How can a European Company (SE) be established?
A European Company (Societas Europaea (SE)) can be set up in four ways:
- by formation of a subsidiary by two or more companies;
- by transformation (conversion) of an existing public limited-liability company by merger of two or more existing public limited-liability companies;
- by formation of a holding company; or
- by two or more public or private limited-liability companies.
All types of formation share a cross-border element: they must always involve companies from at least two different EU Member States. In the case of a transformation, the company must have had a subsidiary in another member state for at least two years. The SE must be registered in the same Member State in which the administrative head office is located. The European Company (SE) Regulation entered into force on 8 October 2004. By that time, EU Member States were required to have transposed the Directive into national law. Since then, companies may establish an SE.
What does 'SE' stand for?
'SE' is the abbreviation for Societas Europeae which is the (formal) Latin name for 'European Company'. Every company established under the European Company Statute (ECS) must be preceded or followed by the abbreviation SE.
European Company (SE) regulation has added additional facets on obligatory worker involvement at European level particularly by including – for the first time – participation rights at company board level. As of 8 October 2004 it became possible to establish a European Company (SE). The main purpose of the SE statute (EC 2157/2001) is to enable companies to operate their businesses on a cross-border basis in Europe under the same corporate regime. An important feature of this new company form is that – by means of the associated SE Directive (2001/86/EC) – obligatory negotiations on worker involvement in SEs were introduced which include the question of representation of the workforce at board level.
What is a European Company (SE)?
A European Company (SE) is a public limited-liability company which is governed by Community law directly applicable in all Member States. It may only be set up within the territory of the European Community. The conditions for this are laid down in two pieces of legislation: the Regulation on the Statute for a European Company (SE) (EC 2157/2001) and the Directive supplementing the Statute for a European Company with regard to the involvement of employees (2001/86/EC). Both were adopted by the Council in October 2001. It is an option, rather than an obligation, for companies to establish an SE.
Are there any differences in tax treatment between European Companies (SEs) and other public limited companies under national law?
In principle, European as well as national legal forms of business organisation are subject to the same national, European and international laws of taxation without differences. However, a different tax treatment of a European Company (SE) is possible according to its specific legal structure and/or in the case of a transfer of its seat across borders.
Do European Company (SE) provisions make Europe more attractive for foreign investment? To what extent could national tax obstacles be overcome by the formation of an SE?
Because of the legal and economic advantages of an SE as such, the different possibilities to use an SE on a European level and the different tax treatment of an SE according to its specific legal structure across borders, the SE Statute makes Europe a much more attractive location for foreign direct investments from overseas.
Does the SE framework contain a special tax regime?
In general, the Europe Company (SE) Statute does not contain any provisions on tax law, although the different proposals for an SE Statute in 1970, 1975, 1989 and 1991 contained various or at least one fiscal provision on the tax treatment of an SE. According to a Study by Deloitte in 2004, no discriminatory legislative tax laws should be adopted to improve the fiscal status of an SE compared to similar national legal forms of business organisation.
However, a suitable tax framework is needed to solve existing cross-border problems of an SE. Therefore, the Council Directive 2005/19/EC of 17 February 2005 amending the Merger Directive (Amendment Directive) contains a provision with regard to the tax treatment of a cross-border transfer of the corporate seat of an SE – a Societas Cooperativa Europaea (SCE) – from one EU member state to another.
As mentioned, the SE Statute does not contain any provisions on tax law. With regard to the intention of the SE being 'tax neutral”, this means that there should be no discrimination between European and national legal forms of business organisation. Furthermore, according to the provisions of the Merger Directive and the Amendment Directive, an SE gives European companies and groups the possibility of a tax neutral formation across borders and a tax neutral transfer of its corporate seat throughout the EU.
From a taxation point of view, how is the European Company (SE) related to other EU Directives on company law?
The SE is the European model and basis for all future Directives on company law (European compromise). It comprises cross-border aspects, aspects of Corporate Governance and aspects of co-determination. One can thus say that European Company Law is SE Law.
