • Combination of the above methods. documentation when its annual sales exceed 4.1.3. Permanent establishment EUR 2,896,200. A permanent establishment of a foreign entity The Lithuanian tax authorities apply the in Lithuania is subject to CIT at 15% rate. transfer pricing methods which basically ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN LITHUANIA] 130 A foreign entity is deemed as operating permanent establishment, is a through its permanent establishment in representative/agent through which the Lithuania if its activities comply with the activity is performed, i.e. a foreign entity is following two criteria: considered to be performing activities • its activities are not temporary; through its permanent establishment if it • a commercial cycle of operations has been performs its activities in Lithuania through a dependent agent/representative. finished. The third condition, on the basis of which it is Activities of a foreign entity are considered established whether or not a foreign entity temporary in the Republic of Lithuania if they performs its activities in Lithuania through its last up to six months. permanent establishment, is a construction A completed cycle of commercial operations site, a construction, assembly or equipment consists of three stages of operations carried facility used by a foreign entity in Lithuania. by The fourth condition, on the basis of which it a foreign entity: is established whether or not a foreign entity • stage one covers one or several of the performs its activities in Lithuania through its following operations: marketing, including permanent establishment, is the use of equipment or structures for prospecting or market analysis, distribution, advertising, extraction of natural resources in Lithuania, design and exploration works and other i.e. a foreign entity is deemed to perform essentially similar operations; activities through its permanent • stage two covers one or several of the establishment in Lithuania if it uses following operations: warehousing, equipment or structures for prospecting or consulting, acceptance of orders, scientific extraction of natural resources, including the research, experimental, development and wells or vessels used for that purpose. technological work, production, provision 4.1.4. Withholding taxes of services and other essentially similar operations; Dividends • stage three several of the following 15% withholding tax is applied on dividends operations: selling, supply, delivery, paid by a Lithuanian company to a foreign payment (remuneration) and other company. essentially similar operations. Full participation exemption applies dividends If the activity of a foreign entity is not if the recipient foreign company has held at temporary, the cycle of commercial least 10% of the voting shares in the operations has not been completed but the distributing Lithuanian company continuously stage of performed activity is considered as an for at least 12 months. The participation independent activity of a foreign entity (or its exemption does not apply to dividends paid to part), such a foreign entity may also be foreign companies registered or organized in deemed having a permanent establishment in listed tax havens. Lithuania. Interest The second condition, on the basis of which it Interest paid to foreign companies is generally is established whether or not a foreign entity subject to a 10% withholding tax. performs its activities in Lithuania through its ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN LITHUANIA] 131 No withholding tax is applied on interest paid 4.1.5. Corporate Income Tax to companies resident in EEA countries or Resident companies and permanent countries having an income tax treaty with establishments of the foreign entities Lithuania. (including branches) in Lithuania are subject Other exemptions include to interest on to corporate income tax on the worldwide government securities issued in the income. international markets, deposit interest and Permanent establishments of non-resident interest on subordinated loans meeting the companies are subject of corporate income criteria prescribed by the Bank of Lithuania. tax principally on the same grounds as Royalties resident companies. Royalties paid to foreign companies are The general corporate income tax is 15%. subject to a 10% withholding tax. A small company is subject to a reduced No withholding tax is applied on royalties corporate income tax rate of 5% if its average payments if the recipient is an associated number of employees does not exceed ten company of the paying company and is persons, and its taxable income during the resident in another EU Member State. Two taxable period is less than EUR 300,000. companies are “associated companies” if (i) Ordinary losses of up to 70% of taxable one of them holds directly at least 25% of the income of the taxable period may be carried capital of the other or (ii) a third EU company forward indefinitely. Capital losses may be holds directly at least 25% of the capital of the carried forward for 5 years to be offset two companies. A minimum holding period is against future capital gains. 2 years. Tax losses can be also transferred from one Other income company to another within the same group of Income from sale or lease of immovable companies and within the same tax period, if property located in Lithuania is subject to a certain conditions are met. withholding tax at a rate of 15%. 4.1.6. Further corporate tax exemptions Reassessment on a net basis is available upon request. For the corporate taxpayers who have been 15% withholding tax applies to income paid to implementing the investment projects (e.g. non-residents (including companies) for acquisition of fixed assets such as machinery entertainment and sports activities performed and equipment, trucks and trailers, computer in Lithuania, as well as to payments to the hardware and software, communication members of the supervisory council. equipment and acquired rights) the taxable Reassessment on a net basis is available upon profit may be reduced up to 50%. request for entertainment and sports R&D costs may be deducted in a triple activities. amount in the taxable period when they are Capital gains received by foreign entities incurred. otherwise than through its permanent Companies established in the free economic establishment are not subject to withholding zones with capital investments of not less tax in Lithuania. than EUR 1,000,000 and which meet certain other conditions are exempt from corporate income tax for the first 6 years following the ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN LITHUANIA] 132 date of the capital investments and they are document for a period of three months subject to a 50% reduction in CIT rate for 10 starting from the first day of entry. A citizen of subsequent years. the EU arriving to Lithuania for a period 4.2 Taxation of Non-Residents exceeding three months within a half a year and meeting at least one of the grounds The income tax base of non-resident individuals specified in the Law on the Legal Status of is worldwide income derived through a fixed Foreigners (eg. to work) shall be issued a base maintained in Lithuania, if any, and the certificate of the form established by the following types of income from the Lithuanian Minister of the Interior. The certificate shall sources: be valid for a period of five years (or a shorter • employment income; period requested by the foreigner). The family • distributed profits, including dividends; members of the EU citizens who are not EU • any payments made to members of the citizens shall be issued EU residence permits management board or the supervisory valid for the period of the EU citizen’s council; certificate but in any case for no longer than five years. • interest; • royalties; A citizen of EU who has been lawfully residing • income from leasing of immovable in the Republic of Lithuania for the last five property located in Lithuania; years shall acquire the right of permanent • income from the disposal of immovable residence in the Republic of Lithuania. property located in Lithuania or movable Absence from Lithuania for more than six property that is subject to mandatory months within a year may constitute grounds for refusing the right of permanent residence, registration in Lithuania; except in cases where absence is caused due • income from sports and entertainment to serious reasons. The acquired right of activities; and permanent residence in the Republic of • compensation for violation of copyright or Lithuania shall be lost upon departure from similar rights. the country for a period exceeding two The general flat rate of personal income tax is consecutive years or gain the permanent 15%. resident status in other EU state. 4.3 Harmonization with EU tax legislation The above requirements shall be also applicable with respect to the citizens of The Lithuanian tax system is harmonized with European Free Trade Association. EU tax legislation. 4.4.2 Visa Requirements 4.4 Residency and visas Citizens of certain countries may enter Lithuania is a member of the European Union Lithuania without a visa. A list of these and it is a Schengen country. The basic rules countries may be found at www.migracija.lt regarding EU and non-EU nationals are as or www.urm.lt. fallows Visa types are a Schengen visa and a national 4.4.1 Citizens of the European Union visa. Schengen visas may be single-entry, A citizen of the EU and his family members dual-entry and multiple-entry visas. National may enter and stay in the Republic of visas shall be single-entry (issued to an alien Lithuania upon a valid travel or identity who has been granted a temporary or ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN LITHUANIA] 133 permanent residence permit to formalize the Board member or has not less than 1/3 of the permit) and multiple-entry visas (issued, for shares of the company. The company should example, to students, artists, sportsmen, meet the special requirements: (i) the employees, etc.). company has to operate at least six months; Documents for the issuance of a visa are to be (ii) the company has at least 3 employees who submitted to a diplomatic mission or a are citizens of the Republic of Lithuania or has consular post of the Republic of Lithuania permanent residence permit to live in the abroad or in certain cases to a diplomatic Republic of Lithuania; (iii) owned capital of mission or a consular post of another the company must be not less than EUR Schengen State representing the Republic of 28,000 and the foreigner’s invested part Lithuania abroad. should be not less than EUR 14,000. 4.4.3 Residence Permits An application for the issuance of an initial temporary residence permit must be In the Republic of Lithuania a foreigner could submitted to a diplomatic mission or a get the temporary or permanent residence consular post of the Republic of Lithuania permit to live in the Republic of Lithuania. The abroad, and a foreigner who is lawfully temporary and permanent residence permit is staying in the Republic of Lithuania must issued to a foreigner who is a citizen of a non- submit the application to a migration office of EU Member State. a territorial police agency in the territory of The temporary residence permit to live in the which he intends to reside. Same applies Republic of Lithuania may be issued for a when lodging an application for the period of one to three years, depending on replacement of a temporary residence permit. the grounds of issuance of the temporary The application for the issuance of the first residence permit, among them employment, temporary residence permit must be owning a business and studying. considered not later than within four months The permanent residence permit may be from the lodging of the application with a issued among other grounds after living for 5 relevant institution (exceptions are applied for years in the Republic of Lithuania with the high qualified employees or shareholder who temporary residence permit, subject to invested not less than EUR 260,000), whereas passing the Lithuanian language exam and the an application for the replacement of a exam of the basics of the Lithuanian temporary residence permit – not later than Constitution. The permanent residence permit within two months from the lodging of the is valid for a maximum period of 5 years. After application, with abovementioned exceptions. this period the permit shall be replaced. The decision to issue a temporary residence In general, a foreigner of a non-EU Member permit is valid for three months, accordingly, State must also obtain a work permit to be after adoption of a particular decision it is issued under a separate procedure when necessary to apply to the territorial police applying for the temporary residence permit agency personally in order to formalise a to live in the Republic of Lithuania on the temporary residence permit. grounds of employment. The work permit is not necessary in certain cases including those when such foreigner establishes a company, becomes a co-owner of it and becomes a Manager, Board member or Supervisory ILN Corporate Group – Establishing a Business Entity Series Fall 08 Fall 15 INTERNATIONAL LAWYERS NETWORK ANAD & NORAINI ESTABLISHING A BUSINESS ENTITY IN MALAYSIA ILN CORPORATE GROUP [ESTABLISHING A BUSINESS ENTITY IN MALAYSIA] 135 ESTABLISHING A BUSINESS ENTITY IN MALAYSIA Methods of conducting business in Malaysia the shares taken up by them2. If the member has In Malaysia, business may be conducted in the paid in full for his shares, he cannot be asked to following manner: pay more and creditors cannot go after the members’ personal assets. This is the most (a) by an individual operating as a sole common company structure in Malaysia. proprietor; or (b) by two or more (but not more than 20) persons in partnership; or (c) by a locally incorporated company or by a foreign company registered under the Companies Act, 1965 (“Act”). A company is a legal entity separate from its members or shareholders. The shareholders cannot be held liable for the debts of a company unless they personally guarantee the debts or loans A company limited by guarantee of the company. According to the Act, a is a company where the liability of the members company must be registered with the is limited by the memorandum and articles of Companies Commission of Malaysia (“CCM”) association to the amount which the members in order to engage in any business activity. have undertaken to contribute to the assets of the company in the event the company is wound For the purpose of this paper, we will focus on up3. Guarantee companies are not usually trading the third method of conducting business in companies. They are usually confined in practice Malaysia, i.e. by way of incorporation of a local to organisations that want the advantages of company or a foreign company. incorporation without necessarily wanting to Classification of Companies engage in business. (A) Limited and unlimited companies An unlimited company is a company formed on the principle of having no limit placed on the As a separate legal entity, a company’s own liability of its members, i.e. the liability of liability for its debts is never limited and it must members to contribute to the assets of the pay off all the debts it owes to its creditors. company on winding-up is not limited. However, the liability of the members in respect Accordingly, there is no commercial reason as to of the debts of the company may be limited or why one would want to form an unlimited unlimited. The question of the members’ liability company. The reason why people incorporate only becomes relevant if the company goes into unlimited companies is in order to comply with liquidation and that its debts cannot be fully the laws or the rules of some authorities. discharged out of its assets. (B) Public and private companies A company may be limited by shares or by guarantee. A company limited by shares is a A company with a share capital (whether limited company formed on the principle that the or unlimited) may be incorporated either as a member’s liability is limited by the memorandum of association to the amount (if any) unpaid on 2 see section 214 (2)(d) of the Act. 3 see section 214 (2)(e) of the Act. ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN MALAYSIA] 136 private limited company or a public limited (C) Foreign companies company. A company will be considered as a Foreign companies generally refer to companies private company if its memorandum and articles incorporated outside Malaysia but set up places of association: of business within Malaysia, or carry on (i) restricts the right to transfer its shares; businesses in Malaysia. According to the Act, (ii) limits the number of its members to 50, “foreign company” is defined as: excluding employees in the employment of the a. a company, corporation, society, association or company or its subsidiary; other body incorporated outside Malaysia; or (iii) prohibits any invitation to the public to b. an unincorporated society, association or other subscribe for its shares and debentures; body which under the law of its place of origin (iv) prohibits any invitation to the public to deposit may sue or be sued, or hold property in the money with the company for fixed periods of name of the secretary or other officer of the payable at call. body or association duly appointed for that purpose and which does not have its head office The certificate of incorporation of a company will or principal place of business in Malaysia. state if a company is a private company. A company that is not a private company is a public A foreign company may carry on business in company. A public company may offer shares to Malaysia by either: the public provided: (i) incorporating a local company; or (i) it has registered a prospectus with the Securities (ii) registering a branch in Malaysia. Commission; In view of the foregoing, whether a particular (ii) it has lodged a copy of the prospectus with the entity is a “foreign company” depends essentially CCM on or before the date of its issue. on the law of the place of its origin. It is also Apart from the mode of incorporation, a public noteworthy that certain unincorporated company may also be formed via the conversion associations may be treated as foreign companies from a private company subject to section 26 of under the Malaysian law if they can sue or be the Act4. sued, or hold property. Thus, a partnership registered in England may possibly be considered A public company can apply to have its shares a foreign company in Malaysia. quoted on the Bursa Malaysia (stock exchange) subject to compliance with the requirements set Representative/Regional Offices out by the exchange. Thereafter, any subsequent In addition to the above, a representative office issue of securities (by way of rights or bonus or or a regional office may also be set up by a issue arising from an acquisition, etc) would foreign company / organisation in Malaysia to require the approval of the Securities Commission. perform permissible activities for its head office / principal. A representative office is an office of a foreign 4 According to section 26 of the Act, a private company company / organisation approved to collect may convert to a public company by lodging with the CCM relevant information on investment opportunities (a) a copy of a special resolution determining to convert to in the country especially in the manufacturing and a public company and specifying an appropriate alteration services sector, enhance bilateral trade relations, to its name; (b) a statement in lieu of prospectus; and (c) a statutory declaration verifying that section 52 (2)(b) of the promote the export of Malaysian goods and Act has been complied with. services and carry out research and development. ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN MALAYSIA] 137 A regional office is an office of a foreign company be engaged in any trading (including / organisation that serves as the coordination import and export), business or any form centre for the company’s / organisation’s of commercial activity; affiliates, subsidiaries and agents in South-East lease warehousing facilities; any shipment Asia and the Asia Pacific. The regional office / transhipment or storage of goods shall established is responsible for the designated be handled by a local agent or distributor; activities of the company / organisation within the region it operates. sign business contracts on behalf of the foreign corporation or provide services for The representative office or regional office does a fee; not undertake any commercial activities and only represents its head office / principal to undertake participate in the daily management of designated functions. Although the any of its subsidiaries, affiliates or representative office / regional office is not branches in Malaysia. required to be incorporated under the Act, the The duration of establishment of a representative setting up of a representative / regional office / regional office of a company and other requires the approval of the Government of organisations (including non-profit organisations Malaysia. not relating to trade) is for a minimum period of The following are the activities which may be two (2) years, depending on the merits of each performed by the approved representative / case. The proposed operational expenditure of regional office for its head office or principal: the representative / regional office must be at least RM150,000 per annum and should be gathering and analysis of important completely funded from sources outside Malaysia. information or undertaking feasibility studies on investment and business Procedure of incorporating a local company opportunities in Malaysia and the region; In order to incorporate a company, application planning of business activities; must be made to the CCM using Form 13A together with a payment of RM30 (for each name identifying sources of raw materials, applied) in order to determine if the proposed components or other industrial products; name of the intended company is available. The undertake research and product application will be approved if name is available development; and the proposed name will be reserved for the application for three (3) months. act as a coordination centre for the corporation’s affiliates, subsidiaries and The following incorporation documents are to be agents in the region; and submitted to the CCM within three (3) months from the date of the approval of the company’s other activities which will not result name: directly in actual commercial transactions. 1. memorandum and articles of association; Nevertheless, an approved representative / regional office may not carry out the following 2. declaration of compliance (Form 6); activities: 3. statutory declaration by a person before appointment as a director, or by a promoter before incorporation of a company (Form 48A); 4. additional documents which would include: ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN MALAYSIA] 138 the original Form 13A; place of residence within Malaysia. Directors of public companies or subsidiaries of public a copy of the letter from CCM approving companies normally must not exceed 70 years of the name of the company; age. A director of the company need not a copy of the identity card of each necessarily be a shareholder of the company. director and company secretary or a copy Registration procedures in respect of foreign of the passport where a foreign director companies is appointed. The applicant must first conduct a name search in The memorandum of association describes the order to determine if the proposed name for the company’s name, the objectives, the amount of intended company is available. The name to be its authorised capital (if any) proposed for used to register the foreign company should be registration and its division into shares of a fixed the same as registered in its country of origin. amount. Applications are to be made using Form 13A with Once the certificate of incorporation is issued, the a payment of RM30 for each name applied. company shall be a body corporate, capable of When the application for registration is approved exercising the functions of an incorporated (which approval is valid for 3 months from the company and of suing and being sued. It has a date of approval), the company must submit the perpetual succession under common seal with following documents5 to CCM:- power to hold land, but with such liability on the part of the members to contribute to its assets in a) a certified copy of the certification of its the event it is being wound up, as provided for in incorporation or documents of similar effect; the Act. b) a certified copy of the foreign company’s charter, statute or memorandum and articles of Requirements of a locally incorporated company association, other instruments defining its A locally incorporated company must maintain a constitution; registered office in Malaysia where all books and c) a list of its directors and secretary containing documents required under the Act are kept. similar particulars to those in the prescribed form A company cannot deal with its own shares or submitted by a local company. If the list includes hold shares in its holding company. Each equity directors residing in Malaysia who are members of the local board of directors of the foreign share of a public company carries only one vote company, a memorandum stating their powers at a poll at any general meeting of the company. that are executed by or on behalf of the foreign A private company may, however, provide for company should be submitted to CCM; varying voting rights for its shareholders. d) a memorandum of appointment or power of The secretary of the company must be a natural attorney, authorising one or more persons person of full age who has his principal or only residing in Malaysia, to accept on behalf of the place of residence in Malaysia. He must be a foreign company, any notice required to be member of a prescribed body or is licensed by the served on such foreign company; Registrar of Companies. The company must also appoint an approved company auditor to be the company auditor in Malaysia. 5 Please note that a certified translation of the registration Further, the company must have at least two (2) documents in Bahasa Malaysia or English shall be required if directors who each have his principal or only any of such documents are in languages other than Bahasa Malaysia or English. ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN MALAYSIA] 139 e) Form 80 (statutory declaration by agent of In the event the foreign company does not foreign company) and additional documents prescribe any share capital, a flat rate of RM1,000 consisting of the original Form 13A as well as a shall be paid to the CCM. copy of the letter from CCM approving the name of the foreign company. Upon compliance with the registration procedures and submission of duly completed Registration fees shall be paid by the applicant to registration documents, a certificate of CCM and the fees to be paid to CCM by a 6 registration will be issued by the CCM. Upon company having a share capital are as follows:- approval, the company or its agent is responsible Nominal Share Capital Fees payable for ensuring compliance of the Act. Any change in (RM) the particulars of the company or in the For companies whose nominal share RM1,000 company’s name or authorised capital must be capital does not exceed RM400,000 filed with the CCM within one (1) month from the date of change together with the appropriate fees. For companies whose nominal share RM3,000 Every company is required to keep proper capital exceeds RM400,000 but does not exceed RM500,000 accounting records. Annual return must be lodged with the CCM once in every calendar year. For companies whose nominal share RM5,000 capital exceeds RM500,000 but does Foreigners are advised to seek further advice not exceed RM1,000,000 from an advocate and solicitor or a practising company secretary for further assistance. For companies whose nominal share RM8,000 capital exceeds RM1,000,000 but Company Tax does not exceed RM5,000,000 A company, whether resident or not, is assessable For companies whose nominal share RM10,000 on income accrued in or derived from Malaysia. capital exceeds RM5,000,000 but Income derived from sources outside Malaysia does not exceed RM10,000,000 and remitted by a resident company is exempted For companies whose nominal share RM20,000 from tax, except in the case of the banking and capital exceeds RM10,000,000 but insurance business, and sea and air transport does not exceed RM25,000,000 undertakings. A company is considered a resident For companies whose nominal share RM40,000 in Malaysia if the control and management of its capital exceeds RM25,000,000 but affairs are exercised in Malaysia. does not exceed RM50,000,000 With effect from the year of assessment 2009, For companies whose nominal share RM50,000 the corporate tax rate is 25%. This rate is also capital exceeds RM50,000,000 but applicable to a trust body. does not exceed RM100,000,000 A person carrying on petroleum upstream For companies whose nominal share RM70,000 operations is subject to a petroleum income tax capital exceeds RM100,000,000 of 38%. With effect from the year of assessment 2010, the assessment system on income derived from upstream petroleum companies under the Petroleum (Income Tax) Act, 1967 has been 6 In determining the amount of registration fee, the changed to the current year assessment system nominal share capital of the foreign company should first be and self-assessment system. converted to the Malaysian currency (Ringgit Malaysia) at the prevailing exchange rate. ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN MALAYSIA] 140 Deductions are allowed for contributions made 1976 and Free Zones Act, 1990. These statutes to: cover investments in the manufacturing, a. the government, state government, local agriculture, tourism (including hotel) and authorities; or approved services sectors as well as research and development, training and environmental b. institutions or organisations approved by the protection activities. Director General of Inland Revenue Board Malaysia; or The direct tax incentives grant partial or total c. sports activities approved by the Minister of relief from income tax payment for a specified Finance or Commissioner of Sports; or period, while indirect tax incentives are in the form of exemptions from import duty, sales tax d. project of national interest approved by the and excise duty. Minister of Finance. For further details, please refer to the website of Nevertheless, the contributions in respect of Malaysian Investment Development Authority at items (b), (c) and (d) above shall not exceed 10% www.mida.gov.my. of the aggregate income of the company in the relevant year of assessment. References: Incentives 1. Malaysia Investment in the Manufacturing - Sector Policies, Incentives and Facilities, In Malaysia, tax incentives, both direct and published by MIDA. indirect, are provided for in the Promotion of Investment Act, 1986, Income Tax Act, 1967, 2. Water Woon on Company Law, Revised Third Customs Act, 1967, Sales Tax Act, 1972, Excise Act, Edition, Sweet & Maxwell, 2009. ILN Corporate Group – Establishing a Business Entity Series Fall 08 Fall 15 INTERNATIONAL LAWYERS NETWORK MARTÍNEZ, ALGABA, DE HARO, CURIEL & GALVÁN-DUQUE, S.C. ESTABLISHING A BUSINESS ENTITY IN MEXICO ILN CORPORATE GROUP [ESTABLISHING A BUSINESS ENTITY IN MEXICO] 142 ESTABLISHING A BUSINESS ENTITY IN MEXICO Preface powers and their attributions are to promulgate, discuss and, in its case, issue laws and Martinez, Algaba, De Haro, Curiel y Galvan Duque, regulations; and the judicial branch, formed by S.C., is a leading law firm in Mexico, committed to federal and local courts who are in charge of provide the highest standard of professional legal enforcing the laws. counsel and representation. Established in 1969, Currently, Mexico is considered the second the firm is comprised of a highly experienced and largest economy in Latin America. According to qualified team of professionals in the diverse the Doing Business Report of 2013, Mexico areas of law practiced by the firm. The firm´s stands in position 48 under the overall “ease of offices are based in Mexico City and in Monterrey, doing business” category, surpassing countries Nuevo Leon, the second largest and most like Brazil (130), Russia (112), India (132) and important industrial city in Mexico. China (91). Our firm is reputed to be one of the few law firms II. Types of Business Entities in Mexico that offers first class litigation services, For foreign corporations or individuals who seek encompassing virtually every aspect of to do business in Mexico, there are several ways commercial, civil and administrative legal for them to invest their capital in this country. procedures, including domestic and international As in many other jurisdictions, a very common arbitration, as well as a consulting legal area in vehicle for doing business in Mexico is through matters related to corporate, financial, regulatory, the incorporation of a Mexican company, where real estate, energy and communications. foreigners may own and participate in their capital stock. This combination of practice areas and fields of expertise allows our firm to render enhanced Unlike several other countries including the United States of America (“US”), in Mexico, the legal advice, a result of the synergy and collective legal provisions governing the incorporation of experience of our trial and consultant lawyers, companies are of Federal nature, which means which grants our clients a competitive advantage that regardless of the place of incorporation hard to match by any law firm in Mexico. within the Mexican Republic, companies are I. General Overview regulated by the Mexican Law Governing Commercial Companies (Ley General de Mexico has a population of 112,336,538 million Sociedades Mercantiles) (“LGSM”); provided according to the Mexican National Institute of that we also refer to a type of entity regulated Statistics and Geography (Instituto Nacional de by the Mexican Securities Law (Ley del Mercado Estadística y Geografía). Covers a land area of de Valores) (“LMV”), which is also Federal. 1,964,375 square kilometers (1,220,606 square miles) and its official language is Spanish. A. Mexican Law Governing Commercial Companies (LGSM) In matters of political division, Mexico is a Federal Republic formed by 31 states and one The LGSM regulates five different types of Federal District. The government in Mexico is commercial companies. Considering the fact divided into three branches: (i) executive; (ii) that the Mexican Income Tax Law (Ley del legislative; and (iii) judicial. Each one of such Impuesto sobre la Renta) (“LISR”) grants the branches has specific authorities granted by the same tax treatment to such five types of Mexican Constitution. The President of Mexico companies, corporate practice has only left leads the executive branch; the legislative two of them as the most common choice branch is divided in federal and local legislative used by foreign investors for doing business ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN MEXICO] 143 in Mexico: grant only voting rights; (iii) limit or broaden the economic rights, or (iv) grant veto right; (i) the variable capital limited liability stock corporation (sociedad anónima de (d) Implementation of mechanisms to be capital variable) (“SA”); and followed in the event of shareholders disagreements with respect to specific (ii) the non-stock variable capital limited matters; liability corporation (sociedad de responsabilidad limitada de capital (e) Broadening, limiting or denying their variable) (“SRL”). preemptive rights in the event of capital stock increases, or even providing for 1. The SA publicity methods other than the ones (i) Structure provided in the LGSM; The SA has been widely used in Mexico as an (f) Liability limitations for damages and losses investment vehicle. It has a capital stock divided arising from directors´ or officers´ actions in into shares, where the shareholders’ liability is connection with the breach of the “duty of generally limited to the full payment of their care” of such directors; and capital contributions. The stock capital must be (g) Stock options to buy or sell shares (“put” or incorporated with a minimum of two “call” options including “tag along” or “drag shareholders (either corporations or individuals) along” rights) or agreements to restrict, and a limited minimum aggregate capital transfer or regulate the preemptive rights contribution, which is represented always by for capital stock increases, among the same shares. The SA may issue shares without par shareholders or with third parties; and value. If it adopts the “variable capital” modality agreements to exercise voting rights in which is almost always the recommendation, shareholders meetings. the variable part of the capital is unlimited. (iii) Minority Rights (ii) Agreements among Shareholders Regarding minority rights, the SA shareholders Pursuant to recent amendments made to the representing twenty-five percent (25%) of the LGSM, the SA can be considered as a very shares of the capital stock with voting rights flexible vehicle since now you can incorporate in will have the right to appoint a member to the its by-laws all of the shareholders agreements board of directors. that were not permitted before such amendments entered into effect. Similarly, the shareholders representing twenty-five percent (25%) of the shares Some examples of the provisions now permitted representing the capital stock with voting to be incorporated in the by-laws of an SA are: rights of an SA may execute a civil liability (a) Restriction with respect to the transfer of action against the directors in the benefit of shares of a same series or class representing the corporation pursuant to the terms of the its capital stock; LGSM. (b) Exclusion causes for shareholders or the (iv) Liability exercise of retirement or separation rights, In addition to the full payment of their capital or the right to redeem shares, as well as to contributions, the share-holders, directors and establish the price of the shares or the even officers of an SA will be jointly and method to determine such price; severally liable for tax purposes when the SA: (c) Issuance of shares that (i) do not confer (a) Did not obtain from the Mexican Ministry of voting rights or limit such voting rights, (ii) Finance and Public Credit (Secretaría de grant non-economic rights or specifically ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN MEXICO] 144 Hacienda y Crédito Público) (“SHCP”) (ii) Transmission of the partner status through the Tax Administration Service In the SRL, capital increase requires the approval (Servicio de Administración Tributaria) of the other partners and the acceptance of a (“SAT”) a tax identification number (“RFC” new partner requires a special quorum. As a or “Registro Federal de Contribuyentes”); general rule, such special quorum, requires the (b) Modifies its address while being subject to a vote of the majority holders of the equity tax revision by the SAT; participations, unless a higher quorum is established in the by-laws of the SRL. (c) Did not record its earnings or if it destroys or modifies accounting documents of the (iii) Number of partners SA; and The SRL may have a maximum of fifty partners (d) Ends or interrupts its activities without prior and a minimum of two. Therefore, the SRL notice to the SAT. structure may not be used nor allowed for an initial public offering through the Mexican Stock Furthermore, pursuant to recent amendments Exchange. Therefore, the concept of uni- made to the Mexican Bankruptcy Law (Ley de members entities is not allowed, nor Concursos Mercantiles) shareholders, directors contemplated under Mexican Law. and subsidiaries of an SA may also be liable in frauds against third parties carried out by the SA. B. Mexican Securities Law (LMV) 2. The SRL The LMV regulates three different types of stock exchange companies: (i) Equity Structure (i) the investment promotion corporation The capital of an SRL is divided into participation (sociedad anónima promotora de inversión) units. Evidence of participation as a partner (“SAPI”); reside in an equity participation recorded in the Special Partners Ledger of the company (no (ii) the public trading stock company (sociedad physical title exists) and may only be transferred anónima promotora de inversión bursátil) with the approval of the other partners. (“SAPIB”); and In the SRL, each partner has the right to own (iii) the publicity traded stock company only one equity participation and each equity (sociedad anónima bursátil) (“SAB”)7. participation can have different values. The Pursuant to the LMV, the SAPI is not subject to participation of a partner in an SRL is evidenced the supervision of the National Banking and by the equity participation ledger book of the Securities Commission (Comisión Nacional company. Equity participations without par Bancaria y de Valores) (“CNBV”) (which is the value are not allowed nor provided for in the commission in charge of supervising public LGSM. offering of stock in the Mexican Stock Exchange Due to US tax legislation (known as “Check-the- (Bolsa Mexicana de Valores)), except when its box” Regulations), the SRL, has been used in capital stock or the securities that represent its Mexico for tax benefits of US parent companies, capital stock are intended to be publicly traded since it can be consolidated for accounting and and be registered in the National Securities and tax purposes with US holding companies. This Intermediaries Registry (Registro Nacional de way, the organization has limited responsibility Valores) (“RNV”). According to the LMV, SAPIBs and pays taxes as a Mexican corporation, but it and SABs, shall request the registry of the is considered, for tax purposes as a partnership securities that represent their capital stock in in the US. We would strongly suggest that the above be confirmed by a US tax expert. 