Europe - that’s the business. The impact of succession law on SMEs.

Thursday, 01 October 2009

The STEP Business Families Group was established in late 2007 recognising the increasing prominence of business families and their family businesses.

In the EU, the European Court of Justice has been doing its bit in ensuring that tax breaks for businesses are not restricted to those in particular member states, but apply across the EU. The 25 October 2007 Case C-464/05 Maria Geurts, Dennis Vogten v Administratie van de BTW, registratie en domeinen, Belgische Staat is an example of this.

Of course, trusts play a central role for STEP members in creating structures that enable the ownership, management and control of family businesses to be handed down the generations in a controlled and systematic way. In Civilopia, the tools of the trade are somewhat different. The ability to use inheritance contracts to preserve businesses has spread from Germany, Denmark and Austria to Italy and now to France.

The impact of succession law on the viability of small and medium enterprises (SMEs) has been of concern to many EU member states. Commission recommendation 2003/361/EC defines companies with fewer than ten employees as ‘micro’, those with fewer than 50 employees as ‘small’, and those with fewer than 250 as ‘medium’. It is thought that globally, SMEs may make up 99 per cent of business and contribute 40-50 per cent of GDP.

Another standard Civilopian tool has been the choice of a suitable matrimonial property regime that protects the business from claims on death, divorce or by creditors of a spouse or registered partner.

The decision of the court of appeal in Radmacher v Granatino [2009] EWCA Civ 649 of 2 July 2009 may have more ramifications than the court thought. This case has largely been reported as a question of the enforceability or otherwise of pre-nuptial contracts in relation to divorce. Actually, it was a case about the choice of a matrimonial property regime by a German woman (Katrin) and a Frenchman (Nicolas) both from wealthy backgrounds, choosing that German law should apply, notwithstanding the fact that the marriage was most closely connected to England & Wales. The German family owns two groups of companies that manufacture paper and apply specialist treatments to it.

Katrin’s father was insistent that, like her sister, she should enter into a German matrimonial property regime in order to protect the family’s wealth and he indicated (or at least implied) to her that otherwise he would take steps to disinherit her. Dr Magis, a notary in Germany who had previously undertaken work for the family, was chosen by Katrin’s mother to complete the notarial authentic deed.

The impact of succession law on the viability of small and medium enterprises (SMEs) has been of concern to many EU member states

During the marriage, Katrin’s father transferred substantial capital to her. By transfers in 2002 and in 2005 he brought her shareholdings in the two groups of family companies from l0 per cent and 13.8 per cent respectively up to 16 per cent and 23.4 per cent. In 2005 he also paid EUR25,000,000 to her in return for her surrender of any entitlement under German Law to a portion of his estate on death (i.e. an inheritance contract).

The decision in Radmacher seems to imply that notwithstanding the fact that the applicable law was that of England & Wales, then if a choice of law provision is valid in accordance with the law of the domicile of each of the parties (i.e. on a dual domicile basis), then English law will now accept the choice of law provision and in this case apply German law. This is a radical and novel departure for English law. The Civilopian tools will become increasingly useful when doing the business.

 

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Richard Frimston

Richard Frimston TEP is a Partner at Russell Cooke LLP and Chairman of the STEP Cross Border Estates Group.

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