To what extent does the introduction of the SE increase the attractiveness and competitiveness of European economies?
The aim of the SE is the completion of the European Internal Market. Its introduction thus increases the cross-border mobility and flexibility of companies and groups within the EU and the European Economic Area (EEA), tax competition within the EU and the EEA, the tax attractiveness of EU and EEA member states, and the tax competitiveness of EU and EEA member states.
Examples of SE law applicability
Example 1
A German company with more than 2,000 employees (50% participation in the supervisory board) merges with a Swedish company (one-third participation in the one-tier administrative board). The registered office of the new company is in Sweden. The German company employs more than one-third of the employees.
Outcome: The SE regulation (negotiations with the Special Negotiating Body) must be applied (Article 16 II, a and b of the Mergers Directive). An exception is the case in which the relevant organs of the merging companies decide to adopt the standard rules without prior negotiations. If the parties cannot reach agreement in time, the standard rules will apply (Article 16 III of the Mergers Directive). If there is a limitation on participation in Sweden to one-third of the board, which is allowed in the Directive, the new board will comprise only one-third employee representatives.
Example 2
A German company with more than 2,000 employees (50% participation in the supervisory board) merges with a British company (no participation). The German company employs 25% of the employees. The registered office of the company resulting from the merger is in Germany.
Outcome: The SE regulation (negotiations with the Special Negotiating Body) is applied (Article 16 II of the Mergers Directive). An exception is when the relevant organs of the merging companies decide to adopt the standard rules without prior negotiations. If the parties cannot reach agreement in time, the SE standard rules will not apply automatically because the one-third threshold has not been reached. If there is no Special Negotiating body decision to apply the standard rules, German law shall apply, which in this case provides for 50% representation in the management organ (Article16 I of the Mergers Directive).
Example 3
A German company with more than 2,000 employees (50% participation in the supervisory board) merges with a Swedish company (one-third participation in the one-tier administrative board). The registered office of the new company is in Germany. The German company employs more than one-third of the employees.
Outcome: The SE regulation (negotiations with the Special Negotiating Body) is applied (Article16 II in the Mergers Directive). An exception is the case in which the relevant organs of the merging companies decide to adopt the standard rules without prior negotiations. If they cannot reach agreement in time, the standard rules will apply automatically (Article 16 III e and h in the Mergers Directive), in this case, 50% participation.
Example 4
A German company with more than 2,000 employees (50% participation in the supervisory board) merges with an Austrian company (one-third participation in the supervisory board). The German company employs more than one-third of the employees. The registered office of the company resulting from the merger is in Austria.
Outcome: The SE regulation (negotiations with the Special Negotiating Body) is applied (Article16 II in the Mergers Directive). The management decides to adopt the standard rules to prevent long negotiations (Article16 IV lit. a in the Mergers Directive). In this case, the company resulting from the merger will have 50% participation in the supervisory board. In the absence of such a decision on the part of the management, the standard rules would apply automatically after the negotiation period, which means 50% participation.
Example 5
A Dutch company (one-third of the supervisory board members are nominated by the works council) merges with a British one (no participation). The registered office of the new company is in the Netherlands. The Dutch company employs more than one-third of the employees.
Outcome: The SE regulation (negotiations with the Special Negotiating Body) is applied (Article 16 II, and b of the Mergers Directive). An exception is the case in which the relevant organs of the merging companies decide to adopt the standard rules without prior negotiations. If there is no agreement, the standard rules will apply automatically (Articles 16 III e and h). This means that one-third of the supervisory board members will be nominated by the works council.
Example 6
A Dutch company (one-third of the supervisory board are nominated by the works council) merges with a British one (no participation). The registered office of the new company is the UK. The Dutch company employs 25% of the workforce and more than 500 employees.
Outcome: The SE regulation (negotiations with the Special Negotiating Body) is applied (Article 16 II of the Mergers Directive). An exception is the case in which the relevant organs of the merging companies decide to adopt the standard rules without prior negotiations. If the parties cannot reach agreement in time, the standard rules will not apply automatically because the threshold of one-third of the employees has not been met (Article 16 III e and h of the Mergers Directive). If the company resulting from the merger was an SE the standard rules would apply because of the lower threshold. However, the Special Negotiating body could decide to apply the standard rules anyway (Article 16 III e of the Mergers Directive and Article 7 II b of the SE Directive).
