Big without wanting to be? The pitfalls for management companies that want to remain small
In business, bigger often seems better, but for management companies, it can be important to stay small. Remaining small can provide tax advantages and reduce administrative burdens. However, this is not always easy: when a company becomes connected to other companies, it may be considered “large” after two years.
What does ‘connected through central management’ mean?
If you want to remain small, it is sometimes essential to prevent your company from becoming connected to other companies. One form of connection that deserves special attention is the so-called “central management”. This means that the same person or group of persons make decisions for multiple companies.
The determination of central management based on the governance structure is conclusive and results in companies being considered connected.
Why is this important?
Normally, the size of a company is assessed based on its own figures. However, when companies are connected, their figures are combined to determine whether they are “large”.
A simple example
Suppose you are the sole director of your management company and of an operational company. Because you have “central management” over both, these companies are considered connected. If together, for two consecutive financial years, they have a turnover of more than EUR 11.25 million, a balance sheet total of more than EUR 6 million, or 50 employees, they are considered large.
If there are multiple directors in one of the involved companies, this does not automatically mean you are “safe”. In that case, not only who is on the board will be considered, but also the decision-making process. In a private limited company where each director can decide independently, the central management test assumes that you are in fact the sole director, regardless of the number of other directors.
What can you do?
Be cautious with management changes within a group of companies. Always first investigate the possible consequences for connectedness and the size of your company. Even small changes in management or control can unexpectedly lead to a reclassification of the company as “large”.
Do you have questions or doubts about whether your company is connected through central management and what this means for you? Our experts are happy to assist you with a clear, practical, and integrated legal, tax, and accounting analysis.
