"The End is Near" - the collapse of UK Limited companies in Germany with the Brexit

The forthcoming Brexit is likely to seal the end of a legal form which, as a result of some de-cisions of the European Court of Justice between 1999 and 2003 ("Centros", "Überseering", "Inspire Art"), enjoyed great popularity in Germany for some time – the UK Limited (usually in the form of the "Private Company Limited by Shares"). These companies will lose their legal acceptance in Germany on Brexit. Measures to avoid unlimited personal liability of the share-holders – which is the result of non-recognition of the UK Limited in Germany – must be taken before the effective date of Brexit – there is no remedy after that point in time!

Historic Background on the UK Limited in Germany

In the UK, a foreign company which has once been effectively formed in accordance with the regulations of its home country is recognized if it has its registered office in the UK. The continental European understanding, which also applies in Germany, is a different one: a specific form of a company is only recognized as such if it has been effectively formed in accordance with the provisions of the country in which it has its registered office. In practice, this means that foreign corporations relocating their registered office to Germany are generally not recognized here as corporations because they have not complied with the German foundation rules. In this context, "relocation of the registered office" is not restricted to a formal relocation; it is sufficient to relocate the management to Germany to assume that this company has its business seat here.

An example illustrates the consequences: if two shareholders in Germany hold a foreign limited company operating here, this company is not recognized. From the German point of view, what remains are two shareholders trading jointly in Germany. According to the German understanding, the shareholders operate a partnership with unlimited personal liability.

In the above-mentioned decisions, the European Court of Justice, referring to the freedom of establishment in the European Union, had ruled that this view was contrary to European law and that a company form effectively established abroad in the EU must be recognized as such even if the registered office is transferred to another EU country. This was the start of the use of UK Limiteds in Germany. Many entrepreneurs found the possibility of establishing a corporation without share capital attractive. Also, UK limited companies were incorporated into German company law as a personally liable partner (without assets) of a Limited & Co KG. Even though the hype has subsided for some time, the Federal Ministry of Justice still assumes that approximately 8,000 - 10,000 of such companies with their registered office in Germany exist.

Consequences of the Brexit

The shareholders of these UK Limiteds must be reminded that their companies will no longer be recognized in Germany once the Brexit becomes effective – i.e. in the likely case of the "hard Brexit" on 30 March 2019 – which leads to the personal and unlimited liability of the shareholders:

The basic German legal view on international company law has not changed despite the rulings of the European Court of Justice. It has only been overruled in relations with other EU states. But when the United Kingdom leaves the European Union, the freedom of establishment no longer applies to UK companies. This is the case after 29 March 2019, save a – meanwhile unlikely – conclusion of a withdrawal agreement with a transitional period. That means, that any UK Limiteds having their business seat in Germany are collapsing. The shareholder(s) will become directly personally and unlimitedly liable for all liabilities of the Limited as sole proprietors or partnership partners. The general partner of a Limited & Co. KG expires, and its shareholders become personally liable. Since these are usually also the limited partners, the intended limitation of liability of this legal form is no longer applicable.

Not yet discussed is beyond that the question, which fiscal consequences the sudden dissolution of the corporation and the associated transfer of the fortune on the partners has. These could also be unpleasant.

What to do?

To solve this problem, various, sometimes quite complex solutions are proposed. In theory, a cross-border merger into a German GmbH should be possible, perhaps even into a UG (without minimum share capital). The main problem lies in the time and cost requirements of such solutions.

HEUSSEN's concept provides for a more practicable solution: the shareholders of Limited establish a German GmbH or acquire a shelf company. Subsequently, the shares in the UK Limited are contributed to the German company. If the UK Limited loses its recognition in Germany at the end of 29 March 2019 (or later in the case of a transitional period), the assets and liabilities of the Limited automatically accrue to the GmbH. The shareholders are still protected by the limited liability of the GmbH. This concept can be designed neutrally from a tax point of view.

The clock is ticking…

However, time is running short for any measures, because a subsequent "repair" after the Brexit is not possible.

Originally published on 21 January 2019 on the HEUSSEN Rechtsanwaltsgesellschaft mbH website by Sven Hoffmann.


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