Changes to the scope of the annual accounts exemption as a result of Brexit
As a result of Brexit, the United Kingdom (hereinafter the ‘’UK’’) is no longer bound by EU law as of 1 January 2021. In a previous news item, we already noted that this may have consequences for legal entities incorporated in the UK that perform their activities entirely in the Netherlands. Brexit also has direct consequences for Dutch legal entities. One of these consequences is that Dutch group companies belonging to a group headed by a UK legal entity may no longer be able to apply the annual accounts exemption of section 2:403 of the Dutch Civil Code (DCC).
What is the annual accounts exemption?
The so-called group regime of section 2:403 DCC offers a group company (hereinafter the "403-company") the possibility to apply an annual accounts exemption under certain conditions. This means, amongst other things, that the 403-company:
(i) does not have to prepare its annual accounts in accordance with the provisions of title 9 of book 2 of the DCC;
(ii) may omit the statutory audit; and
(iii) is not required to publish the annual accounts.
In order to apply this annual accounts exemption, various conditions must be met (see also our previous news item regarding this subject). Two conditions that are important in practice are:
1. the financial information of the 403-company must be consolidated in the consolidated annual accounts of the parent company or another group company (hereinafter the "consolidating group company"); and
2. the consolidating group company has declared in writing that it is jointly and severally liable for the debts arising from the legal acts of the 403-company (the so-called 403-declaration).
With regard to the first condition, section 2:403 paragraph 1 sub c of the DCC requires that the consolidated annual accounts of the consolidating group company are subject to (inter alia) Regulation (EC) 1606/2002 (hereinafter "Regulation EU IFRS") and various EU directives.[1] In other words, the consolidating group company must be a company incorporated under the laws of a member state of the EEA. Given that the UK is no longer a member state, the question arises what the consequences are for the possibility of applying the annual accounts exemption.
What are the consequences of Brexit for the possibility to apply the annual accounts exemption?
If the financial information of a 403-company is included in the consolidated accounts of a UK consolidating group company, the requirement mentioned under 2 above is no longer met. That is the case, even if the UK accounting and reporting rules remain unchanged and the UK voluntarily brings its legislation in line with the EU regulations mentioned above. However, what if the 403-company (incorrectly) continues to apply the annual accounts exemption? In that case, it is acting in breach of its statutory obligation to publish its annual accounts, which is an economic offence and can potentially lead to directors' liability. An interesting question is therefore whether, and if so, how the 403-company may still continue to apply the annual accounts exemption.
Can the 403-company continue to use the annual accounts exemption?
The easiest way to continue applying the annual accounts exemption is to include the financial information of the 403-company in the consolidated annual accounts of another groupcompany to which the aforementioned EU legislation applies, for example a German or Spanish company. After all, it is possible that a group company other than the highest within the group is the consolidating company. However, it is required that the consolidating group company meets the consolidation requirements of section 2:406 of the DCC and may include the financial information of the 403-company in its consolidated annual accounts on that basis.
A specific situation in which the annual accounts exemption can be used despite the fact that the consolidating group company is a UK company is the following: if the UK company (i) performs its activities (almost) entirely in the Netherlands and (ii) has no actual connection with the UK, then this company qualifies as a foreign company within the meaning of the Companies Formally Registered Abroad Act (see also our previous news item). In that case, the accounting and reporting rules of title 9 of book 2 of the DCC apply to that foreign company, which means that the 403-company may apply of the annual accounts exemption.
A third possibility is that the consolidating group company incorporates a subholding under the laws of an EEA member state. This subholding should then consolidate the financial data of the 403-company in its consolidated accounts. In that case, the subholding is considered to be the parent company within the meaning of the group regime rules.
Conclusion
As a result of Brexit, it is no longer possible to consolidate the financial information of a group company in the consolidated annual accounts of a UK group company. If that is done anyway, it may lead to criminal prosecution or directors' liability. There are, however, several situations in which the 403-company can still continue to apply the annual accounts exemption. Heussen is happy to advise you in that regard.
[1] Directive 2013/34/EU, Directive 86/635/EEC and Directive 91/674/EEC.