Example 7
An Italian company merges with a Spanish company. The registered office of the company is in Spain. There is no participation in either Italy or Spain.
Outcome: There will be no participation in the company resulting from the merger.
Example 8
A Hungarian Company (one-third participation in the supervisory board) merges with an Austrian one (one-third participation in the supervisory board). The registered office of the new company is in Hungary. The Hungarian company employs more than one-third of the employees.
Outcome: The SE regulation (negotiations with the Special Negotiating Body) is applied (Article 16 II b of the Mergers Directive). An exception is the case in which the relevant organs of the merging companies decide to adopt the standard rules without prior negotiations. If the parties cannot reach agreement in time, the standard rules will apply automatically, which means one-third of the supervisory board will consist of employees. On the other hand, the Special Negotitating Body could decide to apply the participation rules of Hungary (Article 16 IV b of the Mergers Directive)
Example 9
A Czech company (one-third participation in the supervisory board) merges with a British company (no participation). The registered office of the company is in the Czech Republic. The Czech company employs more than one-third of the employees.
Outcome: The SE regulation (negotiations with the Special Negotiating Body) is applied (Article 16 II b of the Mergers Directive). An exception is the case in which the relevant organs of the merging companies decide to adopt the standard rules without prior negotiations. If the parties cannot reach agreement in time, the standard rules will apply automatically, which means the employees will have one-third participation in the supervisory board.
Example 10
A Spanish company (no participation) merges with a German company (one-third participation in the supervisory board). The registered office of the company resulting from the merger is in Germany. The German company employs less than one-third of the employees.
Outcome: The SE regulation (negotiations with the Special Negotiating Body) is applied (Article 16 II, and b of the Mergers Directive). If the parties fail to reach agreement the standard rules will not apply automatically. However, the Special Negotiating Body can decide that they should apply. In addition, the Special Negotiating Body can decide by a qualified majority to adopt the participation rules in force in Germany (Article 16 IV b of the Mergers Directive), namely, one-third participation in the supervisory board of the company resulting from the merger.
What are the taxation issues when running an SE?
The tax issues regarding the running of an SE are the determination and taxation of income and capital gains of an SE, the taxation of profits of foreign Permanent Establishments of an SE, the taxation of dividends, interests and royalties of an SE Group, transfer pricing issues of an SE Group, and the cross-border balancing of profits and losses of an SE entity or Group. Further tax issues are the tax consolidation of an SE Group, thin capitalisation issues within an SE Group, the application of Controlled Foreign Companies Legislation regarding non-active subsidiaries of an SE and the taxation of the shareholders of an SE.
What are the taxation issues when transferring the seat of an SE?
In accordance with the Amendment Directive, the transfer of seat of an SE across borders (including its shareholders) is treated tax neutrally. In this case, there is no taxation at all, either in the outbound state or in the inbound state. However, it is necessary that a Permanent Establishment of the transferring SE remains and is subject to tax in the outbound state.
What makes SEs attractive from a tax perspective? Are there any tax planning aspects?
An SE may be used for tax planning purposes because of several tax advantages with regard to its specific legal structure and/or its ability to transfer its corporate seat across borders. One tax advantage is the use of a more comprehensive network of tax treaties and the use of the credit versus exemption system to prevent international double taxation. Furthermore, an SE may contain the possibility to offset losses of foreign Permanent Establishments or Subsidiaries from domestic profits in the state of residence of the respective SE. Other tax planning aspects result from the avoidance of 5% add-backs on received dividends from foreign or domestic subsidiaries and of withholding taxes on dividends, interest and/or royalty payments within an SE Group. An SE may also be used for tax neutral transfer of assets across borders between different Permanent Establishments of an SE. Furthermore, the SE is an appropriate instrument for the avoidance or the use of more generous thin capitalization provisions. Other tax advantages are the reduction of the tax burden of future income and capital gains and the avoidance of Controlled Foreign Companies legislation.