7 The SAPIB and SAB are considered as “Public Companies” (hereinafter “PCs”) pursuant to the LMV. ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN MEXICO] 145 the RNV. The LMV has a strict policy stating that, which allows the company to gradually adopt all securities placed in the Mexican Stock corporate governance practices, disclose Exchange shall be first registered in the RNV and policies and protect minority rights required for approved by the CNBV. PCs to the LMV. Mexican legislators created the companies In addition to the above, the CNBV, from time to abovementioned to encourage its participation time, will issue through official communications, in the Mexican Stock Exchange and created general guidelines that will contain additional special regulations in order to maintain a requirements and conditions that SAPIs will also controlled public offering of securities including need to comply in order to be-come Public stock or shares of a corporation. It is important Companies. to note that, according to the LMV, the 2. Main differences between SAPI and SA companies’ abovementioned must follow the same incorporation process established in the (i) Management LGSM for the SA. The management of a SAPI shall be 1. SAPI entrusted to a board of directors and they may adopt for their management The SAPI is a corporate regime that used to and surveillance, the regime contain several exceptions to the applicable contemplated by the LMV for PCs, regime for corporations according to the LGSM except for the independence (no longer with the recent amendments made requirement for board members, which to the LGSM). This corporate regime can be will not be mandatory in this case. In the used in Mexico for corporations who intend to event that the SAPI elects such regime, modify its structure from private entities to the general manager (CEO equivalent), Public Companies. A SAPI may be initially as well as the board of directors will be incorporated as such or, as an SA and may adopt subject to the provisions set forth under such modality later on; in which case, it shall the LMV for such officers which are have the favorable vote of the majority of its applicable to PCs regarding matters such shareholders through an extraordinary as organization, tasks and shareholders meeting. The SAPI may provide in responsibilities. If they do not elect such its by-laws the same agreements and provisions regime, then they will be subject to the as provided in the SA. provisions of the LGSM. Furthermore, the SAPI is a more flexible vehicle The SAPI that elects the regime of the legally located “in-between” an ordinary LMV will not be subject to appoint a corporation regulated pursuant to the LGSM statutory examiner; however, it will and what the LMV calls a Public Company, in need to have an independent external other words, a company which stock is publicly auditor and an auditing committee that traded. Pursuant to the LMV, the SAPI, has the carries out the examiner´s functions. possibility to list its shares in the RNV within a 10 year transition period or before such term if It is important to mention that, the amount of the capital stock of the relevant pursuant to the LGSM, the management SAPI, at the end of the fiscal year, exceeds an of an SA can be entrusted either to a amount equivalent to $1,325,000,000.00 Pesos8 sole manager or to a board of directors, (approximately $87,171,052.63 9 Dollars 10 ), as decided by the relevant Shareholders´ Meeting. The SA will not be subject to the “independent” 8 “Pesos” legal currency of Mexico. requirements as it could be in a SAPI 9 Exchange Rate of 15.20 Pesos for 1 Dollar. and therefore it is common practice that 10 “Dollars” legal currency of US. ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN MEXICO] 146 the shareholders of an SA are the Shareholder may judicially oppose to members of the Board of Directors. The the shareholders meetings’ resolutions SA must appoint an examiner pursuant when they have a voting right in the to the LGSM. corresponding matter, provided that, they individually or jointly hold 20% or (ii) Minority Rights more of the capital stock of the SAPI14. Regarding minority rights exceptions (iii) Acquisition of its Own Shares according to the LGSM, SAPI shareholders that hold ten percent Another right (or exception) granted to (10%)11 of the shares representing its SAPIs by the LMV is the possibility for capital stock with voting rights these companies to acquire its own (including limited or restricted) will have shares15, with the prior agreement of the right to: their board of directors, in which case, such shares may be acquired by the (1) appoint a member to the board of SAPI either through its (i) net worth directors; (capital contable), in which case such re- (2) appoint an examiner (unless they purchased shares shall be kept by the elected to adopt the applicable SAPI without the need to reduce its regime of PCs); and capital stock or (ii) capital stock (capital (3) request the president of the board social), as long as it is resolved to cancel or an examiner to call a them, or to convert them into issued shareholders´ meeting or to adjourn but not paid in shares (acciones any shareholders´ meeting in the emitidas no suscritas) maintained as event that they consider that they “treasury shares”. The placement of a are not well informed with respect SAPI’s own shares will not require a to a specific item of the agenda. resolution from the shareholder’s meeting; however, the board of Shareholders representing fifteen directors shall adopt the relevant 12 percent (15%) or more of the shares resolutions. The issued but not paid-in representing the capital stock with shares maintained as “treasury shares” voting rights of a SAPI (including limited in the SAPI may be subscribed by the or restricted or without voting rights) same shareholders, in which case, the may execute a civil liability action pre-emptive right established by the against the directors or the examiners in LGSM will not be applicable. the benefit of the corporation pursuant Furthermore, SAPIs are not required to 13 to the terms of the LGSM . publish their financial statements pursuant to the LGSM16. 11 In such cases, the percentages established by the LGSM, twenty-five percent (25%) would not be applicable. 12 In such case, the percentage established in the LGSM is 14 In such case, the 25% established by article 201 of the 25%. LGSM, will not be applicable. 13 The LGSM states that shareholders representing 25% of 15 Again, this is an exception to the provisions of the LGSM, the capital stock, may exercise the civil liability action which states an express prohibition for an SA to acquire its against the board members, only if the complaint comprises own shares. the total amount of liability against the company and not 16 The LGSM states the obligation for an SA to publish their the personal interests of the plaintiff and that they have annual financial statements in the electronic system set evidence that they did not vote in favor of the relevant forth by the SE as well as to deposit such financial resolution of the shareholders meeting. statements before the relevant RPPC. ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN MEXICO] 147 III. Incorporation Process containing the company’s by-laws before a public faith officer (including powers-of The incorporation process of a Mexican attorney granted to officers of the relevant company is quite unique and may not be company) (2 business days); compared with the incorporation process followed in common law countries. We can say 4. To file before the Mexican Public Registry of that the incorporation process once all of the Property and Commerce (Registro Público required documents are properly prepared and de la Propiedad y del Comercio)(“RPPC”) of delivered may take from a couple of days up to the company’s domicile the public deed five business days to have the business entity containing the articles of incorporation (and ready to start doing business in Mexico. powers-of-attorney) of the company (from 5 – 10 business days); Due to our civil legal system, the participation of state appointed officers is required (with the 5. To file and obtain before the Mexican Tax same name but different functions as notary authorities the tax identification number publics in common law countries), either (RFC) which will allow the company to pay Notarios Públicos (appointed by local taxes, open bank accounts and electronically governments) or Corredores Públicos (appointed pay taxes. For such purposes, a domicile by federal authorities) to carry out public within Mexico is required in order to obtain certification of legal acts. The participation of the relevant RFC of the Mexican company. such state appointed officers in the (from 1 – 5 business days); and incorporation process plays a very important 6. Filing and registration before other Mexican role. Such officers are professionals (in both authorities (such as the Foreign Investment cases, must be lawyers) that are granted “public Registry (Registro Nacional de Inversión faith authority” (fe pública) by the government Extranjera) (“RNIE”). Thereafter and during with the function to certify legal acts. Generally, the life of the company, it will have to the participation of such state officers is to provide to such authorities’ periodical formalize the consent of the shareholders or information and/or renewal filings (from 5 – partners of the company and therefore, such 7 business days). shareholders or partners (or their representatives) must appear before them to The information required to incorporate either execute the relevant incorporation documents. an SA or an SRL or a SAPI are practically the same. Please note as follows the information The process for incorporating a company in that would be required in order to incorporate Mexico would need to follow the following either an SA, an SRL or a SAPI: steps: (a) As mentioned above, it is required to 1. To obtain from the Mexican Ministry of obtain a permit from the SE for the Economy (Secretaría de Economía) (“SE”) a incorporation of the company to use its permit to use the corporate name of the corporate name. The SE re-quires that the company (1 business day); applicant provides at least three possible 2. To draft the by-laws of the company (based different corporate names for the new on the provisions of the LGSM or LMV company in case some of them are and/or any shareholders agreement or already used and is utilized to secure the other kind of agreement when different name and avoid that two companies that groups of shareholders or partners that shall are not related share the same corporate be equity or stock holders of the company) name; (from 2 – 10 business days); (b) The name of the persons who will be 3. To execute the incorporation deed shareholders or partners of the company ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN MEXICO] 148 (at least two (2), which may be either Procedencia Ilícita) (“Anti Laundry Money Law” individuals or entities). The shareholders or “ALML”) there is the need to obtain or partners may grant a special power-of- additional information for the incorporation attorney to the per-sons that will appear process such as: before the Public Faith officer (Notario or 1. Copies of the identifications documents of Corredor) to incorporate the company on the individuals that will become partners or their behalf. Such power-of-attorney shareholders of the company or in the event would also need to be valid and of an entity it will be required a copy of the enforceable pursuant to Mexican Law and articles of incorporation and by-laws therefore if granted abroad it shall be translated into Spanish. Please note that granted before a notary and comply with this specific requirement may be time International Treaties signed by Mexico, consuming; such as the Inter-American Convention on the Legal Regime of Powers of Attorney to 2. Evidence or proof of the domicile be used Abroad, the Washington Protocol mentioned for each shareholder, such as a on the Uniformity of Powers of Attorney copy of an utility bill (phone, electricity, and the Convention de La Haye. In order etc.); for such power-of-attorney to be effective 3. Tax identification numbers assigned by the in Mexico, it must also be translated into relevant tax authorities of the country of the Spanish language by an expert origin of the individuals or entities that will translator appointed by the relevant become partners or shareholders of the court; company. (c) The amount of the capital stock of the 4. General information of individuals or Mexican company and the participation of entities that will become partners or each shareholder or partner in such shareholders of the company such as their capital stock; telephone number and email address. (d) The name of each member of the Board of The ALML has as main purpose to protect the Directors or in the event that it is so financial system and the national economy from decided, the name of the Sole Manager of transactions carried out in Mexico with illegal the company, and the names of the resources. Therefore, it creates a new set of examiner and main officers thereof; obligations for entities and/or individuals that (e) The names of the persons that will receive carry out what the ALML defines as “Vulnerable powers-of-attorneys from the company, Activities”17. Such “Vulnerable Activities” must and limitations to such powers-of- be filed before the SAT through the elaboration attorney (generally such persons would be of a report that shall be filed before the SAT and carrying out the day to day management that generally contains the description, among of such company); and others, of (i) the transaction considered as “Vulnerable Activity”; (ii) the information of the (f) The rules regarding the dissolution and parties involved in the “Vulnerable Activity” liquidation of the company. such as full name, address, incorporation Notwithstanding the foregoing, due to the information (in case of entities); and (iii) the issuance of a relatively new law called the amount of the transaction.. Some of the Mexican Federal Law for the Prevention and “Vulnerable Activities would be, among others: Identification of Transactions with Illegal (i) the rent of a real estate property; (ii) the Resources (Ley Federal para la Prevención e development of real estate; and (iii) the Identificación de Operaciones con Recursos de 17 As listed in Article 17 of the ALML. ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN MEXICO] 149 incorporation process of a company, mergers, permanent establishment in Mexico. When the acquisitions and capital increases tax identification number (RFC) is obtained, the company may start issuing invoices for their IV. Ongoing Maintenance business. The companies regulated under the LGSM and Residents of Mexico (individuals and the SAPI pursuant to the LMV are required, corporations) are subject to taxation on their among other matters, as its ongoing worldwide income, irrespective of the source of maintenance, to: income or their nationality. Business entities (a) Execute a shareholders/partners meeting having the principal administration of their at the corporate domicile of the company business in Mexico are considered Mexican at least once a year. In such meeting, the residents for tax purposes. We would shareholders/partners shall approve the recommend consulting a Mexican accountant or annual financial statement of the tax expert if specific and further information is company, profits, ratify the board of required regarding tax matters. directors and, in the case of the SA and VI. Foreign Investment the SAPI, ratify the report presented by the examiner. The Mexican Foreign Investment Law (Ley de Inversión Extranjera) (“LIE”) and its regulations (b) Keep Corporate Ledgers whereby the regulate precisely foreign investments activities names, nationalities, capital stock in Mexico. Such “foreign investment” could be variations, Shareholders or Partners done through: meetings, Board of Directors meetings and transfers of capital stock be recorded. (a) the participation of foreigner investors, in It is important to note that, according to any proportion, in the capital stock of the LGSM, the names of the Mexican companies; shareholders/partners that appear in such (b) the activities performed by Mexican records are, with respect to third parties, companies with majority of foreign capital the legal holders of the shares/equity stock; and participation that integrates the capital stock of the company. (c) the participation of foreign investors in the activities and actions contemplated by (c) Appoint a Sole Manager or, in its case, the the LIE and its regulations. members of the Board of Directors to fulfill the instructions provided by the There are a set of rules to be observed in Shareholders/Partners Meetings and to connection with: (i) foreign ownership of real direct the activities performed by the estate properties located in Mexico and; (ii) company. economic activities restricted to Mexican companies incorporated with foreign (d) Also, pursuant to the ALML, additional investment in Mexico. requirements and re-ports will be necessary to be filed periodically to (1) Real Estate. A Mexican entity with comply with such Law. foreign investment (foreign shareholders or partners) may acquire a real estate V. Taxation property in Mexico; however, it should The SA, the SRL and the SAPI, once incorporated be noted that, if such property is located shall obtain from the SAT a tax identification within what is known as the “restricted number (RFC) and will be considered as full zone” (zona restringida) which Mexican entities for tax purposes, since such comprises an area of 100 kilometers entity will be a Mexican resident with (62.13 miles) across the Mexican border ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN MEXICO] 150 and 50 kilometers (31.06 miles) across acquisition. the Mexican beaches and is acquired for Non-residential purposes pursuant to residential purposes, then, such Mexican the regulations of the LIE are considered entity (as well as foreign individuals or as those destined to time sharing, foreign corporations) may not directly industrial, commercial, or tourism acquire such property. Residential related activities and generally those purposes shall be considered as those used by entities pursuant to their destined exclusively for living purposes corporate purpose, such as sales or of the owner or third parties. In such transfers, urbanization, construction, or cases, a Mexican trust must be created development of real estate projects. whereto the property is settled in trust and whereby such Mexican entity, Foreigners may acquire real estate foreign individual or foreign entity is properties outside of the “restricted appointed as beneficiary thereto (no real zone” provided that they must obtain a estate rights can be owned by such permit from the SRE for such purposes. Mexican entity, foreign individual or (2) Permitted Activities. According to the foreign entity, only trust rights and the LIE there are three different types of maximum duration of such trust is 50 reserved activities regulated by such law: years, subject to renewal); provided (a) activities reserved to be performed further that, in such cases it is required exclusively by the Mexican State, which to obtain a permit from the Mexican include, among others, petroleum, Ministry of Foreign Affairs (Secretaría de hydrocarbons and electricity (provided Relaciones Exteriores) (“SRE”) in order that private investment is allowed in for such trust to own the relevant real such activities in accordance with the state property in the “restricted zone”. new Energy Reform which was recently As of today, there are discussions in the passed on September of this year); (b) Mexican Congress in order to delete this activities reserved to the Mexican State Foreign Investment restriction on real and to Mexican companies with estate. exclusion of foreign investment clause, On the other hand, a Mexican entity which include, among others, national with foreign investment but which transportation of passengers in Mexican agrees to a statement called the “Calvo territory; and (c) activities with specific Clause” (which basically states that any regulation were foreign investment can foreign shareholder or partner shall be participate only in the percentages considered to be Mexican with respect establish by the LIE, such as national air to such participation or interest and shall transportation in which case a maximum agree not to invoke the protection of 25% of foreign investment in the capital their Government, under the penalty, in stock of the company is allowed or case of failure to honor such broadcasting companies in which case commitment, to forfeit such interest or up to 49% of foreign investment in the equity participation to the benefit of the capital stock of the company is allowed. Mexican Nation), may acquire property It is required the authorization of the located in the restricted zone for non- National Foreign Investment Com- residential purposes, in which case, they mission (Comisión Nacional de Inversión would require to give a notice to the SRE Extranjera) in order for Mexican of such acquisition within the next sixty companies with foreign investment to (60) days following the date of the participate, directly or indirectly, in a ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN MEXICO] 151 proportion higher than 49% percent of following visas that foreigners can request from its capital stock, in the event that such the Mexican National Immigration Institute in company performs the activities outlined order to travel to Mexico: in section (c) above. i. Tourist Visa: applicable for foreigners that Furthermore, and in order to control and travel to Mexico with the purpose of regulate the provision set forth in the LIE performing recreational, cultural or sporting and its regulations, the Mexican activities. Tourists are allowed by law to stay government through the SE created the up to a term of 180 days in Mexico with the RNIE in which, according to the LIE, the possibility of extending such term. following entities are obliged to be ii. Permanent Resident or Temporary Resident registered: Visa for Family Purposes: applicable for (i) i. Mexican companies in which foreign Mexicans or foreigners that hold the investment participates; condition of temporary students; or (ii) for permanent foreigner resident that requests ii. Foreign individuals or entities that a visa for a foreigner which he/she may normally perform commercial prove a Family bond. activities in Mexico; and iii. Working Visa: applicable for foreigners, to iii. Stock or equity participations trusts whom an individual or an entity legally of real estate or neutral investment, incorporated under Mexican law extends a by virtue of which, rights in favor of job offer. foreigners are granted. All of the abovementioned visas are issued for a Mexican companies in which foreign limited period, but they are subject to renewals. investment participate in its capital stock are required to submit before the RNIE, In general, the Mexican government carries out quarterly and annually, reports which actions to promote tour-ism in the country, reflect the increase or decrease of therefore, different from other countries, in participation of foreign investment in Mexico there are no severe restrictions for the capital stock of the companies and foreigners to enter the country. the fulfillment of the percentages VIII. Real Estate Trusts established by the LIE, in the event that the company performs restricted In recent years, real state trusts have also economic activities. become important investment vehicles for foreigners who seek to invest their capital in VII. Residency and Material Visa Restrictions Mexico. Trusts are regulated by, among others, The Mexican government issued a series of the Mexican General Law for Negotiable amendments to the Mexican Immigration Law Instruments and Credit Transactions (Ley and its Regulations (the “MIL”), that caused General de Títulos y Operaciones de Crédito); (ii) great changes in the criteria applied by the the LMV; and (iii) the LISR. Mexican National Immigration Institute The Mexican Congress, in order to make more (Instituto Nacional de Migración) which is the attractive the investment of capital in the real government entity in charge of issuing visas and estate market in Mexico, included in the LISR observing the compliance of the MIL. The special tax benefits for Real Estate Investment Mexican government issued such amendments Trusts (Fideicomiso de Inversión en Bienes with the main purpose of creating a more Raíces)(“FIBRA”). efficient system for foreigners visiting Mexico. According to the Mexican Brokers-Dealers The MIL establishes, among others, the ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN MEXICO] 152 Association (Asociación Mexicana de completed or as of the date of the Intermediarios Bursátiles), FIBRAS that have acquisition of the real estate, as applicable. placed public offerings in the Mexican Stock iv. that the trustee of the FIBRA issues Exchange have captured resources equivalent to certificates to represent the as-sets 37.3% of the total foreign investment in Mexico. allocated in the FIBRA so that such According to the LISR, in order for a trust to be certificates may be placed through a public considered a FIBRA and to have the tax benefits offering in the Mexican Stock Exchange and provided by the LISR, it needs to comply, among registered before the RNV; and others, with the following requirements: v. that the trustee of the FIBRA distributes to i. to be executed pursuant to Mexican laws the holders of the relevant certificates and with a Mexican trustee. issued through the public offer, at least once a year and no later than March 15th of ii. to have as its main purpose the acquisition each year, at least ninety-five percent (95%) or construction of real estates in Mexico of the total taxable income accrued during that may be destined for lease, or the right the immediately preceding fiscal year. to obtain income from the real estate. This paper was prepared by Luis Lavalle-Moreno, a partner iii. that the real estate contracted or acquired at the law firm of “Martinez, Algaba, de Haro, Curiel y by the FIBRA be destined to lease (or Galvan Duque, S.C.” equivalent) and not be sold within a period of 4 years following the date the Copyrights pending. November 2014 construction of the real estate was ILN Corporate Group – Establishing a Business Entity Series Fall 08 153 Fall 15 INTERNATIONAL LAWYERS NETWORK ØKLAND & CO ESTABLISHING A BUSINESS ENTITY IN NORWAY ILN CORPORATE GROUP [ESTABLISHING A BUSINESS ENTITY IN NORWAY] 154 ESTABLISHING A BUSINESS ENTITY IN NORWAY If your business operates on a medium to large scale with some risk, we recommend that you Different Business Entities organize as a limited liability company. 1.1 Introduction and outline 1.3 Partnerships Enterprises in Norway may be organized in a Partnerships may be organized as an unlimited number of ways; the most common are limited liability partnership or a limited liability liability companies, partnerships and sole partnership. Both are an association of two or proprietorship. more partners who are jointly or severally liable When selecting the appropriate business form in for the enterprise's total liabilities. Norway the choices are mainly between the above mentioned three structures. If the activities are of a non-profit or voluntary nature, a club, association or foundation may also be an alternative. The key factors to consider when choosing a particular business entity type are volume, risk, earning potential and taxation. Also the availability of a particular entity type depends on the number of owners. A single owner may operate as a sole proprietor or a limited liability company. If there are two or more owners of the business, by definition it cannot be a sole proprietorship, but it may be an unlimited or The unlimited liability partnership in Norway is limited partnership, or a limited liability company. called an "ANS". In an ANS partnership, the partners are personally liable for the enterprise's 1.2 Limited liability company total debt (joint and several liability). Debt that In Norway, limited liability companies are one partner is unable to pay may be claimed in independent legal entities, similar to limited full from any one of the other partners. companies in the U.K. and US. A limited liability The limited partnership is called "DA". The company can be organized either as a private or partners jointly are personally liable for the as public company. enterprise's total liabilities, but each partner is Public company shares may, contrary to private only liable in proportion to his or her ownership company shares, be negotiable on stock markets. interest in the partnership. Creditors cannot claim The minimum share capital for a private company coverage for more than 10 % of their debt from a is NOK 30 000,-. For a public company it is NOK 1 partner who has a 10% ownership in the 000 000,-. partnership, even if the other partners are unable The owners of a limited company have no to settle their part of the debt. personal responsibility for the company’s Another form of limited partnership is "KS". This obligations. Their economic risk is limited to the type of business is a hybrid of unlimited liability share capital contributions made to the company. partnership’s and limited liability companies. One Creditors can only file claims against the company, or two "general partners" have unlimited not the shareholders. personal liability covering the partnership's ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN NORWAY] 155 obligations. The "KS" is a legal entity and is itself The memorandum must state the company’s liable for all its obligations. articles of association and bylaws, specify the 1.4 Sole proprietorship company name, state the names and other relevant details of the founders, number of shares Sole proprietorship is a form of enterprise in to be subscribed for by each founder, the amount which a 'physical person' is liable for a business. payable for each share and the time of settlement. This means that he or she is financially liable for all the enterprise's liabilities and obligations. The memorandum also must state the members of the Board. Furthermore, it should indicate The owner (physical person) has the full right to whether the company should have an auditor and decide over the enterprise. There are no special if so, the name of the auditor. rules or separate acts of law regulating sole proprietorships. However, if the enterprise has The company must be registered in the more than 30 employees, certain special Brønnøysund Register Centre's Central Coordinating Register for Legal Entities within requirements apply. three months after the memorandum is signed. If your business operates on a small to medium At this point it is a requirement that payment of scale with little volume and risk, we recommend the company’s capital is made to the full extent. that you organize the business as a sole proprietorship. Finally, the company must have an official name containing the abbreviation “AS” for private 2 Steps and timing of establishment limited liability company, and “ASA” for public 2.1 Introduction limited liability company. When establishing an enterprise in Norway, the 2.3 Partnerships (ANS/DA) founder is required to notify the authorities. The The procedure for forming a partnership, involves same applies when a company takes on that the participants enter into a partnership employees, and when it starts to sell goods or agreement. The partnership is established when services that are liable to VAT. the partnership agreement is signed by all In all of these situations, the enterprise must participants. register with the Brønnøysund Register Centre's No equity is required to start a partnership Central Coordinating Register for Legal Entities. company. This is because the personal The various agencies collaborate on exchanging responsibility of the participants is deemed information, so that one can fill in and send the sufficient to protect creditors' commitments. It form Coordinated Registration Notification to depends upon the participants' own assessment notify the Brønnøysund Register Centre, the of funding requirements whether and to what Norwegian Labour and Welfare Administration extent they should have initial capital. (NAV) and the tax office at the same time. The partnership agreement must be registered in In the following we will give a brief overview of the Register of Business Enterprises. The steps to incorporate before establishing an partnership must have an official name containing enterprise. the abbreviation “ANS” or “DA”. 2.2 Limited liability company (AS/ASA) 2.4 Partnerships (KS) The procedure for forming a limited liability The procedure for forming a (KS) partnership is company starts with drawing up a memorandum. similar to the procedures used when forming an ANS or a DA. Unlike the ANS and DA, each limited ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN NORWAY] 156 partner has to make a deposit of at least 20,000 number. Sole proprietorships are also entitled to NOK within a specified time limit when register with the Register of Business Enterprises. establishing the company. This is subject to a charge. A limited partnership must have a certain If a sole proprietorship has at least five employees partnership capital, divided into one or more or is a wholesale or retail enterprise, registration general partner shares and one or more limited with the Register of Business Enterprises is partner shares. At least two-fifths of the share mandatory. Up on registering with the Register of capital shall be bound capital, which shall be paid Business Enterprises, the enterprise will be issued to the company, and which the participants a certificate of registration. cannot freely dispose of. The general partner The name of the sole proprietorship must contain must make a deposit amounting to a minimum the surname of the owner. one tenth of the share capital, own at least one tenth of the Company's net wealth at any time 3 Governance, Regulation and Ongoing and have at least the same share in profits and Maintenance losses. 