Corporate Governance for “daughters” in the EU

Mainstream

Corporate Governance for a European subsidiary is not just about complying with the formal requirements of local corporate law. It is a system of asset protection and control.

The main issue is not to fill out the registration forms. The question is who really makes the decisions and what responsibility does he have for it.

Effective corporate governance begins with three audits:

1. Is the management structure consistent with operational reality?
2. Where is the actual decision-making center?
3. How the personal responsibility of the directors is distributed.

If these three issues are not settled in advance, the parent company or executives may face unlimited liability, tax claims, and loss of control of the asset.

When it is necessary to set up the management of the “daughter” in the EU

Analysis and restructuring of corporate governance is necessary if:

• you only register a company in Europe (Germany, Netherlands, France, etc.);
• your foreign director manages the company remotely;
• The “daughter” is systematically unprofitable, and there is a risk of insolvent trading;
• the parent company provides instructions (instructions) bypassing the local board of directors;
• Residency of the company for tax purposes.
• M&A or financing is being prepared;
• There is a conflict between shareholders or directors.
• Nominee director appointed;
• Banking services are required (KYC/AML procedures of banks);
• an audit of financial statements is being prepared;
• It is planned to enter the market with hired employees.

The mistake that most beneficiaries make

Many entrepreneurs start with the question:

Which EU country to choose for the lowest tax rate?

That's the wrong first question.

The right question is:

In which country, and how exactly, can I legally control business without putting personal liability at risk and breaking the corporate veil?

Sometimes, low-tax jurisdictions impose the most stringent requirements on the physical presence of the board of directors. Sometimes, the usual structure with nominal service is unacceptable for banks. Sometimes, the single European office model creates a tax representation in an undesirable country.

European corporate governance does not require registration templates, but a structural strategy.

Step 1. Determine the real role of the subsidiary

The first thing to learn is not the charter, but the business function of the company.

Key questions:

• Is it an active business or holding structure?
• Who is the ultimate beneficiary?
• Where will the employees, warehouses, and fixed assets be located?
• Where are the contracts made?
• Who is running the operations?
• Are there any licensed activities?
• Is it an IPO or a private equity?
• Which banks have accounts opened?

If a company is registered in one EU country and managed from abroad, this automatically creates risks for the place of effective management.

Step 2. Analyze applicable corporate law

Unlike many jurisdictions, in the EU, corporate law is deeply integrated with tax and tort law.

We need to analyze:

• requirements for the minimum authorized capital and its payment;
• Rules for the appointment and dismissal of directors;
• Fiduciary duties (fiduciary duties)
• restrictions on the provision of loans and guarantees;
• rules of transactions with interest;
• Beneficiary disclosure requirements (UBO registers);
• Insolvency obligations (Wrongful Trading)
• system of corporate approval of transactions;
• Dates of general meetings of shareholders;
• procedures for increasing and reducing the authorized capital.

An error at this stage leads to the dividend policy or financing scheme being declared illegal.

Step 3. Collect a set of corporate documents

Effective management requires not only standard registrar templates, but working tools.

Preparation should be made for:

• Articles of Association with protective mechanisms;
• Shareholders’ Agreement (Shareholders’ Agreement)
• Board of Directors (Board Rules of Procedure)
• Resolutions and Protocols (Board Minutes)
• Power of attorney with a clear scope of authority;
• Transfer pricing policy (TP Policy)
• Employment contracts with managing directors (Service Agreements);
• D&O liability insurance policy;
• Compliance Policy (Code of Conduct)
• registers of beneficial owners and related parties;
• Disclosure of conflict of interest.

The documents prove that the decisions were made within the framework of established procedures within the EU territory, and not from abroad.

Step 4. Check the status and residence of directors

The identity and location of the directors is critical.

In the EU, there is a distinction:

• Managing Director (Geschäftsführer)
• Non-Executive Director (Non-Executive Director)
• De facto director (De Facto Director)
• The Shadow Director (Shadow Director)

If the parent company or ultimate beneficiary systematically gives instructions that the board of directors executes without discussion, they may be recognized as de facto or shadow directors with full responsibility, including criminal liability, by law of the place of incorporation of the subsidiary.

Step 5. Establish a decision-making system: real vs. nominal

Localization of management (Substance)

The EU courts and tax authorities are testing not what is written in the resolutions, but where management and control actually takes place.