What taxation issues are to be considered when forming an SE?
The cross-border formation of a Merger SE is treated tax neutrally, on the level of the foundation companies (if a Permanent Establishment remains in the respective outbound states), on the level of their shareholders and on the level of the SE. An SE may also be formed tax neutrally as a Holding SE; at the level of the shareholders of the foundation companies and at the level of the SE the formation is treated tax neutrally. With regard to the Subsidiary SE there are also no taxation issues concerning the level of the foundation companies and the level of the SE. Furthermore, in the case of a Transformation SE formation takes place tax neutrally at the level of the converting company, the SE and at the level of the shareholders.
Which existing EU Directives concerning taxation must be respected by an SE?
The relevant EU Directives concerning taxation respected by an SE are the EC Parent–Subsidiary Directive (including Amendments), the EC Merger Directive (including Amendments), the EC Interest-Royalties Directive (including Amendments) and the EC Mutual Assistance Directive (including Amendments).
What are the expected advantages of setting up a European Company (SE)?
In the eyes of the European Commission, the European Company Statute (ECS) “will mean in practice, that companies established in more than one Member State will be able to merge and operate throughout the EU on the basis of a single set of rules and a unified management and reporting system. They will therefore avoid the need to set up a financially costly and administratively time-consuming complex network of subsidiaries governed by different national laws. In particular, there will be advantages in terms of significant reductions in administrative and legal costs, a single legal structure and unified management and reporting systems.” The Ciampi report estimates that savings in terms of administrative costs may be up to €30 billion per year. Moreover, this new business form may have a value in publicity terms, as it indicates that this company is a 'real European undertaking', thereby possibly removing, for example, psychological barriers.
However, this optimistic view is not shared by everyone. Indeed, the attractiveness of the ECS might be reduced because it de facto does not provide for one uniform European corporate form. In all matters that are not regulated by the Regulation, the SE will be governed by the company law provisions of the member state in which the SE is registered. Consequently, there will not be a single SE law but 30 SE laws which may diverge significantly from each other.
What is the relationship between the Regulation on the European Company Statute (ECS) and the Directive on employee involvement in the SE?
As the title already suggests, the Directive represents a supplement to the European Company Statute with regard to the involvement of employees. No European Company (SE) with employees can be set up without an arrangement for involvement of the employees.
Did newer EU Member States have to have to adopt this legislation?
Yes. The 12 newer EU Member States (Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovak Republic, Slovenia, Bulgaria, and Romania) which joined the EU in 2004 and 2007 had to transpose the Directive, just like the other Member States. Companies coming from the (non-EU) countries of the European Economic Area (EEA) – Iceland, Liechtenstein and Norway – have the right to establish SEs. Therefore, these states had to adjust their national legislation as well.
What is understood by 'employee involvement' under the SE Directive?
The SE Directive (Article 2) understands the involvement of employees as “any mechanism, including information, consultation and participation, through which employees’ representatives may exercise an influence on decisions to be taken within the company.” Information stands for the informing of the employees’ representatives on matters which concern the SE (or which concern one of its subsidiaries in another member state or which exceed the powers of the decision-making organs in a single member state). The timing of the information and the manner in which it is supplied must be appropriate and its content adequate. Consultation signifies the right of the employees’ representatives to express their opinion on measures planned by the SE. The timing, manner and content of this consultation must be such as to ensure that the opinion can be taken into account in the decision-making process.
Participation means the right to elect or appoint some of the members of the SE’s supervisory board (in two-tier systems) or administrative body (in one-tier systems). It may also signify the right to recommend or oppose the appointment of some or all members of these company boards.
What does the SE procedure for employee involvement look like?
The procedure is similar to that for which provision is contained in the European Works Council Directive 2009/38/EC. Instead of prescribing detailed provisions on how employees have to be involved, the Directive provides for an agreement negotiated between the participating companies and a Special Negotiating Body (SNB) representing the employees . Additionally, it provides for obligatory standard rules in cases where the negotiating partners fail to reach an agreement.