3.1 Requirements for local The agreement must be registered in the Register shareholding/directors of Business Enterprises. A "KS" cannot be 3.1.1 Private limited liability companies registered until at least one-fifth of each participant's contribution obligation has been A limited liability company (AS) must have a paid to the company. Furthermore, it is required board of directors. that an additional one fifth is paid within two As a rule, a limited liability company shall have years after the foundation. The partnership must a board consisting of at least one member. have an official name containing the abbreviation The company may have a general manager. If “KS”. the company does not have a general 2.4 Sole proprietorship (ENK) manager, the chairman of the board is responsible for the day-to-day management The formal requirements to form a Sole of the company. proprietorship are that the owner must be 18 years of age. He or she does not have to reside in The Limited Liability Companies Act contains Norway. However, the enterprise is required to detailed rules relating to; the company's have an address in Norway. The owner of a sole board of directors, the board's responsibilities, proprietorship is not obliged to set aside funds appointment of a general manager, election (capital contributions) for the enterprise, since he of board members and deputy board or she in any event is personally liable. members, the board's duties, term of office, resignation and removal before the end of the For tax purposes, a sole proprietorship is assessed term of office, and remuneration of board together with the person who owns it. This means members. that the net profit of the business is liable to tax as part of the owner's total income, including, for 3.1.2 Public limited liability companies example, income from employment. Likewise, the A public limited liability company (ASA) must net loss will be deductible. have a board of directors consisting of at least All sole proprietorships can register free of charge three members, and if the company has a with the Central Coordinating Register for Legal corporate assembly, the board must have at Entities, and will then be assigned an organization least five members. The board of directors is ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN NORWAY] 157 subject to a requirement for gender things, rules for "starvation" of the minority, representation. The company is also required the right to require notice of an extraordinary to have a general manager. general meeting, the right to require an 3.1.3 Partnerships investigation, the right to demand a new election of auditors and the right to assert The partnership meeting is the highest claims on behalf of the company. Most of authority of partnerships. There is no these rights require a minority stake of at requirement for the partnership to have a least 10% of the share capital. board of directors or a managing director. Should the partners decide to have a board of 3.2.2 Partnerships directors or a managing director, the In partnerships, all partners are members of Norwegian Partnerships Act contains rules for the partnership meeting. For the partnership their organization. meeting to reach a decision, the decision must be unanimous. Unless otherwise agreed to, All the partners are authorized to sign on behalf of the company, unless otherwise company shares can only be transferred to a stipulated in the partnership agreement or new owner with the consent of all the other where there is a board of directors. All participants. However, each participant can, partners are eligible to vote at the partnership with six months written notice, terminate its meeting, and all decisions must be unanimous, participation and demand to be released by unless the partnership agreement provides the company. otherwise. 4 Foreign Investment, Thin Capitalisation, In a “KS”, the partners are the limited Residency and Material Visa Restrictions partnership’s highest authority. However, 4.1 Possible barriers for an offshore party unlike in the unlimited liability partnership, There is freedom of establishment for businesses the partners cannot participate in the in Norway. That means that you do not have to administration of the partnership. The limited reside in Norway in order to set up a business partners must leave the day-to-day here. If you wish to establish and operate a administration to the general partner(s) or the business, you need to have a Norwegian D- board of directors. number and a Norwegian business address. A D- 3.2 Minority shareholders’ rights and number is a temporary number assigned to, but protection not limited to, foreign nationals liable for tax in 3.2.1 Limited- and public limited companies Norway. In limited liability companies, it is not unusual If you do not have employees, or do not reside in that a majority and a minority disagree on Norway, you must have a Norwegian how to run the company. This is because the representative who is liable for the payment of basic principle of the Corporation law is that direct and indirect taxes. decisions are made by majority vote. A If no economic activity is being conducted, the minority must generally accept the majority’s contact person may reside abroad. decision. If you wish to start a sole proprietorship, you Norwegian Private Limited Liability Companies must register with the police or with a service Act, however, has some rules that protect the center for foreign employees. This does not apply minority. The law includes, among other if you are from another Nordic country. ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN NORWAY] 158 If you come from a country outside the EU/EEA for example objects for use in the business area, a special residence permit may be obtained activities. In a partnership, the capital if you wish to set up business as self-employed in contributions are not as important in relation Norway. to the outside world as the situation is with 4.2 Possible capitalisation obligations regard to a limited company. The partners must in any case use private funds to cover any 4.2.1 Limited liability companies debt, if necessary. It is therefore important In order to set up a new limited liability that the partners make sure that sufficient company, the founders must complete the capital has been set aside to secure the above mentioned procedures before the company financially. That will reduce the risk business can start to operate. The purpose of of any of the partners having to use private the formal requirements is to ensure that funds to cover debt. It will also reduce the funding, liability and rights are unambiguously likelihood of conflicts between the partners. agreed up on between the founders, and to In limited liability partnership’s (KS), the provide adequate security for customers and partners have to make partnership suppliers. contributions as mentioned above. For the The limited company must have a share capital general partner(s), the situation is otherwise of at least NOK 30 000. Before registration, an quite similar to the situation regarding auditor or a financial institution must confirm unlimited liability partnerships. The limited that the share capital has been paid in full. The partner’s role, however, is far more passive notification to the Register of Business than the role of a participant in the ANS. A Enterprises shall confirm that the company has limited partner has only a limited liability for received the share capital contributions. If the company debts. This means that he / she share capital contributions are to be paid cannot be held personally responsible for exclusively in cash, a financial institution may obligations incurred by the company, and that confirm that payment has been made. The he / she is not obliged to provide higher company may cover the formation costs, but contributions to the company than what is the costs must not exceed the share capital required by the foundation of the company. contributions. In a sole proprietorship, the proprietor, who is A public limited liability company must have a a physical person, is liable for the business. share capital of at least NOK 1,000,000.00, and This means that he or she is financially liable the company must have a board of directors for all the enterprise's liabilities and obligations. consisting of at least three members. The The owner is not obliged to set aside funds board of directors is subject to a requirement (capital contributions) for the enterprise, since for gender representation. The company is he or she in any event is personally liable. required to have a general manager. 4.2.3 VAT 4.2.2 Unlimited liability partnership and sole Foreign businesses that start up business proprietorship activities liable to VAT in Norway must In Unlimited liability partnerships, it is up to calculate and pay VAT in the same way as the partners to agree on whether to make Norwegian companies. partnerships contributions. The law does not VAT is payable on all sales of goods and require such contributions. The partners may services, except those that have been also agree to contribute assets other than cash, ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN NORWAY] 159 specifically exempted by law. Certain goods Register (directly or through a representative), and services are exempt from VAT on sales, or is obliged to comply with all applicable subject to a so-called 'zero rate'. Among other Norwegian accounting legislation. The foreign things, this applies to the sale of goods and business has a duty to submit VAT returns to services to other countries, to certain ships and the tax office for each reporting period. aircraft and for use in offshore petroleum Businesses with sales of less than MNOK 1 in activities. Businesses with these types of sales the course of a calendar year can apply for must be registered in the VAT Register. permission to submit a VAT return once a year The importation of goods and services to (annual VAT return). Norway is also liable to VAT. Norwegian 4.3 Restrictions on remitting funds outside of Customs and Excise collect VAT on the the jurisdictions (withholdings, etc.) imported goods. VAT on imported services is 4.3.1 Share dividend subject to certain limitations: Businesses and public institutions must calculate and pay VAT When a company generates a profit, some of on purchases of services provided from abroad. the company's returns may be distributed as In other words, it is the recipient's duty to dividends to shareholders. calculate and pay VAT in such cases. Examples Distribution from Norwegian limited liability of services that can be remotely provided companies can only take place subject to the include electronically provided services, rules relating to dividend, capital reduction, consultancy services and various information merger or demerger and repayment on services. dissolution of a company. The general The standard VAT rate is 25%. A VAT rate of meeting decides whether or not dividends 15% is levied on the sale of food. The rate is 8% shall be distributed. for passenger transport. The same applies to Any transfer of value whereby shareholders hotels and other businesses that rent out benefit, directly or indirectly, is classified as a rooms, apartments and vacation homes to distribution. The value shall be calculated tourists. using the fair value on the transfer date. Foreign businesses that sell goods or services In partnerships, all profits and losses are in Norway, must register with the VAT Register shared equally among all partners. There are when the value of sales and withdrawals liable no restrictions in terms of the shareholders to VAT exceeds NOK 50,000 during a 12-month non-distributable equity as there is in limited period. liability companies. However, there is a formal Foreign businesses that sell goods or services requirement that the financial statements are in Norway without having a place of business approved by a partnership meeting before the or a place of residence here must be registered distribution takes place. through a representative. If the foreign 4.3.2 TAX national registers through a representative, he or she will have the rights and obligations that 4.3.2.1 Limited liability companies follow from ordinary registration in the VAT The profit from limited liability companies is Register. The representative must have a place taxed at a rate of 27%. When profit is being of residence or a place of business in Norway. distributed to personal shareholders, tax is A foreign business that is registered in the VAT calculated after the deduction of a risk-free return, referred to as the shareholder model. ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN NORWAY] 160 This means that a further 27% tax is levied company is liable for the business conducted by on the profit, after the deduction of the the Norwegian branch. If the branch does not deductible risk-free return. operate from a fixed place of business in Norway, Foreign shareholders who receive dividends and is liable for VAT according to the provisions of from a Norwegian corporation pay income the VAT Act, a Norwegian value added tax tax (withholding tax) to Norway at the rate representative must be registered by the of 25%. Foreign shareholders who have authorities. been living in Norway, pay tax on gains from If Norway does not have an agreement with the shares in the Norwegian company until five country of the trader on the exchange of years after that he or she moved from information and mutual assistance in the recovery Norway. A tax treaty may limit the right to of claims, the representative will be jointly and demand such tax on gains. severally liable for payment of VAT. 4.3.2.2 Partnerships The branch will normally be liable to tax in Partnerships are not separate taxable Norway and will otherwise have to comply with entities. The partners are responsible for the Norwegian regulations. In order to employ partnership's tax payments. The net profit is foreigners, residence permits must be issued. taxed at a rate of 27%. When the profit is No equity requirement applies to the distributed to a physical partner, tax is establishment of a branch. However, foreign calculated on the distributed amount after enterprises conducting business in Norway are the deduction of paid tax. This more or less obliged to register with the Register of Business equals the maximum tax rate in a limited Enterprises. liability company. Any remuneration for 6 Are you considering doing business in work will reduce the calculated profit. Norway? 4.3.2.3 Sole Proprietorships If you have any questions on doing business in As the proprietor of a sole proprietorship, Norway, we invite you to contact our office and you are responsible for the enterprise's tax let one of our lawyers assist you. You are always payments. The enterprise is not a separate welcome to visit our webpage, www.oklandco.no. taxable person. The proprietor pays advance *** tax for each period as soon as the income The law firm Økland & Co DA is a full-service business law firm serving legal arises, and payment forms for advance tax needs throughout Norway and internationally. are sent to the proprietor four times a year. The attorneys at Økland & Co DA offer experienced representation and The tax office calculates the amount of tax strategic guidance and our goal is to perform a complete and effective service to our clients. We attach large importance to utter quality and to payable based upon the profit for the achieve the best result possible to the client. previous year. Our services are performed in close collaboration with the client, and they are aimed towards the goal that appears to be the best in each particular 5 NUF - Norwegian-registered foreign case. enterprises – An alternative form of The law firm Økland & Co DA was established in 1983 and today we are 27 conducting business activities in Norway. employees, of which 21 attorneys/associates. We are located in Lillestrøm, 20 km from Oslo City Centre. A foreign enterprise that wishes to do business in Norway, can register a branch of the foreign enterprise in Norway. If a branch is set up in Norway, the foreign ILN Corporate Group – Establishing a Business Entity Series Fall 08 Fall 15 INTERNATIONAL LAWYERS NETWORK QUIJANO & ASSOCIATES ESTABLISHING A BUSINESS ENTITY IN PANAMA ILN CORPORATE GROUP [ESTABLISHING A BUSINESS ENTITY IN PANAMA] 162 ESTABLISHING A BUSINESS ENTITY IN PANAMA Types of Business Entities order to indicate the type of Panamanian legal entity. The main types of Business Entities in the Republic of Panama are the Corporations d. The purpose of the corporation. (Sociedad Anónima) and the Private Interest e. Its authorized capital (which may be expressed Foundations (Fundación de Interés Privado). in any currency of legal tender that in no case Limited Liability Companies (LLC) may be shall be less than an amount equivalent to ten incorporated as well; however, the corporations thousand American dollars (USD $10,000) represent most of the registrations. f. Different types of shares may be issued (in These business entities have the following example: with preferential rights) advantages: g. Amount of shares each subscriber has taken. They offer total secrecy and anonymity; h. The domicile of the corporation and the name and domicile of its resident agent in the There is no requirement to disclose Republic of Panama, who may be a juridical shareholders or beneficiaries; person. There is no requirement to file annual returns i. Its duration. or financial statements; j. The Directors (names and addresses), which There is a full exemption from taxation on any can be any natural or juridical person. The law business activity or transaction carried outside requires a corporation to have at least three of Panama; directors. Simple ongoing administration; k. Any other legal clauses the shareholders have The accounting books may be kept anywhere convened. in the world. Steps to register a Private Interest Foundation: However, besides all the benefits listed a. The name of the foundation, expressed in any hereinabove, a Private Foundation is a unique language with characters of the Latin form of legal entity, which acts like a Trust and alphabet, provided that it does not include operates like a company. any morally sensitive or offensive or objectionable word, and that it is not identical Steps and Timing to Establish or too similar to the name of an already Steps to establish a Corporation: existing Panamanian foundation. a. The names and domiciles of each of the b. The name must include the word ‘Foundation’ subscribers of the articles; to distinguish it from the other natural or juridical persons of a different nature. b. The name of the corporation which may be in any language, provided that it does not c. The purposes of the foundation. include any morally sensitive or offensive or d. The initial capital of the foundation. objectionable word, and that it is not identical or too similar to the name of an already l. It may be expressed in any currency of legal existing Panamanian corporation. tender that in no case shall be less than an amount equivalent to ten thousand American c. The name must include either the acronyms dollars (USD $10,000) ‘S.A.’, ‘CORP.’, or ‘INC.’; or either the words ‘Sociedad Anónima’ or ‘Incorporated’ – in m. The members of the Foundation Council ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN PANAMA] 163 (names and addresses), which can be any subject to Panamanian accounting or turnover natural or juridical person. The law requires a regulations. However, a corporation may foundation to have at least three members of keep such accounting records, inside or the Foundation Council if natural persons outside of the Republic of Panama, as the occupy such posts; or one member of the directors consider convenient or necessary for Foundation Council if a corporate entity is the purpose of reflecting its financial status. acting as such. Private Interest Foundations are statutorily n. The domicile of the foundation and the name prohibited from engaging in commercial and domicile of its resident agent in the activities, but are also not required to file Republic of Panama, who may be a juridical reports of any kind. person. Corporations have to pay an annual company o. The manner of appointing the beneficiaries of tax or single annual charge of US$ 300. the foundation, among which the founder Similarly, Private Interest Foundations are may be included. subject to pay an annual maintenance tax of p. The reservation of the right to amend the US$ 400. Both taxes respectively must be paid foundation charter whenever deemed punctually in order to ensure that documents convenient. are able to be recorded in the Panama Public Registry and/or that the company or q. Its duration. foundation is not removed from the registry. r. The destination to be given to the assets of The deadline for the tax payment depends on the foundation; and the method of liquidation when the entity was formed. In this regard, of its patrimony in case of dissolution. entities incorporated between 1st January and 30th June, have until 30th June of every year s. Any other lawful clause that the Founder to pay. On the other hand, entities deemed convenient. incorporated between 1st July and 31st The timing to establish whichever of the two December, have until 31st January of the next mentioned before is between 24 to 72 hours. year to pay. Regarding the shareholders and Directors requirements, it is important to note that the real identity of the shareholders of a Panamanian corporation does not have to be registered at the Public Registry. Such information is strictly private and confidential, and it only appears in the Share Registry, which is kept by the Directors/Officers of the corporation. The minimum number of shareholders required for an incorporation is one and they may be of any nationality and residence. However, the names and addresses of the Governance, Regulation and Ongoing directors have to be registered at the Public Registry. Maintenance: Foreign Investment, Thin Capitalization, Annual accounting records of the corporation do not have to be audited or submitted to the Residency and Material Visa Restrictions: Panamanian authorities since they are not In Panamanian legislation, there are no significant ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN PANAMA] 164 barriers to entry for an offshore party. Exemption from any obligation to prepare or publish or submit financial statements and full The offshore feature of Panamanian corporations freedom to carry its accounting as and where has been in force and effect since 1927, as the the corporation may decide when its income following exemptions show: arises from sources outside of the territory of There is no income tax applicable to income the Republic of Panama. from sources outside of the territory of the Any Panamanian corporation whose income Republic of Panama. arises only from sources outside of the No capital gains tax applicable to capital gains territory of the Republic of Panama does not through sources outside the territory of the have to make or submit any tax return, and Republic of Panama. may conduct its accounting as and where it pleases. No taxation applicable to interests derived by saving accounts or certificates of deposit No special business or investment visa issues. within or outside of the Panamanian territory. No taxation applicable to dividends received from sources outside of the territory of the Republic of Panama. ILN Corporate Group – Establishing a Business Entity Series Fall 08 Fall 15 INTERNATIONAL LAWYERS NETWORK KAPUNAN GARCIA & CASTILLO LAW OFFICES ESTABLISHING A BUSINESS ENTITY IN THE PHILIPPINES ILN CORPORATE GROUP [ESTABLISHING A BUSINESS ENTITY IN THE PHILIPPINES] 166 ESTABLISHING A BUSINESS ENTITY IN THE PHILIPPINES I. Types of business entities business entity, usually engaged in exactly As a general rule, foreign equity is allowed to the same activities as the foreign “parent” conduct and participate in business in the corporation. As a mere extension, and Philippines, through any of the following modes: operating only through a license, a branch office does not have its own legal personality 1. By investing in a domestic stock separate and distinct from the foreign corporation. business entity. Because of this, the foreign A domestic corporation is a corporation “parent” corporation will most likely be held which is organized under Philippine law. It is responsible for any liabilities which the local an artificial being which has a personality branch incurs, even beyond the investment separate and distinct from the shareholders, of the foreign business entity. An affiliate thus, the liability of shareholders is limited office may be an entity which is formed in only to their capital contribution. Other the Philippines by the foreign business entity, than their capital contribution, the or an existing Philippine business entity shareholders’ other assets are beyond the which is constituted as an affiliate. It has the reach of the corporation’s creditors. Foreign same objective as a domestic branch, which capital may invest in a domestic corporation is to be an extension of the foreign business either by acquiring shares of stock in an entity. existing domestic corporation, or by 4. By establishing joint venture arrangement contributing capital to one that is still in the with a local corporation. process of incorporation. A joint-venture arrangement is essentially a 2. By operating through a local subsidiary business partnership between two or more which may be owned entirely or partially by companies, but it is not a legal entity in itself the foreign business entity. unless the joint venture partners decide to A local subsidiary is a domestic corporation, incorporate a joint venture corporation. incorporated under Philippine law, which is Usually, but not always, a new corporate wholly or majority-owned by the foreign entity is born out of the joint venture business entity. It is considered domestic arrangement, specifically to carry out the because of its local incorporation, but is also business or single undertaking which seen as foreign because of its ownership and necessitated such a new corporate entity in the fact that it acts in furtherance of the the first place. interests of the foreign “parent” corporation. 5. By establishing a Philippine representative However, as it is deemed a domestic office. corporation pursuant to law, it enjoys a legal personality separate and distinct not only A representative office is a promotional or from its shareholders, but also from the marketing office for a foreign business entity, foreign “parent” corporation. which acts as a market research tool, communications interface, or product 3. By establishing a domestic branch office or training arm for the foreign business entity it a Philippine affiliate. represents. Because of its limited role A branch office in the Philippines is an disseminating information about the foreign extension of an already-established foreign business entity’s products and services, it ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN THE PHILIPPINES] 167 does not have the legal personality to entity undertakes to manage all or most of conclude contracts on its own. It also cannot the business of an existing domestic derive income locally from such operations. corporation for a period not exceeding five 6. By establishing a regional operating years. headquarters. 10. By entering into technology transfer Usually connected to a multinational agreements. corporation, a regional operating A technology transfer agreement is a headquarters is an office which is contract between a foreign business entity established in the Philippines for the limited and domestic business entity, the object of purposes of offering qualifying services to which is the transfer of knowledge or the the multinational corporation’s affiliates, transfer and licensed use of all forms of branches, and subsidiaries, and which are intellectual property. The foreign allowed to earn income from these activities corporation assumes no risk in the venture only, despite the fact that it is actually of the domestic corporation. Even if the considered a foreign business entity under domestic corporation is not profitable, it is Philippine law. still obligated to pay royalties for the use of 7. By establishing a regional area the foreign technology. headquarters. II. Matters to be Considered when Choosing a Also usually connected to a multinational Particular Business Entity Type corporation, a regional area headquarters is 1. The nature of the business. an administrative office, tasked with It is important to consider the kind of supervising and coordinating the different business to be conducted because, under branch offices, subsidiaries, or affiliates, Philippine laws, some businesses require within the Asia-Pacific region, of such particular business entity types. A bank, for multinational business entity. It is example, must always be a stock corporation. prohibited from earning income from or If the business is an energy generation or concluding revenue-generating business in mining or any other operation which will use the Philippines, and does not deal directly the natural resources of the Philippines, then with the clients and external contacts of the only a joint venture between the multinational corporation. government and the private business entity 8. By merging or consolidating with an is possible. Furthermore, in such a joint existing domestic corporation. venture, only 40% of the private business A foreign corporation can merge with a entity can be owned by foreign equity. If the brands of the foreign business entity are domestic corporation, and the surviving corporation absorbs the other corporation. already well-known locally, then a domestic A foreign corporation may also consolidate affiliate may be the best choice. with a domestic corporation to form an If a particular business is controversial or entirely new entity- a single corporation. prone to litigation, then some entities, such 9. By entering into a management contract as the domestic branch office, should be with an existing domestic corporation. avoided in order to shield the parent corporation from liability. A domestic Under this arrangement, a foreign business subsidiary, on the other hand, has the ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN THE PHILIPPINES] 168 personality to sue and be sued without different documentary and capitalization involving the foreign “parent” corporation. requirements, as will be discussed below. 2. The specific activities sought to be 1. Domestic Corporation undertaken in the Philippines. A domestic corporation is formed by 5 up to If the objective is simply to promote 15 incorporators. A corporate name will have products and services, or to have an office to be officially reserved and the Articles of that will act as a command center for a Incorporation and By-Laws of the proposed company’s regional operations, and which corporation will have to be filed with the office will not engage in the frontline selling Securities and Exchange Commission. There of products and services, then establishing a must also be a treasurer’s affidavit stating representative office or a regional area under oath that the required 25% payment headquarters will accomplish those things, and 25% subscription of the authorized without the hassle of incorporation or capital stock has been complied with. licensing. Depending on the nature of the business, 3. The tax treatment afforded to each entity. certifications are also required from the concerned government agencies which The Philippines employs a semi-schedular, regulate each particular industry. semi-global tax scheme. Each activity is Consularized documents of the foreign taxed differently, and particular activities are corporate entity will have to also be taxed differently for different entities. The submitted. tax treatment for each entity, thus, must always be part of any due diligence when Generally, the Securities and Exchange deciding on the vehicle used to do business Commission will take about a week to complete the processing of an application for in the Philippines. To use the “branch or subsidiary” example, a domestic branch or incorporation. For certain companies, local affiliate office will always be considered endorsements from other government a resident foreign corporation under agencies are required and this can add to the Philippine tax laws. This is because the processing time by an additional period of branch does not enjoy a separate personality two weeks. from the foreign entity. Hence, such branch 2. Domestic Branch Office / Philippine Affiliate will be taxed only on all of its income derived Since it does not have a distinct legal from Philippine sources, and on remittances personality, and only derives from the it made to the foreign “parent” company. personality of its foreign “parent” company, On the other hand, a domestic subsidiary the processing of an application for a permit corporation is, for all intents and purposes, for a domestic branch office requires the also a domestic corporation. As such, it is submission with the Securities and Exchange liable for income taxes for all revenue, Commission of certain documents coming whether sourced from the Philippines or from the parent company which need to be internationally, following the residency rule. consularized in the Philippines Embassy III. Steps and Timing to Establish A Business Entity where the parent company is situated. The More than differences in the steps required to processing of the approval can take about constitute and establish them, it is important to two weeks from the submission of complete note that different business entities also have documentary requirements. ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN THE PHILIPPINES] 169 Board of Investments; and 3. Joint Venture Arrangement • Proof of inward remittance of at least US In as much as the joint venture arrangement $ 30,000.00. usually results in a new corporation, the 5. Regional Operating Headquarters same discussion on the incorporation of a Under Philippine law, any multinational domestic corporation must be followed. company may establish a Regional Operating That means the registration of a new name Headquarters as long as they exist under the for the joint venture corporation, as well as laws of another country, and as long as the the filing of its Articles of Incorporation and multinational has branches, affiliates and By-Laws with the Securities and Exchange subsidiaries in the Asia-Pacific Region and Commission. other foreign markets. 4. Representative Office The establishment of such an office, however, The requirements are the same as with a requires two certifications, an endorsement, domestic branch, in that a representative and proof of remittance of capitalization, office needs to be registered and licensed namely: with the Securities and Exchange • A certification from the Philippine Commission through the submission of Consulate or Embassy or the Philippine documents coming from the foreign Commercial Office or from the Philippine company based abroad and duly consularized Department of Trade and Industry office by the Philippine Embassy in said jurisdiction. in the applicant multinational The establishment of such an office, however, corporation’s home country, certifying requires two certifications, an endorsement, that said foreign entity is engaged in and proof of remittance of capitalization, international trade with affiliates, namely: subsidiaries or branch offices in the Asia- • A certification from the Philippine Pacific region and other foreign markets; Consulate or Embassy or the Philippine • A certification from a principal officer of Commercial Office or from the Philippine the applicant multinational corporation Department of Trade and Industry office that it has been authorized by its board in the applicant multinational of directors to establish its regional corporation’s home country, certifying operating headquarters in the that said foreign entity is engaged in Philippines; international trade with affiliates, subsidiaries or branch offices in the Asia- • And endorsement from the Philippine Pacific region and other foreign markets; Board of Investments; and • A certification from a principal officer of • Proof of inward remittance of at least US the applicant multinational corporation $ 200,000.00. that it has been authorized by its board 6. Regional Area Headquarters of directors to establish its regional operating headquarters in the The requirements of a regional operating Philippines; headquarters apply as well to a regional area headquarters, and only the amount of • And endorsement from the Philippine remittance varies, thus: ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN THE PHILIPPINES] 170 • A certification from the Philippine required to appoint a Resident Agent who resides Consulate or Embassy or the Philippine in the Philippines. The role of the Resident Agent Commercial Office or from the Philippine is to be the person authorized, on behalf of the Department of Trade and Industry office foreign entity, to receive legal notices and in the applicant multinational processes. corporation’s home country, certifying Under Philippine corporate law, all shareholders, that said foreign entity is engaged in regardless of the class of shares, are guaranteed international trade with affiliates, certain voting rights, more commonly known as subsidiaries or branch offices in the Asia- “fundamental rights”. The number and nature of Pacific region and other foreign markets; shareholdings notwithstanding, any shareholder • A certification from a principal officer of in any corporation may always vote on the the applicant multinational corporation following matters: that it has been authorized by its board 1. Any amendment of the articles of of directors to establish its regional area incorporation; headquarters in the Philippines; 2. The adoption or amendment of the • And endorsement from the Philippine corporation’s by-laws; Board of Investments; and 3. Any transaction or disposition of all, or • Proof of inward remittance of at least US substantially all of the corporate property; $ 50,000.00. 