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Law

Data Governance after GDPR and the protection of personal data

RGPD, client data, client experience, information, RGPD, réglement générale protection donnée, GDPR, General data protection regulation, companies, business secret, data quality, data collection, collection de data, ramasser de la data, information, information technology,

RGPD, client data, client experience, information, RGPD, réglement générale protection donnée, GDPR, General data protection regulation, companies, business secret, data quality, data collection, collection de data, ramasser de la data, information, information technology,

The Structure of Data Governance in Enterprises

Data governance refers to all the organisations and procedures put in place within a company to control the collection and use of data. According to a study conducted by Reach Five and Opinion Way, 78% of French companies harvest data to personalise the customer experience. However, simply collecting data is not enough to improve competitiveness: companies need to learn how to use this data in an optimal way. This collection is subject to restrictions such as the respect of users’ privacy. Therefore, in their data governance process, it is necessary for companies to take into account the limitations posed by both national and European legislation.

Personal data refers to all information that makes it possible to identify a natural person. France was a forerunner in the supervision of its citizens’ data. As early as 1978, it introduced legislation to protect users, even though at that time the Internet was foreign to the general public. The French law of 6 January 1978 has established the principle of freedom to create nominative files and to process data by computer, but this freedom has its limits: the collection of data must respect the principle of fairness and transparency. This means that companies are obliged to inform the persons concerned of the compulsory or optional nature of their replies, of the list of legal persons to whom their replies are addressed and of the consequences of these replies. However, if the absence of a response leads to an inability to access the proposed service, can we still consider that the user has a choice in the disclosure of his data?

One of the fundamental notions of this law is the right of opposition and rectification of the information collected. This issue has been the subject of litigation and the courts are trying to enforce this rule. Through a judgment of 14 March 2006, the criminal chamber of the french court of cassation considered that : « It is a collection of personal data to identify electronic addresses and to use them, even without registering them in a file, to send electronic messages to their holders. It is unfair to collect, without their knowledge, the personal e-mail addresses of natural persons on the public space of the Internet, as this process impedes their right of opposition. ». It can be seen that data is not treated as a commodity that can be exchanged, but rather as the property of an individual who must give his or her consent to its use and to its knowledge.

The 1995 Directive and the RGPD Regulation

In reaching this solution, the judges relied on the Directive of 7 October 1995 on the protection of individuals with regard to the processing of personal data and on the free movement of such data, which led to the amendment of the law of 6 January 1978. However, the aim of this European legislation remains the same as the former French legislation: to regulate data flows and protect users’ information.

To comply with these rules, companies must implement a clear and precise data collection policy. First, it is important to consider the methodology to be adopted in the data collection process. This is essential to ensure compliance with the regulations and effective use of the data. To this end, a data management plan should be drawn up to define the data collection methods and organisational systems, as well as the legal and ethical framework surrounding this information: how will the data be shared? How will you protect the identity of your users?

In addition, it is necessary to define precisely how the data will be stored in order to put in place a security system to prevent data leakage. As a company you need to have systems in place to protect against breaches that could lead to the disclosure of user information and how you will react if this happens. Anticipating the risks and your attitude to them is paramount: knowing that you are prepared in case of an incident gives users confidence.

Finally, it is imperative that you, as a company, ensure the quality of the data. How can you ensure that your data is reliable? This control is achieved by implementing monitoring and processing methods. Poor quality or badly structured data is a security risk because it will be more difficult to determine what data is at risk and what the level of risk actually is. How to monitor and determine what data is at risk? The implementation of data governance tools is a necessity to manage data and to determine the areas at risk.

Some states did not regulate data right away and waited for European intervention before putting in place rules on this matter, such as Luxembourg, which only put in place legislation in 2005, in order to transpose the European directive 2002/58/EC (since repealed) on privacy and electronic communications. Subsequently, 2 laws were enacted on 1th august 2018 : the Act on the organisation of the National Commission for Data Protection and the general data protection regime and the law on the protection of individuals with regard to the processing of personal data in criminal matters and in matters of national security. In the end, however, it can be seen that this regulation is essentially derived from European rules: it is mainly these that provide the framework for data protection.

RGPD, client data, client experience, information, RGPD, réglement générale protection donnée, GDPR, General data protection regulation, companies, business secret, data quality, data collection, collection de data, ramasser de la data, information, information technology,

Facebook problematics

Today, good management and protection of user data is fundamental to a company’s image. The giant Facebook is proof of this: in April 2021 data of 533 million Facebook users leaked . Facebook stated that the data came from an illegal collection that exploited a security flaw discovered and fixed in 2019. This case does not improve the giant’s image in terms of data protection. This is not the first time Facebook has faced a disclosure of its users’ information. In 2018, Cambridge Analytica The UK and US press revealed a massive misuse of users’ personal data for political purposes. This case illustrates the extent to which individuals’ personal information can play a role in shaping behaviour.

Unfortunately, the provision of personal information is nowadays indispensable when you want to surf the Internet, but how can you protect yourself as a user? You have to be vigilant. In the case of Facebook, users were aware of the data leak, but in many situations individuals do not know that their data has been disclosed, so when you receive an SMS, an email, you should check who the sender is. If the message asks you to log in to your personal space, never click on the link directly but type the address of the site into your bank.

RGPD, client data, client experience, information, RGPD, réglement générale protection donnée, GDPR, General data protection regulation, companies, business secret, data quality, data collection, collection de data, ramasser de la data, information, information technology,

L’introduction du RGPD dans le système de data governance

The European Union has taken action to ensure that users of internet platforms have their data protected via the regulation (UE) 2016/679 of the European Parliament and of the Council of 27 April 2016, on the protection of individuals with regard to the processing of personal data and on the free movement of such data which repealed the 1995 Data Protection Directive. First of all, the GDPR has placed an emphasis on consent and transparency, these two principles are at the heart of the data protection rules: ‘The principle of fair and transparent processing requires that the data subject be informed of the existence of the processing operation and its purposes’. It is on this basis that companies must inform users about how their data will be processed: no operation can be carried out without the consent of the owner of the data. The question arises as to who should prove consent. However, it must be clear and unambiguous.

The RGPD grants new rights: the right to data portability implies that it is possible to recover one’s data and transfer them to a third party. The aim here is to give people back control over their data, and to partially compensate for the asymmetry between the data controller and the data subject.

For the first time, the European Union has taken specific measures for minors under the age of 16: the child must be able to understand the information on data processing and the consent of those with parental authority must be obtained.

This regulation offers ever greater guarantees to users, with in particular a simplification of procedures in the event of prejudice, with in particular the introduction of class actions. In addition, the RGPD institutes a code of conduct to ensure the proper application of the regulation. In particular, this code requires cloud computing providers in Europe to put in place physical means of safeguarding and processing data on European territory. Microsoft has taken a public position : data of Europeans will remain within the European territory.

The broad scope of the data protection regulation was seen during the covid-19 crisis. The French CNIL had to intervene to remind employers of their obligations regarding data collection. The sensitive nature of data relating to a person’s state of health justifies the special protection afforded to it: but how to reconcile respect for privacy and personal security? In principle, the CNIL states that: “the employer does not have to organise the collection of health data from all employees“. The employer is only allowed to take individual action against an employee if the employee himself reports that he had been exposed or had exposed some of his colleagues to the virus.

The GDPR has sought to address this issue more comprehensively by introducing 2 exceptions to allow disclosure of an individual’s medical data:

  • Employees self-report their situation
  • The need for a health professional to process this data for the purposes of preventive or occupational medicine, (health) assessment of the worker’s working capacity, medical diagnoses etc.

The Luxembourgian position

Like the French authorities, the Luxembourg National Commission for Data Protection has intervened, notably by issuing opinions on draft laws concerning measures to combat the Covid-19 pandemic. In its opinion on the proposed law n°7808 on the Covid-19 screening strategy in structures for vulnerable persons and in support and care networks.

The CNPD states that the processing of data carried out in the context of proposed law no. 7808, which provides for the obligation to carry out Covid-19 screening tests for external service providers and visitors to certain structures, must “rely on one of the lawfulness bases listed atArticle 6 of the GDPR as well as meeting one of the conditions referred to in article 9, paragraphe (2), of the GDPR insofar as data relating to the health of data subjects may be processed. ».

Moreover, the CNPD’s reflection is interesting because it raises issues that are not related to data protection but that will have to be framed: “The CNPD wonders, in terms of labour law, about the consequences of a refusal by an employee or an external service provider to submit to such obligations. Will the employee have to work at another job? What will be the consequences for an external service provider when the organisation is not its employer?

The CNPD concludes by stating that it cannot comment further on the data protection issues as “the text under opinion would not meet the requirements of clarity, precision and predictability that a legal text must meet“. This response demonstrates the importance of this institution, and of supervisory institutions in general, because it is thanks to it that the legislator was able to realise that it did not meet the criteria of clarity and intelligibility of the law required by European texts.

We can see that the protection of our data and its legislation is a very broad area. Regulation will have to continue to adapt as new technologies evolve. Companies need to check the compliance of their data processing policies with current legislation and users need to be vigilant about how they disclose their personal information.

Law

The institution of the common market and the ECN directive

tax deduction, déduction d'impot, crowdfunding, lévée de fond, tax law, fiscality, tax regime, fiscalité, droit fiscal, régime fiscal, directive européenne, européen directive, national competences, compétences nationales, impot sur le revenu, direct tax,

Towards the establishment of the single market

The institutions of the European Union play a fundamental role in the realisation of the single European market, notably through the adoption of treaties, their interpretation by European judges or the control of the institutions over the actors who impact on this market. However, it cannot be achieved without the active intervention of the Member States, which must respect the Union’s rules and ensure that they are respected by both natural and legal persons. National institutions play an essential role in monitoring the correct application of regulations within the States.

One of the pillars of European Union law is its competition policy, which is one of the means of achieving the European internal market and above all the four freedoms: free movement of services, capital, goods and persons. This involves a ban on abuses of dominant positions and agreements between companies that would distort competition. Moreover, state aid paid to certain companies that would restrict competition is also prohibited, although certain exceptions are allowed.

The different competition authorities of the European Union member states

To ensure that competition policy is respected, in each of the Member States, competition authorities monitor that companies’ actions comply with the competition rules. In order to strengthen European competition policy, the institutions have put in place various measures. The first step was the adoption of the regulation 1/2003 which created a European Competition Network (ECN) in which national competition authorities enforce competition law in a decentralised way while cooperating with each other and with the European Commission.

The European Union has embarked on a new phase in its competition policy. This aims to consolidate and strengthen the role of national competition authorities by harmonising their powers, means of intervention and operating rules. To this end, the directive (EU) 2012/1 of the 11th of decembre 2018 The aim of this directive is to provide the competition authorities of the Member States with the means to implement the competition rules more effectively and to guarantee the proper functioning of the internal market. The aim of this directive is to ensure uniform application of European competition law, in particular by strengthening cooperation within the European Competition Network between the Commission and the national authorities. The system governing European competition law is decentralised and based on trust and dialogue between the authorities and the Commission. The new EU Directive does not fundamentally change the ECN, it only aims at strengthening cooperation between the actors and harmonising the implementation of EU competition rules in all Member States.

tax deduction, déduction d'impot, crowdfunding, lévée de fond, tax law, fiscality, tax regime, fiscalité, droit fiscal, régime fiscal, directive européenne, européen directive, national competences, compétences nationales, impot sur le revenu, direct tax,

The search for independence of national authorities

As regards the institutions themselves, the aim of the Directive is to “ensure that NCAs [National Competition Authorities] have the guarantees of independence, resources and powers of coercion and fine-setting necessary to be able to apply Articles 101 and 102 of the Treaty on the Functioning of the European Union effectively“. This includes the possibility for the authorities of each Member State to impose effective, proportionate and dissuasive fines on companies that engage in behaviour that is contrary to European competition rules. The Directive provides that the fine will be set in proportion to the company’s worldwide turnover.