There is one major difference between this and the European Works Council procedure: no initiative by the employees is needed. In fact, it is the management or administrative bodies of the participating companies who must take the necessary steps to start – as soon as possible – negotiations with the representatives of the companies’ employees on arrangements for the involvement of employees in the SE.
What is the Special Negotiating Body (SNB)?
The Special Negotiating body (SNB) represents the employees in negotiations with the managements of the companies involved in the merger in order to reach a written agreement on employee participation in the company resulting from the merger. In principle, the Special Negotiating Body should be established if one of the three exceptional cases under Article 16 II of the Mergers Directive applies. Timewise, the Special Negotiating Body must be established as soon as the enterprise managements have made known their intention to merge. It can request that experts of its choice assist it in its work. In this context, the Directive explicitly mentions the possibility of calling in representatives of Community-level trade union organisations (Article 16 III lit. a of the Mergers Directive in conjunction with Article 3 IV of the SE Directive).
Who sits on the Special Negotiating Body of an SE?
According to Article 3 II of the SE Directive, the seats are allocated proportionally among the member states in which the participating companies have employees: for every 10% (or fraction thereof) of the total number of employees of the future SE/SE group, the country has the right to send one member to the Special Negotiating Body. All countries concerned will thus have at least one representative on the Special Negotiating Body.
In the case of a merger, there are additional seats (but not more than 20% of the total number) to ensure that – if possible – all involved companies are represented in the Special Negotiating Body. It was left up to the Member States to decide how their Special Negotiating Body members are elected or appointed. Furthermore, the Member States could provide in their national transposition law that representatives of trade unions are allowed to become Special Negotiating Body members even if they are not employees of the company (Article 3V of the Directive).
What is the content of the standard rules of the SE Directive?
The standard rules regulate information, consultation and participation. Member States must lay down standard rules which are in line with the standard provisions defined in the SE Directive’s Annex. The standard rules of the country in which the SE is to be headquartered will be applied.
The Directive contains general provisions on the standard rules (thereby limiting the options of the Member States):
- Part I: composition of the representative body (RB)
- Part II: information and consultation
- Part III : (board level) participation
Under Part I, a Representative Body is created for information and consultation. Its members are appointed or elected in accordance with the national legislation and practice. For every 10% of the total number of employees (or fraction thereof), a Member State has the right to send one member to the RB. Thus, all countries concerned will have at least one representative in the RB. The RB is to form a select committee from among its members. After four years, the RB examines whether negotiations on an agreement (Article 4) are to be opened or whether the standard rules should stay in force.
Under Part II, the standard rules foresee the right to be informed and consulted on the basis of regular reports drawn up by the competent organ on the progress of the SE’s business and its prospects. The Representative Body receives the agenda of the Supervisory Board or Board of Directors' meetings and a copy of all documents submitted to the general meeting of its shareholders. There must be at least one annual meeting with the competent organ. In exceptional circumstances (e.g. in the case of relocations, transfers, collective redundancies), the RB can demand an extraordinary meeting. If the competent organ thereafter decides not to act in line with the RB’s recommendations, the latter may request a further meeting in order to seek an agreement. The workers' representation is entitled to a preparatory meeting prior to each meeting with SE management.
The RB has the right to ask for support through experts of its choice. These costs (which can be limited by the member states to one expert) and the general costs of the RB are borne by the SE. Many Member States have limited the funding obligation of the company to a single expert. The members of the RB have the right to time off for training without loss of wages.
Under Part III, in the case of an SE established by transformation, all prior participation rules remain applicable to the SE. In all other cases, the employees are entitled to elect or appoint some board members. Their number is equal to the highest proportion existing before in one of the companies. Their selection is made by the RB (according to the proportion of the SE’s employees in each Member State). However, the Member States could determine the allocation procedure for the seats on the administrative or supervisory board given to employee representatives from their country. The board members appointed by the employees must have the same rights and duties as those that are appointed by the shareholders.