4. Any initiative to incur, create, or increase IV. Governance, Regulation, Maintenance, and the corporation’s bonded indebtedness; Reporting Requirements 5. Any increase or decrease of the In general, all corporations in the Philippines must corporation’s capital stock; submit, annually, a General Information Sheet and an Audited Financial Statement to the 6. Any initiative to merge or consolidate of Securities and Exchange Commission. This the with another corporation; includes branch offices, representative offices, 7. The investment of corporate funds in regional area headquarters, or regional operating another corporation or business; and headquarters, even though they only act for and in representation of a foreign business entity and 8. Dissolution of the corporation. have no legal personality of their own. V. Foreign Investment, Thin Capitalisation, The requirement for local shareholding depends Residency and Material Visa Restrictions on the industry in which the company will Subject to certain restrictions, business entities operate in. The Philippines has certain may be up to 100% foreign-funded. The biggest nationalized and partially-nationalized industries, hurdle will always be the nationality and any entity operating in such industries must requirements of business entities in certain be either majority-owned, or wholly-owned, by industries. The restrictions on foreign equity in Filipino citizens. certain industries are summed up by Philippine All corporations are required to have at least 5 up foreign investment laws as the “Negative List”. to 15 Directors, the majority of which must be LIST A residents of the Philippines. Other entities which Foreign Ownership is Limited By the Constitution and are not incorporated under Philippine law, but Specific Laws nevertheless do business in the Philippines, are ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN THE PHILIPPINES] 171 Industry Allowed Foreign Exploration, Development and Up to 40% Equity Utilization of Natural Resources Mass Media, Except Recording None Ownership of Private Lands Up to 40% Practice of All Professions None Public Utilities Up to 40% Retail Trade, Paid-Up Capital of Less None Ownership, Establishment and Up to 40% than US$2,500,000 Administration of Schools None Cooperatives Culture, Production, Milling, Up to 40% None Processing, and Trading, Except Private Security Agencies Retailing, of Rice and Corn, and None Acquiring Rice and Corn and the Rice Small-scale Mining and Corn By-Products Up to 40% None Utilization of Marine Resources in Contracts for the supply of Materials Philippine Waters, Including The and Goods to Government-owned or Exclusive Economic Zone None Controlled Corporations, Companies, Agencies or Municipal Corporations Up to 40% Ownership, Operation and None Management of Cockpits Project Proponent and Facility None Operator of a Build-Operate-Transfer Nuclear Weapons Trade and Project Requiring a Public Utilities Up to 40% Manufacture Franchise None Up to 40% Biological, Chemical and Radiological Operation of Deep Sea Commercial Weapons and Anti-Personnel Mines Fishing Vessels Up to 40% Trade and Manufacture Adjustment Companies Manufacture of Firecrackers and Pyrotechnics Ownership of Condominium Units, Where the Common Areas in the Private Radio Communications Up to 20% Condominium Project are Co-Owned Network by the Unit-Owners or by a Corporation Private Recruitment for Local or Up to 25% Overseas Employment Lending Companies Up to 49% Up to 25% Contracts for the Construction and Financing companies regulated by the Up to 60% Repair of Locally-Funded Public Securities and Exchange Commission Works, except: Projects covered in R.A. 7718; Investment houses regulated by the Up to 60% and Securities and Exchange Commission Projects which are foreign funded LIST B or assisted and required to Up to 25% Foreign Ownership is Limited By Reasons of Security, undergo international Defense, Risk to Health competitive bidding and Morals, and Protection of Small and Medium Enterprises Contracts for the Construction of Defense-related Structures Industry Allowed Foreign Equity Advertising Up to 30% ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN THE PHILIPPINES] 172 entity generally requires a capital outlay of at Manufacture, Repair, Storage and Up to 40% least US $ 200,000.00, as per Philippine Distribution of Products / Ingredients Requiring Philippine National Police foreign investment laws. This may be Clearance (such as firearms and reduced if the Philippine Department of explosives; may be allowed for non- Science and Technology certifies that nationals if for export) Up to 40% advanced technologies will be involved in the operations of the local subsidiary, or if it will Manufacture, Repair, Storage and Distribution of Products / Ingredients employ at least 50 direct hire employees. Requiring Department of National 2. Domestic Branch Office / Philippine affiliate Defense Clearance (such as tools for warfare; may be allowed for non- Up to 40% The capitalization requirement for a branch nationals if for export) office or Philippine affiliate is the same as a Up to 40% local subsidiary, or US $ 200,000.00, which, Manufacture and Distribution of Dangerous Drugs again, may be reduced, if a certification that Up to 40% advanced technology will be used in the Sauna and Steam Bathhouses, operations of the office, is obtained from the Massage Clinics and Other Like Department of Science and Technology. Activities Up to 40% 3. Representative Office Gambling, Except Those Covered by Investment Agreements with Up to 40% A representative office must be funded, PAGCOR and Operating within Special through an initial inward remittance, with at Economic Zones least US $ 30,000.00 to cover its operating expenses. Domestic Market Enterprises with Paid-In Capital of Less Than 4. Regional Operating Headquarters US$200,000 A regional operating headquarters in the Domestic Market Enterprises which Philippines must be capitalized by no less Involve Advanced than US $ 200,000.00. Technology or Employ at Least 50 Direct Employees with Paid-In Capital 5. Regional Area Headquarters of Less than US$100,000 Establishing a Regional Area Headquarters in 1. Domestic Corporation the Philippines requires a capital expenditure of at least US $ 50,000.00 annually to cover The minimum paid-up capital requirement of operating expenses. a domestic corporation is dictated almost entirely by the industry it seeks to operate in. Qualified foreign investors are issued by the As expected, insurance, finance, and Bureau of Immigration, through the Board of investment companies have some of the Investments, a Special Investor’s Resident most expensive capitalization requirements Visa pursuant to the provisions of the in the Philippines. Furthermore, the amount Omnibus Investments Code of 1987. The of foreign equity, and whether a company Special Investor’s Resident Visa is a special will engage in mostly export sales or non-immigrant visa which allows the Visa domestic sales, will also result in variances in holder to reside in the Philippines for an the capitalization requirements. indefinite period of time, as long as the required qualifications and investment Setting up a Philippine subsidiary of a foreign ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN THE PHILIPPINES] 173 amounts are maintained. laws. However, depending on the vehicle There are generally no restrictions for chosen, there will be tax liabilities for the remitting funds out of the Philippines, as long remittances from the Philippines to foreign as the remittance complies with Philippine jurisdictions. banking, finance, and anti money-laundering ILN Corporate Group – Establishing a Business Entity Series Fall 08 Fall 15 INTERNATIONAL LAWYERS NETWORK MGRA & ASSOCIADOS ESTABLISHING A BUSINESS ENTITY IN PORTUGAL ILN CORPORATE G ROUP [ESTABLISHING A BUSINESS ENTITY IN PORTUGAL] 175 ESTABLISHING A BUSINESS ENTITY IN PORTUGAL I. INTRODUCTION II. TYPES OF BUSINESS ENTITIES Portugal has circa 10,5 million resident inhabitants II.1. General Considerations and Companies Types and most of its population lives in sunny coastal areas. The basic legal framework on Portuguese corporate Important cities include Lisbon, Oporto (in the north), business organization is codified in the Companies Coimbra (in the center), Faro (in southern Algarve), as Code (“Código das Sociedades Comerciais”), the well as Ponta Delgada (in the Azores) and Funchal (in Commercial Registry Code (“Código do Registo Madeira). Comercial”), the Securities Code (“Código dos Portugal is a Republic since 1910, having in force the Valores Mobiliários”), the Commercial Code same Constitution since 1976. The President, the (“Código Comercial”) and the National Companies Parliament, the Government and the Courts are the Registry Office regime (“Registo Nacional de Pessoas representatives of the sovereign country, and both the Colectivas”). President and the Parliament are chosen through There are five different types of commercial general democratic elections. The Government is companies in Portugal. normally formed by the party who wins the election for Parliament. These five different types of companies are the following: the public limited liability company (by The Constitution separates the Legislative power, shares – “sociedade anónima”), the private limited which is generally attributed to the Parliament, the liability company (by quotas – “sociedade por Executive power, which lies with the Government and quotas”), the partnership (“sociedade em nome the Judicial power, which is left to the Courts. colectivo”), the limited liability partnership Portugal entered into European Union in 1986, is part (“sociedade em comandita simples”) and the limited of the Schengen area and adopted the Euro since its liability partnership with share capital (“sociedade creation, as result of an integration process which last em comandita por acções”). milestone is the Treaty of Lisbon. The first two types of companies are by far the most Portugal is also a founding member of the Community common, the last three having proved to be less of Portuguese Language Countries, the international flexible and suitable to modern business needs. organization that aggregates all Portuguese speaking II.2. The Public Limited Liability Company (PLC) countries. As previously mentioned, the PLC (“Sociedade Portuguese main industries include tourism, seafare Anónima” or “S.A.”) is one of the two most common economy, forest, petrochemistry, cement production, investment vehicles used in Portugal with the automotive, electrical and electronics industries, purpose of establishing business and commercial textile, footwear, furniture, beverages & food industry, transactions. It ensures the limitation of leather & cork. Pharmaceutical, IT, renewable shareholders liability to the amount of their energies and aerospace industry are strong upcoming investment in the company - their participation in its sectors. share capital - and qualifies these participations as With modern infrastructures and technologies, negotiable securities. Portugal is nowadays a business friendly jurisdiction, Shares may be listed on the Lisbon Stock Exchange being the right interface to invest in Europe and in (“Bolsa de Valores de Lisboa”) or remain under Portuguese Language Countries, most of which are private commerce. emerging countries with vast natural resources, such as Brazil, Angola, Mozambique and East-Timor. As a general rule, a PLC must be incorporated by a minimum of five individual or corporate founding shareholders. Exception is made, being required only one founding shareholder, when all ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN PORTUGAL] 176 outstanding capital stock is subscribed and held by they have nominal or par value, preferential another corporation since the incorporation. Also, rights to their holders to receive an annual only two founding shareholders are required when payment of not less than 5% of the shares' the State, or a State holding company, owns more par value, payable as a dividend out of than 50 % of the capital stock. distributable profits. If not, the annual Shares can either be nominative or bearer payment is calculated by reference to the (depending on whether the issuer has the ability to value of the issue of the shares reduced of be constantly informed of the identity of the respective holders) and may be represented by its premium, if any. These shares have also book entries or certificates (depending on whether priority over ordinary shareholders in the they are represented by registrations in an account event of company liquidation. If authorized or by paper documents). by the bylaws, corporations may issue non- Shares are mandatorily nominative if (i) they are not voting preferred shares up to a maximum of fully paid up, (ii) by-laws foresee restrictions on its 50% of its registered share capital; transfer, or (iii) shareholders are required under the 2. redeemable preferred shares (“acções bylaws to deliver additional cash or material preferenciais remíveis”) which are contributions to the company. redeemable at a fixed time date or when Except for legal or company bylaws prohibition, the established by shareholders' general issuer may decide on the conversion of securities as meeting. Only shares which are fully paid up to their form of representation. Also, and except for can be redeemable. Redemption must be legal, bylaws or provisions resulting from special made at par value or according to shares conditions established for each issue, bearer shares issue value (in case of shares without par may, at the holder's initiative and expense, be value), unless bylaws provide for the converted into nominative and vice-versa. payment of a premium. Decree-Law 49/2010 of May 19, 2010, has Shares in a PLC are freely transferable, except where introduced in the Portuguese legal scenario, along the respective bylaws set forth restrictions on its with the shares with par or nominal value, shares transferability. These restrictions may consist of a without par value, in order to facilitate capital right of first refusal or pre-emption right in favour of increase scenarios. the remaining shareholders and right of prior consent. With respect to the transfer of shares, a Thus, a share shall have a minimum value of EUR distinction must be made between the transfer of 0,01 (par value or issue value). nominative shares and the transfer of bearer shares. There are two types of shares: The former may be transferred by a written declaration of the owner addressed to the keeper of • ordinary shares (“acções ordinárias”) which the PLC’s share registry. Bearer shares may be entitle holders to dividends and to a portion of transferred by simple delivery of the share the assets upon winding up, subject to the rights certificates, possession of which confers on the attributed to any existing preferred shares. holder all shareholders’ rights. The bylaws may not • preferred shares (“acções preferenciais”) which prohibit the transfer of shares otherwise permitted by law, being that transfer may only be restricted award special rights to their holders, usually within the terms of the relevant legal provisions. broader rights than the ones attributed to ordinary shares. The bylaws may authorize the A minimum capital stock of EUR 50.000,00 is required for incorporation of a PLC. It can be formed PLC to issue two types of preferred shares: either by private subscription of the entire capital 1. non-voting preferred shares (“acções stock or through public subscription of the shares. preferenciais sem voto”) which confer, if ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN PORTUGAL] 177 The share capital of a PLC must be paid up by means company and the possible enlarged liability of the of contributions in cash or in non-monetary assets former. Generally this sort of company is used for (contributions in kind) and the legal minimum small family business. capital must be fully subscribed at all times. A minimum quota capital is no longer required to However, in a PLC, the capital stock does not have incorporate an LTD company (it used to be EUR to be fully paid up at the time of its subscription. 5.000,00). The contribution of each quota-holder Indeed, only a minimum of 30% of each shares’ does not have to be fully paid up at the moment of nominal value must be satisfied at that time. Within the incorporation of the company. Quota-holders five years of the incorporation, the remaining part may defer the payment of their contributions until of capital stock must be fully paid up. the end of the first financial year or until another As a general rule, a PLC is allowed to acquire and date to be set forth in the respective bylaws but no hold its own shares, but only up to a maximum of 10 longer than 5 years after incorporation. The % of its total registered share capital. The voting and minimum value attributed to a quota is EUR 1,00. economic rights inherent to these shares are As a general rule, a quota can only be transferred by suspended as long as they are owned by the private or public deed under the company’s express company itself, except for the right to receive the consent or under court order, unless the correspondent additional number of shares in case prospective transferee is another quota-holder, of stock capital increase by incorporation of transferor's spouse or the following person in line of reserves. succession. This legal regime can be differently Finally, share capital increases, as any other regulated in the bylaws. amendment to the company's bylaws, shall be II.4. The Single-Member Private Limited Companies approved by shareholders' meeting. Nevertheless, (SMLTD) bylaws can authorize the board of directors to decide on share capital increases in cash within As referred above, LTD companies may be certain limits. incorporated by a single partner, whether an individual or another company (“Sociedade II.3. The Private Limited Liability Company (LTD) Unipessoal por Quotas”). The LTD (“Sociedade por Quotas” or “Lda.”) has Some legal limitations are set forth: (i) an individual traditionally been the investment vehicle used in can only be partner of a unique SMLTD, i.e., cannot Portugal for small business, usually of family nature. hold another company of this kind, and (ii) a LTD The partners are jointly and severally liable to fulfil cannot have as sole partner an SMLTD. the company's entire quota capital, but their liability extends no further than that. This type of business This type of company may be incorporated as such entity does not allow participations to be since the beginning or may result from the represented by shares (since capital stock is divided concentration of all the quotas of a regular LTD in a into quotas) and thus may not be listed on the single quota-holder. This does not prevent the Lisbon Stock Exchange. possibility of being converted into a regular LTD if a new partner comes into scene. The private limited liability company incorporation needs only two partners, regardless of being The sole quota-holder may appoint other people as individual or corporate. There may exist, however, managers or manage the company him/itself. companies with a sole partner (individual or a Any agreement between the sole quota-holder and company) which are named “Sociedade Unipessoal the company shall aim the implementation of the por Quotas” and that basically have the same company’s scope and must be executed in written regime as a regular limited liability company but form. Otherwise, such agreements will be deemed with certain particularities with respect to the as null and void, and the sole quota-holder will be relationship between the sole quota-holder and the ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN PORTUGAL] 178 unlimitedly liable for them. some requirements are met, the holding company is allowed to provide technical management services In case the company becomes bankrupt and to all or some of the partially held companies in provided that the sole quota-holder has complied which the SGPS has a minimum holding of 10 % or with the above mentioned rules, his/its personal with which the SGPS has formalized a managerial assets will not be liable for the payment of the subordination agreement. company’s debts. Depending on the type of investment some holding In the remaining aspects, the rules applicable to the companies can be subject to Bank of Portugal regular LTD also apply to this type of company, (“Banco de Portugal”) supervision along with other apart from those which only make sense with regard non-banking financial institutions or to the to a plurality of partners (e.g., general meeting’ Insurance and Pension Funds Supervisory Authority resolutions). (“Instituto de Seguros de Portugal”). Others are II.5. Holding Companies subject to the supervision of the Tax Authority The current legal framework for holding companies (“Inspecção-Geral de Finanças”). is set forth in Decree-Law 495/88, of December 30, Bank of Portugal supervision is mandatory where 1988, as amended. the company holds, direct or indirectly, the majority A holding company must be organized either as a of voting rights in one or more credit or financial PLC (“S.A.”) or as a LTD (“Lda.”) and its corporate institutions. name shall include the reference “Sociedade Regardless of the legal form adopted, it is required Gestora de Participações Sociais” or “SGPS”. that every holding company appoints a certified The sole corporate purpose of a holding company chartered accountant or an audit company. legally permitted is to own and manage capital stock II.6. The Limited Liability Individual Undertaking (shares or quotas) of other companies as an indirect An individual entrepreneur may also limit his liability form of carrying out business activities. Generally, to the firm's registered capital through the the holding company is required to hold a minimum incorporation of a limited liability individual of 10 % of the capital stock (with voting rights) of its undertaking (“Estabelecimento Individual de subsidiaries and must keep such participation at Responsabilidade Limitada” or “E.I.R.L.”) which least for one year. regime is foreseen in Decree-Law 248/86, of August However, this rule is subject to a number of 25, 1986, as amended. limitations. An SGPS may invest in smaller holdings The minimum capital for an EIRL is EUR 5.000, 00, (less than 10 % of the voting rights): two thirds of which must be paid in cash and • up to an amount not exceeding 30 % of the deposited in a blocked account with a local bank investments made in larger holdings; until the deed of incorporation is registered with the • when each participation’s purchasing value is Companies House. Twenty percent of after-tax at least of EUR 5.000.000,00; profits must be allocated annually to a legal reserve until the amount in such reserve corresponds to at • when the purchase results from the target least 50 % of the EIRL's registered capital. company’s merger or demerger; and • when it has formalized a managerial II.7. Branches / Representation Offices subordination agreement with the target A foreign company intending to conduct business company, under which the management of activities in Portugal for more than one year may do the subordinated company’s business so through the establishment of a subsidiary (or affiliate) in Portugal, except if operating under the activities is entrusted to the SGPS. freedom of provision of services. The subsidiary will Under special circumstances and provided that have to vest one of the above outlined types of ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN PORTUGAL] 179 company, and will be an autonomous legal entity Authorities), the company becomes a separate legal with a separate corporate personality. entity capable of having its own assets, rights and obligations. Any foreign company wishing to operate in Portugal without resorting to a subsidiary is legally required The records are kept by the Companies House and are to establish a Portuguese branch (“sucursal”) or of public access. Certificates disclosing the facts other local permanent representation registered for a specific company can be issued at any (“representação permanente”) and to comply with time (the process has been facilitated since corporate the appropriate registration requirements. records are available through web network). Differently from subsidiary entities, branches are All registered corporate facts are also subject to not autonomous legal entities nor do they have a publication in the official website of the Ministry of separate corporate personality, reason why the Justice (http://publicacoes.mj.pt). foreign company will always be liable for its operations and debts in Portugal. In Portugal, companies are not, as a consequence of incorporation, required to have any insurance policies. III. STEPS AND TIMING TO ESTABLISH However, if the company has or will have any Anyone intending to incorporate a Portuguese employees, it must have a workers accidents company must apply for the approval of the insurance policy. Moreover, the carrying out of certain company's proposed corporate name and for the activities will render companies subject to specific granting of a tax payer number with the National mandatory insurance requirements. Companies Registry Office. Natural persons who Company shall register itself with the Tax Authority intend to incorporate a company must also apply for a and the Social Security Services within 15 days after Portuguese tax payer number with Tax Authorities. incorporation and must serve a notice to Portuguese Individuals from outside the EU must have a tax Labour Department whenever a worker is hired by the representative in Portugal in order to be eligible to be company. registered with Tax Authorities. With the new procedures recently implemented by Since the last reform of the Companies Code (2006), the Government (called “Simplex Program”), it is and as a general rule, public deed of incorporation is possible to conclude this process in one day. no longer mandatory being sufficient a private deed of incorporation, provided that the signatures of the IV. GOVERNANCE, REGULATION AND ONGOING founding partners are duly certified by a public notary MAINTENANCE or a lawyer. In addition, the referred Reform has PLC's management and supervision must take one of introduced the incorporation of companies through the following three forms. The first one, most electronic tools (e.g., internet). commonly used in Portugal, refers to an organization Before the execution of the company's incorporation formed by a board of directors (“conselho de agreement, the capital stock should be deposited in a administração”) and a sole supervisor or supervisory Portuguese Bank, except in case of deferred board (“fiscal único” or “conselho fiscal”). A second contributions in the terms mentioned above. Also, in form of organizing corporate management consists of case the company's capital stock is not fully paid up in a board of directors containing an audit committee cash, the relevant assets (contributions in kind) should (“comissão de auditoria”). It also includes a certified be subject to prior evaluation by an independent chartered accountant (“revisor oficial de contas”) for chartered accountant, whose report must be referred supervision functions. Finally, there is a third form, to in the incorporation deed. which comprises an executive board of directors (“conselho de administração executivo”), a general Afterwards, company's deed of incorporation must be and supervisory board (“conselho geral e de registered with the Companies House (“Conservatória supervisão”), as well as a certified chartered do Registo Comercial”). Upon registration and other accountant. In addition, a PLC whose shares are listed official communications (as Tax and Social Security ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN PORTUGAL] 180 on stock exchange market must appoint a secretary the company can benefit from this new way of (“secretário”). gathering provided that the respective bylaws do not prohibit such mechanism. PLCs with a maximum registered share capital of EUR 200.000,00 may choose to be managed by a sole In a PLC, there is a minimum presence of voting share director (“administrador único”) rather than having a capital for shareholders to approve valid resolutions - board. the gathering quorum. For certain relevant decisions, such as bylaws amendments, stock capital increases or On the other hand, the shareholders of a PLC gather reductions, mergers, spin-offs, liquidation and winding and vote resolutions in general meetings. They must up, etc. it is mandatory that the quorum represents gather ordinarily once a year or whenever they are one third of the entire share capital on first call. convened by the chairman of the general meeting upon request of the management or the supervisory Resolutions are passed by a simple majority of votes body or upon request of one or more shareholders cast of all those attending/represented in the holding at least 5% of the entire share capital (special shareholders' meeting, except for those relevant meetings). Under specific circumstances, the law also decisions mentioned in the preceding paragraph allows the audit committee, the general and where a qualified majority of two thirds of the votes supervisory board, the supervisory board and the cast is required. Bylaws can provide for higher court to summon shareholders for a general meeting. quorums as well as qualify voting requirements. The shareholders' meetings must be convened by a Differently, LTD’s management comprises one or more notice published in the official website of the Ministry managers (“gerentes”). As a general rule, an audit of Justice (http://publicacoes.mj.pt/) or, in certain committee or a sole supervisor is not mandatory, but cases where all shares are nominative and the bylaws the company is allowed to have one. Indeed, the foresee such possibility, by registered mail or by e- accounts on this type of company do not need to be mail to shareholders having expressed their prior checked by a certified chartered accountant, unless written consent. The notice shall be published with at two of the following limits are exceeded during a least 1 month or sent 21 days in advance as to the period of two consecutive years: date of the general meeting, and shall mention, • total balance sheet value: EUR 1.500.000,00; amongst other information, general meeting's agenda. • total net sales and other income: EUR Notwithstanding the above, a general meeting may be 3.000.000,00; and convened and held without complying with the referred prior formalities, provided that all • Average annual workforce: 50. shareholders are physically present or duly The majority of the regime of the PLC is applied to LTD represented and unanimously express their consent to general meetings. The main exceptions refer to gather and take resolutions on a particular subject summons’ formalities -notice must be sent by the (universal meetings). In addition, Portuguese law also manager to quota-holders by registered mail 15 days allows shareholders to pass resolutions without all in advance as to the date of the general meeting – and attending physically and simultaneously the general to voting quorum for bylaws amendments and meeting, provided that the resolutions at stake are winding up of the company - where a qualified approved by unanimity of the votes and laid down in majority of three-quarters corresponding to the writing. capital stock is required, unless the bylaws foresee a Last reform of the Portuguese Companies Code (2006) higher majority. introduced the possibility of holding general meetings As far as requirements for local shareholders/directors by resorting to telematic means (combination of are concerned, please note that currently all telecommunications and informatics – transmission of individuals or corporations holding a participation in a voice and image in simultaneous is usually required) Portuguese company, as well as any director or also called “virtual meetings”. The shareholders and manager of a Portuguese company must have or apply ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN PORTUGAL] 181 for a national taxpayer number with our local lower costs and promoting safety and speed of authorities. business, revolutionized the licensing procedure for certain business premises, by creating the Zero Finally, a brief note concerning licensing procedure: Licensing (“Licenciamento Zero”) figure. prior to the starting up of any commercial activity in Portugal, the Municipality should be consulted to Licenciamento Zero is therefore intended to reduce ascertain whether the planned activity is subject to administrative costs and eliminate licenses, permits, any special licensing procedure. inspections and a priori constraints for specific activities, replacing them with systematic actions of Thus, in case the commercial establishment needs a surveillance and accountability mechanisms a particular license for operating, the Municipality is the posteriori on the economic agents. entity responsible for monitoring this process. In fact, Municipal authorities generally have sole jurisdiction The simplification begins with the creation of a on licensing commercial establishments. simplified procedure for the installation and modification of food and beverage establishments, Commercial licensing is governed by the legal regime trading goods, services and storage. for construction in urban sites, as set out in Decree- Law 136/2014, of September 09, 2014, as amended. As a result, previous administrative permission is now completely replaced for a mere prior notification There is a special regime for commercial served to the “balcão único electrónico” (e- establishments and warehouses handling food administrative spot), also called “balcão do products, as well as other non-food commercial empreendedor” (entrepreneur spot) accessible establishments and service providers whose through the website www.portaldaempresa.pt. operations involve health and safety risks. These regulations are set out in Decree-Law 48/2011, of As mentioned, certain licensing procedures are April 1, 2011. simplified or eliminated, such as: Also, the installation and operation of these • private use of the municipal public domain for establishments must comply with the requirements certain purposes, such as installing an awning, set forth in specific laws, depending on the products an exhibitor or other support information, the traded. placement of a planter or a waste container; As a general rule, owners are required to obtain • map of office hours and its amendments; authorisation from the Municipality or Trade • registration and posting of commercial Associations with regard to opening hours, and they advertisements, subject to the rules of public must inform the “CRSS - Centro Regional da Segurança space occupation. Social” (Regional Centre for Social Security) of any workers hired before they start working. Furthermore, the said Decree-Law eliminates the The application for registration of commercial licensing procedure for certain economic activities, establishments must be submitted with the “DGAE – according to which a system of prior control is no Direcção-Geral das Actividades Económicas” longer applicable, such as the sale of tickets for public (Directorate-General for Economic Activities) or the shows in commercial establishments and the nearest “DRE – Direcção Regional do Ministério da performance of auctions in public places. Economia e da Inovação” (regional office of the Ministry of the Economy and Innovation) or with the The installation of an establishment included in the list relevant Trade Association. annexed to Decree-Law 48/2011 is now only subject The mentioned Decree-Law 48/2011, of April 1, 2011, to a prior notification addressed to the Mayor and to within the scope of the Simplex Program and aiming the General Director of Economic Activities. With this to improve the responsiveness of Public Administration in meeting the needs of citizens, with prior notice and payment of the fees due, the owner is ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN PORTUGAL] 182 allowed to immediately open and operate the impression to anyone that decides to live in establishment, exploit the warehouse or begin its Portugal. All major international studies activity, as applicable. consider Portuguese cities on the top of the ranking for conducting events and Also, the modification of an establishment due to the conferences. change of the activity/service is only subject to a prior notice submitted with the “balcão do empreendedor.” iv. Infrastructure. During the past decade, As per the closure of business, it must be reported in Portugal has invested heavily in modernizing the following 60 days. its communications infrastructure. The result was an extensive network of land, air V. FOREIGN INVESTMENT, THIN CAPITALISATION, and maritime route facilities. RESIDENCY AND MATERIAL VISA RESTRICTIONS We may also enumerate ten other additional V.1. Foreign Investment reasons to invest in Portugal: Foreign investment in Portugal has strongly • One of the lowest operational costs in increased in recent times, especially since Portugal Western Europe; became a member of the European Union. The necessary adjustments that were made so that • A founder member of and full participant in Portugal could be included in the founding group of the European Monetary Union; countries of the European currency had a strong • A superb investments track record, with many effect on the Portuguese economy. firms involved in new projects ; This economic stability, together with the tourism’s • One of Europe’s youngest and most potential has been decisive for investment in enthusiastic workforces, with first rate Portugal. In addition, Portugal’s traditional presence training facilities; in Africa and Brazil, is an advantage in the establishment of commercial contacts and business • One of the world’s best and most flexible opportunities across these expanding markets. incentives packages; Among others, note four major advantages to invest • High levels of productivity growth in both in Portugal: manufacturing and services; i. Strategic access to markets. The • A wide range of sites and buildings at highly combination of Portugal’s economic competitive prices that are ready to use; opening, strong ties with the EU and unique • High quality support services for investors, geostrategic location, make it a natural both during or after investment; gateway to world markets. Portugal’s ties with the African continent, Brazil and • One of Europe’s best records for industrial transatlantic link with the USA provides a relations; low cost effective internationalization base. • A high quality of life with one of the old ii. Cost competitive, qualified and flexible continent’s lowest crime rates. workforce Portuguese employees are Also, there is a principle of equal treatment known for their versatility and commitment between foreign and domestic investors and thus to work, along with a positive attitude there are no entry restrictions for foreign capital. In towards the adoption of new technologies fact, the guiding principle of the Portuguese legal and practices. framework is to prohibit discrimination of the iii. Excellent environment to live and work. The investment on the grounds of nationality. country has safe urban centers and suburbs. Likewise, it is not required to have a national This environment that promotes a freedom partner and there are no specific obligations for ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN PORTUGAL] 183 foreign investors to comply with. There are also no prerequisites established under Portuguese law. restrictions on the profits and/or dividends Included in this category are those concerning the repatriation. production of weapons, munitions and war As Portugal is a member state of the European materials or those which involve the exercise of Union, an entrepreneur planning to invest in the public authority. They must comply with legally country will neither have to submit to different rules mandatory conditions and requirements, thus from those governing domestic investment followed requiring specific licenses. entrepreneurs. Therefore, as a general principle, Finally, it should be noted that some activities are there is no differential treatment between foreign subject to authorization restrictions before starting and domestic investment in Portugal. their operations in our territory, such as banking Notwithstanding the above, some reporting and insurance activities. obligations must be fulfilled: foreign investors in Foreign companies are also liable for taxes and Portugal are bound to report to the investment other tariffs, including Income Tax (“IRC”), Value authorities within 30 days of the date of the Added Tax (“IVA”), Vehicle Tax, Property Tax (“IMI”), investment. Also, in what regards an investment in among others. Madeira or in the Azores, a foreign investor must register with the Planning and Finances Ministry. Companies must also respect deadlines regarding social security payments, as well as payments In general terms, foreign and local companies are payable by its employees. free to invest in any industry. However, there may be specific requirements, such as the granting of a The Treaty of the European Union establishes the concession contract when performing activities for free movement of capital, resulting in an overall the public administration sector. framework of foreign investment within the EU, under the limits set by the subsidiary principle Therefore, it is prohibited for private firms, except which is without prejudice of the legislation of when licensed by a public entity through an certain Member States. administrative contract, the following economic activities: All restrictions on capital movements and payments between EU Member States are prohibited. - Drinking water collection, treatment and Member States may, however, take justified distribution, and disposal of urban waste measures with the aim of preventing breaches of its water, both through fixed networks; and solid own legislation, including taxation and supervision waste collection and treatment in the case of of financial institutions. multi-municipal and municipal systems; EU countries may also provide procedures for the - Postal communications that constitute the declaration of capital movements for administrative public postal service; or statistical purposes, and take other justified - Rail transportation operated for public actions on the grounds of public policy or public service; security. However, these measures and procedures should not constitute a means of arbitrary - Seaports operation; discrimination or a simulated restriction on the free - Exploitation of natural resources of the subsoil movement of capital and payments. or that may be considered public domain. V.2. Thin Capitalisation Likewise, foreign investment projects must be compatible with specific legal requirements if, in any Generally, Portuguese law allows companies to be way, they could affect public order, safety or health. thinly capitalised, except for certain types of Projects of this nature require an assessment of regulated entities which require a certain amount of compliance with statutory requirements and paid-up share capital to be licensed to trade (e.g., ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN PORTUGAL] 184 banks and insurance companies). Holders of a residence permit for investment activity have the right to family reunification, access In what concerns taxation rules for thin to permanent residence permit, as well as the capitalisation, please note that where the Portuguese nationality, in accordance with the indebtedness of a Portuguese taxpayer to a non- legislation in force. resident entity in Portugal or in an EU country with whom special relations exists (i.e. special relations In fact, nationals of other countries who decide to exist if the non-resident entity has or can have engage in an investment activity, personally or substantial influence, directly or indirectly, in the through a company, which lead, as a rule, in the management decisions of the resident entity) is completion of at least one of the following deemed excessive, the interest paid in relation to situations in the domestic territory and for a the part of the debt considered excessive will not be minimum period of five years may benefit from such deductible for the purposes of assessing taxable visa: income. 