Initially, the power or lack of power for Competition Authorities to sanction actors that violate competition law depended on the States. For example, in Ireland, the Competition Authority could not itself impose sanctions on companies that engaged in anti-competitive behaviour, it had to look to the courts to impose sanctions, but it was found that this system was ineffective and in fact very few sanctions were imposed.

French situation

In France, there was already a system of administrative sanctions that could be imposed by the Competition Authority. The main change brought about by this new directive is that of the opportunity to prosecute provided for in Article 4(5) of the directive : « National administrative competition authorities shall have the power to set their priorities in order to carry out the tasks necessary for the application of Articles 101 and 102 of the Treaty on the Functioning of the European Union, as referred to in Article 5(2) of this Directive. To the extent that national administrative competition authorities are required to examine formal complaints, these authorities have the power to reject such complaints on the grounds that they do not consider them a priority. This is without prejudice to the power of NCAs to reject complaints on other grounds defined by national law. » National administrative competition authorities shall have the power to set their priorities in order to carry out the tasks necessary for the application of Articles 101 and 102 of the Treaty on the Functioning of the European Union, as referred to in Article 5(2) of this Directive. To the extent that national administrative competition authorities are required to examine formal complaints, these authorities have the power to reject such complaints on the grounds that they do not consider them a priority. This is without prejudice to the power of NCAs to reject complaints on other grounds defined by national law, in the article L462-8 of the Code de commerce . With this new competence, the question arises as to whether this new system is totally at the discretion of the Competition Authority, as Article 4 does not define the principle of discretionary prosecution, and the risk of abuse must be taken into account, particularly with regard to the lobbying of companies targeted by the complaint. Moreover, it implies that some cases may be treated in priority to others, what recourse will there be in the event of too long a delay due to this new principle of expediency of proceedings?

Secondly, in order to strengthen the powers of the national authorities, the Directive introduces investigative powers for these authorities, powers that will ensure the effective application of Articles 101 and 102 of the TFEU. In the course of these investigations, the Competition Authorities will be able to issue any interim measure they deem necessary, in accordance with Article 11 of the Directive, which provides that  Member States shall ensure that, at least in cases of urgency justified by the risk of serious and irreparable damage to competition, national competition authorities are empowered to act on their own initiative to order, by decision on the basis of a prima facie finding of an infringement of Article 101 or 102 of the Treaty on the Functioning of the European Union, the imposition of interim measures on undertakings and associations of undertakings. This possibility offered to the competition authorities constitutes a new power in many countries, as is the case in Ireland, where the powers of the Competition Authority were previously limited.

The question then arises as to what impact this directive will have on companies. Will they have to make special arrangements to prepare for the new rules? The competition rules are not intended to change with this directive, it only aims to strengthen the authorities of each Member State, therefore, it will influence the activity of companies at international level because they will be able to obtain more easily the respect of the competition rules in all the States of the Union, this is allowed by the fact that it encourages a homogenization of the rights and the rules of procedure.

In France, however, the Directive may have a significant impact on trade associations in which many companies are involved. Article 15 of the directive provides that “the maximum fine that national competition authorities may impose on each undertaking or association of undertakings participating in an infringement of Article 101 or 102 of the Treaty on the Functioning of the European Union shall not be less than 10% of the undertaking’s or association of undertakings’ total worldwide turnover in the business year preceding the decision. In France, the maximum amount of the tax was set at €3 million, but from now on it will be raised to 10% of the total turnover of the company or association. This change may be significant for some professional associations. However, it should be remembered that the Competition Authorities are subject to the principle of proportionality of the sanction they impose in relation to the facts in dispute. Consequently, this ceiling may only be imposed very rarely. This measure is justified by the principle of harmonisation of European Union law and is accompanied by the principle of financial responsibility of companies sanctioned as a result of the cartel.

The Irish Situation

In addition to the introduction of a ceiling, the Directive provides for the introduction of civil financial penalties. This provision makes major changes to certain laws, such as Irish law. Until the entry into force of the Directive, only criminal fines could be imposed by the Irish Competition Authority, which meant that the courts had to intervene to implement it and the Authority had to prove the infringement of the competition rules before the courts, without any doubt. This complex system meant that the Authority only imposed criminal fines for the most serious competition law infringements and where the cartel was characterised. The introduction of civil sanctions is likely to lead to an increase in sanctions and activity by the Irish Competition Authority, due to increased enforcement powers. These measures should introduce a more effective competition law regime in Ireland but also in most EU countries.

Finally, it can be seen that this directive has not had the same impact in all Member States. While some countries, such as France and Spain, already applied most of the rules, in other countries, the power granted to the Competition Authority was less, as was the case in Ireland. Therefore, in the latter, the directive will have a greater impact.

Eternoscorp remains at your disposal for any issues surrounding the new powers granted to the Competition Authorities as well as for any questions you may have regarding the enforcement of competition policies.

Law

Taxation of Crowdfunding in France and Belgium, regime and issues

tax deduction, déduction d'impot, crowdfunding, lévée de fond, tax law, fiscality, tax regime, fiscalité, droit fiscal, régime fiscal, directive européenne, européen directive, national competences, compétences nationales, impot sur le revenu, direct tax,

Taxation as a tool

Taxation plays a fundamental role in orienting the behaviour of actors on the territory, and therefore on the economy. This orientation is achieved in particular through the implementation of tax benefits granted as a result of certain behaviours. In particular, tax benefits are granted to investors in participatory financing platforms, in order to encourage us, as savers, to invest in the real economy via certain projects. It is therefore important to be aware of the tax rules in order to know which type of contribution in participatory financing is the most advantageous from a tax perspective.

There are no specific tax rules for equity crowdfunding, which means that it is subject to the classic income tax rules that depend on the nature of the gain.

The 2018 French Finance Act reformed the taxation of savings to make it more favourable to taxpayers by introducing an unified tax, the PFU(prélèvement forfaitaire unique) 30% (including 12.8% income tax and 17.2% social security contributions) on income from movable capital. For example, dividends from shares in a company financed by a contribution from equity financing will automatically be taxed at 30%. This rate is independent of assets and taxable income.

However, as the main aim of this reform is to support investment, if it appears that taxation on the progressive income tax scale – in force before 2019 – is more favourable to you, you have the option of keeping this taxation. From then on, it is up to you to calculate which taxation is more favourable to you and to know which income should be taken into account in the calculation and how it is taken into account, e.g. the progressive scale of income tax is based on overall income whereas the PFU applies essentially to financial investments.

Secondly, in addition to the tax advantage of the income generated by the participatory investment, any losses are deductible. The investor can offset losses against the amount invested, which means that if one of his investments fails, the resulting losses will reduce the interest generated by other equity loans granted for other projects in the same year or the next five years. As an investor, it is therefore necessary to diversify the projects financed so that, in the event of failure, the losses of one project are compensated by the interest of others.

Similarly, capital losses on securities (shares, bonds) in one year can be offset against capital gains in the following years. But this rule is subject to certain specific conditions.

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Ways to reduce taxes in France

Other solutions exist to further reduce the amount of taxation: in France, for example, certain specific projects allow for a reduction in income tax. This is the case for subscriptions to the capital of unlisted SMEs.

The maximum reduction rate and amount vary according to the taxpayer’s marital status. The 2019 Pact Law has allowed for a broadening of the securities and bonds offered by the participatory financing platforms eligible for this scheme. Thus, when you subscribe to an investment in an SME, it is necessary to ensure that this investment meets the conditions for benefiting from this tax exemption. Like France, Belgium wanted to encourage investment in SMEs. Since 1 July 2015, if the investment in a startup meets a certain number of criteria, it is possible to benefit from a tax reduction on personal income tax corresponding to 30 to 45% of the amount invested up to 100,000 euros per person and per taxable period. In concrete terms, this means that a person who invests 10,000 euros in a start-up can reduce his or her taxes by up to 4,500 euros.

All these advantageous tax procedures are intended to encourage investment. Another way to achieve this goal has been the introduction of cashback, but this time by the companies themselves. This is initially a promotional technique whereby a player undertakes to pay back to buyers part of an initial purchase price. Cashback has evolved into a real source of investment. It allows consumers to build up savings on their daily purchases, which can then be reinvested on participatory financing platforms such as MCC.

Other participatory financing platforms go further by setting up sponsorship offers, such as the bienprêter platform which encourages investment by granting cashback to their investors who sponsor other future investors. This is a way for them to encourage investment and to see their community grow.

What about investments not regulated by the legislator?

The problem with this form of investment is that it is not regulated by the legislator: there are no specific rules on how it should be taxed. It is therefore necessary to find out how the legislator understands this form of income.

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In addition to this adapted tax system, the question arises as to how the tax is levied. Knowing how the tax is deducted ensures that the system is applied correctly. Since 1 January 2019, the deduction of taxes at source has been implemented in France. It consists of having taxes paid at the same time as the income is received. This implies that the French taxpayer is less aware of the benefits of his investments and the taxes collected, to mitigate this and allow them to control the tax paid, the participatory finance platforms are obliged to provide taxpayers with a single tax form that allows them to control the accuracy of the amount deducted. In the event of an error concerning the tax deduction, an appeal against the tax administration is possible.

As a taxpayer, you are obliged to file a tax return. Any deliberate false statement is considered tax fraud and may result in criminal penalties. A simple error on the part of the taxpayer will result in additional penalties. It is therefore essential to keep track of the income you earn from your investments and to have a thorough knowledge of the tax rules to avoid any mistakes.

Le régime en Belgique du crowdfunding

In Belgium, there are various taxes applicable to investments in general. Depending on your status, you will not be subject to the same taxation rules: what are they? The first tax is the tax on stock market transactions: this is a tax that the participatory finance company levies on the securities bought or sold. There are three applicable rates: 0.35%; 1.32% and 0.12%. The application of the rate will depend on the nature of the investment product, so it is important to find out which rate applies to the investment you have made. Then there is the withholding tax, which works simply: it is a tax at source, meaning that the participatory finance platform deducts the tax itself and pays it to the tax authorities. On most of the dividends or interest you earn from your investments, you will pay 30% withholding tax. But there are exceptions, in some well-defined cases it is possible to pay only 15% of the tax and others are exempt from the tax, for example the interest on the first 15,630 euros (for 2021) of loans to start-ups is exempt, as well as the first 200 euros (for 2021) of interest on loans to social enterprises The last tax is the capital gains tax on bond funds, whereby the bank has to levy 30% withholding tax on capital gains from the bond component (and/or cash) of capitalisation shares of cash funds, mixed funds or bond trackers. The question arises as to the amount of investment from which a fund or tracker can be considered a bond fund.

Finally, there is no common tax system in the European Union concerning participatory financing, so it is advisable to find out the applicable tax system in each country.

