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Why simplify the legal structure of group companies?

Blogs September 14, 2016


Companies are perpetually looking for ways to reduce operating costs, improve their tax position and reduce legal risks. These goals may be achieved by simplifying the legal structure of a group of companies.

Often complicated legal structures are side effects of M&A projects, internal reorganizations or historic use of subsidiaries for special purposes. In some cases companies have ended up with complicated structures consisting of dozens or even hundreds of legal entities. Maintaining a complex group legal structure with a significant number of redundant entities can make the company susceptible to significant legal risks which can harm the company and its shareholders. Such structures also tend to accumulate costs across the group of companies. Below, I have listed reasons why companies should simplify their legal entity structure.

Risk management and less administration

While a company remains registered, it also remains subject to the ordinary legal requirements imposed by the local jurisdiction. The directors or board members of the company also remain subject to legal obligations relating to dormant companies. Companies that have been dormant for years without proper administration can contain significant legal risks. Usually when years have passed by, the management has lost the knowledge of the history of the dormant company. Yet, the issues and risks associated with them remain. Gradually, the administration of these dormant companies becomes increasingly difficult as records are destroyed and staff move on to new roles or leave the company. It is also an administrative burden to perform annual regulatory compliance related tasks associated with these dormant companies which creates costs for the parent company.

Easier to do business

If the company has fewer legal entities it can be easier for both customers and vendors to do business with the company. By presenting one single point of contact for each jurisdiction the company can streamline its interface with the customers and vendors. This may allow the company to enhance their customer experience and relationships with vendors and even simplify contracting and invoicing. By reducing complexity in the group structure the company becomes also more transparent to the public.

Tax issues

Even routine tax compliance incurs costs. The cost of annual and monthly filings can quickly add up. With fewer legal entities the company can potentially achieve significant cost savings. Fewer legal entities reduce the risk associated with transfer pricing as arm’s length intercompany transactions and agreements are easier to maintain in a simpler legal structure. A legal structure simplification project may also identify tax-planning opportunities and synergies between the remaining legal entities.

Here are some ideas how to get started:

  1. Draw up your own legal entity structure including dormant entities.

  2. Try to recognize dormant entities from the company structure. Quite often these dormant entities are easier to eliminate or de-register.

  3. Try to investigate which entities are truly a good fit for the legal entity structure. Try to eliminate such entities that are no longer needed in the business and are no longer active. It is always cheaper to maintain a legal structure that is aligned with business operations.

  4. Try to identify entities that should not be merged or eliminated due to existing legal liabilities, regulatory restrictions, non-transferable rights, labor law issues, costs, etc.

  5. Make sure that the chosen procedures are tax neutral and have full understanding of the tax consequences.

Before starting the project it is important to find the right advisors. Fondia is happy to be your trusted legal advisor in legal structure simplification projects.