1) Transfer of capital in an amount equal to Excessive indebtedness occurs where the value of or more than 1 million Euro; the debts in relation to each of the entities is more 2) Creating at least 10 jobs; than twice the value of the corresponding shareholding in the taxpayer’s equity. Any 3) Acquisition of property of a value equal or disallowed interest is not re-qualified as a dividend more than 500.000 Euro. for withholding tax purposes. This means that This situation also covers holders of capital stock in withholding tax should be levied on the full amount a company based in Portugal or in another EU of the interest, including the interest related to the Member State with a permanent establishment in part of the loan that exceeds the 2:1 debt-to-equity Portugal, provided their contributory situation is ratio. regularized. In cases where the 2:1 ratio is exceeded, the *** taxpayer may be able to avoid adjustments under the thin capitalisation rules where it can be shown The information contained in this “Guide” is provided for informational purposes only and should not, under any circumstances, be understood as that the same level of indebtedness could have legal advice on any subject matter. Recipients of this document, clients or been obtained with similar conditions from an otherwise, should not act or refrain from acting on the basis of any content independent party. Such evidence must be kept in included in the document without seeking the appropriate legal advice the annual tax file of the company for 10 years. This from an attorney on their particular facts and circumstances. Mouteira option is not applicable where the indebtedness is Guerreiro, Rosa Amaral & Associados, Sociedade de Advogados R.L. expressly disclaims all liability for any possible damages caused by actions towards an entity resident in a territory considered taken or not taken based on any or all the contents of this document. by Portuguese law as a territory with a clearly more favourable tax regime. This "Guide " and its contents are provided "AS IS" without warranty of any kind, either expressed or implied, including, but not limited to, the implied V.3. Residency and Material Visa Restrictions warranties of merchantability, fitness for a particular purpose, or non- Today’s law open the possibility for foreign investors infringement. to apply for a residence permit for investment Reproduction, distribution, republication, and/or retransmission of material activity, who have regular input into national contained within this “Guide” is prohibited without prior written permission territory, through a transfer of capital, job creation of Mouteira Guerreiro, Rosa Amaral & Associados, Sociedade de Advogados R.L. or purchase of real estate. ILN Corporate Group – Establishing a Business Entity Series Fall 08 Fall 15 INTERNATIONAL LAWYERS NETWORK LIDINGS LAW FIRM ESTABLISHING A BUSINESS ENTITY IN RUSSIA ILN CORPORATE GROUP [ESTABLISHING A BUSINESS ENTITY IN RUSSIA] 186 ESTABLISHING A BUSINESS ENTITY IN RUSSIA Russia is the largest country in the world in terms the last several years Russia has become a large of size, having a vast territory of 17.1 million presence in the global economy. square kilometers. It shares borders with many European and Asian countries such as Norway, Finland, Estonia, Latvia, Lithuania, Poland, Belorussia, Ukraine, Georgia, Azerbaijan, Kazakhstan, China, and Mongolia (plus sea borders with the United States and Japan). Its population in the beginning of 2010 numbered 141.9 million people. Russia is a federal republic comprised of 85 constituent entities. There are six categories of federal constituent entities that represent equal Russian law is a civil law system. Therefore, the members of the federation. They include 22 main regulations in the area of business and republics, 46 regions, one autonomous region, 9 economic relations are contained in different territories (krais), 4 autonomous okrugs and three legislative acts, adopted mainly at the federal cities of federal significance: Moscow, St. level by the Parliament (“State Duma”), and Petersburg and Sevastopol. subordinate acts issued by various governmental The 8 years of Vladimir Putin’s presidency from authorities and institutions. Legislative power is 2000 to 2008 was a period of rapid economic exercised by a bicameral Federal Assembly, which growth incurred by an increase in commodity consists of the Federation Council (upper house) prices and accompanied by a significant increase and the State Duma (lower house). in living standards. Local consumption was fueled 1. Types of Business Entities by the introduction of consumer loans and mortgages. The country was exposed to the crisis Foreign investors may conduct business activities that started in the final quarter of 2008, as in the territory of Russia using one of the forms of national Gross Domestic Product decreased to legal entities stipulated by the law. 7.8% for 2009, however by the year 2013 a The law establishes an exhaustive list of forms for number of Russian areas had mostly returned to commercial entities. It includes partnerships pre-crisis levels. (general partnerships and limited partnerships), Despite foreign investments falling in 2009 by 21 companies (limited liability companies, public percent to USD 81.9 billion, already the beginning joint-stock companies and joint-stock companies of 2010 resulted in an economic revival which led (non-public), as well as peasant (farm) enterprises to further growth and development in various producers’ cooperatives, business partnerships industries. and state and municipal unitary enterprises. State and municipal unitary enterprises are commercial The Russian government focuses on the creation organizations in which the ownership of assets of a modern, innovative economy. The current does not pass to the organization itself. The trend in Russian government activity is making assets of a state-owned or municipal enterprise the country and its economy more attractive to are under government or municipal ownership; foreign investors and less dependent on the the enterprise has the rights of administrative country’s huge, but exhaustible resources. Within ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN RUSSIA] 187 management or operational control. Only state- participatory interest. Participatory interests may owned and municipal enterprises can be set up in be paid in various forms including cash, securities, the form of unitary enterprises. The unitary assets, and rights. The forms of contribution to enterprise is managed by its director, who is the charter capital can be limited if provided for appointed by the owner (i.e., state or municipal in the Charter. The Charter or corporate authority) or the body authorized by the owner, agreement of an LLC may provide for a non- and is accountable to them. In the late 1990s, the proportionate distribution of members’ rights to government decided to end this form of their shares provided that this information is organization. However, many of these enterprises included in the unified state registry of legal still exist. entities (EGRUL). Most common forms of business entities that are Specific legislation can stipulate larger amounts of used by foreign investors in their commercial charter capital depending on the business activities in Russia as well as a description of the activities which will be exercised by the LLC (or steps for their establishment and registration are any other legal entity). For example, in order to set out below. obtain a license for the retail of spirits and wines 1.1 A description of the types of entities (except beer) depending on the region of the available for conducting business Russian Federation, the LLC could be obliged by regional state authorities to have charter capital Limited Liability Company of no less than RUB 1,000,000 (approx. 25,000 A limited liability company (“obshestvo s USD). ogranichennoy otvetstvennostyu” or “OOO” in The charter capital of the LLC is payable within Russian) (the “LLC”) is the most widely used form four months from LLC incorporation date. Once of business entity according to official state the charter capital is paid in full it may be statistics. It is a non-public company. Аn LLC is increased or decreased by resolution at a general allowed to engage in most business activities. The participants’ meeting. An increase of the charter charter capital of an LLC is divided into shares capital may be implemented (participatory interests) that are not actually on the account of the company’s assets, the recognized as securities. Generally, a participant’s secondary investments of participants or the liability is limited to the amount of his investment contribution of third parties admitted to the LLC. in the charter capital, i.e. to his participatory Charter capital decrease requires the notification interest. The LLC is regarded as a simplified of all creditors of the LLC. business entity and the least burdensome, as the rules governing an LLC’s internal corporate Joint-Stock Companies relations are mostly of nature. An LLC may have A joint stock company (a “JSC”) (“aktsionernoe no more than 50 participants and LLCs with sole obshestvo” in Russian) is a commercial corporate participants are not prohibited. entity entitled to carry out most business The minimum charter capital of an LLC amounts activities. Unlike an LLC, the charter capital of a to RUB 10,000 (approx. 250 USD) and is divided JSC is divided into shares recognized as securities. into participatory interests. There is no Thus, a wide range of rules related to capital requirement as to the minimum size of each markets and securities applies to JSCs. Moreover, participant’s contribution but the Charter of the corporate legislation applicable to JSCs appears to LLC may provide for one member’s maximum be more imperative and precise. ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN RUSSIA] 188 In accordance with the Federal law No. 99-FZ are subject to capital market regulations. dated 05 May 2014 “On amending chapter 4 of Ordinary shares grant the shareholder the same part one of the Civil code of the Russian corporate rights as a participant in an LLC: Federation and on recognizing inoperative management (voting) rights, the right to obtain separate provisions of the legislative acts of the information about the corporation’s activities, Russian Federation” which introduced significant and the right to receive the declared dividend and amendments to the current civil legislation there liquidation quota. Preference shares, as a general are two types of JSC: rule, are “non-voting” but may become voting in - public joint stock company (PJSC) in case (a) it certain cases specified by law. performs public placement of shares (bonds) or The number of a shareholder’s votes is (b) said shares (bonds) are publicly listed or (c) its proportional to his stake, reflected in the register Charter and name refer to its public status; of shareholders containing information about - non-public joint stock company, named “joint- each registered shareholder including the stock company” (NJSC) if it doesn’t meet number, category, and classes of shares held. The abovementioned criteria of the PJSC. Charter or corporate agreement of NJSC may The PJSC and NJSC differ in charter capital provide for a non-proportionate distribution of amount requirements, requirements on the members’ rights to their shares provided that this number of shareholders, public placing limitations information is included in the unified state issues, the preferential rights of shareholders, registry of legal entities (EGRUL). Like participants and requirements on information disclosure. A in an LLC, shareholders in a NJSC possess a pre- PJSC may have an unlimited number of emptive right to purchase shares sold to third shareholders. Shareholders in a PJSC are entitled parties at the same price. Shareholders in both to freely alienate their shares. The number of types of JSC have a pre-emptive right to purchase shareholders in a NJSC should not exceed fifty, newly publicly issued shares pro rata to their otherwise it must be transformed into a PJSC, and existing stakes. the shareholders of a NJSC may benefit from Partnership preferential rights on alienated shares. Partnerships (“tovarishestvo” in Russian) are The minimum authorized capital for an PJSC is considered less formal business entities, and are RUB 100,000 (approx. 2500 USD), whereas the actually less widespread. A partnership means: minimum authorized capital for a NJSC is RUB joint ownership, joint management and joint 10,000 (approx. 250 USD) Both PJSCs and NJSCs profits. The Civil Code distinguishes between Full are entitled to issue ordinary and preference (no (“polnoye” in Russian) and Limited more than 25%) shares. Shares of a particular (“tovarishestvo na vere” in Russian) partnerships. type should be of equal nominal value. NJSC A limited partnership may have two types of shares are not subject to public placement and members: partners (full partners) and circulation, but both PJSCs and NJSCs are entitled contributors (limited partners). The number of to issue bonds. Issuance of any securities, as well limited partners must be no more than 20 people, as their consolidation, conversion or division, otherwise it must be transformed into a company require certain corporate approvals, in most cases within one year (if not, it is subject to liquidation – by an extraordinary resolution at a general upon court’s decision). Full partners are fully meeting. At the same time, all such procedures liable for their partnership obligations. Limited ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN RUSSIA] 189 partners bear liability the same way as LLC partnership has limited capability in the sense participants do (i.e. limited by their share in the that it is not allowed to establish other legal capital), but are not entitled to participate in entities (except non-profit unions and management. Only commercial entities and sole associations). Neither can a business partnership proprietors may act as full partners, while there issue obligations or other equity securities. are no such limitations for limited partners. In Russian Law defines the formation of pooled addition, full partners may participate only in one capital in business partnerships by analogy with partnership as full partners. full and limited partnerships. Contributions to the In Russia, a partnership should create a pooled pooled capital can be assets, monetary funds, (joint) capital, which consists of all tangible and proprietary rights and other rights having intangible property contributed by partners (and monetary value. However, securities may not be by limited partners if applicable). There is no contributed to its capital, except for bonds issued requirement on the minimum amount of pooled by certain companies included in a special list capital. Profits and losses are distributed among maintained by the Bank of Russia. the partners pro rata their interests in the pooled There are no minimum pooled capital capital. Both full and limited partnerships are not requirements for business partnerships. entitled to issue any securities. Partners’ interests should be defined in the The ownership stakes of all partners are equal, register of the business partnership. Partners’ unless agreed otherwise in the Foundation interests in the pooled capital may be subject to Agreement. If a partner drops out of the transactions. The procedure of concluding such partnership, he should be given the monetary or transactions is mostly determined by property equivalent of the current value of his Management Agreement. Partners enjoy pre- interest. For the alienation of a share in emptive rights to purchase other partner’s partnership to third parties or another partner, interest (this rule may be rescinded by the consent of all other partners should be Management Agreement). obtained. Representative Offices and Branches Business Partnership Foreign companies are able to start a business in A business partnership (“hozyaistvennoye Russia through a branch (“filial” in Russian) or a partnerstvo” in Russian) is a newly established representative office (“predstavitelstvo” in form of business entity, which was introduced by Russian). According to the Civil Code, both the Federal Law “On business partnerships” that branches and representative offices are not became effective starting from the 1st of July acknowledged as legal entities, but recognized 2012. This form must be distinguished from the only as subdivisions of their head company above described forms of full and limited (including foreign companies) (“subdivisions”), partnerships. From the legislative standpoint, which are located in a place other than the head business partnerships are intended to operate as company’s office. The activities of representative an SPV in the course of innovative activities offices and branches are maintained by the head (including venture activities). A business company, which is to provide assets and to be partnership is determined by the law as a fully liable as well. commercial organization created by one or more These two kinds of subdivisions differ in the persons that is managed by the participants of functions they are supposed to implement. A the partnership or other persons. A business ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN RUSSIA] 190 representative office is entitled only to represent can also remain in effective control by using, in and to protect the interests of the head company particular, their preferential right to acquire and is supposed to be engaged in non-commercial transferred interest in the authorized capital. A activities. A branch, in turn, is entitled to perform NJSC has lots of similarities with an LLC, and the any of the head company's functions, including main difference is in the composition of the but not limited to representative office functions, charter capital: shares as securities in a NJSC on behalf of the head company. In particular, a compared to participatory interests in an LLC. A branch is generally taken to be engaged in NJSC provides a substantially higher level of commercial activities with subsequent confidentiality, but corporate risks are also deprivation of profit. higher. A PJSC is a form of public organization—its 1.2 Matters to be considered when choosing a main purpose is to attract investment. It requires particular business entity type large material and organizational expenditures and assumes more complicated mechanisms of An investor should answer the following company management and decision-making by questions when deciding which legal structure to regulatory bodies. If the founder cannot decide employ in his or her business: whether the company will be public at its Constitutive aims (to make profit or engage establishment, but doesn’t wish to lose such a in socially oriented activities) possibility later on, it is better to choose a NJSC as opposed to an LLC, as the procedure for changing Plans of business development (to form a the business legal structure from a NJSC to a PJSC public company and attract investors, or run is simpler. an independent company and not borrow any funds) Pursuant to amendments to the Civil code of the Russian Federation standard charters of legal Business holders’ rights (their participation entities adopted by the authorized body can be in management, their level of involvement used (however the forms of such standard in business development) charters have not yet been developed by the Confidentiality of business registration authorities). Level of defense against corporate attacks If the company’s aims change, it is possible to hold a reorganization (for tax optimization, Tax planning increased transparency, as well as its Starting expenditures capitalization): to form a holding company, to enlarge or diminish separate companies, to There are no strict advantages or privileges to any render merger and acquisition transactions, etc. form of business organization. Tax planning is performed individually depending on If the purposes of establishing a legal presence in entrepreneurial business and other factors. Russia are rather limited, it might be reasonable to consider opening a representative office that The choice of business legal structure depends on will perform only general marketing tasks. the goals of its incorporators. The LLC is, Despite its accreditation procedure being rather apparently, the simplest model both in terms of time consuming and substantially more expensive its incorporation procedure and its further than the incorporation of an LLC, in the long term functioning (there is no requirement to register the representative office will enjoy the the issuance of shares; therefore, the founders advantages of less administrative formality and don’t incur costs related to this). The participants ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN RUSSIA] 191 bureaucracy when receiving work permits for its participatory interests should be paid within 4 foreign employees, easier funding procedures, months after the time of state registration. At the and even some tax exemptions. Having similar moment of registration no participatory interests benefits, a branch could also be a convenient and need to be paid. suitable option for foreign investors who plan to LLC Incorporation Procedure start certain real business activities (e.g., production, maintaining warehouses, rendering In compliance with the provisions of the Law on services, etc.) right away. However, it should be registration, the incorporation procedure for taken into account that both of these forms are legal entities is comprised of the following less flexible for further extension of foreign steps. The first step consists of the preparation business in Russia and are limited in some of a full set of incorporation documents to be business opportunities that are available to local submitted to the registering authorities, i.e. legal entities. Russian Tax authorities. LLC incorporation documents consist of an application for LLC In any case, while starting up a business and later incorporation with the duly verified signature on while running it, it is essential to strictly follow of the applicant, the resolution on all procedures as stipulated in the legislation. This establishment, the LLC's future Charter, a will not only prevent claims from state stamp duty payment notice, and a certificate of authorities, but will also increase the company’s charter capital payment. The legal address of capitalization and ease further business the future LLC shall be proved by a warranty operations and development. letter from the lessor and its ownership The next section will divulge in more detail the certificate for the rented premises. main steps required to establish certain forms of For a non-resident applicant, incorporation legal entities in the territory of Russia. documents include a notarized translation of the 2. Steps and Time required for Establishment non-resident applicant’s passport (unless the Limited Liability Companies documents are lodged by an authorized person acting pursuant to Power of Attorney). A An LLC may be established at foundation or notarized translation of the apostilled extract through the reorganization of a currently existing from the Trade register of foreign companies entity. An LLC is established on the basis of a acting as participant(s) in the future legal entity is Foundation Agreement and the Resolution of a also required under the law. foundation meeting (or the Resolution of the sole founder), but, as with all other legal entities, is The presence of the shareholder’s appointed considered incorporated from the date of its state official (i.e., acting by virtue of bylaws and not registration. The procedure of LLC establishment power of attorney) in Russia is recommended at usually takes from two to four weeks and includes the time of filing for state registration. If that is registration with the tax authorities and with non- not possible, the applications may be signed budgetary pension and insurance funds and abroad, apostilled, translated, and then filed by statistics authorities, the creation of a seal, the post, though that will significantly increase the opening of bank accounts, the appointment of a duration of the process. General Director and some other internal Upon the submission of the full set of LLC corporate actions. LLC registration does not incorporation documents to the Tax authorities, require any securities issuance procedures, but the registration of the legal entity in Russia ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN RUSSIA] 192 takes five working days starting from the date with the balance payable in full within the first of the documents' submission to the Russian year. Tax Authorities. The legal entity's incorporation Individuals and legal entities may be the founders documents can be collected from the Tax of a JSC. A company’s foundation document, i.e., authorities by an authorized person acting its charter, must include information on the pursuant to Power of Attorney. The second company's name, address, the size of its charter step consists of the registration of the newly capital, the quantity, nominal value and established legal entity with the Statistics categories of its shares as well as the classes of authorities and non-budgetary funds. Said preferred shares issued by the JSC. procedure includes submitting certified copies of the legal entity’s incorporation documents to Partnership Mosgorstat and the Pension and Social The constitutive document of a partnership is the insurance funds and obtaining confirmation of Foundation Agreement, which should contain the registration. This step usually takes no detailed clauses on the amount of pooled capital, more than 1-2 working days from incorporation. on the partners’ shares and the order of their The third step consists of opening an operating change, etc. The registration process is similar to bank account. that of an LLC as described above. Opening the operating account takes around 3- Business Partnership 5 working days upon the submission of the full set of documents on the newly established Procedures of establishment, reorganization and legal entity depending on the bank’s liquidation applicable to business partnerships requirements. Participatory interests in are simplified. The establishment of a business monetary form may then be paid on the partnership is implemented by at least 2 and no operating account of the company (within 4 more than 50 persons (either individuals or legal months since the moment of LLC’s registration). entities) by the decision of a partners' (founders') meeting, which should, at the same time, adopt a The newly established legal entity is obliged to Charter. The establishment of a business notify tax authorities of the opening of the partnership through the reorganization of an bank account within seven days of its opening existing legal entity (or entities) is restricted. The date. The same applies to notifying the pension statutory document of a business partnership is fund and social insurance fund. the Articles of Association. A business partnership Joint Stock Company is governed in compliance with a partnership management agreement entered into by the The establishment and state registration of a JSC partners. This agreement is verified and kept by is not significantly different from that of an LLC. the notary establishment. Nonetheless, the establishment of a JSC is closely connected with stock issuance procedures aimed Taking into account that the law introducing at constituting the charter capital. At the moment business partnerships was enforced only in 2012, of state registration, a JSC is not required to have only a few entities of that legal form have been it paid in at all, but the placement of stock should established so far and some aspects of their be implemented within one year after its incorporation procedure will be clarified at a later registration. In contrast to LLC founders, the date. founders of a JSC must pay at least ¾ of the JSC charter capital by the time of state registration, ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN RUSSIA] 193 Establishment of RO and Branch mother company on opening of branch or Both subdivisions should be founded and representative office; terminated on the basis of the head company’s application shall include certain documents charter and the statements of a special local act. enclosed to it (the list of the documents will In accordance with Russian legislation a be adopted by the authorities), as well as representative office and branch of a foreign legal certified by the Chamber of Commerce and entity in Russia may be opened without any Industry of the Russian Federation (CCI) data special restrictions. For confirmation of the on the number of foreign employees of a official status of the representative office or branch or representative office; branch it is necessary to undergo an accreditation term for making a decision on accreditation by 18 procedure with the State Registration Chamber . the FTS is 25 business days; Thus, the opening of branches and representative -document on introduction of entry to the offices consists of several stages, specifically: the Register constitutes a proper confirmation of accreditation of a branch or representative office accreditation; with the State Registration Chamber, and the accreditation denial is possible not only in registration of a branch or representative office case of inconsistencies in the submitted with the tax authority within 30 calendar days of documents or violation of the term for their the date of the commencement of its activities in delivery, but also for the reason of 19 the Russian Federation . contravention of branch or representative The accreditation of a representative office is office opening purposes to the legislation, as issued by a registration body for 1, 2 or 3 years well as in case such purposes threatens the with the possibility of extending the term (for 1, 2 sovereignty, political independence, territorial or 3 years as well) on the basis of an application integrity, national interests of the Russian from the foreign head company. In contrast, Federation; branches of foreign companies are subject to 1, 2, registration of changes to the Register is 3 or 5-year accreditation. performed within 10 business days from the Starting from 01 January 2015 the accreditation day of delivery of proper documents to the procedure will change due to enactment of the FTS. Federal law dated 5 May 2014 N 106-FZ "On The amendments will come into force on 1 introduction of amendments to the particular January 2015 except for provisions on legal acts of the Russian Federation": accreditation of foreign credit organizations’ application on accreditation will be now representative offices by the Central bank of the submitted to the Federal Tax Service of the Russian Federation which are effective since 3 Russian Federation (FTS) within 12 months May 2014. from the date of adoption of decision by By 1 April 2015 all branches and representative offices accreditation term of which does not 18 Starting from 01 January of 2015 accreditation of expire till this date must submit documents for branches and representative offices of foreign companies registration with the FTS Register. In case of non- will be exercised by Federal Tax Service of the Russian Federation (hereinafter – the FTS) compliance with said requirement accreditation 19 Starting from 01.01.2015 accreditation of branches and will cease. representative offices of foreign companies will be All branches and representative offices exercised by the FTS ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN RUSSIA] 194 accreditation term of which expires in January Apart from the above, in the case of employing 2015 are entitled to address the FTS until 28 non-residents general requirements of Russian February 2015 for the purposes of accreditation labor legislation should be complied with, i.e., extension. In the rest cases documents for registration with State migration authorities, and accreditation extension need to be submitted to obtaining invitations and work permits. The the FTS within 30 calendar days till the date of statement below is a general overview of the accreditation expiration. organization of management bodies in the above The management of the RO or branch is carried listed legal entity types including the specifics of out on the basis of decisions taken by the foreign their functioning. company. The latter is entitled to adopt 3. Governance, Regulation and Ongoing Regulations for the RO or branch that are Maintenance registered with the applicable authorities 3.1 Governance and Management (currently and till 01 January 2015 - the Ministry of Justice or the Ministry of Foreign Affairs). Limited Liability Company The RO of a foreign legal entity consists of the All participants of an LLC are granted certain Head of the RO acting pursuant to Power of mandatory corporate rights, the number of Attorney issued in his favor by the foreign entity. which depends on the participatory interest amount, and additional rights provided in the In accordance with provisions of the Civil Code of Charter or the Shareholder’s Agreement. The the Russian Federation, the RO is not a legal number of LLC (and all NJSC) participants’ entity, it does not conduct commercial activity on corporate rights may be defined not only the territory of the Russian Federation nor depending on the participatory interest amount, derives profit. Thus it does not have its own funds but also according to other rules, if provided by for disposal. The RO performs representative the LLC’s (or any other NJSC’s) Charter or by functions and protects the interests of the foreign the corporate agreement in case this legal entity. information is included in the Unified state There are no requirements as to the formation of registry of legal entities (EGRUL). charter capital or initial funds for an RO or branch. The participants are entitled to participate and In compliance with the Permit on the vote in the general meeting, which is accreditation of an RO, the latter is entitled to considered the supreme governing body of the employ up to 5 foreign employees without LLC. Its exceptional jurisdiction includes specific requirements on their personal resolutions on various issues, namely: accreditation. In the case of an RO employing in amending the Charter, increasing the charter excess of 5 foreign employees, they will have to capital, forming (appointing) other corporate undergo a procedure of personal accreditation bodies, approving annual reports, issuing bonds, with the State Registration Chamber of the reorganization or liquidation, etc. The Charter Ministry of Justice of the Russian Federation and of an LLC (as well as NJSC) may provide for the obtain a personal accreditation card20. extension of competence of the general meeting and a special order of its convening, preparation and holding may be established. 