The Growing Pains of Societas Europaea
The SE is a corporate vehicle governed by EC law designed to enhance free trade and facilitate the development of a single market. This week's Tax Eye takes a look at some of the open tax questions on the operation of SE companies.
The creation of an SE is regulated by European Company Statute Regulation, which sets out the core company law framework and is directly applicable in domestic law (i.e. in Polish legislation) as well as a supplementary directive that concerns employee involvement. An SE registered under the regulation will be a public limited liability company with a minimum share capital of R120,000. It must be registered in the member state where it has its administrative head office but can operate throughout the EU under one set of rules and a unified management and reporting system.
Therefore, by setting up as an SE a business can save on the maintenance of a financially costly and administratively time consuming network of subsidiaries governed by different national laws. Moreover, the SE will offer efficient restructuring means enabling multinational businesses to take optimum advantage of the trading opportunities offered by the internal market.
For one, the regulation allows an SE in Member State A to move its registered seat to Member State B without having to wind up the company in Member State B. It is not clear at this point whether such transfer of an SE's office will trigger taxation. European Company Statute Regulation does not actually address the taxation of SEs, they are by default subject to the tax law of the member state in which it is a tax resident.
In view of preparing for the advent of the SE, the EU Commission proposed a number of amendments to existing EU directives, including the introduction of a new title within the Merger Directive applying to the transfer of registered offices of an SE. The idea is that when an SE moves its registered seat to another member state in the course of a business reorganization, there is no implied transfer of assets and, therefore, the shareholders of the company do not derive any taxable income, profits or capital gains as a result. This tax relief is available as long as the assets of the SE remain effectively connected with a permanent establishment situated in the member state in which the SE was previously resident. Any attempt to levy tax upon such transfer of registered seat of an SE would be deemed under the draft provisions to constitute an infringement of the fundamental EU freedom of establishment.
Unfortunately, up to now very little has been done to regulate the regime for taxation of SEs. Unless appropriate changes are quickly introduced to the Parent-Subsidiary Directive and the Interest & Royalties Directive, the SE will remain an infant for as long as the regulatory environment fails to stimulate its development.
Currently, there are a number of growth inhibitors. For instance, there is no tax relief on dividends received by domestic individual/corporate shareholders in a foreign SE and no such relief on dividends paid by an SE to EU resident shareholders. Another example is that interest expense incurred by an SE and allocated to a permanent establishment of that SE in another member state is not tax deductible in every member state.
It is likely that the most common form for an SE, at least initially, will be the fully merged European entity. The foreign entities merged into the SE will be viewed as foreign branches, which may not be particularly attractive given the inconsistent manner in which EC members tax branches. For this reason, experts and scholars have suggested the establishment of a common tax base applicable to SEs in all member states.
On the other hand, according to some, the creation of a special tax regime exclusively for the SE is likely to be discriminatory under the general EC Treaty rules, unless made available to comparable domestic companies.
Despite various hindrances along the way, the SE has finally come to life after some 30 long years in the works.
Donka Darpatova is a senior tax manager in the Warsaw office of Ernst & Young.
The creation of an SE is regulated by European Company Statute Regulation, which sets out the core company law framework and is directly applicable in domestic law (i.e. in Polish legislation) as well as a supplementary directive that concerns employee involvement. An SE registered under the regulation will be a public limited liability company with a minimum share capital of R120,000. It must be registered in the member state where it has its administrative head office but can operate throughout the EU under one set of rules and a unified management and reporting system.
Therefore, by setting up as an SE a business can save on the maintenance of a financially costly and administratively time consuming network of subsidiaries governed by different national laws. Moreover, the SE will offer efficient restructuring means enabling multinational businesses to take optimum advantage of the trading opportunities offered by the internal market.
For one, the regulation allows an SE in Member State A to move its registered seat to Member State B without having to wind up the company in Member State B. It is not clear at this point whether such transfer of an SE's office will trigger taxation. European Company Statute Regulation does not actually address the taxation of SEs, they are by default subject to the tax law of the member state in which it is a tax resident.
In view of preparing for the advent of the SE, the EU Commission proposed a number of amendments to existing EU directives, including the introduction of a new title within the Merger Directive applying to the transfer of registered offices of an SE. The idea is that when an SE moves its registered seat to another member state in the course of a business reorganization, there is no implied transfer of assets and, therefore, the shareholders of the company do not derive any taxable income, profits or capital gains as a result. This tax relief is available as long as the assets of the SE remain effectively connected with a permanent establishment situated in the member state in which the SE was previously resident. Any attempt to levy tax upon such transfer of registered seat of an SE would be deemed under the draft provisions to constitute an infringement of the fundamental EU freedom of establishment.
Unfortunately, up to now very little has been done to regulate the regime for taxation of SEs. Unless appropriate changes are quickly introduced to the Parent-Subsidiary Directive and the Interest & Royalties Directive, the SE will remain an infant for as long as the regulatory environment fails to stimulate its development.
Currently, there are a number of growth inhibitors. For instance, there is no tax relief on dividends received by domestic individual/corporate shareholders in a foreign SE and no such relief on dividends paid by an SE to EU resident shareholders. Another example is that interest expense incurred by an SE and allocated to a permanent establishment of that SE in another member state is not tax deductible in every member state.
It is likely that the most common form for an SE, at least initially, will be the fully merged European entity. The foreign entities merged into the SE will be viewed as foreign branches, which may not be particularly attractive given the inconsistent manner in which EC members tax branches. For this reason, experts and scholars have suggested the establishment of a common tax base applicable to SEs in all member states.
On the other hand, according to some, the creation of a special tax regime exclusively for the SE is likely to be discriminatory under the general EC Treaty rules, unless made available to comparable domestic companies.
Despite various hindrances along the way, the SE has finally come to life after some 30 long years in the works.
Donka Darpatova is a senior tax manager in the Warsaw office of Ernst & Young.
