Conversion into an SE
The European Council Regulation on the Statute for a European Company(1) ('Societas Europea', or SE) will enter into force on October 8 2004. From this date onwards it will be possible to set up an SE anywhere within the European Union
The SE Regulation affords international entities the opportunity to develop their activities without having to take account of the national laws of the various EU jurisdictions in which they are active. According to the preamble of the regulation, the new regime should help to reduce costs and legal charges for multinational companies, since they will no longer have to maintain a network of subsidiaries which are subject to the domestic law of the individual states in which they are established.
However, the SE Regulation fails to provide for the necessary tax harmonization. The regulation itself contains no tax provisions, and the preamble states that the regulation "does not cover other areas of law such as taxation, competition, intellectual property or insolvency". This is due to the continued refusal of member states to waive their sovereignty in tax matters.
An SE may be formed by means of a cross-border merger. Such a merger should benefit from the favourable tax regime set out in the Merger Directive (90/434/EEC).(2)
Accordingly, the formation of an SE by means of a cross-border merger should be exempt from tax, as long as the conditions set out in the Merger Directive are fulfilled. Therefore, the transaction will not give rise to any capital gains tax calculated on the basis of the difference between the real value of the assets and liabilities transferred and their value for tax purposes (Article 4 of the Merger Directive). The transaction will involve a carryover of the provisions or reserves which should properly qualify for tax exemption (Article 5). The losses of the transferring company will be assumed (Article 6). If the transferee has a holding in the share capital of the transferor, any gains which accrue through the cancellation of its holding will not be liable to tax. Share exchanges will not give rise to any taxation on the income, profits or capital gains of the shareholder.
Unfortunately, however, numerous member states have not yet incorporated the provisions of the Merger Directive into national law, even though the deadline for such incorporation was January 1 1992 (Article 12). As a result, the formation of an SE by means of a cross-border merger will trigger taxation if the merger involves one or more companies incorporated under the law of these member states.
A holding SE may be formed as long as both (or at least two) of the participating companies are governed by the law of different members states, or have a subsidiary company or branch in another member state.
The formation of a holding SE will lead to an exchange of shares (ie, the initial shares will be exchanged for the new shares of the SE). Generally, this exchange will also be governed by the Merger Directive (Article 2(b)) and may be tax exempt if (i) the conditions set out in the directive are met, and (ii) the directive has been implemented in the relevant jurisdiction.
Should the two members states be identical, the formation of a holding SE will be a purely national transaction which is generally tax exempt, insofar as the conditions specified under the domestic laws are met.
Companies participating in the formation of a subsidiary SE will be subject to the rules on the formation of a subsidiary in the form of a public limited liability company under national law (Article 36 of the SE Regulation).
Capital contributions may be made in cash or in kind.
A cash contribution will generally not give rise to any tax liability in terms of income tax. However, it may give rise to registration duties (stamp duty).
Contributions in kind will also give rise to registration duties. In addition, capital gains made on the transferred assets will be tax exempt as long as the conditions set out in the Merger Directive are fulfilled.
A public limited liability company can be converted into an SE on a national basis only.
The SE Regulation further provides that the conversion will not result in the winding-up of the public limited liability company or in the creation of a new legal entity (Article 37.2). However, the tax implications of this provision are unclear, as the preamble of the SE Regulation expressly states that the regulation does not cover taxation issues. Accordingly, for tax purposes only, the conversion may in fact qualify as a winding-up.
The tax implications associated with the formation of an SE are significant. As the Merger Directive has not yet been incorporated into the national legislation of several member states, the formation of an SE will in many cases generate tax liabilities which will impact on its operations. The SE Regulation does not set out a tax regime. Therefore, the operation of the SE will be also governed by the domestic tax law of the member state in which the SE has its registered office. This will inevitably lead to 'forum shopping' when deciding on the place of incorporation. If the SE has some branches in other member states, the usual tax rules remain applicable - that is, the branches will be subject to tax in the jurisdiction in which they are located unless other provisions apply under national law or double tax treaties.
Tax competition between individual member states has thus not yet ended.
In order to satisfy the needs of business on a pan-European scale, the SE Regulation provides that the registered office of an SE may be transferred to another member state. This transfer will not result in the winding-up of the SE or in the creation of a new legal entity (Article 8). Pursuant to the national tax legislation of a number of member states, however, this kind of transfer is equated with a taxable winding-up. The transaction may thus trigger national 'exit' tax before the registered office can be transferred to another member state.
The SE Regulation illustrates the growing need for tax harmonization in the European Union. One important step towards this goal would be the full incorporation of existing EU directives into the national legislation of all member states. Until this is achieved, the SE Regulation will be neither coherent nor self-sufficient.
An alternative means of investing in the European Union is the formation of EU holding companies with operating subsidiaries in the European Union. The EU holdings benefit from a favourable tax regime in terms of:
- taxation of dividends received by the holding company;
- taxation of capital gains made on the holding's interests; and
- taxation in case of winding-up.
For further information on this topic please contact Sylvie Leyder at Afschrift by telephone (+32 2 646 46 36) or by fax (+32 2 644 38 00) or by email ([email protected]).
(1) Regulation 2157/2001, Official Journal L 294, 10/11/2001, p 1-21.
(2) Official Journal L 225, 20/08/1990, p 1.