Law

Forum shopping: European freedom, security and justice objective 

forum shopping, european union, CJUE Vereniging van Effectenbezitters 2021, Union européen, regulation 1215/2012, place of the exchange, obligation of divulgation, British Petroleum, la loi Macron 6 août 2015, Bruxelles Regulation, insolvency proceedings, procédures d'insolvabilité, dispositif anti-forum shopping,

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Important EU objectives 

The European Union aims to create an “area of freedom, security and justice” within which people can move freely, but the emergence of certain behaviours has led to the idea that, in certain well-defined situations, freedom of movement must be limited to guarantee the security of the internal market. This was the case, for example, with the emergence of forum shopping, which is a practice whereby the litigant brings a case before the court most likely to uphold his or her own interests. But beware, this practice is not a fraud on jurisdiction because the latter consists of an active fraudulent manoeuvre such as the voluntary alteration of the location of the company’s registered office with the aim of evading the rules of the lawsuit. Although the European Union admits forum shopping, the CJEU has been led by its case law to restrict this possibility.

A recent decision : CJUE Vereniging van Effectenbezitters 2021

In a judgment of 12 May 2021 the European Court of Justice restricts jurisdiction under Article 7(2) of the Brussels I bis Regulation for investor actions. The European judges consider that only the courts of the state in which a listed company has to fulfil its legal disclosure obligations can be seized for such disputes.

In this case, the Dutch shareholder association Vereniging van Effectenbezitters (VEB) brought an action before the Amsterdam courts against British Petroleum. It is accused of disclosing inaccurate and misleading information in Germany and the UK about the oil spill in the Gulf of Mexico that occurred in April 2010. According to VEB, British Petroleum’s disclosure of this information caused the company’s share price to fall, harming VEB investors who bought shares between 2007 and 2010 through an investment account in the Netherlands.

This case led the Dutch Supreme Court to ask the CJEU whether the Dutch courts had jurisdiction to hear a collective action and to hear claims for damages brought subsequently by the injured investors on an individual basis. The questions referred for a preliminary ruling are as follows:

The main issue that emerges from this judgment is the following: the Dutch Supreme Court asked about the interpretation of Article 7 of Regulation 1215/2012: is it to be interpreted as meaning that the direct occurrence of a purely financial loss on an investment account in the Netherlands is sufficient to consider that the Dutch court has jurisdiction to rule? According to this interpretation the place of occurrence of the damage would be relied upon to establish the international jurisdiction of the court, as the damage results from “investment decisions taken on the basis of generally available but inaccurate, incomplete and misleading information from an international listed company”. Thus, this judgment addresses the relevant criteria for locating damage caused by an issuer’s failure to meet its transparency obligations to the market. Article 4 of the Brussels Ia Regulation determines the general jurisdiction and provides that “persons domiciled in a Member State shall, whatever their nationality, be sued in the courts of that Member State”, i.e. the courts of the defendant’s domicile without jurisdiction. However, Article 7(2) of the Regulation provides for an exception: it establishes the rule that it is possible to bring proceedings in the courts of the place where the harmful event occurred or is likely to occur. A fundamental question that arises is how to interpret the concept of “place of damage”.

The European Court of Justice answered this question in the Bier v. Mines de Potasse judgment in 1976. It adopted a broad interpretation of this concept, considering that it includes both the place where the unlawful act causing the damage was committed and the place where the effects of the unlawful act were felt. Nevertheless, the case law has evolved and has progressively restricted this notion of the place of damage.

In this judgment of 12 May 2021, the judges of the European Union insist on the fact that this notion of “place where the harmful event occurred” must not be interpreted in an extensive way. Therefore, it is necessary to establish a close link between the place of residence of the claimant and the place of the damage. The mere fact that the claimant would have suffered financial loss in another Member State is insufficient to characterise the fact that it is the “place where the harmful event occurred”. The Court concludes that “the mere fact that financial consequences affect the claimant cannot justify conferring jurisdiction on the courts of the claimant’s domicile, such conferral of jurisdiction being justified in so far as that domicile is in fact the place of the causal event or the place where the damage materialised. This principle aims at preserving the objective of foreseeability, which implies that a defendant should not be sued in a court where he could not reasonably be expected to be sued.

Therefore, in this case, the CJEU held that British Petroleum had no obligation to disclose information to the Netherlands, which implies that it could not foresee being sued in the Dutch courts. It therefore held that the mere location of an investment account in a country is insufficient to establish a close link with the jurisdiction of that country and give it jurisdiction under Article 7(2) of the Brussels I bis Regulation.

A decision in line with the usual case law of the Court of Justice of the European Union

This decision of the Court of Justice seems rather contradictory with the European orientation of recent years. Indeed, if one applies the facts of this case to the Directive 2004/109 on transparency of information of issuers on stock markets and Regulation 596/2014 on market abuse, British Petroleum should have made available periodic information likely to have an effect on its share price. While only the UK and German authorities were obliged to disclose some of this information, it was available to all EU Member States in accordance with EU law, not just to the German and UK public. Thus, it seems questionable to consider that British Petroleum could not foresee that the information disclosed would not be disclosed throughout the European Union and therefore could have repercussions in all Member States.

The CJEU therefore confirms its restrictive interpretation of Article 7(2) of the Brussels I bis Regulation in the context of financial losses and strengthens its position in order to avoid forum shopping.

Case-by-case limits: state resistance and European collaboration in the French case 

However, although the issue of forum shopping was initially an international one, it seems to be emerging within the States themselves. In France, the Macron Act of 6 August 2015 for growth, activity and equal economic opportunities introduces a form of French-style forum shopping. It leads to competition between specialised jurisdictions, ensuring greater attractiveness of French law in cross-border insolvency proceedings.

The Macron Act aims to improve the management of groups of companies in insolvency situations, and to this end it has created specialised commercial courts and derogatory rules of jurisdiction.

forum shopping, european union, CJUE Vereniging van Effectenbezitters 2021, Union européen, regulation 1215/2012, place of the exchange, obligation of divulgation, British Petroleum, la loi Macron 6 août 2015, Bruxelles Regulation, insolvency proceedings, procédures d'insolvabilité, dispositif anti-forum shopping,

The French legislator wanted to avoid the debtor choosing his court. Article R600-1 of the Commercial Code provides that “in the event of a change in the registered office of the legal person in the six months preceding the referral to the court, the court within whose jurisdiction the initial registered office was located shall remain the only competent court”. This means that the debtor has no interest in changing the jurisdiction of its registered office before the implementation of proceedings. In application of this article, the competent court to open an amicable or collective procedure in France is the one in whose jurisdiction the company has its registered office. But a question arises: what are the rules applicable to a group of companies whose various registered offices may be scattered? Indeed, this connecting rule could lead to a scattering of proceedings in multiple jurisdictions. To alleviate this problem, Article L662-2 of the French Commercial Code provided for a system of deferral of proceedings “when justified by the interests at stake“. The Macron Law of 6 August 2015 will maintain this system but will add the possibility of referring the case to a specialised court. Moreover, it will replace the system of coordination between courts by a regrouping of all amicable collective proceedings under the jurisdiction of a single court: the court seized first. As a result, the debtor now has the choice of bringing the case before the commercial court in whose jurisdiction the registered office of one of the companies in the group is located, and this will become the sole court for the entire group. The Macron Law has quietly introduced a version of forum shopping in France and in the group of companies, which now allows the debtor to exercise a choice in favour of the court that is most favourable to him, to a certain extent.

The Insolvency Proceedings Regulation 2015/848 

The main risk of forum shopping is that it undermines legal certainty, but the new EU Regulation 2015/848 on insolvency proceedings seems set to change this. The European legislator distinguishes between virtuous and fraudulent forum shopping. Forum shopping would consist of a debtor moving the centre of its main interests while informing its creditors of the new location from which it operates. On the contrary, Recital 29 provides that it is necessary to put in place “a number of safeguards to prevent fraudulent or abusive forum shopping”. In order to combat fraudulent forum shopping, the Regulation introduces in its Article 3 a waiting period of 6 months which implies that the procedure will be unenforceable in case of transfer of residence to another Member State by an individual.

The European Regulation provides that the competent State court is the centre of the defendant’s main interests, Article 3, paragraph 1 provides that “The courts of the Member State within the territory of which the centre of the debtor’s main interests is situated shall have jurisdiction to open the insolvency proceedings”. However, this concept remains vague, what are the criteria for characterising the centre of a person’s main interests? The European legislator has attempted to answer this question in this same article by stating that “the centre of main interests corresponds to the place where the debtor habitually manages his interests and which is ascertainable by third parties”. Thus, two conditions must be met for a place to be defined as the centre of main interests: it must be the place where the debtor habitually manages his interests and it must be verifiable by third parties.

forum shopping, european union, CJUE Vereniging van Effectenbezitters 2021, Union européen, regulation 1215/2012, place of the exchange, obligation of divulgation, British Petroleum, la loi Macron 6 août 2015, Bruxelles Regulation, insolvency proceedings, procédures d'insolvabilité, dispositif anti-forum shopping,

As stated above, an anti-forum shopping device has been introduced. For companies and legal persons, the presumption that the centre of main interests is the place of the registered office. But this presumption “shall only apply if the registered office has not been transferred to another Member State during the three months preceding the application for the opening of insolvency proceedings”. The habitual nature of the definition of COMI therefore presupposes a certain stability in the location of the registered office of the company.

Despite the European legislator’s mistrust of abusive forum shopping, which aims to fraudulently evade its creditors, it nevertheless wished to provide a framework for virtuous forum shopping. Provided that it is legitimate and carried out in a transparent manner, the transfer of the debtor’s centre of main interest is allowed. This implies that the debtor will have to inform its creditors of the change in the registered office of its company. For example, in the Eurotunnel case, brought before the Commercial Chamber of the French Court of Cassation on 30 June 2009, the fact that the company moved its registered office in a “virtuous” manner by informing its creditors led the court to consider that the parent company of a group can constitute the centre of main interests of its foreign subsidiaries. This led the judges to consider that it is possible to open collective proceedings, subject to French law, against all the companies in the group.

Law Law

Abuse of dominant position in European Countries

abus de position dominante, abuse of dominant position, abuse of power, market distortion, law, droit de la concurrence, competition law, competition, EU law, european law, news, directive

Originally published on : EternosCorp

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Respect for competition rules is one of the fundamental principles of the European Union. The European single market cannot be achieved without a competition policy that guarantees free access to the market for all. The Treaty on the Functioning of the European Union aims to prevent restrictions and distortions of competition within the internal market. Despite these rules aimed at ensuring the proper functioning of the internal market, there is evidence that some players continue to engage in anti-competitive behaviour. The European Commission, as guardian of the EU Treaties, is responsible for sanctioning players who do not respect the competition rules in the European market.

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A very hot issue for the commission

This competition regulation, guaranteed by the Commission, applies directly in all EU Member States and prohibits certain behaviour that could harm the proper functioning of the internal market, such as agreements aimed at fixing prices, allocating customers in the market or limiting production. The second major prohibition is the abuse of a dominant position, which consists of behaviour by a company in a dominant position on a market which is designed to eliminate other players from the market or to deter others from entering the market, thereby distorting competition.

