When it comes to extending the network of companies held under a specific structure in Western Europe, ready-made companies are a popular alternative to incorporating a company from scratch. In fact, the rule is to acquire a ready-made company from a specialized provider and the exception is to incorporate one. Ready-made companies, also named “shelf companies” or more accurately, “off-the-shelf companies” are companies incorporated by specialized providers with the purpose of being sold to investors who need a new company in a respective jurisdiction. The name describes them quite accurately – such companies are a simple set of documents and do not hold any assets, do not have any employees, they leave all of this to the decision of the buyer and, according to the local legislation of each jurisdiction.
The main advantage of buying a ready-made company is that the buyer – in return for a fee – gets an operational company which they can use immediately. Shareholder, director, corporate name, scope of activity and other changes still need to be registered with the Trade Register, however, the ready-made company can immediately enter into agreements, issue official documents, make payments and so on. In the opposite case, when an investor decides to pursue the incorporation process, he or she must take into consideration the time required to prepare the incorporation file, providing certain documents in a notarial, or even apostilled, format. This entire process needs to be undertaken prior to incorporation, and before the investor can use a local company, which can sometimes be critical for instance, when only resident companies may enter into certain transactions.
In Romania, whilst local investors and numerous law firms tend to opt for company incorporation and wait until this process is completed, there is a certain market for ready- made companies. Buyers of this product are mainly Western European investors who are used to the shelf-company model. However, there are also some law firms that appreciate the benefits of this option and advise their clients to act accordingly. Buying a ready-made company still requires registrations with the Trade Register and other authorities (depending on the specifics of each transaction), and law firms help their clients to comply with these formalities.
Another advantage of purchasing a ready-made company is that almost every possible corporate change can be made when the company is purchased. The most common changes include the change of shareholders, directors, sometimes even the corporate name or the registered address. However there are cases where a buyer decides to change the scope of activity into one that requires certain prior certifications. Sometimes, the change can be from a limited liability company (a very typical company type in Romania) to a joint-stock company. This is done by increasing the share capital and the number of shareholders and directors to the levels required by law.
Throughout the entire registration process, the company remains operational and can participate in a large variety of activities (except for those that require prior authorization).
Earlier this year, the Romanian Parliament approved legislation to alleviate the restrictions applicable to companies, including:
- the removal of the requirement for a shareholder, owned entirely by another shareholder, to be a sole shareholder in a Romanian company
- the requirement for a shareholder to own only one company as a sole shareholder, and;
- the requirement for each company to have its registered address uniquely identified so that only a limited number of companies can use specific premises.
These restrictions were seen as hindrances by investors, who had to implement formal solutions for the sole purpose of overcoming the challenge at hand, without any other added value for their structure. The restrictions were a higher impediment for the provider of such companies, who needed to ensure compliance of these businesses with the law, whilst making sure the market had enough companies available. And the issue could be transferred to the buyer when more ready-made companies were purchased by the same buyer, or when such companies were added to an existing lot of companies.
The aforementioned legislative changes are extremely beneficial for the future corporate structures, and there are further improvements that can be made to grant these structures more flexibility. For example, VAT registration cannot currently be completed for ready-made companies if they are owned by the provider, because the purpose of incorporation is not to undergo economic activities, as required by the VAT registration norms. This means that VAT registration begins – at the earliest – when there is a share purchase agreement signed and potentially submitted to the Trade Register, showing that the company at stake is becoming part of a structure that will use it for its “economical purpose.” However, this fact alone most likely does not secure the VAT registration and needs to be accompanied by other justifying pieces of evidence about the purpose of the structure, such as business plans, pre-orders, and so on. In our observations, a well-documented file will most likely lead to a successful and swift VAT registration.
Another challenge is in opening a bank account. Usually, ready-made companies do not have pre-opened bank accounts. This is to avoid the unnecessary payment of bank commissions. Unnecessary because, when the shareholding structure changes, the company must notify the bank and update the ownership information as part of “Know Your Customer” regulations. Failure to do so may lead to the blocking of bank accounts with immediate effect. A solution is for the provider to open a bank account when the sale of the ready-made company is looming, in order to incur minimum bank fee costs and still provide a viable product. This does not remove the buyer’s obligation to notify the bank about changes in the ownership of the ready-made company, nor their need to update client identification files. But in the Romanian banks’ highly bureaucratic and formalistic environment, this can avoid any payment delays.
All these challenges aside, TMF Romania believes that ready-made companies are a very viable solution for the local market and a valid alternative to the classic company incorporation. Our belief is supported by the abovementioned considerations, and the deep experience that we’ve gained providing ready-made companies over the last 20 years.
Radu Plop is the Head of Corporate Secretarial Department, Global Entity Management of TMF Romania