20 Starting from 01 January2015 individual accreditation and Some issues require the unanimous resolution visa support of foreign employees of branches and of all participants, but ordinary issues require representative offices will be exercised by the Chamber of Commerce and Industry of the Russian Federation ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN RUSSIA] 195 2/3 of the votes, unless otherwise set in the under special agreement with the company. Charter. In an LLC consisting of a sole The Charter may limit the powers of the sole participant, issues within the jurisdiction of the executive body in its relations with third parties. general meeting are adopted by resolution of Some transactions (Major transactions, the sole participant. According to the Law “On interested party transactions and others if Limited Liability Companies” a distinction is stipulated by the Charter) require the made between ordinary and extra-ordinary additional corporate approval of a general general meetings; the former should be participant’s meeting or of the Board of conducted at least once a year, the latter may Directors. Generally, an LLC is not required to be convened by the general director at any form a collective executive body; however its time. Russian law contains certain provisions formation and powers may be stipulated by the for protecting minority shareholders' rights and Charter. interests. This regulation consists of a triad of The day-to-day management of the LLC is the rights (the right of control, property rights, and responsibility of the sole executive body, which the right to information) and allows minority may comprise one person, several persons shareholders to avoid various forms of abuse. acting simultaneously, or several sole executive The most important property rights for bodies acting independently, or may consist of minority shareholders are the pre-emptive both a sole executive body and a management right to purchase shares in the legal entity (in committee (a collective executive body). The Russian law this pre-emptive right is applied if collective executive body is responsible for all in the LLC a participant is willing to sell their matters that do not fall within the authority of shares to a third party); the right to re-buy their either the board of directors or the general shares in certain cases (as in the reorganization participants’ meeting. The Board (management of the company or the acquisition of shares committee or board of governors) represents a from minority shareholders at squeeze out); collegial executive body made of individual and the right to dispute certain transactions of persons only. Said persons may not be the company in arbitration courts for the participants/shareholders in the company at benefit of the company. Moreover, the main the same time. The CEO of the company relief in the case of a violation of property exercises the powers of the chairman of the rights is claiming for damages. company Board. The jurisdiction of the Board An LLC is not required to create a board of and its decision-making is to be outlined in the directors (supervisory board) (the “BoD”), but LLC’s charter or internal documents of the this also may be established by the Charter. company. The existence of a BoD is considered Usually, the company’s Board is entitled to mandatory as an exception in cases of an LLC (without limitation): bonds listing. The functions and jurisdiction of the BoD are completely determined by the decide on managing the day-to-day Charter. activities of the company; The statutory body of the LLC, empowered to ensure the implementation of the act on behalf of the company in all affairs, is decisions of the General participants’ the sole executive body which is generally meeting and the BoD; represented by a general director (analogous to develop priority financial and business the “CEO”) or a Managing company acting ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN RUSSIA] 196 plans to be adopted by the BoD and other documents under the current legislation. approve internal documents of the A person that acquires more than 30% of the company on matters within the overall shares of a PJSC is obliged to issue a jurisdiction of the executive bodies of the public offer to other shareholders of the LLC; respective types of shares and owners of issuance securities within 35 days of the time of approve certain company transactions. entering the relevant credit entry in their The Charter of LLC may provide for delegation to personal account on the acquisition of such the BoD of some issues under the general shares from them. meeting’s competence. The functions of Board A person that acquires more than 95% of the can be performed by the CEO or the BoD if also shares in the charter capital of a PJSC as a result provided by the Charter. The same rules are of voluntary JSC shares offers or obligatory shares applied to the NJSC. offers is obliged to buy out the remaining shares Joint Stock Company that belong to the other shareholders as well as The general shareholders’ meeting constitutes issuance securities. the supreme governing corporate body. The Shareholders holding no less than 2% of voting general meeting’s competence of a PJSC cannot shares overall of a JSC are entitled to bring issues be extended. The shareholders are entitled to to the agenda of the annual general shareholders’ enter into shareholders’ agreements to re- meeting and propose candidates for the board of distribute voting rights and to determine directors (supervisory board) of the JSC, its special contractual rules applicable to collective executive body or its revision transactions with shares, etc. commission and also the candidacy for the CEO Each common share carries one vote at the position. The day-to-day management of the JSC general shareholders meeting (except for cases is performed by the General Director (Director). of cumulative voting provided by law), and The functions of the CEO can be implemented by most resolutions are made by a simple majority one Director, several persons acting jointly as one vote, although for certain key decisions a CEO or by several CEOs, acting independently. If it qualified majority of 75% is required. Owners of is provided for by the Charter, a collective preference shares are entitled to vote only in executive body (where the General Director acts special cases (specifically, liquidation or as the Chairperson) may be created. The JSC is reorganization). able to delegate the powers of the executive body to the Managing Company acting under Russian law regulations with regard to minority special agreement. The executive body deals with shareholders apply equally to JSCs. all matters which do not come under the Shareholders in a JSC possess pre-emptive jurisdiction of either the BoD or the general rights to acquire additional shares allocated as meeting. The functions of the CEO are rather public offering or issuance shares in the similar to those in an LLC. amount proportionate to the amount of shares For the PJSC existence of collective management of the same type that they possess. body (supervisory or other board, BoD), which Shareholders have equal access to the internal shall comprise not less than 5 members, is accounting documents of the JSC as well as obligatory, for the purposes of protecting appraisal reports, the list of JSC affiliates and shareholder rights from violation by the ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN RUSSIA] 197 management. CEO and members of collective functioning of a sole executive body is put executive bodies cannot preside and constitute forward, which should be elected unanimously by more than one fourth of collegial management individual partners only and bears liability for body’s members. The powers of the BoD include damages inflicted to the partnership. the convocation and conduction of general The Management Agreement may define, inter meetings, the adoption of resolutions on the alia, a special procedure for approving the actions issuance of additional shares, etc. (these powers of this sole executive body. may be limited by the Charter). One of the main peculiarities of business Partnership partnerships is the delegation of significant The management in a partnership is carried out discretionary powers in determining the means of under the mutual consent of all partners, unless management, the structuring of corporate specific decision-making rules are stipulated by relations, and the possibility of stipulating the Foundation Agreement. Limited partners, as different regimes of partners’ rights and duties. mentioned, are not entitled to participate in The embodiment of permissive regulation of the management or carry out business on behalf of business partnership's activities is the the partnership. Management Agreement, which is different from Each full partner is entitled to carry out business Foundation Agreements and Shareholders’ on behalf of the partnership, unless the Agreements. Foundation Agreement indicates that business Partners are able to regulate their internal should be carried out either jointly or by certain corporate relationship (including the partner(s). Due to this, partners in a full establishment of veto rights) to the full extent partnership are jointly and severally liable for the possible by entering into a Management obligations of the entity, provided that such Agreement. liability is not limited to the value of the The Management Agreement may stipulate the investments. establishment of other bodies of the business Limited partners have no access to decision- partnership. However, there are no restrictions making; however their liability for the on such bodies with regard to their types, powers partnership's obligations is limited. Also, the and functions. name of the limited partnership may not contain Representative Offices and Branches the names of limited partners (otherwise they shall be considered full partners). A partnership The affairs of branches and representative offices does not have any supervisory body, as such a are administrated by the head of the subdivision. form of legal entity is mostly considered an Such a body should be appointed and incorporation of individuals, rather than an empowered by Power of Attorney by the head incorporation of capital. Nonetheless, each company. The powers of the head of the partner is granted access to all of the subdivision may be transferred to third parties partnership’s documents and is entitled to through another notarized Power of Attorney, demand information if the management of affairs unless this is restricted by the head company. is delegated to certain partner(s). It should be noted that rules on major and Business Partnership interested party transactions apply to branches and representative offices, hence certain Similarly to the JSC and the LLC, the creation and corporate approval systems should be ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN RUSSIA] 198 implemented by the head company if necessary. in cases provided by law (for example, when the 3.2 Accounting and reporting requirements securities of the JSC are approved for public circulation). In practice, the accounting in a NJSC Limited Liability Company is similar to that in an LLC, and a PJSC is subject to A peculiarity of the LLC is in the absence of disclosure procedures and specific requirements. mandatory information disclosure rules (the only The validity of the data contained in the annual case of an LLC being subject to disclosure is public reports and other accounts, in contrast to the LLC, bond issuance), but the need to furnish tax are subject to mandatory verification by the authorities with accounting information for internal audit commission – a special body to be taxation purposes. An LLC is obliged to keep created in the PJSC. In a NJSC as well as in an LLC information regarding its business activities, in it is not obligatory to establish internal audit particular: the resolutions of its general meetings, commission provided that this is stipulated by the its certificate of state registration, local acts, lists Charter. If the JSC is obliged to disclose of affiliates, etc. Any participant is entitled to information, it should involve an independent access the given information. auditor in the auditing process. It should be noted that under Russian Law, Partnership mandatory audit is required only for a limited range of business entities (regardless of the type Under Russian Law there are absolutely no of entity), engaged in certain activities, namely: specific requirements for accounting and banks and other credit organizations; insurance mandatory auditing of partnerships. companies; commodity, currency or stock Business Partnership exchange companies; custodies companies; There are no specific requirements regarding brokers; dealers; securities trust managing accounting in a business partnership or organizations; registrars, etc. mandatory information disclosure. Being a rather closed business entity, an LLC is not The law does not define cases when mandatory subject to mandatory auditing, except in the case auditing is required for business partnerships. of public bond issuance. An audit may be Auditing should be conducted only if it is voluntarily performed with the use of an stipulated in the Charter or at the request of a independent auditor. Moreover, mandatory partner. auditing must be conducted at the request of participants. A mandatory audit must also be Representative Offices and Branches conducted in the case that earnings for the period Sufficient grounds for either a branch or prior to the auditing period are more than RUB representative office to perform accounting in 400,000,000 (approx. 10,000,000 USD) or the Russia for taxation purposes are regular value of company assets is more than RUB commercial activities on the territory of Russia. 60,000,000 (approx. 1,500,000 USD). According to the official explanations of the Establishment of the internal audit commission is Russian tax authorities, a regular character always not also compulsory for the LLC if provided for in applies to the commercial activities of those the Charter. branches and representative offices which are Joint Stock Company registered (or are bound to register) with the Russian tax authorities (notwithstanding, there A JSC is required to disclose information and are several exceptions when commercial activities render accounts in accordance with special rules ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN RUSSIA] 199 are not considered regular). It should be taken the Russian Federation. Rights for the exploitation into account that such an obligation arises if a of natural resources and other rights under subdivision of a foreign head company contracts are recognized as investments as well. A implements any activities for a period exceeding special term “foreign direct investment” is used 30 days in a year and creates any permanent to describe a portfolio investment representing work place. It is important to mention that the no less than 10 percent of equity interest in the limited scope of activities performed by company, investment of capital assets in the representative offices does not exempt them branch of a foreign legal entity established in the from profit tax in the same way as a branch, in territory of the Russian Federation, and the those cases when a representative office is in fact leasing of equipment (of a certain type and value) engaged in commercial activity. carried out by a foreign legal entity in the Russian legislation proscribes no obligation to territory of the Russian Federation. audit a branch or representative office as a The Investment Law operates with categories of separate entity. However, the existence of such investment projects and priority investment an obligation may be determined by the activities projects. Priority investment projects enjoy of the head company. In that case, a branch or preferential treatment, including tax benefits. To representative office is subject to auditing as a qualify as a priority investment project, the part of the head company, rather than as a investment must meet certain requirements as separate entity. regards the amount and procedure of approval. A 4. Foreign Investment, Capitalisation, Residency list of priority investment projects is maintained and Material Visa Restrictions by the Russian government. 4.1 Foreign Investment Investment of foreign capital in banks and other credit organizations, insurance organizations, and Foreign investments in Russia are regulated non-commercial organizations (such as charities mainly by the Investment Law and the Law on and scientific and religious organizations), and Strategic Investment. The Investment Law also relations defining establishment procedure stipulates a principal according to which the legal and termination of foreign banks’ representative regime of foreign investments and the use of offices’ and other foreign lending agencies’ profit gained as a result of such investments activity is subject to specific regulation under the cannot be less favorable to Russian investors than corresponding Russian laws, such as the Law on the legal regime provided. It contains general Insurance, the Law on the Securities Market, the principals and guarantees to protect foreign Law on the Protection of Investors' Rights and investors’ rights, including: the right to freely Lawful Interests in the Securities Market, the Law (without licensing or quoting) import and export on Communal Associations, the Law on Banks and personal electronic data carriers, the right to buy Banking Activity, etc. shares and securities of Russian organizations, and the guarantee of fair compensation in the The Investment Law guarantees national case of nationalization or requisition of property. treatment of foreign investments, with certain exceptions. Special restrictions affecting foreign Foreign investments are defined by the investors may be introduced only by federal laws Investment Law as the contribution of foreign where it is necessary to protect the fundamentals capital (i.e., money or other assets) owned by the of the constitutional system, public moral health, foreign investor to a business in the territory of the rights and lawful interests of other persons, ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN RUSSIA] 200 and the defense and national security of the independent assessor. The charter capital may state. be increased only after the original charter The Investment Law provides a system of capital has been paid up in full. guarantees for direct foreign investments in Another option for legal entity financing is Russia. These guarantees shall not apply to receiving a loan by a subsidiary from the foreign capital deposited in banks or other credit mother company. It should be specifically institutions or insurance companies, as well as to mentioned that such loans may trigger thin foreign capital investment in non-profit capitalization rules in some cases. organizations with a socially beneficial objective The role of thin capitalization rules is to ensure in the sphere of education, charity, science, or that the interest rate under certain loan religion. These forms of investment are governed, agreements between mother and subsidiary respectively, by Russian laws on banks and companies (referred to as “controlled” debt) banking activity, Russian insurance laws, and corresponds to the market interest rate. Russian laws on non-profit organizations. The system of guarantees include: fair, efficient, and Thin capitalization rules only apply in cases adequate compensation in the case of investment where the mother company owns more than a nationalization or requisition; a grandfathering 20% share in the subsidiary company and the clause for priority investment projects in which gross debt amount under the loan agreement is the foreign investment share exceeds 25 percent 3 times higher than the equity of the subsidiary (unfavorable subsequent amendments to tax company (i.e. the debt is a “controlled” one), legislation do not apply to existing priority calculated for the respective quarter of the investment projects for the period of return of year. initial investments but not for more than seven To determine equity, the quarterly balance years); repatriation of income and proceeds from value of liabilities should be subtracted from investments; and repatriation of assets and the balance value of assets. Therefore, in the information previously imported to Russia as an case that in the quarter when the loan was investment. issued (i.e. the debt amounts to 3 bln USD), the A special provision of the law recognizes the equity of the subsidiary is 1 bln USD or less validity of the assignment of rights and (example: asset value of 1.5 bln USD and obligations from a foreign investor to another liabilities amounting to 0.7 bln. USD), thin entity. This is a standard clause required by many capitalization rules will apply. international financial institutions to underwrite In the case of the debt being deemed a international investment projects. “controlled” one, thin capitalization rules on 4.2 Capitalization requirements interest rate calculation apply. The taxpayer should confirm that the interest rate under Legal entities such a loan agreement is not higher than the Contributions to the charter capital of a legal rate calculated in accordance with art. 269 of entity may be made in cash or in kind, and the Tax code of the Russian Federation. If the some customs benefits may be available for in- interest rate under a “controlled” debt is higher kind contributions made by foreign investors. than the rate calculated in accordance with art. In-kind contributions exceeding 20 000 RUB 269 of the Tax code of the Russian Federation, (500 USD) require evaluation by an the exceeding amount is considered dividends ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN RUSSIA] 201 of the mother company and is subject to tax Representative Offices and Branches according to the rate specified in the double Both branches and representative offices are tax treaty, while the calculation of the interest provided with assets by the head company in rate under art. 269 may only be deducted as an accordance with its Charter. The assets of the expenditure for the purposes of corporate subdivision should be simultaneously income tax. accounted on the balance sheets of the branch It should also be noted that the law sets a or representative office and of the head maximum interest rate that may be deducted company. as an expenditure. For loan agreements It should be taken into account that the head concluded in 2014 this rate is calculated as the company is liable for debts incurred in Bank of Russia official refinancing rate (7.50%) connection with the affairs of the branch or multiplied by 1.1, so it is equal to 8.25%. This representative office with all its property rather rate is equal to 15% for loans granted in foreign than only that allotted to the particular currency. subdivision. Therefore, in order to comply with thin 4.3 Residency, visa and migration issues in the capitalization rules and in order to minimize the employment of foreign employees risks of additional dividends taxation under “controlled” debt, the mother company is Employment and migration requirements are presented with two possible options. The first provided for by the Labor code of the Russian one is to try to avoid the creation of “controlled” Federation (hereinafter – “The Labor Code”), debt. This may be done by ensuring that the the Federal Law "On the Legal Status of Foreign balance value of assets at the end of each Citizens in the Russian Federation", and the quarter exceeds the amount of the balance Federal Law "On the Migration Registration of value of liabilities by more than 1 bln USD. In Foreign Citizens and Stateless Persons in the this case the equity of the subsidiary shall be Russian Federation". more than 1 bln USD, thus the debt under the According to the Constitution of the Russian loan agreement will not be a “controlled” one Federation, Russian citizens, foreign citizens, (the 1:3 ratio shall not be met) and the thin and persons without citizenship have equal capitalization rules will not apply. access to work. In cases when the 1st option cannot be realized It should be noted that in case the company and the debt is qualified as a “controlled” one, decides to employ foreign citizens in Russia, the the interest rate under the debt must be company will need to obtain work visas for compared with the rate specified by art. 269 of them as a business visa does not grant the right the Tax code of the Russian Federation. Also, it to work. is recommended that the interest rate under “controlled” debt does not exceed 8.25% (for Foreign citizens can be hired as ordinary loan agreements concluded in 2014), as only employees or as highly-qualified specialists the interest amount calculated at this rate may (hereinafter – “HQS”). The hiring procedure and be deducted from the corporate income tax time-frames depend on the status of the foreign base as an expenditure. citizens involved. Please note that it is also a decisive point whether or not the company would like to employ the CEO ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN RUSSIA] 202 and members of staff as HQS under Russian law. Obtaining a work permit issued by the A HQS is an employee with an annual salary FMS for the employee; amounting to 2 mln Russian rubles or more. A Obtaining a registration card from the HQS may benefit from a simplified procedure of FMS for the company that allows it to obtaining a work permit. In case the CEO and obtain invitation letters and convert staff do not qualify for the HQS requirements and visas; are employed on a general basis, the relevant permit procedure is more complex. Please kindly Obtaining an invitation letter for the note that in the Russian Federation, the company visa issued by the FMS; wishing to use the services of foreign employees Obtaining a work visa for the employee should have reserved a quota for such employees (done by him/herself); before May of the year preceding the year of hiring. Only specialists for the jobs announced by Registering the employee with the Ministry of Health and Social Development in migration authorities; the quota-exempt professions list can be hired Notifying the required authorities on beyond the quota. hiring the foreigner; The alternative option (which does not require It usually takes no less than 3 months from the quota reservation) is to hire foreigners as HQS. date of the submission of the required documents This will be possible if the foreigners have certain to the state authorities to obtain a work permit skills and achievements in the area they are going plus the time for the collection of all the to be employed and if their annual salary will be necessary documents and the preparation of the no less than 2,000,000 RUB, as already mentioned required application and other relevant forms. above. HQS Procedure of hiring a foreign employee The following steps shall be taken in order to hire The following main steps shall be made by the a highly-qualified foreign specialist: company in order to hire an expatriate under the ordinary work permit procedure: Registering the Company with the FMS and obtaining the registration card that Obtaining a decision from the State allows the Company to obtain invitation Employment Centre for the company letters and convert visas; confirming the reason for engaging the foreign employee; Obtaining a work permit for the employee; Applying to the Federal Migration Service (hereinafter - the “FMS”) for a Notifying the tax authority about the quota of foreign employees that the hiring; company may hire per annum (no quota Obtaining an invitation letter for the requirements for the CEO, the visa issued by the FMS; managerial staff and HQS); Obtaining a work visa for the foreign Obtaining permission for the company employee; to engage and use a foreign workforce, issued by the FMS; Registering the employee with migration authorities; ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN RUSSIA] 203 Registering the highly-qualified visiting the Russian Federation: specialist with the tax authorities; personal visa; Notifying the migration authority on the business visa; tax registration of the employee; tourist visa; Carrying out other registrations and regular reporting to the state educational visa; authorities after the foreigner is hired. work visa; The estimated time for obtaining a work permit humanitarian visa; is from 14 business days to 1 month from the date of submission of the required documents visa for entry into Russian Federation to the state authorities plus the time for the with the purpose to obtain political collection of all necessary documents and asylum or to receive Russian citizenship. preparation of the required application and According to Russian legislation visas may be other relevant forms. issued with up to two entries and for up to 90 Visa issues days. However, you can use multiple-entry business visas, valid for 6 or 12 months but To enter the Russian Federation a foreign with unlimited entries/exits. citizen must submit a valid identity document, accepted as such by the Russian Federation, In practice the following types of Russian and a visa, if no other means of entry into the business visas exist in Russian jurisdiction: Russian Federation is established by an Single entry, valid for up to 3 months; international agreement. As a whole, a visa under the legislation of the Russian Federation Double entry, valid for up 3 months; is a document, permitting staying in Russia for Multiple entry visas. a specific period of time. Business visas are The Law on Amendments to the Law on the issued to foreigners who visit Russia for the Legal Status of Foreigner Citizens increases the purposes of official or private business, i.e. maximum validity period of the work permit for visas are intended for foreign citizens who foreign qualified professionals for up to three arrive in Russia in order to meet with their years instead of the one year that was used business partners, sign contracts, etc. The before. Moreover, the accompanied work visa procedure and terms of the issuance and will be valid for a maximum of three years also. provision of a visa, the extension of its validity However, the duration period of the work period, its re-issuance in case of loss, and the permit and work visa cannot exceed the term visa cancellation procedure, are established by of the labor agreement concluded with the the Government Regulation of the Russian foreign specialist. The work permit along with Federation. the work visa can be prolonged upon the Depending on the purpose of entry into Russian employee's request, also for up to three Federation and the lodgment purpose a foreign calendar years. citizen can be given a diplomatic, service, Procedure and terms of obtaining a business ordinary, transit, and temporary residence visa. visa There are 7 main types of ordinary visas for To obtain a visa a foreign national should apply ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN RUSSIA] 204 to a diplomatic or a consular representative basis of a written application of a foreign office of the Russian Federation in person or via citizen. his legal representative and should submit the 4.4. Any restrictions on remitting funds out of following documents: jurisdiction a valid identity document, accepted as Current currency regulations establish basic such by the Russian Federation; rules of currency regulation and control. A a completed visa application form with currency transaction report form is required for one photograph; certain transactions (for instance, exterior trade and loans at Russian banks). The main one photograph (30x40 mm); requirements in respect to currency transaction a medical insurance policy, unless report forms are set out by the Regulations of otherwise provided for by international the Bank of Russia. agreements of the Russian Federation; A Russian counterparty must comply with these an additional certificate proving that the requirements in connection with payments to applicant does not have HIV (AIDS), in another counterparty (import or export cases where the foreign national applies transactions). A currency transaction report for a visa for a term exceeding three form is issued in the process of foreign months. An ordinary business visa is exchange operations in connection with foreign issued for a foreign citizen entering the trade transactions, if the contract amount Russian Federation for the purpose of exceeds the equivalent of 50,000 USD at the making business activities. An ordinary official exchange rate of foreign currencies in business visa can be a single or double relation to the Russian ruble, defined by the lasting up to 3 months, or a multiple Bank of Russia at the date of the contract's lasting up to 1 year. conclusion. Ordinary business visas are issued on the basis *** of an invitation to enter the territory of the Lidings is a leading independent national law firm with a broad base of clientele in Russia and the CIS. The firm advises its predominantly Russian Federation, issued in accordance with international clients from its two offices in Moscow and St Petersburg. the legislation of the Russian Federation and Since its launch in the mid-2000s, the firm has achieved impressive growth and built a noteworthy reputation. Lidings has followed a the decisions of the Ministry of Foreign Affairs consistent strategy of growth to become a high-quality provider of legal of the Russian Federation, directed to the services with a clear focus to advise almost exclusively international businesses active in Russia and the CIS. It has also been successful in diplomatic mission or consular office of the establishing sector expertise in certain industries where global investors Russian Federation. An ordinary business visa play an important part, such as pharmaceuticals and life sciences, automotive, energy and aviation. can also be issued on the basis of a decision of The firm’s significant footprint, accompanied by a growing degree of the head of the diplomatic mission or consular brand reputation in the domestic markets, has been recognised by a office of the Russian Federation in connection series of awards from independent global market analysts like The Legal 500 EMEA, Chambers and Partners, ILFR1000 and Martindale- with the necessity to enter the territory of the Hubbell. Russian Federation to participate in Areas of practice: Antimonopoly, banking and finance, corporate and international and national official, economic, M&A, dispute resolution, employment, government relations, social, political and scientific events on the intellectual property, real estate and construction, and tax and customs ILN Corporate Group – Establishing a Business Entity Series Fall 08 205 Fall 15 INTERNATIONAL LAWYERS NETWORK DEJ-UDOM & ASSOCIATES LTD. ESTABLISHING A BUSINESS ENTITY IN THAILAND I L N C O R P ORATE GROUP [ESTABLISHING A BUSINESS ENTITY IN THAILAND] 206 ESTABLISHING A BUSINESS ENTITY IN THAILAND Thailand has a civil or codified law system. The foreigner’s ability to engage in them is regulated main legal codification governing commercial by the Foreign Business Act (“FBA”). aspects in Thailand is prescribed under the Civil Sole Proprietorship - Under the law, a and Commercial Code (“CCC”) and other related person acting as a sole proprietor can Acts which are issued from time to time to govern engage in almost any lawful type of business specific circumstances. with the exception of those businesses which have been otherwise regulated by the government. Taxation of a sole proprietorship business is calculated on a progressive personal tax rate. Unregistered Ordinary Partnership - An Unregistered Ordinary Partnership is when two or more persons join together to conduct business without formally registering their operation. Unregistered ordinary partnerships are taxed as natural persons, but each partner must also separately file their own personal tax return. Registered Ordinary Partnership - To form a Registered Ordinary Partnership, all The part of the CCC which refers to companies, particulars, including the partnership called “Company Law” in other jurisdictions, is contract, capital contribution, management, under Title XXII, “Partnerships and Companies” and objectives, must be submitted to the (Book III of the CCC). The CCC governs the Ministry of Commerce. Partner profits are establishment, management, shareholder and subject to taxation, so profits are subject to partner rights, and liquidation of partnerships and two levels of taxation. private limited companies. Public Companies are Limited Partnership - In a limited partner- governed by the Public Limited Companies Act B.E. ship, the managing partners are jointly held 2535 and the Securities and Exchange Act of the personally liable for the partnership's debts same year and its related Regulations and and any non-managing partners are only Announcements. Breaches of the CCC’s liable for the amount of any undelivered or provisions concerning “Partnerships and withdrawn capital contribution. Partner Companies” may be subject to penalties under profits are subject to taxation, so profits are the “Act on Offence concerning Registered subject to two levels of taxation. Partnerships, Limited Partnerships, Limited Companies, Associations and Foundation” B.E. Private Limited Company - Basically a 2499. corporation, a Private Limited Company must have a minimum of three persons join The following are the business entity types together to start a business with the capital available in Thailand’s jurisdiction; however, a divided into shares of equal par value. A ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN THAILAND] 207 Private Limited Company is taxed as a the average per year of three years’ juristic entity. estimated expenditures. Public Limited Company - A Public Limited A Private Limited Company (“PLC”) is the most Company is formed in order to offer shares common type of business incorporation in to the general public and must have a Thailand and its basic characteristics are similar to minimum of 15 persons join together. A those of Western corporations. A private limited Public Limited Company is a juristic entity company is formed by way of registration of its and taxed as one. Individual shareholders constitutive documents (Memorandum and must pay tax on their earnings, and foreign Articles of Association) as well as other related corporate shareholders pay tax on all applications with the Partnerships and Companies dividends. Registration Office, Department of Business Development, Ministry of Commerce. The ultra Joint Venture - In Thailand, a Joint Venture vires doctrine is still applicable in Thai law, so a is not a legal entity under the Civil and company must specify in detail its objectives in its Commercial Code. If two parties do enter Memorandum of Association. into an agreement to work together as a Joint Venture, it is valid as long as it Shareholders of a PLC enjoy limited liability up to conforms to Thai laws. A Joint Venture’s the amount of the unpaid value of shares income is subject to corporate tax as a invested in the company. This means that a single entity. shareholder will not be liable for more than their investment in the company (subject to extreme Branch Office - A Branch Office can only do situations of piercing the corporate veil). A PLC is business on behalf of a company based managed by a board of directors according to the outside Thailand and must obtain a business laws and the Company’s Articles of Association. license according to the FBA. However, a Normally, the