20 February 2006
A new legal entity under EU law, the European company, or Societas Europaea (SE), was brought in following Council Regulation No 2157/2001 and Council Directive 2001/86/EC of 8 October 2001.
The rules governing the SE were developed over the course of many years. In total, it took community lawmakers 30 years to come up with a comprehensive set of rules. An SE can be established in any of the EU member states and the three European Free Trade Association (EFTA) countries - Iceland, Norway and Liechtenstein.
Although the SE's corporate status is governed by a regulation that is directly applicable throughout the EU, implementing legislation in each country is required in order to form an SE. As a result, the legislation governing the SE will vary slightly from one country to another.
Most countries of the European Economic Area (EEA) have, in the meantime, implemented the directive and the regulation. Austria, Belgium, the Czech Republic, Denmark, Germany, Estonia, Finland, France, Hungary, Latvia, Lithuania, the Netherlands, Poland, Portugal, Slovakia, Sweden, the UK and the three EEA countries have all enacted the required legislation.
Cyprus, Spain, Greece, Malta and Italy are still in the process of making the necessary amendments to their national laws, while Luxembourg, Slovenia and Ireland have yet to take any action.
In Belgium, the regulation and the directive were implemented by a royal decree on 1 September 2004 and Collective Bargaining Agreement No 84 on 6 October 2004.
But why should a multinational group consider establishing an SE?
The first major advantage would be its European credentials - national corporate forms do not present the same European dimension. Therefore, European corporate groups can express their European identity by choosing to take the form of an SE. The SE may thus turn out to be a useful marketing tool, particularly for listed companies.
A second advantage is that the registered office of an SE can be transferred to another member state relatively easily and without a loss of legal personality. If all conditions are met (and to the extent the member states have transposed the regulation, which provides as from 1 January 2006 for the tax-free transfer of an SE's registered office) the transfer will occur without adverse tax consequences.
Any other kind of company (ie one that is not an SE) that transfers its headquarters from one member state to another will in most cases have to face the burdensome procedure of dissolution and reincorporation. Furthermore, the transfer will usually result in adverse tax consequences.
Since an SE can transfer its registered office without negative tax consequences, it is the ideal corporate form to use as a special purpose vehicle (SPV). In structured finance transactions, SPVs are often used to carry out business related to a specific transaction (for example, project and real estate finance and acquisition finance).
Currently, SPVs in Belgium usually take the form of a public limited-liability company or société anonyme (SA). The SE is a valid alternative to an SA in such transactions. If it becomes too difficult for the SPV to conduct its business in Belgium, or if the financing costs increase due to significant changes in the tax laws applicable to SPVs, the company may wish to relocate abroad.
The third benefit is that an SE can be formed through a cross-border merger, for which the regulation provides an autonomous legal basis. The Tenth Company Law Directive (No 2005/56/EG) of 26 October 2005 on cross-border mergers of public limited companies, also provides a legal basis for such mergers. The member states have until 15 December 2007 to transpose the merger directive into national law. In the meantime, the SE is the only possibility to realise a cross-border merger. The merger directive is drafted in terms similar to those of the directive.
Unfortunately, the SE also has its disadvantages. The first is the absence of tax harmonisation in the EU and the EEA. An SE is treated as a national company, and each of its subsidiaries or branches is subject to the tax laws of the country in which it is established. This implies that there is no simplification of the formalities that must be fulfilled by the group of which the SE is the parent or holding company. Most member states, including Belgium, are developing special tax rules for SEs. For the time being, however, no such rules are currently in effect.
This anomaly can be turned to a firm's advantage, however. If the member states set out advantageous (from a tax standpoint) SE-specific rules for SEs with their head office on their territory, founders can choose the most interesting tax rules for the company. Since the registered office of an SE can be transferred with relative ease from one member state to another, the SE can, when confronted with a change in the applicable legislation in its home country or another EEA state, decide to transfer its headquarters to a more attractive country from a tax perspective. This will result in competition among the member states to attract SEs.
Another downside can be the complexity and uncertainty in the procedure for concluding arrangements on employee involvement. Negotiations with trade unions (or personnel) can take between six and 12 months, meaning an SE cannot be established at short notice. However, if well prepared, this procedure should not be an obstacle to the incorporation of an SE. Moreover, if the SE is used as an SPV and/or if the founders do not have any employees, the procedure can be completed much sooner, since negotiations need not occur.
Finally, it should be kept in mind that the incorporation of an SE requires the involvement of at least two companies situated in different member states. Consequently, it is necessary to take into account SE-specific rules in each member state concerned. Of course, such regulation will only differ slightly from one member state to another.
The first SEs have already been incorporated. In Belgium, none of the SEs established to date have any employees and they are mostly SPVs. Now that practically all the EEA member states have enacted the necessary legislation, corporate groups can start comparing the various (tax) rules. It is only a matter of time before the first large group opts for this new corporate form.
Without a doubt, the SE offers new opportunities to large EEA and non-EEA groups, but also to small or medium-sized companies that wish to develop their activities in the EEA.
Dirk Van Gerven is a partner and Elke Janssens an associate in the Brussels office of NautaDutilh