What is a letterbox company?
A letterbox company is a firm that is set up with the intention of circumventing legal and conventional obligations. Examples of these are taxation, social
security, VAT and wages. These companies do not actually perform any real economic activities although claiming to do so.
Who sets up a letterbox company and why?
Letterbox companies are set up by individual fraudsters and by fraudulent companies. They have two reasons for doing so: a desire to make huge profits on
the back of the workers and the authorities, and to conceal the true identity of the owner or owners. In many cases, letterbox companies are managed by front men (usually lawyers, consultants). They generally work with a mandate on behalf of the real owner(s). This makes it very hard to find out who the real owners are. A key feature of letterbox companies is that they can be very quickly, simply and cheaply set up and wound down. Indeed, such entities may be established and disbanded in a matter of a few hours, making supervision very difficult.
What damage do letterbox companies create?
As well as being used for tax evasion purposes, letterbox companies are increasingly being used as a way to avoid paying workers’ social security
contributions. As a result, workers are not insured in any way if they fall ill or have an accident, nor are they entitled to for example unemployment benefit or a pension.
Are letterbox companies legal?
It is impossible to give a clear-cut answer to this question. Under EU law, letterbox companies are perfectly legal. In fact, the European Union even promotes them. Generally speaking, they are set up in countries that do not have company supervision and that have stringent confidentiality requirements. Unfortunately, letterbox companies are completely legal in those countries. The problem is that in many cases foreign letterbox companies are established so as to circumvent the legal and collective-agreement obligations in another country, thereby avoiding payment of required wages and social contributions. As these bogus companies are set up in another country, it is in practice very difficult for a receiving country to take action against them.
In which countries are the most letterbox companies set up?
A lot of countries in Europe deliberately allow letterbox companies. These include Malta, Cyprus, Hungary, Estonia, Luxembourg, the UK, Ireland, Slovenia and other countries. Furthermore, huge numbers are set up in all the EU micro-states, such as Andorra, Monaco, Liechtenstein and San Marino, and also in many overseas territories, for instance the British Virgin Islands, Gibraltar and Saint Lucia.
The EFBWW has developed concrete demands, which should be implemented at European and national level to STOP the practices of letterbox companies.
- insert an enforceable “anti-abuse social clause” in the Social security Regulation n° 883/2004;
- allow host Member States to rapidly question, contest and reject clearly falsified or fraudulent Social Security A1 declarations when workers are posted abroad;
- introduce a mandatory prior notification of posting in the host country;
- introduce an unconditional system of chain liability making the main contractor liable for the social abuses and fraud committed by any of the subcontractors;
- allow host Member States in case of cross-border posting to collect the social security contributions due, which afterwards should be transferred to the national authorities of the sending countries;
- impose the mandatory use of the Electronic Exchange of Social Security Information (EESSI) by the end of 2016, allowing authorities to target artificial companies’ schemes that flout workers’ social protection;
- revise the services Directive 2006/123/EU, which makes it far too easy to set up “letterbox companies”, without genuine economic activities, in another EU country;
- create a unique European Social Security number for all workers, that makes it easier to check whether a worker has proper social Security protection;
- set up a transparent and accessible business register of all EU-companies, with at least the following details: (a) the company's founders, (b) the company's legal representatives, (c) the company's address, (d) the paid-up initial capital, (e) the company's business, (f) the VAT number, (g) the necessary attestations and certificates and (h) the number of workers and their identities;
- oblige all Member States to check whether a company, which has been set up in their country, has a genuine activity;
- forbid the setting up of a company anonymously, either via middlemen or websites;