Signs of insufficient substance:

• all directors are located in the country of the parent company;
• Protocols are signed without real meetings.
• There is no local office suitable for work;
• Bank payments are authorized exclusively from abroad;
• Key contracts are signed by persons without powers of attorney.

Professional directors

Often the right decision is to appoint a professional local director.

This ensures:

• independence of decision-making on local issues;
• Compliance with fiduciary duties to the company;
• Reducing the risk of recognition of a foreign beneficiary as a shadow director;
• Communication with banks and auditors.

However, this does not remove the liability of the parent company at the level of shareholder control.

Step 6. Identify the Liability Risks of Directors

This is a key stage. The personal responsibility of a director in Europe is not a theory, but a practice.

Risks arise when:

• Untimely filing of an insolvency application (bankruptcy);
• Payment of dividends in the absence of net profit;
• Failure to comply with tax obligations (VAT, corporate tax);
• violation of environmental legislation and labor protection;
• transactions with interest without proper approval;
• conducting business without the necessary license;
• violation of the GDPR;
• Non-compliance with EU sanctions regimes.

Winning a corporate dispute, but getting a director’s personal bankruptcy is a commercially disastrous scenario.

Therefore, D&O insurance and director’s duties analysis should begin before the appointment, not after the receipt of the claim.

Step 7. Review of Asset Protection (Asset Protection)

Asset protection within a group is based on compliance with corporate procedures.

Protection tools:

• Corporate Veil: strict observance of the separation of budgets, accounts and assets of the parent and subsidiary companies.
• Board Independence: Documenting that shareholder instructions are in the nature of corporate approval, not the operating team.
• Intercompany Agreements: All intra-group services, loans and royalties must be contracted on market terms.
• Capital Maintenance Rules: compliance with the rules of capital conservation in the distribution of profits.
• Cash Pooling Structures: Special attention is paid to the legal structure of cash pooling so that it is not recognized as a hidden withdrawal of assets.

It is especially important to exclude situations where the “daughter” acts as a “wallet” to cover the costs of the parent company.

Step 8. Develop and implement compliance and ESG policies

The modern management model includes:

• Anti-Bribery and Corruption Policy (Anti-Bribery and Corruption Policy)
• The Whistleblowing Policy (Whistleblowing Policy)
• Data Protection Management System (GDPR Compliance)
• Human rights impact assessment in the supply chain (EU Supply Chain Directive)
• Environmental Reporting (CSRD/ESRS)

The document should describe not only the rules, but also the procedures for escalating problems to the head office.

In M&A transactions, weak compliance often reduces the value of a company more than financial risks.

Step 9. Compliance with KYC/AML banking requirements

Without a successful KYC, the company will not be able to function.

It is critical for European banks to understand:

• Who is the real beneficiary;
• What is the structure of management (organgram)?
• who makes financial decisions;
• where the directors are located;
• Where does the money come from?

Providing a bank with a formal list of denominations without explaining the control structure leads to account locks, payment delays and compliance risks.

Step 10. Regular Corporate Governance Audit (Governance Health Check)

Compliance with the requirements is not a one-time action.

It is necessary to check annually:

• Changes in the composition of shareholders and beneficiaries;
• the validity of the powers of the signatories;
• compliance with the procedures for approval of transactions;
• Updating the compliance policy;
• Timeliness of disclosure of information in the UBO-register;
• minutes of meetings to reflect real decisions;
• capital adequacy;
• There are signs of insolvency.

In practice, a regular governance health check often prevents disputes better than expensive litigation.

Nominee Director or Substance: pick

The choice does not depend on the budget for legal support, but on the willingness of the beneficiary to personally bear the risks of European jurisdiction.

How to strengthen your position before a dispute arises

The best corporate governance is built upon the registration of a company.

It is desirable to include in the corporate structure and documents:

• clear rules for the appointment of members of the Board of Directors;
• requirements for an independent quorum;
• deadlock resolution mechanisms;
• tag-along and drag-along rights in SHA
• put and call options;
• arbitration clause with a seat in a neutral jurisdiction;
• Mechanisms for resolving deadlock situations (Russian roulette / Texas shoot-out);
• Financial covenants for intragroup loans;
• the right of access to information for shareholders;
• Assurances of circumstances (Warranties and Indemnities) in transactions.

The framework should be written not only for the start-up moment, but also for a scenario of tough corporate conflict.