In 2018, the giant Google was criticised by the Commission for engaging in such behaviour. The company was fined €4.34 billion for illegal practices regarding Android mobile devices in order to strengthen the dominant position of its engine. The company was forcing mobile device manufacturers to install its applications. Margrethe Vestager, European Commissioner for Competition Policy, said: “Google is using Android as a vehicle to consolidate the dominant position of its search engine”. This behaviour has consequences in many areas, “These practices have deprived its competitors of the possibility to innovate and compete on their merits. They have deprived European consumers of the benefits of effective competition in the important market for mobile devices. This practice is illegal under the European Union’s rules on anti-competitive practices.

This practice used by Google in order to strengthen its dominant position on the market is considered as an anti-competitive practice and sanctioned as such. The CJEU has had the opportunity to define the concept of a dominant position a few times, starting dating back in 1978 : “To a position of economic strength enjoyed by an undertaking which enables it to prevent effective competition being maintained on the relevant market by giving it the power to behave to an appreciable extent independently of its competitors , customers and ultimately of its consumers . ” – Judgment of the Court of Justice of 14 February 1978, United Brands v Commission. This definition by the European judges remains very general and does not really answer our questions: what acts can be sanctioned on the basis of abuse of a dominant position? The answer is left to the national authorities. 

The Irish law : a packed yet very efficient system

In application of European law, Irish law prohibits the abuse of a dominant position. Competition in Ireland is, of course, regulated by European provisions but also by the Competition Act de 2002 (CA 2002), latest amended in 2017, and by the Competition and Consumer Protection Act de 2014. Both act mainly give the government itself the ability to attack law-breaking companies, allowing court to judge in very fast trials. However, the  Commission for Communications Regulation , a mainly bureaucratic institution, also has powers to enforce Articles 4 and 5 of the Competition Act and Articles 101 and 102 TFEU. It worth noting that the CCPC may not grant injunctions or interim measures , which function is confined to the courts, making it a mainly prosecutorial body. 

The article 5 of the CA 2002[1] prohibits conduct by one or more undertakings which amounts to an abuse of a dominant position in a market if it is capable of affecting trade in Ireland. In order to be characterised, the dominant position must exist in Ireland and the effect on trade must occur in Ireland, yet the abuse may take place outside Ireland. This means that a Spanish company, which has no premises in Ireland, can be punished for abuse of dominance in Ireland if its action in Ireland would affect trade in Ireland. There is no exemption from the abuse of dominance prohibition under Irish law. In addition, both the High Court, Court of Appeals and Supreme Courts have given extremely broad definitions in cases such as  in the HB/Mars/Ice-cream (This litigation started in Ireland and culminated in the Court of Justice of the European Union (CJEU) judgment in Case C-344/98, Masterfoods Ltd. v. HB Ice Cream Ltd., 2000 E.C.R. I-11369.) .
Abuse has been alleged and mostly found to exist in regard to issues such as :

  • discriminatory pricing, (Island Ferries Teoranta v. Minister for Commc’n, Marine & Nat. Res. [2011] IEHC 388)
  • excessive pricing, ( Case COM/107/02—TicketMaster Ireland, Enforcement Decision E/06/001 (Sept. 26, 2005),) 
  • margin squeeze,
  • predatory pricing, (COM/005/03—Drogheda Indep. Co. Ltd., Enforcement Decision E/05/001 (Dec. 7, 2004)) 
  • rebates, (Case COM/13/005—An Post, Enforcement Decision E14/001, part 5 (Oct. 30, 2014),. motivated by a previous EU principle decision,  C-497/99 P, Irish Sugar plc v. Comm’n, 2001 E.C.R. I-5333.) 
  • refusal to supply (by a open note) 
  • and tying. (Competition Auth. v. O’Regan [2007] IESC 22 (Supreme Court); and Blemings v. David Patton [2001] 1 IR 385 (High Court).) 

The Irish regime creates no provision for non-economic (or, more precisely, non-competition) factors (e.g., public policies favouring preservation of multiple market participants or protection of small businesses). This is consistent with Irish competition law in general, which is entirely focused on competition and unaffected by other factors (except in the case of media and newspaper mergers). Irish anti-abuse of dominance laws have not been widely applied. As a result, they remain underdeveloped in the Irish context.  There have been relatively few cases over the nearly three-decade lifespan of the rules—many of the cases have involved alleged dominance (which is sometimes not established) in the case of State entities. The fact that the (now) CCPC’s first major case about dominance failed (the Competition Authority v. O’Regan and others case [2007] IESC 22 (Supreme Court).) does not inspire private litigants to bring cases, and thus more public enforcement is needed to encourage private enforcement. 

The French law : a classic continental position

Exactly as Irish law, the French system also sanctions for abuse of dominant position, but provides a more precise definition than that laid down by the CJEU.  The article L420-2 du Code de commerce states that « It is prohibited, under the conditions provided for in in the article L. 420-1,the abuse by an undertaking or group of undertakings of a dominant position in the internal market or in a substantial part of it. […] The abuse by an undertaking or group of undertakings of a position of economic dependence of a customer or supplier on the undertaking or group of undertakings shall also be prohibited where it may affect the functioning or structure of competition.  ».

The French definition is of course broader, as it directly focuses on both consumers and suppliers But how do you know when a company is really in a dominant position? Article L420-2 of the French Code du Commerce lists a series of acts that can constitute an abuse of a dominant position: refusal to sell, exploitation of a state of dependence, etc. …. However, this list is by no means exhaustive, and the European Commission has published a guide to implementing the article 102 du TFUE[2] sanctionning anti-competition practices. It provides in particular that factors such as the geographical area and the existence of barriers to market entry must be taken into account in order to consider that there is an abuse of a dominant position. Secondly, there can be a dominant position without abuse, and it is therefore this notion that must be characterised so that the actions can be sanctioned. The abuse may, for example, consist of a significant reduction in prices in relation to competitors, which has the consequence of reducing the market share of competitors and of creating new barriers to entry, thus preventing the arrival of new companies on the market.

But the situation of abuse of a dominant position is not so simple to characterise. At what stage can it be considered that the actions are sufficiently serious to constitute an abuse of a dominant position? The French Court of Cassation recalled this in a decision of 15 July 1992: only an appreciable harm to competition can characterise an anti-competitive practice. Therefore, only abuses of economic dependence that are sufficiently significant can be sanctioned. Moreover, the infringement can only be sanctioned if a causal link between the situation of economic dependence and the offending practice can be demonstrated. If both the existence of harm and the direct link are underlying in European jurisprudence in matters of abuse of dominant position, they are explicit in French law.  For instance, a state of dependence must lead to the abuse in French law : a company must first be in a situation of dependence and then it will take advantage of this situation to obtain even greater benefits, for which abuse will be found. 

Lack of link in French law between monopolies and abuse of dominance 

Unlike Irish case law, which gives a direct link between monopoly and abuse of dominant position, the French case law do not link the two. Abuse of a dominant position is the act that is sanctioned, and  it can lurely lead to a monopoly, which is a market situation in which a single seller faces a multitude of buyers. However, one has to be careful: not all monopolies arise from situations of dominance. Monopoly is explained by the existence of “barriers to entry”, which means that new companies cannot enter the market to provide the service in question / sell the same products. These barriers to entry can be set by the companies themselves, as in the case of abuse of a dominant position. But another hypothesis is the presence of barriers that are inherent to the activity carried out. The first hypothesis is the existence of high fixed costs due to the size of the market, expensive infrastructures, high research and development costs, etc., which may prevent new players from entering the market because without significant financing they cannot start their activity. High fixed costs are a characteristic of network economies such as electricity where, in order to enter the sector, it is necessary to be able to build power stations, ensure distribution etc., which implies very high costs and is a brake on the entry of new players in this market.

The second category of barriers to entry is the existence of economies of scale in certain industries with increasing returns. Economies of scale refer to the fact that the unit production cost of a product or service decreases as output increases. These economies of scale do not allow small companies to be profitable, so they block them from entering the market. This is for example the situation Google is in: the company invested many years ago in hardware and was able to grow and establish itself allowing its turnover to increase considerably compared to the financial requirements to generate these profits. If a company were to enter the market today, it would have to face extremely high fixed costs that would not allow it to be profitable compared to Google.

A third hypothesis concerning barriers to entry, which can lead to a monopoly, is the state: we speak of legal monopolies. These are monopolies that are authorised and regulated by law. They aim to restrict competition in certain markets in order to pursue strategic or regional planning objectives or to guarantee a public service. How can a monopoly be compatible with the competitive requirements imposed by the European Union? The combination of these two requirements in the European Union is complex. Since the Single European Act of 1986, the questioning of public monopolies has appeared in Community law. It is from this treaty that many sectors previously entrusted to national monopolies have been opened to competition. For example, in Italy, the Mammi law was passed in August 1990 to abolish the RAI (radiotelevisione Italia) monopoly, allowing access to television to be opened up to private groups. And the end of state monopolies has multiplied in many EU member states with the major role it plays in our economy. The European Commission is not clearly opposed to public monopolies but considers that these services must be provided efficiently and at low cost. The risk for a public company not subject to competition is that it will charge too high prices, which is why the European Commission considers that any activity should be subject to free competition unless it is incompatible with it.

The European Law : evolving but not yet fixed as to public monopolies

Article 37 of the Treaty on the Functioning of the European Union provides a framework for these public monopolies, stating that “Member States shall arrange national monopolies of a commercial character in such a way as to ensure that no discrimination regarding the conditions under which goods are procured and marketed exists between nationals of Member States”. This implies that Member States have a duty to provide these services fairly and in accordance with the general interest. The Court of Justice of the European Union is there to supervise the States and to sanction the bad management of their monopoly. For example, in the 2010 Stoss and Carmen Media Group judgments, the European judges ruled that the public monopoly on sports betting in Germany did not ensure that the general interest objectives invoked by the German legislator were achieved in a consistent and systematic manner. This decision was justified by the fact that the monopoly holders were running intensive advertising campaigns and that the competent authorities were at the same time pursuing policies to encourage participation in other games that could lead to a high risk of addiction for players.

Despite strict rules governing legal monopolies, they are set to disappear due to the influence of European ideas. One of the major monopolies of the French state ended in 2020: the railway market. The aim was to allow private operators to run their trains on the rail network. This reform was prompted by the European Union to improve service performance. However, the situation is now more complex as there is little competition to the SNCF. This can be explained in particular by the very high costs of entering the market. This raises the problem of how to encourage companies to invest in this sector, a situation that the global pandemic has not improved.

Finally, it can be seen that the European Union makes it a point of honour to ensure that competition in the market is respected, but the situation is not so simple and the abuse of a dominant position can happen quickly, so it is important, as a single player in the market, to ensure that it does not take unfair advantage of its situation.

 

  1. « (1) Tout abus par une ou plusieurs entreprises d’une position dominante dans le commerce de tous biens ou services dans l’Etat ou dans toute partie de l’Etat est interdit.

    (2) Sans préjudice de la généralité du paragraphe (1) , un tel abus peut notamment consister en :

    (a)  imposer directement ou indirectement des prix d’achat ou de vente déloyaux ou d’autres conditions commerciales déloyales,

    (b) limiter la production, les marchés ou le développement technique au préjudice des consommateurs,

    (c) appliquer des conditions différentes à des transactions équivalentes avec d’autres parties commerciales, les plaçant ainsi dans une situation de désavantage concurrentiel,

    (d) subordonner la conclusion de contrats à l’acceptation par d’autres parties d’obligations supplémentaires qui, par leur nature ou selon l’usage commercial, n’ont aucun rapport avec l’objet de ces contrats. »

  2. Article 102 TFUE : Est incompatible avec le marché intérieur et interdit, dans la mesure où le commerce entre États membres est susceptible d’en être affecté, le fait pour une ou plusieurs entreprises d’exploiter de façon abusive une position dominante sur le marché intérieur ou dans une partie substantielle de celui-ci.

