The comfort letter/ 403-declaration
From the 1st of January 2021, the United Kingdom will no longer be bound by the European Union and therefore by EU law. This could have severe consequences for Dutch companies for which a British parent company has issued a letter of comfort or the so-called “403-declaration”. Are you doing business with a company with a British parent company, or are you a director of such a company? Then this information is essential to you.
What is and what does the 403-declaration stipulate?
The 403-declaration is an exemption for different legal persons belonging together to a group to prepare annual accounts. A legal person can make use of this annual accounts exemption if the legal person is incorporated under the law of an EU member state and is therefore subject to EU law. According to Section 2:403 of Book 2 of the Dutch Civil Code, these legal persons do not have to individually prepare company annual accounts in accordance with the provisions of Part 9 of Book 2 of the Dutch Civil Code, but may prepare joint (or: consolidated) annual accounts for the entire group. This exemption can be used if several conditions are met. The first requirement is that the financial data of the whole group are combined in the consolidated annual accounts. The second requirement is that these consolidated annual accounts have been prepared by the legal person that has issued a written statement in which it declares itself liable for the debts of the legal person arising from legal acts (the 403 statement) and has filed this with the Chamber of Commerce.
The UK after 1 January 2021: no more 403-declaration
The United Kingdom will no longer be bound by European directives and regulations after the 1st of January 2021. The annual accounts exemption requires that under the applicable law – of the legal person preparing consolidated accounts – the Regulation (EC) 16/06/2002, the Accounting Directive, the Directive on the (consolidated) accounts of banks and other financial institutions or the Directive on the (consolidated) accounts of insurance undertakings apply to consolidated accounts. As from the 1st of January 2021, this will no longer be the case for UK legal entities, and they will therefore no longer be able to benefit from the annual accounts exemption.
This also applies if the United Kingdom’s accounting law complies with European law. Only a legal person incorporated under the law of an EU Member State can benefit from the annual accounts exemption.
Consequences
The Brexit may affect a legal person set up under the law of the United Kingdom, which makes use of the annual accounts exemption. Therefore, if it continues to make use of the annual accounts exemption after the Brexit, the disclosure obligation will be breached.
This is an economic crime and can have profound consequences, both for the legal person and for the directors. The legal person risks fine of the fourth category (approx. EUR 20,000 per company) and the directors may be held liable. A community service sentence or imprisonment for up to 6 months would also be a possibility, but we note that the latter sanctions are very rarely applied.
What is to be done now?
Two alternatives are outlined below in which the annual accounts exemption can continue to be applied.[1]
- Another company within the group consolidates the annual accounts. This other legal person does not have to be the parent company of the group but may also be positioned somewhere else in the chain. This can be achieved relatively quickly if a legal person is available for this purpose.
- The creation of a new (sub)holding company to be established under the law of an EU Member State. Through this sub-holding company, the annual accounts exemption can be used because the sub-holding company is bound by EU law.
Conclusion
As from the 1st of January 2021, a legal person whose financial information is consolidated in the consolidated accounts of a parent company under the laws of the United Kingdom may no longer make use of the annual accounts exemption according to EU law. To prevent directors or legal entities from encountering problems with this, it is advisable to take prompt action and seek legal advice.
It should be clear whether a 403-declaration has been issued within the group by a legal person incorporated under the law of the United Kingdom. If so, additional action is needed. For example, it is possible to issue a 403-statement and have an consolidated annual accounts drawn up by another legal person in the group which is established in the Netherlands or established under the law of an EU Member State.
If you would like to know more about the Brexit and its possible consequences for the annual accounts exemption according to Article 2:403 of the Dutch Civil Code, please contact Robert van Muijen, Hester Derkx or Yannick van den Berk.
[1] These alternatives have been given from a company law perspective. Possible tax consequences have not been taken into account.