Common Mistakes in Managing a European Subsidiary

1. The company is registered in one country and managed as a remote wallet – this leads to a tax review of residency.

2. In European courts, “I only signed” does not exempt from liability to third parties.

3. Loans between group companies without written contracts and market rates are hidden dividends or gifts with tax consequences.

4. If the director knew about insolvency, but continued to take on new obligations, he shall be liable with personal property.

5. Even an unintentional transaction with a sanctioned person destroys corporate protection.

6. The absence of formalized decisions of the board of directors on raising financing makes the transaction contestable.

7. Power of attorney without restrictions General power of attorney for an employee without control can lead to the alienation of assets without the knowledge of the owner.

Checklist of beneficiary and director

Before launching or auditing a subsidiary, 15 questions must be answered:

1. In which jurisdiction is the company registered and why?
2. Who is the UBO and is it listed?
3. Where is the Board of Directors physically located?
4. Who signs the financial statements?
5. Are there any contracts between the companies in the group?
6. Is there a disqualification from the candidate for director?
7. Are there any powers to open and maintain a bank account?
8. How are shareholder decisions documented?
9. Is there a risk that the parent company will be recognized as a shadow director?
10. Is the company solvent at the moment?
11. Are capital maintenance rules followed before dividends are paid?
12. Are there any significant risks in the ownership chain?
13. Is the liability of directors (D&O) insured?
14. Does the company have a reporting channel?
15. What is the most likely scenario of a corporate dispute and are we ready for it?

What a strong corporate governance system looks like

A strong system usually includes five levels:

1. Structural Foundation Selection of jurisdiction, company type, charter and board composition.

2. Decision-Making Framework: Real meetings, local protocols, clear signatures.

3. Liability Shield Analysis of directors’ responsibilities, D&O insurance, local compliance procedures and capital protection.

4. Documentary Layer Intra-group agreements, shareholder agreements, proper legal technique protocols.

5. Crisis Governance Procedures in case of financial crisis, shareholder conflict or seizure of assets.

Without a fifth level, the top four may not stand the test of a real threat.

FAQ

Can a German or Dutch company be run entirely from abroad?

Legally yes, but this risks recognizing the company as a tax resident in your country or placing a foreign director under personal liability without proper protection of local law.

Which is better: One director or a board of three?

A collegial body (a three-person board of directors) is better protected from accusations of shadow management, as decisions are made collegially rather than individually on command from the center.

Can the personal responsibility of the director be avoided?

The risk cannot be completely eliminated, but it can be critically reduced through documentation of procedures, D&O insurance and timely access to lawyers in case of signs of crisis.

What if the “daughter” asks for financial assistance from the parent company?

It is necessary to formalize the shareholders’ decision, conclude a loan agreement, check the adequacy of the capital of the subsidiary company and comply with the TP rules.

Can a bank block an account because of Governance?

Yeah. Banks often freeze transactions if they see that the person managing the account does not match the person in the registration documents, or if the ownership structure is opaque.

What is Shadow Director and Why is it Dangerous?

This is a person whose instructions are carried out by the formal board of directors. Such a person shall have the same duties and responsibilities as the official director, including criminal for tax evasion and bankruptcy.

What is the danger of paying dividends without checking the profit?

If dividends are paid in the absence of net profit, directors are required to reimburse the company from personal funds, and shareholders are required to return the illegally obtained money.

Do you need a board of directors if there is only one director?

Even a sole director needs a written decision-making process to separate his actions as a management body from those of a shareholder representative.

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Related material

How to choose a jurisdiction for a holding company in Europe Substance in the European Union: Requirements for a real presence How to protect assets in Europe before a dispute Personal liability of a director in Germany, France and the Netherlands Features of KYC for European banks Shareholder agreements under European law How to avoid recognition of a beneficiary as a shadow director Transfer pricing for intragroup services Banking Compliance and Corporate Governance How to prepare a company for Due Diligence

Conclusion

Corporate governance for European subsidiaries does not require copying the Russian or offshore model, but rather creating a full-fledged decision-making structure that meets local legal realities.

A strong position is built on real substance, separation of control and management, documentation of all procedures and protection from personal liability of directors.

In European corporate law, it is not the one who saves on registration that wins. The winner is the one who understands in advance how to maintain a corporate veil, protect directors, and ensure the smooth operation of bank accounts and businesses.