    Ces pratiques abusives peuvent notamment consister à :

    imposer de façon directe ou indirecte des prix d’achat ou de vente ou d’autres conditions de transaction non équitables,

    limiter la production, les débouchés ou le développement technique au préjudice des consommateurs,

    appliquer à l’égard de partenaires commerciaux des conditions inégales à des prestations équivalentes, en leur infligeant de ce fait un désavantage dans la concurrence,

    subordonner la conclusion de contrats à l’acceptation, par les partenaires, de prestations supplémentaires qui, par leur nature ou selon les usages commerciaux, n’ont pas de lien avec l’objet de ces contrats.

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European Ecommerce, Dropshipping and VAT: The Essential Guide

europe, law, VAT, Value Added Tax, Europe, Tax

Initially published on the EternosCorp blog on the 

by B.F. Fabregue, Legal Affairs Director, Eternos Corp.

If you sell to buyers in the EU you need to know how VAT impacts your business. How do you ensure you follow the rules, and what happens if you don’t?

If you sell online, you need to understand which international tax laws will be relevant to your business. Just because you sell online, this doesn’t mean your business is not governed by the normal rules of taxation.

And if you sell to buyers within European Union (EU) countries (also known as member states), even if your business is based in another part of the world, you will need to know how Value Added Tax (VAT) impacts your business.

What do ecommerce businesses need to think about? What exactly are the different rules and regulations? What do you need to do to ensure you are compliant? What happens if you don’t comply? And finally, what upcoming changes in VAT regulations should you be aware of?

As we will see below, the VAT rules you need to consider when trading within the EU are not impossible to comply with if you ask yourself the right questions.

Additionally, the EU VAT landscape is ever changing and today this is true more than ever with new parameters such as Brexit and a focused fight against VAT fraud in ecommerce by EU tax authorities happening. In this guide, we will cover the rules you should currently follow and explain to you the new legislation coming into place in the next year that may impact the way you trade in the EU.

What is VAT, then?

The Value Added Tax (VAT) applies to most EU traded goods and services. Any business which exceeds a certain threshold of turnover usually adds VAT to the price of what they sell there. For every EU country the threshold is different.

VAT is also regarded as a general levy, because it extends to all goods and services more or less. It is a tax on sales, that is, it is charged by the consumer theoretically, not the company. But by applying VAT to the price customers pay, firms are essentially raising the tax on behalf of the EU.

Is dropshipping any different from any business ?
Short answer, no.

There are however specific elements to think about. Very often, dropshipping will happen without any storage of your products. So there is a “flash purchase and sale” when the final customer buys the product. As an example, in these scenarios the flow of events would be as follows: 1) Company A advertises a product online; 2) The final client makes a purchase of this product; 3) Company A buys the product from Company B and requests this company to ship it to the address of the final client; 4) Company A issues an invoice to the final client.

In these scenarios, you should take into account where are the goods coming from and , in case of goods are originally coming non-EU countries like China or the US, who is in charge of clearing customs on these products. In case the goods come from another EU country, you will normally require a VAT number in either a) the EU country of origin or b) the EU country of destination. Contact us to get help understanding where do you need to register in case you have this activity.

Import and export

Who pays the import VAT when importing goods into the EU? What should you do about it.

When importing goods from outside the EU and selling into EU member states, the responsibility for taxes and duties depends on who is the “importer of record”.

When using non-EU marketplaces such as AliBaba, it is usually up to the consumer to pay the import charges and VAT, via the parcel carrier, before the goods will be delivered. This is often not a pleasant customer experience, especially if it is unexpected. The additional import costs may even negate the benefits of buying abroad and can result in a high number of goods returned from disgruntled customers.

To avoid this, you may want to consider registering for VAT in the first port of entry into the EU for your goods. By keeping ownership of the goods, you will be the importer of record, and VAT will be charged on the cost price of the goods on entry.

The import VAT you pay is reclaimable on your VAT return, and the customer pays the full price at checkout – including VAT – so no nasty surprises for them. You will also benefit from a reduction in the number of returned goods.

Import One Stop Shop scheme (Import OSS)

For physical goods imported in the EU, a new import scheme will be created and accessible for both EU and non-EU businesses.

From 1 January 2021, EU and non-EU businesses selling physical goods with a value up to EUR 150 to EU consumers, will be able to declare and pay the VAT due on these imported goods in a single monthly VAT return by joining the Import One Stop Shop (OSS) Scheme.

When the new Import OSS is used, VAT will have to be charged and collected when the payment for the goods has been accepted. This means that when the goods arrive at the EU border, they will benefit from a fast release at customs with the VAT already accounted for.

The online seller will then be able to declare and pay the VAT collected to a single EU country where they decide to register for the Import OSS. The VAT returns and payments will be due on a monthly basis, and the EU country of identification will distribute the corresponding VAT amounts and information to the other EU countries.

When this special scheme is not used, for any reason, a simplified import mechanism will be introduced as well and VAT will have to be collected from the end customers by the customs broker, who will be responsible for paying the VAT amount collected to the local customs authorities on a monthly basis.

VAT

VAT on dropshipping and E-commerce: EU Companies Obligations – Treatment of E-commerce VAT (dropshipping)

Who has to pay VAT? The EU VAT Distance Selling Rules

If you are based in the European Union, or hold stock within the EU and sell to consumers within the EU, the Distance Selling Rules apply to you.

The rules apply even if:

  • You are not VAT-registered.
  • You are a sole trader.
  • You sell through marketplaces such as eBay and Amazon

Every single EU country sets its own particular VAT rate. By regulation, for specific goods and services eligible for the reduced rate, this rate must only be greater than 15 percent, or 5 per cent. Also per regulation, there are at maximum 5 class of VAT rates, except in France and Spain, which have “legacy VAT rates“. Strictly-medical supplies (which doesn’t include masks and medical gloves) and pharmaceuticals don’t have VAT per se but pay a similar levy in a different fashion, depending on countries.

The individual rates for each country can be found on the applicable website of the tax authorities in that country. The Website of the European Commission has links to each authority.

In certain cases, however, European VAT applies and is applied directly to the price, along with an indication that the price is inclusive of VAT. VAT is not applicable in other situations, and should be left off the list.

What value added tax do I pay when I sell between EU countries?

How VAT works in the EU depends on what you sell, and who you sell to. Goods and services are perceived differently, as is the disparity between the B2B and B2C transactions.

When marketing B2B products

If you sell to someone with an EU VAT number you do not charge VAT. You also subtract any VAT you’ve paid from your quarterly return to make the deal. If the customer does not have an EU VAT number, you are applying VAT on the sale to your country.

When marketing B2C products

You should register your company in the country of the customer and apply the VAT on the sale to their country. You don’t have to do that if your sales to a given country fall below a certain amount, set separately by each country in that tax year.

When marketing B2B Services

Typically you will not charge VAT. It gets charged at the rate of your country by the customer itself via the reverse charge process. Once again, however, you can subtract the VAT you paid to make a quarter of the transaction.

When marketing B2C services

For most services you apply VAT at your own country cost. The exceptions are telecommunications, television, or electronic services which are charged according to the country of the consumer.

When you are purchasing products or services for industrial use

You pay VAT at the cost of the goods in your country as if you had sold them. Usually this can be deducted when you declare VAT yourself.

The above would apply in most situations but you will need to familiarise yourself with some exceptions. For eg, does the VAT extend to EU countries’ overseas territories? Yeah and no.

VAT does not apply to:

  • The Åland Islands
  • The French Overseas Departments (which have a specific VAT tax regime)
  • The territory of Büsingen and Campione d’Italia (both exclave in Swiss territory)
  • The island of Heligoland
  • Mount Athos
  • The Italian waters of Lake Lugano
  • Livigno
  • The Canary Islands
  • Ceuta & Melilla

But VAT does apply to:

  • Monaco (same rates of France, with a few reductions)
  • UK bases in Cyprus (on the behalf of Cyprus)

The combination brings its own complications to the overseas territories straddling EU membership, as well as countries outside the EU at large.

National and intraeuro threshold

However, for small business, there are ways to not pay VAT, temporarily. For sales within the EU, if you have not exceeded the threshold in a specific country, you should apply your domestic rate of VAT to those sales – if you are VAT registered. Otherwise no VAT should be applied. Once you have exceeded the threshold in an EU country, you will have to register for VAT there, charge the country’s own rate of VAT, and file VAT returns according to the frequency and deadlines set by that country. You will stay registered as long as your sales exceed the threshold for the year. If your sales drop and you want to de-register, check the rules in that country – how soon you can de-register varies.

There are however two different kind sales regarding EU VAT threshold: national, and at distance or intraeuro

National thresholds

National thresholds indicate threshold meant for companies registered in the same territory they pay VAT to : for instance, a Polish tax-registered company paying VAT in Poland. National threshold differ by country. The selling threshold only apply to national sellers: for instance, if you have a French tax-registered company, you will NOT benefit from the threshold of Belgium or the Netherlands. In most EU member states the threshold is set at Euros 35,000 (or equivalent). For Germany, Luxembourg and The Netherlands, however, it is Euros 100,000 (or equivalent), and 85,000 euros in Ireland.

It is worthy to not that as multiple tax-registration is possible in the EU, so is the multi-VAT national threshold benefits, under very specific condition.

Infraeuro threshold

Since the 1rst January 2021, a new set of rules apply to infraeuro threshold due to the introduction of the 2021 EU VAT Ecommerce Package. The terms generally used by authorities is “Changes to the EU VAT Distance Selling thresholds”, mainly due to the old regime name. The directive is a series of measures applicable from 1st January 2021 which will aim to simplify the VAT rules for online sellers, while, in fact, mainly complicating the rules.

In 2015 VAT-MOSS (Mini-One-Stop-Shop) was introduced to facilitate the sales of digital services to private consumers within the EU. As VAT MOSS proved a real success in respect of the collection of VAT on digital services, this scheme is now being extended into a One Stop Shop (VAT-OSS) from 1st January 2021 to cover the supply of goods.

The new VAT-OSS rules stipulate that if you sell goods to private customers located in the EU, local VAT must be accounted (and paid) for based on where the customer is located, once you have exceeded a threshold of €10,000, which is now the rule. Please note that this rules DOES NOT apply to services.

For instance, if you have an Austrian company (which a threshold of 35k for VAT years), but which has a 15k turnover in Czechia, you’ll have to pay VAT through the OSS, even you don’t pay it in your own country.

Another example : The distance sales threshold in Germany is €100,000 and the German VAT rate is 19%. As long as the total value of annual sales in Germany is below €10,000, an Austrian business can avoid VAT allover. Between 10,000 and 10,000, the company will have to pay VAT through the OSS-VAT. Over 100,000 a VAT registration may be required in Germany.

To avoid multiple VAT registrations in different EU countries, the OSS (One Stop Shop), allows the seller to register for VAT in one single country and submit quarterly VAT returns. The host country collects and pays the VAT due from the seller’s EU sales in one VAT return instead of the seller having to register for VAT in every EU member state where they have customers.

The VAT-OSS is an optional scheme. You can still become (or remain) VAT registered in any EU country where you have customers through a voluntary VAT registration in that country.

