Why are companies leaving Catalonia? The importance of the registered office

Large companies leaving Catalonia have made the headlines and these moves are undoubtedly influencing the confusing “procés” towards independence led by the Catalan Government. There is much discussion about the possibility of return and the consequences on Catalonia´s economy (I recommend this article). It is therefore essential to understand what the registered office is and its importance.

Some say it is a change of postal address. And it is: the registered office is the official address of a company : it appears in its Bylaws, its registration, and its documents and invoices. It allows any partner or third party to know where to contact the company.

But it is much more than that. The registered office also determines the nationality of the company (Article 8 of the Spanish Company Law or LSC). This is the essential reason for the recent changes: if Catalonia becomes in fact independent, the companies with their registered office in Catalonia would change nationality. As under the EU Treaties independence this would imply that Catalonia would no longer be part of the EU, companies would automatically be excluded from the single European market. They would not benefit from the right to freedom of establishment enshrined in Articles 49 and 54 of the Treaty. Any export to the rest of Spain or the European Union would be subject to tariffs and other restrictions; any services would need to be authorized. It would mean a severe problem for any company that has significant activity in the rest of Spain or EU countries.

As nationality is linked to the  the company´s regulation, companies with registered office in Catalonia would be subject to the Law of that new State: the “Ley de Transitoriedad” which is supposed to apply after the declaration of independence says that initially Spanish laws would  be applied as laws of Catalonia, but this is temporary. The Parliament of an independent Catalonia could approve reform by introducing, for example – at the request of the CUP? –  a worker´s right of participation in the Board of Directors. Being outside the EU, these rules would not be subject to the harmonization imposed on companies regulation by the EU Directives.

The change of national law would also block the possibility of future transfers. Once independence is declared, a change of the registered office to Spain would be a Cross Border Conversion, subject to much stricter rules. As a non EU country (not subject to the treaties or to European Court of Justice doctrine as stated in VALE) it could -and probably would- oppose these transfers.

The registered office also determines to what judicial system the company is subject. Internal and corporate issues would be judged by the Catalan courts. Relations with third parties would also in ome cases be subject to these courts, whose organizational structure and independence is at the moment totally unpredictable. The same would happen in connection with a bankruptcy procedure (Article 10 Insolvency Law).

Besides these issues derived from the company´s nationality, taxation is also a problem. Tax law is generally governed by the principle of territoriality, and the general connecting factor is not the  registered office but the place of effective management or head office (article 48 Ley General Tributaria). This could make companies subject to Catalan taxes if that administration considers that the head office is still in Catalonia. However, as Spanish law establishes that companies with registered office in Spain are subject to its Corporate Tax (Impuesto de Sociedades), it is possible that both administrations would demand payment, as the Ley de Transitoriedad establishes that from the moment independence is declared taxes will have to be paid only to the Catalan Treasury.

These uncertainties explain the past moves, and also why the Government has tried to facilitate them, as Fernando Goma explained here.

Of course, some might think that the lack of international recognition of a unilateral declaration of independence would prevent these effects. But it is absurd to ignore the possible consequences of the de facto actions of the actual Catalan Government, no matter how illegal. Certainly neither bank customers (queuing to draw money form their accounts) or markets seem to be convinced: the shares of quoted Catalan companies only stopped falling when they transferred their seat.

It must be emphasized that the change of registered office is not merely a formal affair, a simple letter box change. To be sure they will not be required to pay Corporate Tax twice, companies will also have to transfer their head office. This seems also necessary from the point of view of company law, as Spanish law: art. 9 ot the LSC establishes that the registered office must be located where it has “the center of its effective administration and direction, or …. its principal place of business “. It is true that the precise location of administration is not easy to determine in large companies. But to avoid the problem that the other jurisdiction may claim that the nationality in fact has not changed, companies will tend to move their head office and hold their meetings and boards at the new registered office, while leaving commercial offices or industrial establishments in Catalonia.

The transfer of the head office might also be required for certain companies: Solvency II Directive (Article 20) requires insurance companies to have their head and registered office in the same country. A recent EBA report on the provision of financial services after Brexit has stated that “empty shells” without real activity in the EU will not be authorized.

As we see, the consequences of a change of nationality are very complex, and in the case of a unilateral declaration of independence, the risks are enormous. In the present situation of impasse, my guess is that transfers will continue, extending to medium sized companies, while the centers of administration follow the new formal address. On the other hand, the importance of registered office location -and the enormous cost that uncertainty has or most companies- will make the return very difficult unless the political situation is totally stable. The first conclusion is that the damage to the Catalan economy – and to the Spanish economy, for different reasons – will be serious and lasting. The second, that this damage will increase every day that the situation of a unilaterally declared -and suspended- independence lasts.

Note: this is the englishh translation of this post