Taking counsel

  • 2004-11-01
  • By Pekka Puolakka, Sorainen Law Offices in Tallinn
European Company - what is it?

The European Company (Societas Europaea) provides a new opportunity for international corporations.

October 8 was a historical day with respect to European Union legislation harmonization as Council regulation No. 2157/2001 on the statute for the European Company entered into force.

The SE (known by its Latin name of Societas Europaea) is now a reality, but it took some 30 years of political negotiations to finalize the regulation.

The regulation gives businesses operating in several European Union member states the real possibility of being established as one single company under community law and to operate throughout the European Union with one set of rules and a unified management and reporting system. For companies operating throughout European Union markets, it will offer possibilities of reducing administrative costs and a common legal structure. Also, through SEs, the real legal cross-border mergers are now a reality, which has been the long-waited wish of many corporate CEOs and shareholders.

The legal format of the SE is the one of a public limited-liability company with its capital being divided into shares. Its share capital may not be less than 120,000 euros, but it may be more, as according to the regulation the laws of a member state requiring a larger subscribed capital for some companies shall apply to an SE with registered offices in that member state.

The aforementioned situation might arise, for example, when insurance companies having their registered offices in different member states would like to set up an SE operating in the insurance business. One should also note that an SE has the right to draft and publish its annual accounts in euros even though the member state where it has its registered office does not belong to the euro zone.

The universally recognized principle on shareholders' liability in limited liability companies applies also to the SE, where no shareholder shall be liable for more than the amount he has subscribed for.

The management of an SE can be organized as consisting of a general meeting of shareholders and either a supervisory organ and a management organ or an administrative organ. The number of members of the aforementioned management bodies or the rules for determining the same shall be laid down in the statutes of the SE. A member state may, however, set forth a minimum and/or maximum number for the said management members in its internal legislation.

It should be noted that a legal person might also serve as a member of the said management bodies, unless prohibited by applicable laws of the member state in which the SE has its registered office.

The application of the SE in practice might be rather complex. As the regulation itself sets forth the framework for the SE and its administration, the laws of each member state applicable to public limited liability companies in the respective member state are important, as they are applied to the activities of SEs.

The biggest practical obstacle is the nonexistence of an EU-wide and unified corporate income taxation system that would be applicable to SEs. Currently an SE is usually taxable for its global income in that member state, and in accordance with the tax laws of that member state, where the SE has its registered office.

At the same time the SE might be subject to taxation in other member states as well as on the basis of a permanent establishment under any applicable tax treaty.

Another problem is the lack of enforcement of laws on the implementation of the SE in some new member states. For example, for the Baltic states Lithuania is currently the only state that has enforced a law on implementing the SE at a national level.

Hence when establishing an SE, one should take into account and anlayze a wide range of legislation: respective member states' corporate and tax laws, as well as any possible bilateral or multilateral tax treaties.