It is worth specifying that VAT-OSS covers private consumer supplies only, not sales to other businesses, which means you would need to be able to identify who your customers are – businesses or private consumers – and apply the relevant VAT rules accordingly.

The rules now also applies to sellers that were previously exempt thanks to the extension of their national threshold, under the previous regime.

Why am I paying VAT on Amazon products I’m selling, even if I’m not liable for VAT?

The French and German tax authority have already introduced measures that now make the marketplaces liable for the VAT owed by the third-party sellers, instead of the sellers themselves. This has, in turn, made the marketplaces insist that a seller must have a VAT registration in place prior to being able to use a marketplace in either of those countries.

The last new rule coming into force from 1st January 2021 (effective in early March) stipulate that digital marketplaces such as Amazon and eBay will be, under certain circumstances, deemed for VAT purposes to be the supplier of the goods imported from non-EU territories and sold to EU customers.

Under the new 2021 rules the responsibility of charging, collecting, and remitting the VAT due to the national tax offices will shift in certain cases from the seller to the marketplace itself. This is a major change as for the first time, digital marketplaces are given a significant role in the fight against VAT fraud.

New selling proof – 1st January 2021

In order to understand which EU country’s VAT rate to apply, you will need to collect evidence of where your customer is based.

One piece of evidence per sales is required if your VAT sales are below €100,000 and two pieces of evidence are required if the value of your sales are over that threshold. This evidence can include the billing address, the IP address of the device used to make the purchase, and the customer’s bank details.

Which VAT rate applies to your goods or services?

It is important to know which VAT rates are relevant for the goods you are selling. Please note, these may differ between countries. The European Commission (EC) have published information relating to VAT rates and specific country rules.

Selling to non-EU customers

If you are an EU-based business and are selling to consumers outside the EU, the supply of goods is usually zero-rated provided strict rules are followed, including providing evidence of the export within three months of the sale.

It is, however, important to check the local rules and regulations of the country you are importing into.

VAT Fines : the cost of compliance: penalties and fines

In 2018, the European Commission reported that EU countries were losing €150 billion each year from undeclared VAT. To stop the hemorrhaging, special measures have been put in place across the EU in the last few years.

First, in 2012, member states set up a “mutual co-operation” initiative, with special units focused on ecommerce. The authorities in each country now communicate regularly and share data.

More recently, the formal adoption of new regulations and data-sharing tools to strengthen cooperation on VAT fraud between national tax authorities means that EU countries are becoming much more pro-active and effective in identifying and dealing with online retailers avoiding their VAT obligations.

Online retailers selling abroad need, more than ever, to be aware of their tax obligations in the countries where their customers are. Unfortunately, ignorance is no defense. The “head in the sand” approach can work for a while, but it’s not a long term solution.

Tax authorities have the power to levy penalties and interest charges, which can be as high as 120% on top of the unpaid taxes in some countries.

Other general Rules

Are your invoices compliant?

Find out if you will need to raise an invoice and what information needs to be on that invoice – again different rules apply to different countries. Also consider whether your billing system can cope with the potential variations.

Compliance tips

Here are some tips to help keep you in compliance with the practicalities of VAT in the EU:

First, make sure you have the systems in place to capture accurate sales information including which countries your customers are in, and where stock is located for onward sale to your customers.

Make sure you include shipping/delivery costs as these are included in the final sums when calculating if a threshold has been exceeded.

When charging your customers, make sure you add VAT to the shipping cost as well as the product price on your invoices.

Keep up-to-date with the current VAT registration thresholds and where relevant, monitor currency fluctuations. Know when you are about to exceed a threshold including when the local currency is not in Euros. This is important even though the rules will change in the future as tax authorities are combating VAT fraud more than ever.

Know which VAT rates apply to your goods or services. If you are based within the EU, you may be familiar with the VAT rates in your own country, but they can vary elsewhere within the EU. Children’s clothing is a good example – it is zero-rated in the UK and Ireland, but attracts VAT everywhere else in the EU.

Once registered in another country, do not charge VAT for your own country as well as the buyer’s country. VAT should only be charged once.

It can take approximately 6 – 8 weeks to obtain a VAT registration, depending on the country that you are registering in.

Once registered you need to make sure your invoices comply with local regulations

Prepare for Brexit! So far there are no changes in the way UK companies can trade in the EU. However, you need to prepare for every possible scenario after the end of the transition period which is 31st December 2020.

Finally, anticipate the upcoming VAT regulation changes we have covered in this article, whilst staying compliant in respect of your current obligations.

Pricing tips

Pricing is a big issue. Unlike the USA, where it is customary to quote prices without sales tax, VAT should always be included in the price shown to consumers. It is important to understand the impact of VAT on your profit

Other questions?

Should you charge different prices in different EU countries or does one price fit all?

How badly will your margins be affected by the different VAT rates if you don’t differentiate price in each EU location?

VAT rates vary across Europe from 17% – 27%. Can the margins you have set for your products absorb the variations?

Will you stay competitive once you have VAT registered in another EU country?

Is your ecommerce system set up for multi-currencies and multi-VAT rate application? If not, how easy is it to update?

Financial Law Law

Fraud in Crowdfunding : a synthetic legal view of risks and solutions (I)

crowdfunding estonia payment escrow europe directive

The coronavirus crisis has led to a development of participatory financing platforms which have seen an exponential increase in their revenues. But with the development of these platforms, the risk of fraud has itself increased, with more and more platforms setting up fictitious projects, often offering investors high interest rates. How can you, as an investor, build up legal guarantees to protect yourself against these fraudulent platforms? The subject is very vast, and can be divided in a few different thematics. In this paper, we will explore the different problematics that an investor can encounter when someone invest and he can answer them from a legal standpoint.

How to protect yourself from platform fraud?

Many platforms are mainly located in countries where the regulation is very legimited, thanks to the flexible regulation on the subject. This has lead in the past to some problems. For instance, at the beginning of 2020, many Estonian crowdfunding platforms were no longer able to pay back their investors, initially the Estonian police became interested in the mismanagement of these platforms. The investigations led to the discovery of evidence of fraud.

To understand how this fraud was organised, it is worth recalling how a crowdfunding platform works. When you invest in a project through a crowdfunding platform, you should be aware of the risk inherent in this type of investment: if the project fails, the investment will collapse and be lost. However, there are ways to limit this risk. The investment platforms themselves insure themselves against this risk and this means that they are not accountable to investors for the success or failure of investments. They are only subject to a duty of care which takes the form of verification of the identity of borrowers and their ability to repay. Once this obligation is fulfilled, platforms do not have to guarantee the success of the investment made by the capital providers. Crowdfunding is therefore a platform that is totally conducive to scams: there is no justification for the failure of the investor to repay. In this situation, it is necessary to know how to recognise a fraudulent platform in order to be able to turn against it if you are a victim.

Wisefund is one such Estonian crowdfunding platform suspected of fraud. It aimed to finance extremely diverse projects ranging from the manufacture of microbiological fertilisers to the purchase of car parts for export. One irregularity drew the attention of investors: the guarantee allowing the platform to redeem bonds from investors in return for a discount was unilaterally deactivated. This constitutes a unilateral modification of the contract between the platform and the investors, and this possibility is regulated in the majority of EU member states’ laws, in this case Estonian law applies: how does it regulate the unilateral modification of the contract by a crowdfunding platform?

The capital providers discovered that this guarantee was provided by a Hong Kong company, Best Treasure Limited, located in a letterbox building. Despite these irregularities, the platform continued to operate, making numerous late payments and justifying its loss of capital by the risks associated with the investments. The investors decided to file for insolvency in the Estonian civil court (equivalent to a writ of reorganisation) on the basis of alleged fraud.

In a judgment of 14 January 2021, the Estonian civil court rejected the investors’ claim, considering that once fraud is suspected, only the criminal courts have jurisdiction. In this situation, a crowdfunding platform cannot be sued in insolvency, so the creditors must initiate criminal proceedings. This decision was confirmed by the Estonian Court of Appeal on 26 March 2021.

This is a decision that applies the classic division of competences between civil and criminal matters. The civil court denies jurisdiction in all situations where fraud is suspected. This implies that investors can only be reimbursed if they initiate proceedings before the criminal courts. As in French law, the courts have held that the civil court cannot substitute itself for the criminal court in judging criminal acts.

It is likely that this ruling, handed down by the Estonian courts, will set a precedent within the European Union. Investors do not have a claim on the platform but on the final borrower, so in case of fraud, they will have to turn to the criminal courts and not to the civil courts. The investors of the Wisefund platform had to pay additional sums to bring this action, which was ultimately unsuccessful. This case shows that it is necessary to determine which type of action to take to avoid incurring additional costs and lengthy proceedings.

crowdfunding estonia payment escrow europe directive

It is possible to imagine certain hypotheses whereby investors would engage the civil liability of the participatory finance platform, in particular on the basis of its due diligence obligation, and they could then have been compensated on civil grounds. In this case with the Wisefund platform, the initiation of this procedure would have forced the platform to provide evidence of fraud or the absence of fraud. Similarly, it would be possible to hold the platform liable before the civil courts if, on reading the contract between it and the investors, it appears that certain clauses are abusive.

At present, criminal proceedings are underway and the Estonian police have contacted the local police of the investors. The investigations have led to the discovery of evidence that suggests a Ponzi scheme, a criminally punishable financial fraud. But how can you, as an investor, identify them?

A second case : the platforms Envestio and Kuetzal, which offered capital providers to invest in empty companies or in existing companies but did not seek investors on the platform in order to recover the money provided by the investors and not to reimburse them by invoking the failure of the project. At the end of 2019, investors on the crowdfunding platforms investigated the projects that Envestio and Kuetzal were offering to fund, revealing the fictitious nature of some of them. These revelations led investors to demand their money back, causing the collapse of the Kuetzal and Envestio platforms. This collapse is explained by the fact that any financial intermediary does not have enough funds to pay back all its investors at once. In June 2020, the bankruptcy of both companies was declared by the Estonian courts.

Faced with this situation, investors organised themselves to form a collective action against the 2 participatory finance platforms. A procedure has been implemented at European level to facilitate the application process for the platforms’ investors. Criminal investigations have been initiated and are still ongoing, but the Estonian police suspect the platforms of being fraudulent and organising money laundering activities.

Other platforms such as Monathera or Grupeer have also experienced difficulties in repaying their investors. Initially, this was considered to be caused by mismanagement and default by borrowers, however, it now appears that these companies are suspected of embezzlement.

Investors in the Grupee platform have come together to coordinate action against it and investigations appear to reveal a scam. The Latvian authorities, where the platform is based, have stated that Grupeer has no licence to provide financial services in Latvia. Although the platform was originally established in Latvia, it was legally transferred to Ireland and therefore falls under Irish national regulation and should have obtained a licence to operate in Latvia. The characterisation of the applicable law is fundamental here, as the rules that apply will differ between a Latvian platform and an Irish platform.

It seems that this crisis of the crowdfunding platforms has raised awareness. It has revealed the lack of supervision of equity crowdfunding platforms, for example, there is no supervisory authority for platforms in Estonia to ensure that their projects are genuine. It was noted that it is difficult to engage the civil liability of the platform, but if the bankruptcy of the platform is not due to fraudulent manoeuvres, only the civil courts can be used, and it will therefore be necessary to determine on what grounds to base oneself in order to be compensated. Similarly, no procedure was really provided for to enable collaboration between the national authorities concerned and foreign investors; this was born out of practice, in particular by drawing on existing procedures. There was no European framework for crowdfunding, leading to a disparity of rules within the Member States: but how to determine the law applicable to the platform?

