Virginijus Bitė, Law Professor at Mykolas Romeris University Law School

Ivan Romashchenko, Senior Researcher at the Legal Technology Centre, Mykolas Romeris University Law School

Photo credit: EmDee, via Wikimedia Commons

On March 29th, 2023, the European Commission unveiled a proposed Directive as part of an initiative to modernize digital company law. This proposal primarily emphasizes increased transparency, information accessibility, and the cross-border exchange of company data. These objectives were previously outlined in an inception impact assessment report released on July 20th, 2021. Interestingly, this initial assessment included an additional policy option, aligning EU company law rules and procedures with the digital age, which was absent from the current Proposal. The concept of a virtual registered office (VRO) was also not approved due to conflicting stakeholder feedback.

Prior to the European Commission’s mention of VROs, Lithuania explored implementing this concept domestically. In 2018, a draft law proposing the introduction of VROs was presented to the Lithuanian Parliament (Seimas). Despite general support for the idea, VRO provisions remain unadopted.

Despite the absence of EU and national regulations, coupled with limited academic analysis of VROs, researchers and practitioners have expressed enthusiasm about their potential benefits. A 2017 report by Adelė Jaškūnaitė and Raminta Olbutaitė, part of the ‘Create Lithuania’ program, suggested that Lithuania already possessed the necessary technological infrastructure to enable communication with public institutions, even without a formal legal framework for VROs. They argue that a virtual address is a necessary replacement for physical addresses as registered offices, as the latter has become ineffective. This is evidenced by the prevalence of ‘mass addresses,’ where hundreds of companies share a single registered office. Proper VRO implementation could potentially alleviate financial burdens on both public authorities and companies. Additionally, given that most stakeholder communication already occurs digitally, introducing VROs would not negatively impact corporate governance. Inspired by Lina Mikalonienė’s editorial, our recent research delves into the concept of VROs and explores how they could be effectively implemented.

For a VRO to effectively replace a traditional registered office, it must fulfill the same functions: determining applicable laws and jurisdiction for the legal entity and facilitating communication between the entity and involved parties.

Regarding the first function, determining applicable law and jurisdiction may not necessitate a precise physical location. Information about the country where the entity operates should suffice. A VRO could easily link a legal entity to the relevant laws by identifying its country of origin. National law would then connect the entity with appropriate local laws, regulations, and authorities. For example, a Lithuanian legal entity might have a VRO linked to Vilnius and its city authorities.

Concerning the second function, existing regulations require modernization to accommodate wider digitalization. This shift would allow legal entities to operate via a VRO instead of a physical address. However, it’s crucial to consider potentially disadvantaged parties, such as consumers with limited digital literacy or access, who might be reliant on traditional mail. Additionally, some foreign authorities might be restricted to using traditional mail or clerk services due to legal constraints. Therefore, a transitional period where legal entities retain a link to a physical address, such as a director’s address, appears practical. This ensures communication channels remain open for all stakeholders while facilitating a smoother transition to a fully digital system.

Therefore, EU intervention is recommended to clarify these issues and define a registered office as encompassing both a physical address and a VRO. This intervention should establish requirements for organizations providing VROs in Member States and establish a legal framework for opting for a virtual address over a physical one. Additionally, it should outline communication procedures for domestic and foreign entities using VROs. These rules must include safeguards against fraud, which could involve requiring all legal entities using VROs to maintain a temporary link to a physical address, such as a director’s or contact person’s address. This suggested temporary link to a physical address represents a transitional compromise. Ultimately, the aim is to progress towards a fully realized VRO system. This would involve improving virtual cross-border communication, culminating in the replacement of the traditional registered office with its virtual counterpart.

For a deeper understanding, refer to: Bitė, V. and Romashchenko, I., 2023. The Concept of a Virtual Registered Office in EU Law: Challenges and Opportunities. Utrecht Journal of International and European Law, 38(1), p.25–38.DOI: https://doi.org/10.5334/ujiel.605