If you are considering entering the Portuguese market, you may have come across the concept of a “shelf company.” While acquiring a ready-made business entity can seem attractive, it is crucial to understand the significant disadvantages of buying a shelf company in Portugal. This article explores, in detail, the risks and drawbacks you should consider before making such an investment.
What Is a Shelf Company in Portugal?
A shelf company, also known as a “ready-made company,” is a legal entity that has been incorporated but has never conducted any business. These companies are kept “on the shelf” by law firms or service providers, ready to be sold to entrepreneurs who want to start operations quickly without going through the incorporation process.
How Does a Shelf Company Work?
The process is straightforward: you purchase the shares of an existing, dormant company, change its name, business purpose, and directors, and start trading immediately. While this can save time compared to incorporating a new company, the apparent convenience comes with several hidden disadvantages.
Disadvantages of Buying a Shelf Company in Portugal
1. Unknown Liabilities and Legal Risks
Even if a shelf company has never traded, there is always a risk of undisclosed liabilities. Previous owners or service providers may have used the company for purposes not immediately apparent, such as signing contracts, opening bank accounts, or even incurring debts. Due diligence is often limited, and hidden obligations can surface later, exposing you to unexpected legal and financial risks.
2. Reputational Concerns
Shelf companies may have a history that is not transparent. If the company was previously used for any activity, even minor or administrative, it could have a negative reputation with banks, suppliers, or tax authorities. This can make establishing business relationships or obtaining credit harder, as stakeholders may be wary of the company’s background.
3. Compliance and Regulatory Issues
Portuguese authorities, including the tax office and commercial registry, are increasingly vigilant about using shelf companies. There is a risk that your company could be subject to additional scrutiny, audits, or even investigations, especially if the authorities suspect the company was used for money laundering, tax evasion, or other illicit activities in the past.
4. Banking Challenges
Opening or maintaining a bank account for a shelf company can be more complicated than for a newly incorporated entity. Banks in Portugal are required to perform enhanced due diligence on companies with unclear histories. This can result in delays, requests for additional documentation, or outright refusal to open an account.
5. Higher Costs and Hidden Fees
While shelf companies are marketed to save time, they often come with higher upfront costs than incorporating a new company. Service providers may charge a premium for the convenience, and you may also face additional legal and notarial fees to update the company’s records, change directors, and amend the articles of association.
6. Tax Risks
There may be outstanding tax filings or obligations if the shelf company was registered for VAT or other taxes. Failure to submit required returns can result in fines or penalties, even if the company was dormant. Upon acquisition, you may inherit these issues, leading to unexpected costs and administrative burdens.
7. Limited Customisation
Shelf companies are created with generic articles of association and share structures. Adapting the company to your specific business needs may require significant amendments, which can be time-consuming and costly. Sometimes, incorporating a new company tailored to your requirements may be easier and more efficient.
8. Potential for Fraud
The shelf company market is not immune to fraudulent practices. Unscrupulous providers may misrepresent the company’s history or fail to disclose important information. Identity theft or other scams are also risky, especially if you do not work with a reputable law firm or service provider.
9. No Real-Time Savings
While the main selling point of a shelf company is speed, the reality is that incorporating a new company in Portugal is a straightforward and fast process, often completed within a few days. The time saved by purchasing a shelf company is minimal and rarely justifies the additional risks and costs.
Conclusion: Should You Buy a Shelf Company in Portugal?
Given the numerous disadvantages, ranging from legal and financial risks to reputational and compliance issues, buying a shelf company in Portugal is rarely advisable. Incorporating a new company is efficient and transparent, letting you start your business with a clean slate. If you value security, compliance, and long-term success, it is almost always better to establish a new company rather than acquire a shelf company.
If you are considering entering the Portuguese market, consult a reputable service provider, such as MCS, to ensure your business is set up fresh and correctly from the start.
The founding of Madeira Corporate Services dates back to 1996. MCS started as a corporate service provider in the Madeira International Business Center and rapidly became a leading management company… Read more
