Company Transfer Rules Must End ‘Regime Shopping’

Peter Scherrer

For decades, the European trade union movement has been urging EU authorities to put an end to ‘regime shopping’, which allows companies in Europe to move their headquarters to another Member State where they pay fewer taxes and lower wages, regardless of where their operations take place.

Artificial commercial arrangements permitted within the single market lead to exploitation of workers and a downward spiral in social conditions, perpetuate wage gaps between Member States, cut revenues for vital public services and create unfair competition for responsible employers.

For example, so-called ‘letter-box’ companies are little more than mailing addresses set up in countries with lenient tax and regulatory regimes, enabling businesses to minimise legal obligations such as taxation, social contributions, VAT and minimum wages. A study last year by the ETUC found that 96% of foreign investment in Luxembourg and 83% in the Netherlands goes into ‘special purpose entities’ – i.e. letter-box-style companies.

And regime shopping just got a whole lot easier due to a judgement issued by the Court of Justice of the European Union (CJEU) in October. In response, the ETUC is insisting that the European Commission’s forthcoming ‘European Company Law package’ must include a binding measure that harmonises procedures and protects workers.

The CJEU case of Polbud-Wykonawstwo focused on the transfer of Polish company Polbud’s registered office to Luxembourg, even though its business remained in Poland. Polish law obliged the company to be liquidated before transferring to another Member State. But the European court decided this was an obstacle to freedom of establishment that was not justified by “the public interest”, thus giving the green light to companies wishing to circumvent national standards and obligations.

The ETUC has uncovered many examples of abuse of company mobility rules. For example, in the meat-processing sector, work was sub-contracted to Eastern European letter-box companies employing low-paid workers on short contracts. The complexity of such arrangements makes it hard for inspectors with limited resources to follow the trail of responsibility. People work up to 20 hours a day, with no sick pay, overtime compensation or health insurance.

In the construction sector, a Polish-registered company with one room and a shared phone number in Gdansk posted workers to Sweden, where local staff were sacked. The posted workers experienced long hours, bad housing, and non-payment of wages. The company paid no social security contributions in either country, while at the same time deducting charges from workers’ salaries.

On business side

For the ETUC, it is clear that single market freedoms must not be used to sanction such behaviour. Furthermore, as in earlier court rulings affecting workers’ rights, it seems to be the judges who are reinterpreting EU law to the benefit of business – a wholly undemocratic procedure. That is why the ETUC has been calling for a Social Progress Protocol to be appended to the EU Treaties, clarifying that fundamental social rights must always take precedence over economic freedoms in the EU. Only in this way can we ensure that the economy serves the people and not the other way around!

In his September 2017 letter of intent on the State of the Union, Commission President Jean-Claude Juncker promised an “EU Company Law Package […] providing efficient rules for cross-border operations whilst respecting national social and labour law prerogatives”. We understand that publication of the package has been postponed, probably until March, and is likely to comprise four proposed Directives, including one on cross-border conversion and the transfer of registered offices. If the Commission fails to set out harmonised rules (as already exist for cross-border mergers) and safeguards for workers, it will be unacceptable to the ETUC.

To prevent the further expansion of letter-box companies, we want to see companies obliged to register their head office in the country where a substantial/dominant part of their economic activity takes place. At the same time, we are demanding greater transparency in company ownership, so that workers know who is responsible.

Establishing a fair framework for cross-border transfers has major repercussions across the spectrum of corporate responsibility. It impacts not only on working conditions and social security, but also on workers’ rights under the Posting of Workers Directive, while the recent Paradise Paper revelations demonstrate the need to compel companies to respect their social responsibilities and pay tax in the place they earn their profits.

Shopping around

Regime shopping also makes a mockery of workers’ participation rights. For example, where thresholds exist for workers’ representation on boards, as in Austria, Germany, Slovenia and elsewhere, companies can simply relocate as they grow, in order to deny such rights. Even genuine corporate moves are frequently followed by restructuring, so workers must have full access to timely information and consultation. The introduction of the European Company Law package is an excellent chance to come forward with a modern and appropriate standard of information, consultation and participation rights for workers and their representatives in all EU Member States.

Cross-border operations like those described above permit outright violations of EU labour standards. In November, EU heads of state and the European trade union movement backed the European Pillar of Social Rights. If the Commission is serious about putting principles into practice and creating a fair labour market for workers in Europe, it must introduce measures to plug the legal loopholes that enable firms to get away with regime shopping.