What are the legal steps for UK businesses to follow when setting up a subsidiary in the EU?

12 June 2024

In the wake of Brexit and the related changes in the UK business environment, many companies are turning their eyes towards the European Union (EU). The EU, a market consisting of 27 member states, offers numerous opportunities for expansion and growth. For UK firms eager to maintain and strengthen their European connections, setting up a subsidiary in the EU seems like a viable and strategic move. However, doing so requires a thorough understanding of the legal formalities and procedural requirements involved. This article will guide you through the legal steps your business needs to undertake when setting up a subsidiary in the EU.

Identifying Suitable EU Jurisdictions

Before your UK business can establish a subsidiary office in the EU, you’ll need to select an appropriate jurisdiction. Each member state in the EU has its own legal requirements, business norms, and tax systems, all of which need to be thoroughly considered and compared.

When making your choice, it is critical to consider factors such as the country’s corporate tax rates, the existing market for your services, the ease of doing business, the availability of skilled labour, and the overall political and economic stability.

Some European countries offer more favourable conditions for certain businesses. For instance, technology companies might find Ireland appealing due to its low corporate tax rates and strong tech ecosystem. On the other hand, a manufacturing company might prefer Germany due to its robust industrial infrastructure and central location in the EU.

Comprehending the Legal Structure of EU Subsidiaries

Once a suitable country has been selected, the next step is to understand the legal structure that will apply to your EU subsidiary. An EU subsidiary is a separate legal entity from its UK parent company. This means that it can operate independently, have its own business identity, and be subject to the laws and regulations of its host country.

In most EU countries, subsidiaries are typically set up as 'Limited Liability Companies' (LLC). An LLC is a type of business structure that combines the features of a corporation and a partnership. It offers the benefits of limited liability for its owners, and flexibility in terms of management and profit distribution.

It's important to note that each EU country may have slightly different regulations and requirements for setting up an LLC. For instance, some countries might require a minimum amount of capital to be deposited during the formation of the LLC, while others might have specific requirements for the nationality or residency of the directors.

Establishing the Subsidiary

The process of establishing a subsidiary involves several steps, starting with the preparation of necessary documents. These typically include the Articles of Association (a document that outlines the rules for running the company), a Memorandum of Association (which states the company’s name, location, and business purpose), and a list of the directors and shareholders.

Next, you'll need to register your subsidiary with the appropriate business registry in the host country. This involves submitting the necessary documents and paying a registration fee.

After registration, your subsidiary will be assigned a unique business identification number, which is used for tax and administrative purposes. You'll also need to open a local bank account in the name of your subsidiary.

Complying with Tax Obligations

Tax compliance is a key legal requirement for any business operating in the EU. This includes both corporate taxes and Value Added Tax (VAT). The corporate tax rate varies from country to country, and will need to be factored into your business plans.

VAT is a tax on the consumption of goods and services, and is typically added on top of the sales price. If your subsidiary is selling goods or services in the EU, it will likely need to register for VAT, charge this tax to its customers, and periodically report and pay this tax to the local tax authorities.

Certain tax exemptions or reductions might be available, depending on the country or the type of business. Therefore, it's advisable to seek expert tax advice to ensure that you are fully compliant with all tax obligations, and are taking advantage of any available tax benefits.

Maintaining Compliance with Local Laws and Regulations

Finally, once your subsidiary is up and running, you'll need to ensure ongoing compliance with local laws and regulations. This can include employment laws, health and safety regulations, data protection laws, and industry-specific regulations.

For instance, if you're in the financial services industry, you'll need to comply with the regulations of the local financial regulatory authority. Or, if you're in the healthcare industry, you might need to comply with certain medical or pharmaceutical regulations.

Maintaining compliance requires regular monitoring of changes in local laws, and updating your business practices as necessary. Non-compliance can result in penalties, fines, or even the revocation of your license to operate, so it's crucial to stay on top of these requirements.

Engaging a Local Law Firm for Legal Assistance

Setting up a subsidiary in an EU country often involves complex legal procedures that require expert knowledge. Hence, it is advisable to engage a local law firm to guide you through the process. A good law firm can provide you with comprehensive services including legal advice, document preparation, and representation in local courts if necessary.

A local law firm can help you understand the specific laws and regulations that apply to your business in your chosen EU country. They can advise you on matters such as corporate law, employment law, tax law, intellectual property law, and data protection law. They can also help you draft your company's Articles of Association, which is a crucial document that outlines the company's governance and operational structure.

Furthermore, a local law firm can assist you with the process of registering your subsidiary with the local business registry, setting up a bank account, and complying with initial and ongoing capital requirements. In many EU countries, a certain amount of share capital needs to be paid up when establishing a limited liability company.

Lastly, a local law firm can provide you with ongoing legal services to ensure that your subsidiary remains compliant with local laws and regulations. This may involve regular monitoring of changes in laws, advising on legal implications of business decisions, and representing you in dealings with local authorities.

Choose the Right Business Structure

Choosing the right business structure for your European subsidiary is a crucial decision that will impact your business's tax obligations, legal liabilities, and operational efficiency. The most common business structures in the EU are the Limited Liability Company (LLC) and the Public Limited Company (PLC).

An LLC is a business structure that provides its owners, referred to as members, with limited liability. This means that the members are not personally liable for the company's debts and liabilities. An LLC is suitable for small to medium-sized businesses.

On the other hand, a PLC is a type of company that is allowed to offer its shares to the public. A PLC is subject to stricter regulations and reporting requirements compared to an LLC, but it can raise capital more easily by issuing shares. A PLC is suitable for larger businesses that plan to go public in the future.

Before choosing a business structure, it is important to consider factors such as your business size, growth plans, and risk tolerance. You should also consider the tax implications of each business structure. For instance, LLCs and PLCs may be subject to different corporate tax rates.

It is advisable to seek legal and financial advice before making this important decision. A local law firm or financial advisor can provide you with customized advice based on your specific business needs and goals.

Setting up a subsidiary in the EU can be a complex process, but it can also be a rewarding move for UK businesses looking to tap into the vast EU market. The key to a successful setup lies in careful planning, thorough research, and diligent compliance with local laws and regulations. Engaging a local law firm is often beneficial, as they can provide expert guidance and assistance throughout the process. Choosing the right business structure for your subsidiary is also a critical step. Whether you choose an LLC or a PLC, make sure it aligns with your business needs and goals. As a UK business, setting up a subsidiary in the EU may seem daunting, but with the right approach and resources, you can successfully navigate the process and reap the benefits of European expansion.