To address these issues, the European Union has taken steps to create a harmonised regulation between EU countries, the regulation on this issue will be applicable from 10 November 2021. It provides a framework for crowdfunding, notably by imposing certain obligations on the investment platform, such as information obligations towards the investor. Being aware of the obligations incumbent on a crowdfunding platform is becoming a necessity, as breaches of these obligations have important legal effects.

Moreover, Estonia now wants to strengthen its legislation to regulate the activity of P2P platforms more strictly and to prevent such a situation from happening again. In addition to complying with European regulations, the Estonian legislator wishes to create a framework for P2P consumer loans, similar to the one applicable to companies. It is also intended to regulate crypto-currency services, which are currently very poorly regulated. The Estonian Ministry of Finance’s draft regulation provides that all service provision activities related to virtual currencies will be placed under the jurisdiction of the Financial Supervisory Authority, increasing the control over these institutions, which should help limit fraud.

To prevend fraud, check reliability.

But how can you be sure of the reliability of a crowdfunding platform? This is a question that is currently at the heart of the news with the discovery of numerous scams set up through participatory financing platforms.

TFGCrowd is one such crowdfunding platform suspected of fraud. A class action suit was filed by investors after the service became increasingly late in making payments. It seems that it is suspected of fraud. This raises the question: what are the elements, the clues that allow us to control the reliability of a participatory financing platform?

Initially, the TFG Crowd platform offered investment plans to its members, so it acts as an investment advisor. The idea is that investors send money to the platform, which will invest it in a diversified portfolio. This diversification of the portfolio reduces the risk of loss to the investor, but other schemes would have allowed investors to limit their risk.

The risk of investing in a project is that if it fails, you will lose the money invested in it, so you need to put safeguards in place to minimise the losses your investments may suffer.

One of these guarantees is the fact that investing in many different projects allows you to reduce losses if a project fails. However, the downside of this diversification is that it involves additional work: before investing in a project, it is essential to find out whether the project is reliable. The more projects you invest in, the more work you have to do to analyse the market and balance the gains and risks. The advantage of this type of financing platform is that it takes care of this work of analysis and of the investments while respecting the principle of due diligence, so as to balance the risks and the interests of the investments, but how can we be sure that the work provided by the platform is sufficient?

On paper, the TGF crowdfunding platform seems ideal: a minimum of work for investors, a high interest rate, guarantees put in place by the platform. However, before investing in any crowdfunding platform, it is advisable to analyse it thoroughly to ensure its reliability; and irregularities concerning the TFG Crowd platform have not been slow to emerge: what are these clues to detect fraudulent projects set up by a crowdfunding platform?

The first problem with this platform is the lack of transparency: investors have no idea how the money is invested and if it is really invested. TFG Crowd displays a multitude of projects on its website, but it is impossible to get in-depth information about them, for example, the location of the properties is not necessarily indicated, the guarantees provided are not specified, or even how investors will get their money back. This lack of transparency is reminiscent of the Envestio platform, which was investigated as a scam. However, information obligations are imposed on participatory finance services in the majority of EU Member States and the institutions have sought to standardise these obligations within the EU. Today, the absence of information for investors on the guarantees provided to them constitutes a violation of European law, which you can invoke as soon as the applicable law is that of a State that is part of the European Union. It is therefore appropriate to question the methods of application of European law within the Member States.

The second suspicious element is that the TFG Crowd funding platform provides investors with a fixed annual interest, independent of the returns on investments, which is extremely high. This interest can represent from 14 to 26% of the initial investment. The size of this income should have alerted investors: how can an investment yield so much with such low risks? This is not possible unless the platform is using reprehensible financial arrangements, which one must be aware of in order to recognise and protect oneself.

Secondly, the TFG platform claims to have a buy-back guarantee fund in the event of default by a project contributor. This sum would be used to guarantee the repayment of the face value of the loan and the accrued interest. However, when one examines the amount of this guarantee, it appears derisory in relation to the amount of projects financed. FT Crowd claims to have a special fund of €1,437,000 to be used in the event of a project failure, but the amount allocated to this fund is very small and a single failed project would be enough to wipe out this repurchase promise.

In addition to this buy-back guarantee, TFG Crowd is putting in place a corporate guarantee to secure the investments made through its platform. It guarantees the repayment of the loans issued with the movable and immovable assets it owns, which will be secured by their shares. During the period in which the loans received are active, TFG Crowd Limited undertakes not to pay dividends to its shareholders or reduce the value of these guarantees, for example by disposing of any of its property or assets. Similarly, the share capital, on which the value of this guarantee depends, must be analysed in detail. The value of this guarantee is zero because the share capital is only 1GBP, so that an action to enforce this guarantee would be of no interest to the investors. This situation illustrates that once you have an investment

Finally, the guarantees offered by the platform are illusory, and this situation shows that simply reading the contract between the platform and the investor is insufficient to know the level of protection granted to investors. As a provider of capital, it is necessary to inform you of the real issues surrounding this contract and to inform you of the reality of the guarantees it grants you. This effective information allows you, in the event of the platform’s failure, to take the most appropriate course of action to turn against the participatory financing platform.

Limit your losses

How can you protect yourself from certain unforeseen risks when investing in crowdfunding? The subject is vast and the problems multiple: one of the risks as an investor in a crowdfunding platform is that of the insolvency of the platform or the investment.

Insolvency of the platform means that the participatory financing platform, as a company, does not have sufficient cash flow to repay its debts. Since the platform is the intermediary in many cases, such as in crowdlending, this can have a significant impact on the distribution of the loan interest. On the other hand, the insolvency of the investment means that the project whose capital provider participated in the financing is no longer able to pay off its creditors, and the investment is lost. In these two cases, it is necessary to have legal guarantees in order to be able to take action against the platform in the event of damage: knowing how to protect oneself from losses in the event of insolvency becomes a necessity.

Yet solutions exist. In France, for example, any insolvency can be broken by legal action. In the event of even partial insolvency, the platform may be subject to collective proceedings, a judicial measure aimed at guaranteeing the continuation of the company’s activity and maintaining employment, while ensuring that the rights of creditors are respected.

Among the various procedures, the most widely used is that of judicial liquidation, which is opened when the debtor is in a situation of “cessation of payments and whose recovery is clearly impossible” (Article L640-1 of the Commercial Code).

Liquidation has a particularly important impact on the company because it means that the recovery of the company’s finances is impossible (Cour de Cassation, Chambre commerciale, 8 July 2003, 00-13.627), particularly when a company is in a situation of cessation of payments, meaning that it is “unable to meet its liabilities with its available assets“. In this situation, the company can no longer meet its debts and the procedure will organise the end of the debtor’s activity; it is therefore appropriate to ask: How, as an investor, can you obtain the repayment of your claim when the debtor is insolvent? As soon as the judicial liquidation is pronounced, a procedure aiming at paying off the creditors is put in place. However, this action plan will affect the creditors of the company in liquidation by limiting their power to act. The main goal is to be able to pay the creditors in the end, but liquidation is not always the best solution.

First of all, it implies the freezing of the debtor’s liabilities, i.e. the debtor is prohibited from paying creditors whose claims arose before the opening of the judgment. Similarly, as a creditor of the platform, the investor will have to declare his claim in order to hope to be paid. This means that any creditor can no longer sue his debtor individually.

During the course of these collective proceedings, a creditors’ representative is always appointed who has a monopoly on action: the liquidator; he acts on behalf of and in the interest of the creditors (Article L641-4 of the Commercial Code). The liquidator will receive the damages that will be distributed among the creditors. In principle, the distribution is carried out by respecting the order of privileges: unsecured creditors will only be paid once the privileged creditors have been paid. It is therefore necessary to ask how a creditor can provide guarantees in order to benefit from the status of preferred creditor. During the judicial liquidation procedure, creditors remain subject to their contractual obligations. Indeed, as a matter of principle, “The co-contractor must fulfil his obligations despite the debtor’s failure to perform commitments made prior to the opening judgment. Failure to perform these commitments only entitles creditors to a declaration of liabilities” (Article L641-11-1of the Commercial Code). This means that you remain subject to your obligations under the contract in the same way as if the liquidation proceedings had not been initiated, e.g. the investor must pay all the funds that he had undertaken to deliver to the platform; however, certain assumptions are allowed for the automatic termination of the contract. However, the Court of Cassation has accepted that a situation in which the contracting party expressly declares its intention not to terminate the contract and the liquidator does not oppose this has legal effects. (Court of Cassation,Civil, Commercial Chamber, 17 February 2015, 13-17.076).

In principle, “the judgment closing the judicial liquidation for lack of assets does not allow creditors to exercise their individual actions against the debtor” (Article L643-11 of the Commercial Code). However, there are exceptions to this rule and it is therefore necessary to consider how the individual action can be exercised and in what situations. This is notably the case when “the claim originates from an offence for which the debtor’s guilt has been established or when it concerns rights attached to the creditor’s person“; but the criminal chamber of the Court of Cassation specified in a decision of6 April 2016 that when the claim originates from an offence for which the debtor’s guilt has been established, the recovery of the individual action can only take place after the closure of the compulsory liquidation procedure.

When it comes to crowdfunding, platforms that go bankrupt are a common occurrence. In France in 2018, the Unilend platform was declared insolvent, meaning that it no longer had the capacity to settle its debts. This situation can happen to any professional and to any participatory finance platform, so it is necessary to take measures to limit the consequences of this.

However, no collective action has been taken and the company has undertaken to reimburse each of the investors. It can be seen that judicial proceedings are not systematic and that it may be worthwhile to consider an out-of-court procedure when the judicial procedure does not correspond to the interests of the investors. Out-of-court proceedings are a mechanism for parties to a dispute to assert their rights without going to court: knowing the interests at stake, such as financial means or the need for confidentiality, is therefore necessary to determine whether an out-of-court settlement of the dispute would be more appropriate.

In recent years, class actions against crowdfunding platforms have increased, especially at European level. In January 2020, two crowdfunding platforms, EnvestioandKuetzal, were subject to compulsory liquidation proceedings. At present, the trial is still ongoing but investigations have revealed that they were fraudulent platforms. The Kuetzal collapse is said to have affected more than 550 people and to represent €3 million in liabilities. Envestio is said to have affected more than 1,800 people who are claiming €10 million from the company.

A collective action has been implemented. The companies are established in Estonia, so they are subject to Estonian law. In addition to being subject to a law that is not that of their country of origin, investors must contact the Estonian authorities and join a collective action based in Estonia, thus in a language that is not their mother tongue. In order to address these issues, a European regulation of 2017 has been put in place to regulate the insolvency of a company. It facilitates access to proceedings for litigants by setting up a form allowing them to contact directly the authorities in charge of the procedure as well as to have all the necessary information concerning the insolvency proceedings in progress. Moreover, it provides that the courts opening insolvency proceedings must contact the creditors concerned by the insolvency proceedings.

However, it does not standardise the law of the Member States of the Union on the question of collective proceedings, for example, the time limits and procedures to be followed differ from one State to another. It provides that the competent court is the one that opens the proceedings, which is a fundamental concept because the applicable law will be that of the place where the proceedings are opened. Similarly, this regulation provides for the possibility of opening one main procedure for all the injured creditors or several territorial secondary procedures. It will therefore be necessary to determine which procedure is the most suitable for your situation.

