Brexit has many implications, including for daily corporate matters. Following the UK's exit from the EU, legal entities established under UK law are no longer subject to European Union law from 1 January 2021. This could also impact Dutch legal entities that are part of the same corporate group as UK entities.
One consequence could be that Dutch companies might not be allowed to make use of the annual accounts exemption under Article 2:403 of the Dutch Civil Code (DCC) anymore.
Understanding the 403 Statement
As many companies conduct their business through the use of a wider corporate group of legal entities, lawmakers recognise that preparing audited annual accounts for all these entities separately would be cumbersome and cost-sensitive. Dutch law, therefore, created a specific exemption as laid down in Article 2:403 DCC.
Due to this exemption, a Dutch legal entity:
- may draw up its annual accounts in a simplified manner
- is exempt from the obligation to have these annual accounts audited
- is exempt from the obligation to draw up a management report, and
- is exempt from the requirement to file its annual accounts at the Dutch trade register of the Chamber of Commerce for public inspection.
Naturally, these exemptions can only be invoked if certain conditions have been met.
One of these conditions is that the parent company of the relevant subsidiary must assume joint and several liability for any debts arising from legal acts of that subsidiary in writing – the so-called "403 Statement". This 403 Statement is to be published with the Dutch trade register.
A further condition dictates that the financial figures of the subsidiary must be consolidated into the group financial statements.
Brexit's impact on the 403 Statement
The issue of Brexit arises in meeting the condition of the consolidation of financial figures. Article 2:403 DDC requires that the consolidated financial figures are subject to either the international financial reporting standards accepted by the EU (IFRS), or are subject to EU Directive 2013/34/EU.
As EU law is no longer applicable to UK legal entities from 1 January 2021, they can therefore no longer comply with the consolidation requirement of Article 2:403 DCC. Even if UK parent entities opted to voluntarily continue complying with the EU accounting standards, the issue still wouldn't be resolved.
Article 2:403 DCC discusses the consolidation of financial statements to which EU legal accounting standards are applicable and not if they are actually applied.
How will Dutch subsidiaries be affected?
The upshot of this is that Dutch subsidiaries of a UK parent company that have issued a 403 Statement must now file their annual accounts under the standard accounting rules, following the provisions of Title 9, Book 2 of the DCC.
Incorrect drafting of annual accounts may have consequences. For instance, if annual accounts have not been filed correctly or on time, it could be assumed that the management board of the company in question has improperly fulfilled its duties. If the company is bankrupt, this may even lead to joint and several liabilities for management in the amount of the estate shortage.
It's also worth noting that not filing the annual accounts timely can be regarded as an economic offence, which can result in fines of up to EUR 19,500.
How could UK parent companies be affected?
But it's not just Dutch subsidiaries that have to take Brexit into account – British parent companies that have issued a 403 Statement need to be up to speed, as well.
As mentioned above, the 403 Statement implies the assumption of liabilities by the parent company for the subsidiary’s debts. A 403 Statement is not terminated by operation of law – and even not by Brexit as such – but has to be pro-actively revoked. Until such revocation has been made and published in the Dutch trade register, the parent company remains liable for the subsidiary’s debts.
In that respect, be mindful that the revocation doesn't end all liabilities at once. The (former) issuer of the 403 Statement remains liable for debts that are the result of the subsidiary’s legal acts that have been performed until the moment of (publication of) revocation.
For example: if a subsidiary concluded a commercial contract one day prior to revocation of the 403 Statement, the parent company is (jointly and severally) liable for the subsidiary’s debts arising out of such contract. These so-called "residual liabilities" are only terminated once the parent company and the subsidiary no longer belong to the same corporate group.
Possible alternatives to consider
Dutch legal entities that wish to continue benefitting from the 403 Statement – and from the exemptions to the annual accounts, in particular – will likely be eager to identify and implement alternative arrangements.
One such possible solution might be to appoint or incorporate another legal entity within the relevant corporate group that is a resident of the EU as issuing party for the 403 Statement. Under article 2:403 DCC, it's not mandatory that this issuing entity is actually at the very top of the corporate group company. Other alternatives might also be available, depending on the corporate structures of the companies involved.
Here to help
Dutch legal entities that have been issued a 403 Statement and their UK parent companies both are recommended to verify compliance with Dutch accounting law and possible liabilities; please reach out to a member of our Corporate/M&A and Capital Markets team to find out how we can assist you in this regard.
