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By Michelle Mathers (Partner)

Ford & Warren Solicitors

Leeds, United Kingdom

Introduction

It is clearly established that many companies have entered and are considering entry into the United Kingdom (UK) market by direct approach instead of engaging agents (to market/sell on their behalf) or distributors (as resellers within the UK).

Companies incorporated outside of the UK and Gibraltar, and whose shareholders/members have limited liability (known as overseas companies) currently (until 1 October 2009) have a number of options if they wish to carry on business directly in the UK they can either establish a branch or a place of business or, if they require limited liability in the UK, they can establish a new subsidiary company or buy an existing company. The overseas company should consider both the tax and legal implications of the various options in order to make an informed choice, but here we set out a summary of the concepts, registration and ongoing formalities.

Branch or Place of Business - Concepts

A branch is an establishment which allows a business to be conducted by the overseas company through local representatives, with the local organisation appearing to be permanent and capable of dealing with the business itself.

On the other hand a place of business is established if the business has a physical or visible connection with a particular premises (e.g. with a sign outside an office) or if the business is regularly carried out at those premises. In each case the business must not be carried on through an independent agent, distributor or sub-contractor for it to qualify as a place of business.

An overseas company would need to consider establishing and registering a place of business, instead of a branch, if, its business does not qualify as a branch, its shareholders/members have unlimited liability, or it is incorporated in Northern Ireland or Gibraltar. Minimal business activity is a key factor pointing towards a place of business rather than a branch.

From 01 October 2009, when the Overseas Companies Regulations 2008 (currently not in final form) and the Companies Act 2006 fully come into force, the distinction between ''branches'' and ''places of business'' will disappear, leaving a single concept of the ''UK Establishment''.

Initial Registration Requirements

Currently, a branch is registered by filing with the Registrar of Companies at Companies House, within 1 month of the branch being established: a Form BR1, certified copies of the overseas company's constitutional documents, a certified translation into English if applicable, a copy of the latest accounts to be published under the overseas company's national law and a registration fee. A place of business is registered by filing the same documents except that a Form 691 is used instead of Form BR1.

From 01 October 2009, the registration requirements for a UK Establishment will essentially be the same, with a single application form.

The overseas company's corporate name must comply with the domestic company name rules in the UK. If, it does not (e.g. because it is the same or too similar to the name of an existing UK company) then an alternative name may be requested by Companies House From 01 October 2009, however, a more streamlined approach will apply in that, the overseas company will be permitted to state its corporate name and an alternative name on registration so that, if its corporation name does not comply, an alternative is already in place.

Ongoing Regulatory Requirements

As in other jurisdictions, overseas companies with a branch or a place of business (or, form 01 October 2009, a UK Establishment) in the UK have ongoing regulatory requirements. These include:

  • Filing: Registering any change in the details registered with Companies House within 21 days of the change occurring.
  • Signs: In every place that the overseas company carries on a business it will need to exhibit its name and country of incorporation, and display a notice that the overseas company's shareholders/members have limited liability (if that is the case). From 01 October 2009 these disclosure requirements will increase and the overseas company will in most cases also have to display all service addresses of people authorised to accept service on its behalf in respect of the UK Establishment and every location where it carries on business in the UK.
  • Stationery: All overseas companies are required to disclose their names, country of incorporation and a statement that the shareholders/members have limited liability (if that is the case) in every letter, bill, notice and other official publication. For overseas companies incorporated outside the European Economic Area (EEA) (e.g. in one of the States in the USA) they must also disclose the place of registration and registered number of the branch, the company's legal form, head office location, the registry in which the company is registered in its country of incorporation, registration number in that country and, if applicable, the fact that the company is being wound up.
  • Accounts: All registered overseas companies are required to file accounts annually with the Registrar of Companies, with a filing fee for each set of accounts. From 01 October 2009 the overseas company has to file the same accounts that it files in its home country, plus directors' reports and auditors reports, separately for each UK Establishment it has registered (although, if the overseas company is exempt from filing auditors reports in its home country, the same position will apply here). The accounts have to be filed within 3 months of them being filed in the home country. However, if the company's home country does not require the company to prepare, have audited and disclose accounts then from 01 October 2009 the company will have to file short form unaudited accounts in the UK within 13 months of its accounting reference date in each financial year.
  • Mortgages and charges: Currently, all registered overseas companies are required to register a mortgage or charge created over property in Great Britain in the same way as domestic companies even if they do not have a UK Establishment. From 1 October this will only apply to overseas companies with UK Establishments.
  • Insolvency: An overseas company with a registered branch must also file at Companies House certain documents, if it is subject to winding up proceedings or other insolvency proceedings, arrangements, compositions or analogous proceedings.
  • Increased or decreased activity: If the overseas company has a registered ''place of business'' and the business activity increases so that it has a ''branch'' presence, currently, it must re-register the place of business as a branch. Likewise, if it has a registered ''branch'' and the business activity decreases, then it must re-register the branch as a ''place of business''. In either case constitutional documents of the overseas company do not have to be re-filed if they are up to date. This only applies until 01 October 2009 when the UK Establishments will be the sole entity.
  • Movement within the GB/UK: Currently, if a branch or place of business is moved within Great Britain then Companies House need to be notified in writing: a letter signed by the overseas company's officer or a person authorised by the overseas company will suffice. From 01 October 2009 this notification requirement applies if the UK Establishment is moved anywhere within the UK
  • UK and EU law: The overseas company is required to comply with any general mandatory legal requirements and sector specific regulatory requirements both in the UK and Europe.

Criminal Offences

Failure to comply with any of the above requirements is a criminal offence. In such circumstances the overseas company, and every officer or agent of the overseas company who knowingly and wilfully authorises or permits the default, is liable to a fine.

Subsidiary Company - Summary

Following tax or legal advice the overseas company may decide to enter the UK market through a subsidiary company. In such circumstances the subsidiary will be subject to the full range of corporate governance regulations in the UK.

That said, the process of establishing a new subsidiary company in the UK is relatively simple. The overseas company would typically be asked to supply the subsidiary's name, registered office, shares that the subsidiary will be authorised to issue, the shares that will actually be issued to the overseas company on incorporation, the subsidiary's directors and some personal information for the directors and the signatory for the overseas company. The whole process up to incorporation typically takes up to 15 days from the point of receiving instructions to incorporation. Thereafter there are ongoing regulatory requirements some of which are more onerous than those set out above.

Where the overseas company has little or no experience in the UK market, but wants control and limited liability, it may consider buying an existing company which is already established and registered.

Subsidiary companies require the appointment of directors. The board of directors of any overseas company's subsidiary can include foreign nationals. Each such national has certain statutory duties which include:

  • to act within their powers;
  • to promote the success of the subsidiary (for the benefit of the overseas company being the subsidiary's sole shareholder);
  • to exercise independent judgement;
  • to exercise reasonable care, skill and diligence (NB! there has been recent case law which has held non-active directors liable for failing to supervise active directors);
  • to avoid conflicts of interest; and
  • not to accept a benefit from a third party conferred by reason of the director being a director of the subsidiary or his/her doing (or not doing) anything as a director of the subsidiary, and which can reasonably be regarded as giving rise to a conflict of interest.

This is just a short summary of the key requirements for establishing and maintaining a business in the UK. Each overseas company has different circumstances or different needs. If you are interested in setting up a business in the UK, please do not hesitate to contact Michelle Mathers for more information on michelle.mathers@forwarn.com.

http://www.forwarn.com