Financial Law Law

The 2020 EU Crowdfunding directive, quid novo sub solem?

Ühisrahastus Crowdfunding

Article published originally during the summer 2020.

Crowdfunding is experiencing an increasing momentum in the global economic landscape. Although it represents a unique category of fundraising, with different vehicles, processes and goals, its underlying concept is neither so revolutionary nor so different from a traditional whip round . Anyway, the coming of several disruptive events such as the Web 2.0 revolution, translated Crowdfunding into an innovative financing mechanism which is gaining always more attention from fundseeking ventures. Many different notions have been proposed with the aim of defining Crowdfunding, essentially developing a common conception that labels it as an internet-based open call for the provision of financial resources in order to support initiatives for specific purposes. It is really challenging to assess what would have happened if no one started to recognize in crowds a potential source both of finance and innovation; what is acknowledged though, is that nowadays companies are giving external individuals always more importance in several core functions, contributing to the rapid spread of the crowd phenomenon in all its derivations. Basically, Crowdfunding allows a large number of parties from different contexts to finance a project or a business by making a personal contribution, thus giving proponents the possibility to exploit their personal networks to raise funds. The innovation it provides could be found in its linkage to the crowd, implemented through dedicated platforms, that open new rooms for bridging investors’ and fundraisers’ communities. From a broad perspective, it is part of the recent wake of new forms of economic exchange which share common rationales including disintermediation through technological platforms, centrality of trust and reputation and connective dynamics. Provided that Crowdfunding encompasses different application models, this thesis focuses on the equity-based one; essentially, when a company wants to attract investments from individuals instead of credit institutes or private equity firms, this is called Equity Crowdfunding or Crowdinvesting . After the coming of 2008 crisis, traditional financing sources for startups and SMEs such as business angels, venture capitalists and banks, have become more risk averse; in this sense, some literatures have argued that Equity Crowdfunding could successfully fill in the financing gap which originated after the hardening of funders’ selection processes. Actually, despite its recent birth, Equity Crowdfunding currently forms a consistent part of the whole Alternative Finance segment for several countries, acting as a new disintermediated source of financing , which seems able to impact funding processes of young businesses in a relevant way, especially in this “digital era”.

Why Crowdfunding

The European market for crowdfunding has grown rapidly in recent years and is likely that it will grow further as investors look for yield-generating opportunities and people, organizations and businesses, notably start-ups can raise financing through websites (also known as portals or crowdfunding platforms) that acts as service providers or intermediaries between those wanting to invest and those wanting investment.

Improving the regulation of European crowdfunding service providers (ECSPs) and how investors as well as how small-to-medium sized enterprises (SMEs) can make use of crowdfunding as an alternative to bank intermediated funding has been a longstanding priority of the European Commission including as part of tis FinTech Action Plan. Rulemaking in this area was first proposed as part of the first launch of the EU’s Capital Markets Union (CMU) in September 2015 and has now become legislative reality as part of the 2020 relaunch as CMU 2.0. The European Commission is of the view that crowdfunding, in addition to being an important source of non-bank financing, can help spur job creation, economic growth and competitiveness – areas which the European Crowdfunding Stakeholders Forum,  as an expert group of representatives of associations of concerned stakeholder groups as well as national competent authorities (NCAs).

Last October,  the European Parliament has adopted the latest text for the European Crowdfunding Service Provider (ESCP) for Business Regulation. as well as related changes to Markets in Financial Instruments Directive (MiFid). The EU’s Regulation (ECSP Regulation) and a Directive (ECSP Directive) on Crowdfunding Service Providers were published in the EU’s Official Journal on October 20, 2020, entering into force on November 9, 2020 with its scheduled date of application beginning November 10, 2021. Both the ECSP Regulation and ECSP Directive have direct effect across the EU-27 and while the ECSP Regulation has direct effect, Member States have six months’ time to implement the ECSP Directive into national law. The original proposal for a regulation on crowdfunding, adopted by the European Commission in March 2018, has already enable crowdfunding platforms to easily provide their services across the EU.

Platforms have now to comply with only one set of rules, both when operating in their home market and in other EU countries. For investors, the proposal will provide legal certainty as regards the applicable protection rules. However, the rules do not stop there. The ECSP Regulation states that in the interests of legal certainty and in view of replacing national rules, a transitional switchover period applies. This means that a person carrying out activity that is covered by the ECSP Regulation and ECSP Directive may continue to conduct such business until November 10, 2022 under the existing national regimes (where these exist). During the transitional period, Member States can put in place special procedures enabling legal persons, which have been authorized under national law to convert such authorizations into ECSP compliant authorizations provided that such firms meet the requirements set out in the regime. Where crowdfunding service providers have failed to obtain an authorization as an ECSP by November 10, 2022 they should not issue any new crowdfunding offers after that date but may continue, in accordance with applicable national law, to service existing contracts, including collecting and transferring of receivables, providing asset-safekeeping services or processing corporate actions.

New rules a

  • a single set of requirements that will apply to all ECSPs for offers up to EUR 5 million, calculated over a period of 12 months for each crowdfunding project owner. Larger fund raisings will fall into the scope of MiFID II/MiFIR and the Prospectus Regulation. Reward and donation-based crowdfunding are explicitly excluded from the scope of the new rules;
  • a harmonized investor disclosure regime whereby crowdfunding project owners provide investors with a key investment information sheet (KIIS) for each crowdfunding offer or at platform level, in addition to a comprehensive set of disclaimers and recommendations on ECSP websites and communications;
  • a suitability and appropriateness testing requirement for investors prior to being able to invest assessing their understanding of financial products and their ability to bear financial losses;
  • a uniform authorization and passporting process for ECSPs across the EU-27 whereby the European Securities and Markets Authority (ESMA) has a central role in facilitating coordination and cooperation amongst national competent authorities (NCAs) or otherwise has supervisory powers including developing further technical standards and a binding dispute resolution mechanism; and
  • detailed conduct of business obligations for ECSPs including duty to avoid and prevent conflicts of interest, restrictions on inducements to clients and on a ECSP participating in crowdfunding offers hosted on their crowdfunding platform.

Ühisrahastus Crowdfunding


THE REGULATION SHOULD BRING LEGAL CLARITY TO THE PROVISION OF THE SERVICES

In the case of crowdfunding services, it has become evident that although on the one hand, companies are looking for solutions to finance their projects through crowdfunding, the unregulated market of crowdfunding services has also led to negative examples of investors losing money. The establishment of common rules for crowdfunding platforms has been underway at the European level for several years. What improvements will the new regulation bring along?

First, the new regulation determines the crowdfunding service – matching of business funding interests of investors and project owners through a crowdfunding platform, which includes either the facilitation of granting of loans or the offering of transferable securities and instruments accepted for crowdfunding without a specific obligation and the provision of the reception and transmission of related client orders. In case a crowdfunding platform wishes to safe keep investors’ assets or provide payment services in the course of its activities, the platform must have a separate authorisation for the respective financial service. Nor can a crowdfunding platform operate as a multilateral trading facility or an organised trading facility without the relevant authorisation of an investment firm or receive deposits from the public without the authorisation of a credit institution.

One of the problems in the area of crowdfunding is that under the name of crowdfunding, there are financial services offered which would require separate authorisation. The new regulation creates legal clarity for companies and investors and makes it possible to define more clearly, which services the crowdfunding platform may provide in the course of its activities and when additional authorisation is required. The preamble to the regulation also points out, as a problem, that the fragmented legal framework in the Member States creates substantial legal costs for retail investors, especially in the case of cross-border crowdfunding services.


AUTHORISATION OBLIGATION FOR CROWDFUNDING PLATFORMS

The new regulation establishes an authorisation obligation for crowdfunding platforms. The information required to apply for authorisation is essentially similar to that required for other financial services authorisation, such as a description of the programme of operations, governance arrangements and internal control mechanisms, description of operational risks, information and evidence on prudential safeguards, description of the business continuity programme, and the documents providing proof of the management’s competence and reputation, etc.

The new regulation applies to crowdfunding offers with a total value of up to EUR 5 million over a 12-month period. As the Prospectus Regulation allows Member States to derogate from the obligation to publish a prospectus in a public offer of securities until the raising of funds up to EUR 8 million, Estonia has a limit that obligation to publish a prospectus is not applicable when raising funds up to EUR 2.5 million. Projects offered through crowdfunding will unequivocally be subject to a limit of EUR 5 million, which means that under this regulation, securities of up to EUR 5 million can be offered to the public through authorised crowdfunding platforms without the obligation to draw up a prospectus. Member States such as Estonia, where the obligation to draw up a prospectus has so far applied at a lower threshold, will have a transitional period to make the necessary changes at the national level.

Minimum prudential requirements are also set for crowdfunding service providers. Namely, the service provider must have own funds or an insurance policy, which at any time is at least EUR 25 000 or one-quarter of the fixed overheads of the previous year.


THE RULES ESTABLISHED TO PROTECT INVESTORS ARE SIMILAR TO THOSE ESTABLISHED FOR OTHER INVESTMENT SERVICE PROVIDERS

Under the new regulation, a number of rules have been established to protect investors, imposing similar requirements on the activities of crowdfunding service providers as on other investment service providers. Crowdfunding platforms must distinguish between sophisticated and non-sophisticated investors, just as MiFID II distinguishes between professional and retail clients. When defining an investor as a sophisticated investor, the platform should take into account the limits set out in the regulation on the income, volume of assets, or other criteria of natural and legal persons. The service provider must assess its knowledge and ability to bear losses before granting the customer access to the platform’s services, and the assessment must be carried out periodically in the future.

Minimum due diligence measures that shall be taken by the crowdfunding service provider for project owners who offer their projects through their platform are also defined. The service provider must verify that the project owner does not have a criminal penalty for various infringements and that it is not a legal person established in a high-risk third country or non-cooperating region.

The crowdfunding service provider must allow for non-sophisticated investors a reflection period of 4 calendar days, during which the potential investor may withdraw the investment offer or interest related to his crowdfunding offer without giving a reason and without incurring a penalty.
A KEY INVESTMENT INFORMATION SHEET MUST BE PREPARED FOR EACH CROWDFUNDING OFFER

The crowdfunding service provider is obliged to provide investors with a key investment in-formation sheet prepared by the project owner for each proposed project. The Regulation lays down a mandatory minimum content of a key information sheet, which in many areas is similar to the main content of a prospectus. Although the document is prepared by the project owner, the service provider must have procedures in place to verify the completeness, accuracy, and clarity of the key information sheet.

The service provider must inform the project owner when identifying that key information sheet contains misleading or missing information that is important for the return of the expected investment and, if necessary, suspend the crowdfunding offer for up to 30 days until the project owner corrects the information. At least the project owner or its administrative, management, or supervisory bodies shall be responsible for the information provided in the key investment information sheet.
RESPONSIBILITY FOR THE INFORMATION PROVIDED IN THE KEY INFORMATION SHEET

As in the provisions on prospectus liability, the Member State undertakes to ensure that the laws, regulations, and administrative provisions on civil liability apply to the natural and legal persons responsible for the information contained in the key investment information document and its translations, at least where the information is misleading or inaccurate and the key information, necessary for investors when deciding on the financing of a crowdfunding project, has been omitted from the key information sheet.