directors’ liability will be limited Branch Office can only engage in specific and indemnified by the company unless business activities granted under the FBA. A otherwise prescribed in the company’s company must bring in a minimum capital of Memorandum of Association or Articles of at least 3 million Baht; however, this is the Association. Directors may be personally liable if minimum threshold and the actual amount they act beyond their powers as granted by laws is calculated at 25% of the average per year or the Memorandum and Articles of Association, of three years’ estimated expenditures. For or are in breach of their duty of loyalty and care tax payment, a Branch Office is treated as a towards the company and its shareholders. juristic person. All shares must be subscribed to and at least 25% Representative Office - A Representative percent of the subscribed shares must be paid up Office can only do business on behalf of a on incorporation. Ordinary as well as preferred company based outside Thailand and must shares may be issued based upon the discretion obtain a business license according to the of the shareholders’ resolution. All shares must FBA. A Representative Office cannot engage carry voting rights which might vary between in any revenue earning activities in Thailand ordinary and preferred shares. The minimum par and pays no taxes. A company must bring in value of a private company’s shares is Baht 5 per a minimum capital of at least 3 million Baht; share. Treasury shares for a private company are however, this is the minimum threshold and prohibited. the actual amount is calculated at 25% of ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN THAILAND] 208 A Private Limited Company needs to maintain a shareholders at the annual ordinary meeting for minimum of three shareholders at all times. approval within four months from the fiscal year- In general, shareholders are entitled to attend end. The company is obliged to submit the any general meeting of shareholders and vote audited financial statement which was approved based upon the voting system of such entity. by the shareholders to the Department of Minority shareholders have no absolute power to Business Development within one month from control the majority shareholders. However, the the date of shareholders meeting. Thai Civil and Commercial Code sets some rights Tax Filings: A PLC carrying on business in Thailand and protections for minority shareholders as must file a half-year and an annual corporate follows: income tax return. The tax paid at the half-year is a prepayment calculated on the forecasted net (i) Shareholders holding not less than one-fifth of the shares of the company may request profit for the year and is credited against the full- in writing that the board call for a year tax liability. The latest a half-year return can shareholders meeting to discuss any matter be filed is two months from the last day of the requested by such minority shareholders. first six months of the company’s accounting period, and the annual return must be filed within (ii) In case the company refuses to claim against 150 days from the last day of the accounting a director for compensation for injury period. caused by him/her, any shareholder shall be entitled to claim against the director. Social Securities Fund: Thailand also implements a social securities fund for all business entities to (iii) Shareholders holding not less than one-fifth participate in and contribute their support to of the issued shares may request the their employees. There are penalties for any non- competent officer to appoint an compliance by an employer. inspector, designated by the Ministry of Commerce, to examine the affairs of a Remitting funds out of the country: All foreign limited company. exchange transactions must be done through commercial banks or authorized non-banks. Both (iv) Any shareholder shall be entitled to request direct and portfolio foreign inbound investments the court to cancel any resolution passed are freely permitted. Repatriation of investment at any general meeting of shareholders if funds and repayment of overseas borrowing in such meeting was held in conflict with the foreign currency can be remitted freely upon law or the company's Articles of Association. submission of supporting evidences. Annual Filing: Upon incorporation, a PLC is Legal Capacity and Limitation: Limitations for granted a Tax Payer ID number, the same number undertaking business operations in Thailand will as its Company Registration number. A PLC is depend upon the type of business transaction and obliged to pay corporate income tax on its annual the qualifications of an operator wishing to profit to the Thai Revenue Department within 150 conduct such business. In principal, Thai days from the date of fiscal year’s end. A operators, whether individuals or juristic entities, company’s board of directors is also obliged to can conduct all kinds of legal businesses in close the company’s books of accounts at the end Thailand, unless a specific law requires certain of every fiscal year and have them audited by a prior qualifications and specific approvals. qualified local auditor. The audited financial statements must be submitted to the The main legislation concerning foreigners who ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN THAILAND] 209 wish to operate a business in Thailand is the 1999 (“IEAT”). For your information, the BOI is a Foreign Business Operation Act (“FBA”). The FBA government entity which grants support to lists the restrictions on the type of business a investors (regardless of their nationalities) foreigner can conduct in Thailand as an individual, which wish to conduct businesses under the as a juristic entity registered overseas, or as a promoted businesses governed by BOI. juristic entity registered under Thai law with 50% Although there are no clear thin or more of its shares are owned by foreigners, capitalization rules in Thailand, the BOI may unless a specific business operation license has prescribe a maximum ratio of equity: debt. been obtained when applicable. You can visit the BOI's website to obtain The FBA’s three Annexes contain three (3) more details at: http://www.boi.go.th categories of such restricted activities. Mainly, In addition, please note that foreigners wishing to Annex 1: media, rice farming, forestry and herbs - reside and work in Thailand will need both a non- be restricted from foreigners; Annex 2: national immigrant visa and a work permit. A non- safety or security, arts and culture, natural immigrant visa is initially valid for 90 days and can resources - subject to permission of the Minister be extended for one year and is renewable. The of Commerce and the Cabinet; and Annex 3 (the procedures to acquire a non-immigrant visa are most common case): Services: accounting and linked to procedures to obtain a work permit legal services, construction, agency, auction, from the Department of Employment, Ministry of hotels, wholesale and retail - subject to a business Labour. license. Guidelines for Incorporating a Thai Limited Despite the above-mentioned restrictions, Company foreigners may still obtain certain privileges for i) Corporate name reservation conducting restricted businesses without obtaining a business operation license (but rather A promoter of a company is required to apply for merely a business certificate), as follows: the company’s name reservation, either directly or electronically, with the Registrar’s Office at the (i) Being granted a business certificate under Department of Business Development, Ministry of the Treaty of Amity and Economic Relations Commerce. The result is obtained on the date of between Thailand and U.S.A. except for the filing. following restricted businesses: a) communications; b) transport; c) fiduciary ii) Incorporation functions; d) banking; e) exploitation of land Thereafter, the process for incorporation consists and natural resources; f) domestic trade in of two steps, namely: indigenous agricultural products (Remark: the said Treaty of Amity actually expired but Step 1. Registration of the Memorandum of since the FTA between Thailand and U.S.A. Association has not yet been finalized, the Thai Information required for this registration Authority still grants business privilege to includes: U.S.A. nationals and corporations); (i) Corporate Title (ii) Being granted an investment promotion (ii) The Location of the Company’s Head Office from the Thailand Board of Investment (“BOI”), and on certain occasions, the (iii) The Company’s Objectives Industrial Estate Authority of Thailand (iv) Registered Capital: There is no minimum ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN THAILAND] 210 requirement set by the Registrar. Therefore, company in the process of formation, if any. the business owner needs to consider the (3) Approval of the Company’s Articles of size of its business. According to Thai law, Association. the par value of shares of a company must not be less than Baht 5 each. (4) Appointment of the Company’s Board of Directors and fixing the authority of the (v) Name of Promoters: Under Thai law, three authorized directors of the Company. individual promoters need to enter their names and subscribe for at least one share (5) Appointment of the Company’s auditor and of the Company. approval of his/her remuneration. Note: The Promoters shall affix the Revenue (6) Other businesses, if any. Stamp of Baht 200 on the original copy of Notes: Memorandum of Association prior to filing the same with the authority. (1) The director shall affix the Revenue Stamp of Baht 200 on the original copy of Articles Generally, the registration process for the of Association (“By-Laws”) prior to Memorandum of Association takes two to three submitting the same to the authority. days, but it depends on the completeness of the application. Once approved, the registration fee (2) According to Thai law, a Company is not must be paid to the Registrar’s Office. The required to have a corporate seal. In practice, a government fee is collected at a rate of Baht 50 Thai company usually has a corporate seal to for each Baht 100,000 registered capital with a prevent fraudulent acts by unrelated persons. minimum amount of not less than Baht 500 and a Shareholders maximum amount not exceeding Baht 25,000. Thai corporate law requires a minimum of three Notice Calling for Statutory Meeting shareholders of the Company at all times. After registration of the Memorandum of Step 2. Final Registration Association, the authorized promoter will issue a After the Statutory Meeting, all directors notice calling for a Statutory Meeting. The said appointed in the meeting must sign the meeting must be scheduled no less than seven application form and other related documents days from the date of issuing the notice, which needed to register the Company as required by normally is the day after the Registration of the Thai Corporate Law. The application form shall be Memorandum of Association. accompanied with copies of the Memorandum Statutory Meeting and Articles of Association and details concerning At the Statutory Meeting, the Chairman will be office address, names of directors and authorized elected and the Agenda contained in the Notice directors, name of auditor, etc. Once approved, calling for the Statutory Meeting shall be the registration fee must be paid to the discussed. There are altogether six matters that Registrar’s Office at Baht 500 for each Baht need to be considered at the Statutory Meeting, 100,000 of registered capital with a minimum as follows: amount not less than Baht 5,000 and a maximum amount not exceeding Baht 250,000. (1) Approval of the first list of shareholders. Remark: According to the amendment of the Thai (2) Ratification of actions taken and approval of Civil and Commercial Code effective on July 1, expenses incurred by the promoters of the 2008, the registration incorporation process for a ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN THAILAND] 211 company can be completed with the Department corporations, small & medium-sized enterprises, local companies, and Thai and foreign small businesses. The firm’s corporate practice handles the of Business Development within one day. formation of all kinds of juristic entities including, but not limited to, public limited companies, limited liability companies, joint ventures, consortiums, *** and branch and regional offices. Other matters covered include reorganizations and restructurings, investments, mergers and acquisitions, Dej-Udom & Associates, an independent law firm in Bangkok, Thailand, due diligences along with obtaining special benefit privileges and incentives provides legal services to a diverse client base that ranges from leading from government agencies including the Thailand Board of Investment multinational corporations to local companies and individuals. The firm (BOI) and Industrial Estate Authority of Thailand (IEAT). This department supplies partner-led service in the practice areas of Litigation, Immigration also advises on and drafts contracts and other business and legal & Employment, Intellectual Property, Corporate Law and Services, Taxation, documents and offers full corporate secretary services. The Corporate team and Financial Markets and Investment to clients who value expert counsel combines transactional expertise with comprehensive experience in all and astute representation coupled with realistic billing policies and areas of law relevant to establishing and operating a business in Thailand personal contact and attention. The Corporate Department is a one-stop and regularly handles a wide range of complex domestic and cross-border corporate solution for all business types and represents multinational corporate and commercial matters. ILN Corporate Group – Establishing a Business Entity Series Fall 08 Fall 15 INTERNATIONAL LAWYERS NETWORK ÖZCAN & NATAN ATTORNEY PARTNERSHIP ESTABLISHING A BUSINESS ENTITY IN TURKEY ILN CORPORATE GROUP [ESTABLISHING A BUSINESS ENTITY IN TURKEY] 213 ESTABLISHING A BUSINESS ENTITY IN TURKEY A. Types Of Business Entities sirket are responsible with their 1. Description Of The Types of Entities personal assets for the tax liabilities and social security contributions which Pursuant to Turkish Foreign Direct may not be collected from the Investment Law, foreign investors are free company. On the other hand, to make foreign direct investments in shareholders of an anonim sirket who Turkey and shall be subject to equal are not board members do not have treatment with domestic investors. Thus, such responsibility. According to foreign invested companies enjoy the article 553 of the TCC, board members same rights available to local companies may only be held liable for damages if under the Turkish Commercial Code they breach any obligation imposed on (“TCC”). The TCC provides several them by law or the articles of company structures. However, largely due association of the company and if their to advantages regarding liabilities borne fault or negligence caused the damage. by the shareholders, investors most commonly chose between a stock The anonim sirket shares are usually corporation known as anonim sirket which freely negotiable instruments; is similar to an Aktiengesellschaft under therefore share transfers are not German law and to a société anonyme subject to notarization and under Swiss or French law and limited registration. On the other hand, any liability company known as limited sirket share transfer in a limited sirket which resembles a GmbH under German requires fulfillments of execution of law or an S.A.R.L. under French law. share transfer agreement before a Notary Public, approval of general assembly of shareholders and registration with the Trade Registry. The share transfer of a limited sirket is subject to income tax for the selling party. However, in an anonim sirket, if share certificates are held more than two years by the selling party, the share transfer will not be subject to income tax. 2. Matters To Be Considered When Limited sirket is a simpler form of Choosing Between Anonim Sirket and corporate ownership. There is no Limited Sirket compulsory board of directors. The Both companies can be established company’s business may be managed with one or more shareholders. directly by the shareholders. It is possible to appoint one or more Both companies, in theory, are solely managing directors. liable for their debts and liabilities with their assets. However, It is statutory to establish companies shareholders and directors of a limited operating in certain fields such as ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN TURKEY] 214 banks and insurance companies shall C. Governance, Regulation and Ongoing be established as anonim sirket. Maintenance B. Steps and Timing to Establish 1. Brief Summary of Regulation Of Each Although the required documents for Type And Ongoing Maintenance, establishing the above described companies Reporting Requirements are almost the same, it differs in accordance i. brief summary of regulation of with either preferred type or way of anonim sirket and limited sirket participation to the partnership. Common Anonim sirket is managed by its basic steps are as follows: board of directors. The board of Before the incorporation of a company, directors may be comprised of a shareholders should register with the single person or more. Non- local tax office and receive potential shareholders and legal entity Turkish Tax Identification Number. shareholders can be appointed as board members. All the required documents and statements such as articles of Limited sirket may be governed by incorporation certified by notary one or more managers. The public, signature declarations and shareholders can transfer their chamber registration statement management rights to one or more should be submitted to the Trade shareholders or can appoint third Registry Office located at the province party manager(s) provided that at where the company will be established. least one of the managers is a shareholder. The documents delivered to Trade Registry Offices should get the official ii. reporting requirements approval after their examination of The board of directors of anonim whether all given and described sirket should prepare financial conditions on the documents and statements, its supplement annual statements are in compliance with report while the manager of limited legislation. sirket should prepare financial Company registrations should be statements, annual activity reports. announced to third parties or related It is compulsory to appoint parties through being published on independent auditor(s) for the type Turkish Commercial Registry Gazette. companies determined by the TCC After all required documents are and shall prepare reports for risk prepared; the incorporation process of the detection and risk management. company normally does not take more 2. Requirements For Local than a week. Shareholding/Directors Anonim sirket and limited sirket can be established with 100% foreign capital without the necessity of a Turkish shareholder and at least one ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN TURKEY] 215 shareholder is required for the D. Foreign Investment, Thin Capitalization, incorporation. Shareholders may be Residency And Material Visa natural persons or legal entities, Restrictions residents or non-residents in Turkey. Barriers To Entry For An Offshore In both corporate forms, there is no Party obligation for directors and managers to reside in Turkey or to be Turkish All the procedures for incorporating citizen. foreign invested companies are the same as local companies. The national 3. Minority Shareholders’ Rights And treatment principle is applicable by all Protection means. Therefore, there are not Minority shareholders’ rights are significant barriers to entry for an regulated under the TCC. Minority offshore party. shareholders have right to request the Thin Capitalization followings: According to Corporate Income Tax Law, extraordinary general assembly if the total of the borrowings of a meeting to be convened, or that a corporation, which are obtained directly time to the agenda of the general or indirectly from its shareholders or assembly meeting to be added, persons related to the shareholders and postponement of balance sheet used in the business, exceeds three discussions for one month to have times of the equity capital of the a chance to review the balance corporation at any time within the fiscal sheet in detail, year, the excess part of the borrowings will be considered as thin capital for the independent auditor to be relevant fiscal year. However, appointed or replaced, borrowings such as loans borrowed by under circumstances requesting the banks or from third parties based on dissolution of the anonim sirket by non-cash guarantees provided by the filing a lawsuit, shareholders or persons related to the Minority shareholders may also be granted shareholders are not deemed to be thin the right of being represented in the board capital. of directors by the articles of Capitalization Obligation association. Apart from the rights Incorporation of a company requires the mentioned above, meeting and decision minimum capital as stipulated in the TCC. quorum also have impact on minority rights. Accordingly the minimum capital For instance, consents of at least 75% of amounts required for an anonim sirket is shareholders of anonim sirket are TL 50,000 (approx. EUR 18,500) while TL required to change the scope of the 10,000 (approx. EUR 3,600) for a limited company. sirket. For both companies, if the shares are stipulated in cash, at least 25% of the capital should be paid during the registration process and the unpaid ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN TURKEY] 216 amount should be paid within 24 companies operating as foreign currency months after registration. Assets exchange offices, companies dealing including intellectual property rights with public warehousing, publicly held may be contributed as capital in-kind companies subject to the Capital provided that those assets are Markets Law, companies that are transferable and eligible for valuation in founders and operators of free zones. cash. Restrictions On Remitting Funds Out Special Business Or Investment Visa Of The Jurisdictions Issues Pursuant to Turkish Foreign Direct Due to the national treatment principle, Investment Law, investors can freely foreign investments are not subject to transfer abroad: net profits, dividends, pre-entry screening requirement or proceeds from the sale or liquidation of additional approvals and authorizations. all or any part of an investment, However, the companies operating in compensation payments, amounts certain commercial activities arising from license, management and determined by the TCC should obtain similar agreements, and permission from the General Directorate reimbursements and interest payments of Domestic Trade for the incorporation arising from foreign loans through banks of company such as banks, private or special financial institutions. All finance institutions, insurance mentioned incomes utilized within companies, financial leasing companies, Turkey will be subject to withholding tax. factoring companies, holding companies, ILN Corporate Group – Establishing a Business Entity Series Fall 15 INTERNATIONAL LAWYERS NETWORK LAVRYNOVYCH & PARTNERS ESTABLISHING A BUSINESS ENTITY IN UKRAINE ILN CORPORATE GROUP [ESTABLISHING A BUSINESS ENTITY IN UKRAINE] 218 ESTABLISHING A BUSINESS ENTITY IN UKRAINE Types of Business Entities (ii) Limited partnership; Ukrainian legislation provides for the (iii) Partnership with additional liability; following forms of legal presence in (iv) Limited liability company (LLC); and Ukraine: (v) Joint-stock company (JSC). (i) Legal entity; The most common and suitable forms of (ii) Representative office; and legal presence for conducting business in (iii) Joint venture and cooperation Ukraine are limited liability companies and agreements. joint stock companies. Both forms are based Commercial activities in Ukraine may be on the concept of the limited liability of investors. carried out by the following types of legal entities: The table below contains the main (i) General partnership; differences between JSCs and LLCs: Issue LLC JSC Types N/A Public or private Maximum number of 100 members/ If the number of members shareholders exceeds the given maximum figure, the LLC is either subject 100 more than 100 to a mandatory reorganization for Private JSC for Public JSC into a JSC or obliged to decrease the number of the members. Issue of shares No formal shares are issued. A first issue of shares upon the establishment Members hold participatory of either a public or a private JSC should be interests in a LLC which are not made by means of a private placement among considered to be securities. the founders. A public JSC is obliged to undergo a listing procedure (its shares must be included into the list of at least one of the Ukrainian stock exchanges). While a private JSC may issue additional shares only by means of a private placement, a public JSC may issue additional shares by means of both public and private placement. ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN UKRAINE] 219 Restrictions on There are some restrictions in place in respect of wholly-owned legal entities, establishment i.e. entities that fully belong to a sole member/shareholder. A wholly-owned legal entity in the form of either an LLC or a JSC may not have a sole founder/member/shareholder which, in its turn, is also a wholly-owned legal entity. An individual or a legal entity is not allowed to be the sole founder/member/shareholder in more than one LLC/JSC in Ukraine. A legal entity, which is wholly owned by a foreign company, may not own agricultural land in Ukraine. Share Capital Participatory interest Shares Minimal share capital N/A 1,250 Ukrainian monthly salaries (UAH 1,522,500.00, approx. USD 70,000.0021) Quorum more than 60% - at least 60% - more than 50% (starting from 1 January 2016) Management/ General Members’ Meeting, General Shareholders’ Meeting, Supervisory Bodies Collective management body Collective management body (Directorate) or individual (Management Board, Directorate) or management body (Director), individual management body (Director, Audit Commission General Director), Supervisory Council – mandatory in JSC with 10 or more shareholders, Audit Commission (Auditor) 21 The official exchange rate of the National Bank of Ukraine as of 4 August 2015 is used which is UAH 21.7 per USD 1. ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN UKRAINE] 220 In comparison with a JSC, an LLC is likely to (iii) completed registration form; be a more convenient form of legal (iv) one copy of the duly executed presence in Ukraine due to the following certificate of incorporation (extract reasons: from the commercial or trade register) (i) Less time-consuming procedure of the of each of the founders (if a founder is a establishment and registration; foreign legal entity); and (ii) Absence of minimum share capital (v) one copy of a duly executed power of requirements; and attorney granted by each of the founders authorizing the (iii) Less burdensome corporate representative(s) to carry out the governance. registration process. Required Documents to Establish LLC One of the most recent legislative novels The following documents must be with respect to the state registration of submitted to the state registrar for the legal entities is the cancellation of the state purposes of the state registration of the LLC: registration fee. (i) two originals of the articles of Stages and Approximate Timing to association of the LLC; Establish LLC (ii) original or copy of the minutes of the Constituent Meeting of the LLC; No. Stages Time 1. Holding of Constituent Meeting, execution of the LLC's articles of 1-2 business days association and the minutes of the Constituent Meeting of the LLC 2. State4 registration with the state registrar (this stage also includes up to 3 business days registration with the State Statistics Service of Ukraine and the State Fiscal Service of Ukraine) 3. Arranging for the execution of bank signature cards and opening of a 1 business day permanent bank account 4. Registration8 as a value added tax (VAT) payer (if necessary) up to 3 business days Corporate Governance The Ukrainian CG Principles, among many The Ukrainian Principles of Corporate others, put emphasis on such things as the Governance have been developed in following: accordance with the OECD Principles of (i) Protection of the rights and interests of Corporate Governance. They were approved shareholders; by the decision of the National Securities (ii) Fair treatment of all shareholders, and Stock Market Commission of Ukraine of including minority and foreign July 22, 2014 (the “Ukrainian CG shareholders; Principles”). The principles are of a (iii) Facilitation of a communication recommendation nature and their between shareholders with respect to application is optional. the exercise of their basic rights; ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN UKRAINE] 221 (iv) Prevention of inside dealings. The table below contains the main differences in corporate governance between JSCs and LLCs: Issue LLC JSC Highest governing General Members’ Meeting General Shareholders’ Meeting body Voting procedure All decisions should be approved by a All decisions should be adopted by a simple majority of votes of members simple majority of votes of shareholders present at the general meeting. registered for the meeting. The following resolutions require the The legislation of Ukraine requires more approval of a simple majority of votes than the 3/4 majority of the total of all members (rather than those number of votes of the shareholders present at the meeting): registered for the meeting for the following resolutions: (i) the determination of the main business activities of the LLC; (i) amendments to the articles of (ii) the amendments to the articles of association; association and decrease/increase of (ii) the cancellation of shares bought out the LLC’s share capital; and by the JSC; (iii) the expulsion of a member from (iii) the changes of the JSC type; the LLC. (iv) the placement of shares; (v) increase/decrease of the share capital; and (vi) the terminations and spin-offs of the JSC. The legislation also envisages the method of cumulative voting for the appointment of the members of the Supervisory Council and/or Audit Commission. Exclusive competence The legislation of Ukraine specifies a list of issues, which belong to the exclusive of the highest competence of the highest governing body and may not be delegated to other governing body governing bodies of JSC/LLCs. Executive body Should be appointed and removed by May be appointed and removed by the the General Members’ Meeting. Supervisory Council or the General Shareholders’ Meeting. ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN UKRAINE] 222 An executive body is responsible for the day-to-day management of a JSC/LLC. The Chairman of the executive body or the individual manager (Director/General Director/Head of the Management Board) is entitled by law to represent the JSC/LLC without a power of attorney. The authorities of the Director/Head of the Management Board may be limited by a joint signature procedure. If this procedure is triggered, all documents on behalf of the LLC/JSC must be signed by both the Head of the Management Board/Director and an authorized representative(s) appointed by the General Shareholders’/Members’ Meeting. The joint signature procedure should be envisaged by the LLC’s/JSC’s articles of association. Supervisory Council No legislative requirements to The Supervisory Council represents the establish a Supervisory Council. interests of the shareholders between the shareholders’ meetings. It exercises In certain cases, the formation of a control over the JSC’s management to Supervisory Council can be envisaged the extent envisaged by the articles of by the articles of association. association. The members of the Supervisory Council should not be members of the Management Board or the Audit Commission. A JSCs with 10 or more shareholders must appoint the Supervisory Council. The powers of the Supervisory Council should be established by the articles of association. Audit Commission An Audit Commission is established by A JSC with the fewer than 100 the General Members’ Meeting to shareholders may choose between review the financial matters of the establishing an Audit Commission or LLC. appointing an auditor. The Audit Commission’s authorities A JSC with more than 100 shareholders are determined by the General must form an Audit Commission. Members’ Meeting. The Audit Commission carries out the The Audit Commission should consist audit of financial and commercial of at least 3 members. None of the matters of the JSC. members of the Audit Commission may simultaneously hold the position of the head of the executive body. ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN UKRAINE] 223 Disclosure of Information and Transparency Guarantees and Protections of Investors’ Rights The disclosure of information and transparency As far as establishing new legal entities is is one of the basic principles of healthy viewed as a form of foreign investment, it corporate governance. makes sense to point out the main guarantees of investors' rights. Under Ukrainian law JSCs are required to disclose regular information on an annual and Protection against Changes in Legislation quarterly basis. In addition, JSCs are obliged to In case of any changes in legislation on publish information that may impact their investments, the foreign investors have financial position or the price of their shares. guaranteed protection of their investments for a This information includes particulars with regard period of 10 years from the date the relevant to the following: amendments are in force. However, the amendments of legislation with respect to (i) The issuance of shares in the amount defense, national security, public order and exceeding 25% of the share capital; environmental protection are excluded from the (ii) The redemption of shares; guarantees. (iii) Listing/delisting of shares; Protection against Nationalization (iv) Change in the composition of the The foreign investments may not be subject to Management Board; nationalization. The state bodies do not have (v) Change in owners holding 10% or more of the right to expropriate foreign investments, shares; excluding expropriation in emergency measures such as natural disaster, accidents, epidemics (vi) Formation/termination of and epizootics. branches/representative offices; Guarantee for Compensation and (vii) Decrease of the share capital; and Reimbursement of Losses (viii) The decision on the bankruptcy of the Foreign investors have the right of JSC. reimbursement for their losses, including loss of Specific disclosure requirements are established profits and moral damages incurred as the for banks and financial companies. result of action, failure or improper performance of the state bodies, including its The scope and procedure of the disclosure of officials who have obligations toward foreign information of an LLC may be governed by its investors or enterprises with foreign articles of association. investments. All such expenses and losses of In addition, according to the latest legislative foreign investors must be reimbursed at the developments, all legal entities are obliged to current market rate and/or well-determined disclose their ultimate beneficiary owner to the valuation which has been set by an auditor or state registrar. The failure to disclose the above audit company. The reimbursement paid to a information will result in the imposition of a fine foreign investor should be fast, adequate and on the director of the legal entity concerned in effective. the amount of UAH 5,100 – UAH 8,100 Guarantee in event of Termination of (approximately USD 250-400). The disclosure Investment should be done by completing a registration form and submitting it to the state registrar. In case the investment activity is terminated, the foreign investors have the right to return their investments in in-kind form or in the currency of the investments in the amount of ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN UKRAINE] 224 the contribution as well as revenues from investments at the market value within six months from the termination of their investment activity. Such investments should be returned free of duties. Guarantee of Repatriation of Profits After the payment of taxes, duties and other mandatory payments, foreign investors are guaranteed the right of unimpeded and immediate transfer abroad of all profits and other proceeds in foreign currency earned as a result of their investment activity. ILN Corporate Group – Establishing a Business Entity Series Fall 15 INTERNATIONAL LAWYERS NETWORK DAVIS MALM & D’AGOSTINE P.C. LEWIS RICE LLC ESTABLISHING A BUSINESS ENTITY IN THE UNITED STATES ILN CORPORATE GROUP [ESTABLISHING A BUSINESS ENTITY IN THE UNITED STATES] 226 ESTABLISHING A BUSINESS ENTITY IN THE is a preliminary decision that will affect a UNITED STATES company’s formation requirements and operations. A natural choice for many 1. Choosing the Right Legal Structure companies will be the state where the 1.1 Introduction company maintains its primary place of business or U.S. headquarters. Establishing a business entity in the Nevertheless, a company domiciled in United States can be an important the U.S. can be organized in any state strategic step for any international and Delaware remains the most popular company that wants to avail itself of the state for domestic and international world’s economy. There are, however, companies alike. Delaware’s Court of many considerations to weigh carefully in Chancery has extensive experience consultation with an experienced interpreting business legal documents attorney. Perhaps first and foremost, a and adjudicating disputes, and all cases company should choose the legal are decided by judges. This lends a structure that is most advantageous and certain predictability that many best suited to their needs. Section 1 businesses find desirable. Many other examines the basic principles of five of states, however, are popular for a the most common types of business variety of reasons: New York, Maryland, entities in the United States: the and Nevada to name a few. This article corporation, the limited liability will provide general principles, but will company, the general partnership, the focus on Delaware law when referring to limited partnership, and the limited specific state laws or interpretations of liability partnership. In particular, this state laws. Regardless of a company’s Section will highlight governance, chosen state, it may have to register as a capitalization, personal liability, and tax “foreign” company in other states where treatment for each entity type. While the it conducts business, and may be subject tax discussion will focus on federal to special fees or franchise taxes in income tax, most state laws follow those states. federal income tax principles. Finally, some consideration will be given to less- 1.3 The Corporation common business structures and other regulatory issues. The corporation is the most popular form of business entity in the United 1.2 A Preliminary Note: Choosing a State States. Once formed under state law, for Organizing the Entity corporations are often characterized as “private” or “public,” mainly depending In the U.S. federal system, each state upon the number of shareholders. promulgates its own statutes and Generally, a private corporation may go regulations that govern the business public after establishing itself in the U.S. entities which may be established in marketplace through an initial public that jurisdiction. It is important to offering (“IPO”), which is commonly remember that in most cases there is no undertaken to provide access to capital general “U.S. corporation,” and that markets. choosing the state in which to organize ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN THE UNITED STATES] 227 Governance: A corporation is owned by corporation may pay out dividends to its shareholders, each of whom holds a attract shareholders, since there is no certain number of shares representing readily available market for its shares. It equity ownership in the company. may also make “capital calls” (if Management, however, is vested in a permitted under its organizational board of directors. In Delaware, a documents or under a shareholder corporation may have any number of agreement) or issue additional shares to directors. The directors are not required raise capital. Public corporations, that is, to be United States citizens or residents. corporations which are registered with These directors owe important fiduciary the United States Securities and duties to the corporation, and establish Exchange Commission and are usually corporate by-laws to regulate corporate listed on a public stock exchange, can decision-making. Typically, the directors raise large amounts of capital via an IPO will delegate many of the day-to-day or additional public securities offerings. management activities to the officers of Dividends become less important to the corporation, subject to their attract investors, because shareholders oversight. Most corporations have at can freely trade their shares in the least three officers: a President (often markets where they are listed. also called the Chief Executive Officer), a Treasurer, and a Secretary, but many All corporations may issue additional other officers are also often named by classes of stock, usually called preferred the Board. One person can serve in stock, that give holders additional rights multiple roles as an officer, and a person – such as priority for dividends or may be both a director and officer. preference in a liquidation – and may Officers also need not be United States also restrict certain other rights, such as citizens or residents. voting. Under Delaware law, closely- held corporations must place certain Shareholders are entitled to vote to transfer restrictions on their shares in elect the board of directors and to order to qualify for closely-held status, approve changes to the corporation’s and many private corporations also elect “charter” or articles of incorporation to do this. Corporations may also raise (the terms are used interchangeably). In capital by taking on debt. Many public a closely-held corporation (a statutorily- corporations issue bonds to investors in defined “private” corporation), addition to other traditional means of Delaware law allows direct management borrowing, while private corporations by the shareholders, so long as the often issue preferred stock, sometimes corporation meets the statutory in combination with traditional lending requirements for closely-held status. arrangements. Capitalization: A corporation will Personal liability: One very attractive generally issue shares of common stock aspect of a corporation is the limited to its founders upon formation. Either liability of the owners. Generally, common or preferred stock, described shareholders are exposed to liability more fully below, may be issued to only up to the amount of their investors to raise capital. A private investment in the corporation. Directors ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN THE UNITED STATES] 228 can potentially be personally liable to corporation” filing status (a term the shareholders for violations of certain referring to an election to be treated as fiduciary duties, but courts will generally an S-corporation under federal and state defer to a director’s business judgment tax law). All profits (and losses) “pass and limit personal liability to egregious through” an S-corporation and violations. Moreover, many individual shareholders pay tax only at corporations carry directors and officers the personal income level, so long as the (D&O) liability insurance covering corporation maintains its S-corporation certain actions taken by directors and status. To maintain such status, there officers and will also indemnify their can be no more than 100 shareholders, officers and directors for certain non- and all must be U.S. citizens and natural fraudulent behavior. If a private persons, or certain qualified trusts. S- corporation is merely an alter-ego of a corporations are rarely useful in the single owner, courts may “pierce the international context. corporate veil” and hold that individual liable for the corporation’s debts and 1.4 The General Partnership obligations. A general partnership is any association Tax treatment: U.S. domestic of two or more individuals or business corporations are subject to U.S. federal entities who carry on a business for income tax on their worldwide income profit. The general partnership can be a regardless of source, but generally may very flexible structure, easily tailored to claim a foreign tax credit or deduction the needs of the partners via a for taxes imposed by non-U.S. partnership agreement. Moreover, jurisdictions. For this purpose, a U.S. general partnerships enjoy partnership corporation is considered domestic if it taxation and are not taxed at the entity is formed under U.S. law or the law of level. It is important, however, to any U.S. state. Thus, a corporation consider some of the drawbacks of the organized under state law will be general partnership before pursuing this treated as domestic, and subjected to type of entity. tax on its worldwide income, regardless Governance: A general partnership is of whether its place of management and owned and controlled by the partners, control is outside the U.S. One potential who have wide latitude to organize drawback to a corporation is that it is partnership governance in the subject to so-called “double taxation.” A partnership agreement. In Delaware, for U.S. corporation will pay state and example, a partnership agreement will federal corporate income tax on its control in almost every situation unless income at the corporate level. the agreement conflicts with explicit Moreover, individual shareholders will statutory requirements. For large also pay personal state and federal partnerships, these agreements can income tax on any income from become very complex and will dividends distributed. occasionally result in gridlock between Some corporations, if they meet the partners. In general, a partner is an qualifications, will opt for “S- agent of the partnership, and owes the ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN THE UNITED STATES] 229 partnership basic fiduciary duties of care below) often hold their interests and loyalty. If any partner disassociates through “blocker” companies formed in from the partnership, the partnership off-shore jurisdictions. This permits will automatically dissolve unless the these investors to obtain the benefits of partnership votes to continue business. pass-through taxation without subjecting the foreign investor to United Capitalization: A partnership raises States filing, tax and audit requirements capital through equity contributions by that may reach all of their worldwide the partners and by taking on debt. activities. Like foreign corporations that Partners may also be able to transfer invest directly in partnerships, foreign their economic interest in the corporations that invest in a single partnership to an outside party, such as member LLC treated as a disregarded a creditor, but with few exceptions entity may be subject to a 30% branch partnership interests are not publically- profits tax on their accumulated traded in capital markets. earnings and profits effectively Personal liability: The major drawback connected to a U.S. trade or business to a general partnership is that each carried on through the disregarded partner is jointly and severally liable for entity. the obligations of the partnership. The 1.5 The Limited Liability Company (“LLC”) only exception to this rule is if a partner joins a partnership after the obligation The LLC is a relatively new and was incurred by the partnership. increasingly popular choice of business entity. Members of the LLC benefit from Tax treatment: The partnership pays no limited liability, pass-through taxation, income tax as an entity. Instead, and a highly-customizable management partners pay individual income tax after framework. Nevertheless, because the partnership income is deemed LLC is relatively new, the case law is not distributed to the partners. This is as developed and reliable as that for known as “pass-through” taxation, and corporations, although that is rapidly is one of the most desirable aspects of changing given their popularity. forming a partnership. However, in the Moreover, LLCs usually lack access to international context this is often a capital markets that public corporations distinct problem, because non-United enjoy. States shareholders will be required to file United States tax returns and pay Governance: The owners of an LLC are taxes to the United States. In addition, called “members.” Members may foreign corporations that invest in a manage the LLC themselves, or set up a partnership may be subject to a 30% wide variety of management branch profits tax on their accumulated frameworks using the LLC agreement, earnings and profits effectively including a board of “managers” that connected to a U.S. trade or business functions much the same as a board of carried on by the partnership. For this directors in a corporation. LLCs also reason, non-United States investors in may, but are not required to, name partnerships (as well as LLCs, discussed officers. State laws typically give wide ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN THE UNITED STATES] 230 discretion to LLC agreement Tax treatment: An LLC with multiple governance. In Delaware, for example, members is treated as a partnership for the LLC agreement will control over tax purposes, enjoying pass through nearly any default statutory taxation, unless the LLC otherwise elects management rule. Unlike partnerships, corporate tax treatment. Please see the LLCs can also be wholly-owned by one discussion of partnership tax treatment member (a natural person or another above for important tax information on entity) who exercises complete control the taxation of non-United States of the LLC. investors in partnerships. If the LLC meets the necessary requirements, it Capitalization: LLCs can raise capital by may opt for S-Corporation tax status, issuing equity interests to new members which, although very similar, is slightly or by taking on debt. The LLC different in treatment than partnership agreement offers a great deal of taxation and may be more favorable to flexibility – members regulate how and the members. A single-member LLC is when new equity may be issued, and treated as a disregarded entity for can create different classes of income tax purposes unless it elects to membership that offer varying levels of be taxed as a corporation. voting rights, powers, distribution rights, and duties. Unless prohibited under the 1.6 The Limited Partnership (“LP”) LLC agreement, members can also assign or pledge their equity stake in an LLC to An LP offers many of the advantages of a a third party. Depending on the terms general partnership, but also allows for of the LLC agreement, this assignment a class of “limited partners” who can include both the financial interest contribute capital to the partnership, and membership rights and powers. but do not face the joint and several Subject to a few restrictions under state liability of general partners. This entity and federal tax law, profits and losses is attractive because of its ability to may be allocated among the members attract investors who would be unwilling as provided in the LLC agreement. to join as a general partner. Like a general partnership, limited partnership Personal liability: Similar to a interests are rarely publically traded. corporation, the debts, obligations, and liabilities of an LLC are solely those of Governance: In an LP, only general the LLC and no member will be held partners may manage the partnership. personally liable for those debts, For example, under Delaware law, a obligations, and liabilities. This limits limited partner may not participate in the exposure of most LLC members to the control of the business. They may, the amount of their equity contribution, however, vote on certain issues that and is a significant advantage LLCs have affect the partnership, such as over general partnerships. Most state dissolution, admission or removal of courts, including Delaware, have applied partners, or an amendment to the the same principles for “piercing the partnership agreement. Like a general veil” to LLCs as they have to partnership and an LLC, the partners in corporations. an LP can tailor the structure of ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN THE UNITED STATES] 231 management to their needs in a variety administrative and filing requirements of ways using a partnership agreement. as trade-offs for this advantage. Capitalization: An LP can more easily Governance: Like a general partnership, raise additional capital than a general the partners manage and control the partnership by creating and offering partnership. They set-up the limited partnership stakes. These are management framework through a attractive to potential investors because partnership agreement that is flexibly limited partners do not assume joint and drafted to address the partnership’s several liability for the debts or needs. obligations of the partnership. Capitalization: An LLP raises capital like Personal liability: An LP must have at a general partnership. The partnership least one general partner (a natural agreement may create different classes person or an entity) who is jointly and of partnership interests, with different severally liable for the debts and rights and powers, to attract different obligations of the partnership. Limited classes of investors. partners – so long as they do not participate in control – are not liable for Personal liability: Debts and obligations the partnership’s debts. Moreover, a arising out of an LLP are solely those of limited partner who does participate in the partnership. the control of the business is only liable Tax treatment: The LLP enjoys to persons who transact business with partnership pass-through taxation the limited partner and reasonably treatment. Please see the discussion of believe the limited partner to be a partnership tax treatment above for a general partner. description of this treatment. Tax treatment: A limited partnership 1.8 Special Entities: Banks and Joint enjoys partnership pass-through Ventures taxation treatment. Please see the discussion of partnership tax treatment Banks: It is important to understand above for a description of this that none of the entities described treatment. above are appropriate for a company that will conduct commercial banking 1.7 The Limited Liability Partnership activities, such as receiving deposits or (“LLP”) certain trust activities. In the United Like the LLC, the LLP is a relatively recent States, all commercial banks must be hybrid creation that combines the chartered by either an individual state or limited liability of a corporation with the the federal government (a “national tax advantages of a partnership. The LLP association”). Both state and national is, for all practical purposes, a general banks are subject to significant partnership, except that the debts and regulation and oversight, and any obligations of the LLP are solely those of foreign bank moving a bank or branch to the partnership. An LLP faces additional the United States, starting a new bank, or acquiring an existing bank should ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN THE UNITED STATES] 232 consult the advice of an attorney corporation is a USRPHC if the fair experienced with bank regulations. market value of USRPIs held by the Formation often involves establishing a corporation equals or exceeds 50% of bank holding company and a formal the fair market value of its USRPIs and charter approval process. Although its interest in real property located state and national commercial banks are outside the U.S., plus any other of its subject to strict oversight, they do enjoy assets which are used or held for use in many privileges, such as deposit a trade or business. insurance from the Federal Deposit Insurance Corporation and discounted Real Estate Investment Trusts: The U.S. loans from the Federal Reserve. provides special tax benefits for corporations that qualify as real estate Joint Ventures: A joint venture entails a investment trusts ("REITs"). REITs must formal collaboration between two satisfy strict and detailed requirements separate business entities. Entering a intended to ensure that their activities joint venture with an established U.S. are primarily limited to passive company may be an ideal arrangement investments in professionally managed for a foreign business. Joint ventures real estate investments. REITs pay can take the form of any of the business corporate tax only on amounts not entities discussed above, or may simply distributed to their shareholders. To the be a contractual agreement. Regardless extent that a REIT distributes its income of the form, joint ventures should be to its shareholders, therefore, its income custom tailored to the needs of both is subject to a single layer of tax at the entities and formed after close shareholder level. In this respect, REITs consultation between the venturing resemble pass thru entities such as parties and their respective legal partnerships. Because REITs are treated counsel. as corporations, however, non-U.S. investors in a REIT generally are shielded Real Estate Investments: Sales of U.S. from most U.S. tax and reporting real property interests ("USRPIs") are requirements. subject to special income tax rules under the Foreign Investment in U.S. Real 1.9 Regulatory Issues Property Tax Act ("FIRPTA"). Sales of USRPIs by non-U.S. investors are subject It should be noted that businesses in the to U.S. federal income tax. To ensure United States are subject to a wide the tax is paid, a purchaser is generally variety of regulatory schemes at both required to withhold 10% of the the state and federal level. For example, purchase price and the non-U.S. seller is any company issuing equity interests required to file a U.S. tax return to claim (whether through private placements or a refund of any amounts withheld in public offerings) is likely subject to excess of the actual tax due. The sale of regulation by the Securities and stock in a U.S. domestic corporation is Exchange Commission as well as state treated as a USRPI if the corporation is a securities laws. Companies merging U.S. real property holding corporation with or acquiring another company must ("USRPHC"). In general, a U.S. domestic look closely at applicable antitrust law. ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN THE UNITED STATES] 233 Any company with employees will have highlights the key statutory to consider state and federal employee requirements based on Delaware law. protections or state workers’ compensation schemes. Moreover, 2.2 The Corporation companies involved in specific industries In order to form a corporation, a may encounter additional regulations. business must file its certificate of For example, manufacturers need to incorporation with the Secretary of look closely at environmental State. The certificate must contain a regulations, communications companies variety of information, including the must address federal communication name, registered office address, and a regulatory issues, and companies general corporate purpose. Moreover, engaged in providing consumer goods the certificate must name the and services face a number of incorporators and/or the initial regulations designed to protect directors. The certificate may provide consumers. In nearly any scenario, that the board of directors can amend these regulations may create extensive the by-laws. The certificate will require administrative costs, and the advice of shareholder approval for any competent legal counsel will be needed amendment after receipt of any to ensure compliance with all related payment for stock. federal and state regulations. 2.3 The General Partnership 2. Forming Your Business Entity – First Steps 2.1 Introduction A general partnership is formed anytime two or more persons agree to carry-on Once the organizers have decided on a as owners of a business for profit, and particular business entity, there are still no formal state filing is required, except many steps to take before opening for that many states require the filing of a business. In most states, a business fictitious name registration for the name must apply for a business license and under which the partnership is doing have a registered agent in the state, and business. The partnership is formed should consider reserving its name. whether or not these individuals intend Moreover, any business with employees to form the partnership. Nevertheless, a must obtain a Federal Employer partnership may file a statement of Identification Number from the IRS and partnership existence with the Secretary consult with the state’s tax regulator. In of State. Generally speaking, however, Delaware and many other states, the the partnership will be governed by the business entity is formed on the same terms of its partnership agreement day as filing so long as the filing meets unless it directly contradicts a all statutory requirements. Often the mandatory statutory rule. filing process and payment of fees may be completed online. This Section 2.4 The Limited Liability Company (“LLC”) identifies the concrete first steps to forming a particular business entity. An LLC must file a certificate of Rather than offering an exhaustive list, it formation with the Secretary of State. The certificate must include the name of ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN THE UNITED STATES] 234 the LLC and the name and address of the . . . registered agent and the registered office. Non-U.S. companies or other 3. Foreign Investment and Operational domestic entities may consider filing a Considerations; Residency and Material certificate of limited liability Visa Restrictions for Employees domestication or a certificate of a. Investing in Your Entity conversion to an LLC, respectively. Generally, transferring funds into a Members of the LLC must draft an LLC newly formed United States business agreement that can become effective entity is not difficult. Funds generally after or at the date of filing. There is no flow freely between the United States requirement to file the LLC agreement. and most other countries with very 2.5 The Limited Partnership (“LP”) limited restrictions or capital controls. There are restrictions with respect to All general partners must file a certain countries that are under certificate of limited partnership with sanctions from the United States (such the Secretary of State in order to form as Iran and North Korea) and for an LP. The certificate includes the companies or persons who are on following information: name of the “watch lists” of potential terrorists or partnership, name and address of the security risks maintained by the registered agent and office, and names government. There is also a reporting and addresses of all general partners. requirement on movements of cash (or Again, the partners should pay careful physical checks which are being carried attention to the partnership agreement, rather than mailed) in excess of which may take effect after or at the US$10,000 across the U.S. border, but date of filing. There is no requirement wire transfers generally occur without to file the partnership agreement. the need for any reporting by the transferee or recipient. 2.6 The Limited Liability Partnership (“LLP”) In addition, banks have “know your customer” rules that will require them A general partnership may file a to have copies of passports or other statement of qualification with the identifying and background information Secretary of State to become an LLP. on one or more of your executives; The statement includes the name of the usually that information is gathered partnership, the name and address of when opening the account. Generally, the registered agent and office, the opening an account will require a number of partners, and a statement resolution of the Board of Directors (or that the partnership elects to be an LLP. other governing body if the entity is Like the general partnership and LP, the formed as a partnership or LLC) setting LLP partners should set up their forth the individuals who will have governance framework in a partnership authority over the bank account as well agreement that is not required to be as copies of the account holder’s filed. organizational documents, copies of the passports of the authorized signatories, ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN THE UNITED STATES] 235 and the entity’s taxpayer identification Failure to file an annual report can number. lead to the dissolution of a corporation. There are similar Non-United States investors forming a requirements for other forms of United States company will want to business entities. It is possible to consider the extent to which they will reinstate a dissolved corporation, but invest funds as debt or as equity. Like penalties will apply and, in the many other countries, the United States meantime, shareholders of the has “thin capitalization” rules. However, corporation may be exposed to these rules generally only apply for tax liabilities. purposes; there is not a requirement of minimum capitalization for corporate Businesses are also required to file to purposes other than such as is qualify to do business in each state in reasonably necessary and appropriate to which they do business, and each state carry out the business of the enterprise has a different statute defining “doing in light of its expected liabilities (i.e., the business” for these purposes. Usually, entity cannot be significantly under having property (including leased capitalized without risk of piercing the property, such as an office) or corporate veil). Failure to meet the thin employees in a state will result in a capitalization rules simply means filing requirement, among other interest deductions on debt to the non- things. United States investor are denied to the United States company. For tax purposes, federal United States income tax returns must be filed b. Operational Issues annually for corporations; entities i. Annual Reports and Filings, taxed on a flow through basis also Qualifications to Do Business. must file annual information returns. Quarterly estimated tax payments are After forming a corporation, it is also required. Once a business important to file annual reports, which qualifies to do business in a state, it for Delaware includes paying an will likely need to file tax returns in annual franchise tax fee. Annual that state as well. Income earned in reports in Delaware are due on or the United States will be apportioned before June 30. Note that the among the different states in which a franchise tax is calculated based on corporation does business. either authorized capital or on an “alternative basis” which multiplies ii. Additional Investments and Offerings the corporation’s net worth by total After an entity is formed, it often authorized stock divided by total requires additional investment, which, issued stock. The alternative basis thus as noted above, may come in the form results in higher tax when a large of debt or equity. If additional equity number of shares are authorized but investment is needed, it is often not issued. For this reason, authorized necessary to amend the charter to but unissued shares should be authorize additional shares of stock. minimized. ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN THE UNITED STATES] 236 In many cases, investment from new overall rules for public offerings are investors in particular comes in the beyond the scope of this overview, the form of new series or classes of stock, ability to buy or sell stock on the most often, new classes of preferred public market may be restricted to stock (these classes are usually certain “registered” shares even after labelled with new letters, so there will a company has become publicly listed, be Series A Preferred, Series B unlike many other countries where Preferred, etc.). These new series of simply “listing” provides access to the stock may have priority over or be on market. Thus, most investors in par with earlier series of stock, so that United States companies will negotiate they receive an investment return “registration rights” at the time of either before or alongside of those making an investment. Registration earlier series. rights agreements set rules for what shares first become liquid following an Preferred stock often includes initial public offering. protections for the holders of such preferred stock, such as rights to veto iii. Taxes on Transfers to Non-United major corporate actions (sales of the States Investors. corporation, issuance of dilutive securities, changes to the charter or Transfers from the United States to bylaws), rights to participate in new shareholders or investors in another offerings (“preemptive rights”), rights country are potentially subject to to participate in sales of stock by other withholding taxes. Which withholding shareholders (“tag-along” or “co-sale” taxes apply, however, depends on the rights), and even rights to force a sale underlying facts for specific transfers: of stock by other stockholders (“drag- is the transfer a return of debt, a along” rights). This is particularly true payment of interest, a corporate in the venture capital or private equity dividend coming out of earnings and marketplaces, and the National profits of the subsidiary, a corporate Venture Capital Association maintains distribution that is not drawn from model documents that can provide earnings and profits (probably a return considerable background on how of capital), a royalty payment, a these rights are used and what the payment for management services, or documents for such investments look something else? Is the transfer like. Delaware law also provides for governed by a tax treaty between the special “class votes” when a class of United States and the country of the stock is effected in a manner different recipient? than other classes, and this special When a non-United States business approval can often be critical to major forms a United States subsidiary, it will transactions, such as mergers and usually enter into an intercompany acquisitions. agreement with that subsidiary which United States securities regulations will help ensure that transfers occur in also provide special and very detailed the most tax efficient manner. rules for public offerings. While the Withholding rates on different types of ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN THE UNITED STATES] 237 income can vary from zero to thirty- entity is used, to withhold taxes from five percent, so properly amounts paid to employees, and to characterizing payments back to the file employment tax returns showing home country will be very important. all such amounts. Most businesses will Intercompany agreements are usually use a local payroll servicing company drafted with input from both the to manage the withholding process. accountants and lawyers advising the business. Executives transferred to the United States will have special considerations. Withholding tax issues can be Upon becoming resident in the United particularly important for non-United States, an executive will be taxed in States investors in partnerships, the United States based on his or her limited liability companies, and other worldwide income (subject to credits pass-through entities. Generally, for foreign taxes paid), and will be these entities must determine required to fully report all non-United withholding tax liabilities at the time States bank accounts and possibly income is earned, not at the time other holdings. In many cases, an distributions are made. As a result, executive may be well-advised to there may be withholding taxes due engage in tax planning prior to from the entity even when no becoming resident in the United States distributions are made. in order to minimize the impact of these requirements. In general, for a United States corporation, withholding taxes are due c. Special Business or Investment Visa at the time of a transfer, and there is Issues an annual report filing by March 15 of the following year. Withholding taxes Anytime a business in the United States can often be substantially reduced or wishes to host, train, or employ a eliminated under a tax treaty, but foreign national not already authorized taking advantage of the tax treaty will to work in the United States, they must require the timely filing of a form (W- obtain the appropriate immigration 8BEN) with the United States Internal status for that worker or face penalties. Revenue Service claiming treaty A visa is a passport stamp, issued by the benefits. In addition, taxpayers State Department, which allows the subject to withholding under the U.S. foreign national to travel to the United Foreign Account Tax Compliance Act States and request admission under a (“FACTA”) generally are subject to a particular immigration status, or to full withholding tax and must file a change their current immigration status. claim for refund to claim any benefit In most cases, the underlying of reduced taxes under a treaty. immigration status justifying a visa or change of status must also be approved iv. Employee Tax Issues. by U.S. Citizenship and Immigration Services prior to applying for a visa at a The United States also requires all U.S. consulate abroad or before the employers, regardless of what form of foreign national can change status. A ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN THE UNITED STATES] 238 brief discussion of several of the most visas/statuses are for professionals who widely used classes of temporary and need to work in the United States at a permanent visas (statuses) follows in branch, parent, affiliate, or subsidiary of this Section. their current, foreign employer. Treaty Trader and Investor Visas (E-1, Temporary E-2). If a foreign national is from a Business Visitor Visas (B-1). This is county that maintains a treaty of available to foreign nationals who are commerce and navigation with the surveying potential investment United States, (s)he may qualify as an E- opportunities, attending a conference 1 treaty trader or E-2 investor. To or trade show, conducting independent qualify, the foreign national must be research, participating in a short-term engaged in substantial trade or training program, or giving a guest investment, and must be an essential lecture or speech. The B-1 status is for a employee or possess highly-specialized limited period of time (usually less than skills. six months). To qualify for this status, the visitor cannot remain in the United Permanent States to manage their investment, Employment Immigrant Visas/Statuses perform productive employment, or (EB-1, EB-2, EB-3, EB-5). The U.S. State receive any salary (other than Department issues approximately reimbursement for expenses) from U.S. 140,000 employment-based immigrant based companies. visas (otherwise known as green cards) Temporary Worker Visas (H-1B, H-2B, each year. Top priority (EB-1) goes to H-3, L, O). These are available for persons with “extraordinary ability” foreign employees who fall within (international recognition in their fields) several specific categories. The H-1B is and multinational executives with an for specialty occupations, which overseas affiliate, parent, subsidiary, or generally are professionals whose branch of a U.S. employer. EB-2 visas position require at least a bachelor’s are issued to foreign nationals who fill degree or higher, fashion models, or positions in the national interest that researchers for Department of Defense require the skills of someone with an projects. H-2B visas are for seasonal advanced degree, or to those who work and limited to nationals from possess exceptional ability in their field designated countries. Both H-1B and H- (although the latter category of EB-2 2B visas are subject to quotas. H-3 visas visas also requires certification from the are available for training in any field Department of Labor that qualified U.S. (except graduate medical education) workers are not interested in the that is not available in the foreign position). Third priority goes to EB-3 national’s home country. Persons with visa applicants, who are skilled extraordinary ability as evidenced by professionals or workers, and must national or international acclaim may provide certification from the qualify for O visas/statuses. L ILN Corporate Group – Establishing a Business Entity Series [ESTABLISHING A BUSINESS ENTITY IN THE UNITED STATES] 239 Department of Labor that qualified U.S. There are additional types of workers are not interested in the immigration statuses which authorize position. Historically, long wait times employment in the United States. ranging from 5-10 years exist for EB-3 Whether a foreign national qualifies visas, especially for foreign nationals generally is dependent on the type of from Mexico, India, and China. EB-5 work being performed, his or her visas are for immigrant investors who qualifications, and the type of employer. engage in new commercial enterprises Careful consultation with legal counsel that invest at least $1,000,000 in capital experienced in business immigration matters is recommended for any ($500,000 in high-unemployment or company that is considering employing rural areas), and create full-time jobs for foreign nationals in the U.S. at least 10 U.S. citizens. ILN Corporate Group – Establishing a Business Entity Series