Tax Issues and Tax Treatment of the Societas Europaea

Abstract

According to the Treaty on the Functioning of the European Union (TFEU)1, Companies of the Union do not actually have to be in a certain Member State in order to be associated with it. However, the question of companies’ nationality has remained for a long time a subject of controversy in European company law. Although the question of transfer of the seat has been mentioned in the Treaty, experts and national representatives have not been able to issue an adequate solution. Some members like France, Germany and Italy are not always ready to accept the movement of the company headquarters without re-incorporation into the new legislative system, while some states as the United Kingdom (UK) or Denmark opt for company cross-border relocations without losing the legal identity. The difference in the application of national principles gives constantly rise to conflicts between national laws and are only resolved by the interference of the European Union’s (EU) legal bodies.2 For example, the Centros case describes very well the Danish reaction towards the creation of a branch of the English Centros Ltd in Denmark and considered that the founder of the company had the intention to circumvent the Danish minimum capital requirement, especially that the company was not engaged in any real activity in England.3 The common rule in the transfer of the seat of an Societas Europaena (SE) is that the transfer does not change the identity of the European Company; it only changes the applicable law.4 The SE Statute provides that the company can transfer the seat to another State without affecting the legal person.5 Until now, at least 60 SEs out of the overall number of registered SEs have transferred their seat from one State to another without any difficulty.6 However, if we take in consideration the Cartesio case’s decision7, where a Hungarian limited partnership applied for transferring its seat to Italy but intended to continue its business activities under Hungarian law, the Hungarian Company Register refused to transfer the head office and the case was referred to the European Union Court of Justice (ECJ). However, the ECJ decision was surprising as it continued to support its previous Daily Mail case which gives a Member State the possibility to restrict the transfer of a company’s central administration into According to the Treaty on the Functioning of the European Union (TFEU)1, Companies of the Uanother Member State.8 This opinion has also been confirmed by the Vale case (C-378-10). Therefore, freedom of establishment afforded in art. 49 and 54 of the TFEU, (previously 43 and 48 EC), accords the right to cross-border conversion for companies, however this right is not absolute, as the sovereignty of the Member State and its national laws may have important weight on the rights of the company to freedom of establishment. The decision would suggest that whether or not a Member State accepts the conversion of a foreign company into a national company depends on that Member State only.9 The mobility of the SE is probably the most important advantage of the company form. Besides its national founding and its similarity to a PLC of the state where it is registered, the SE enjoys a European legal personality, which allows it to benefit from an unequalled freedom of movement. The jurisprudence of the ECJ afforded this freedom for legal entities, but it has been until now more theoretical than real. Since the famous case of Centros10 in 1999 until the Sevic11 case in 2005, the Court has recognized the right for a company to register in any state it wants and then not to exercise its activities in this state but to carry out the entirety of its activities through a subsidiary based in another state (Centros). In Überseering12 the Court stated that a Member State shall admit to a company of another state the possibility to be a party to legal proceedings in order to represent and defend their rights, although there is no European Convention on mutual recognition of legal entities . In Inspire Art13, the Court provided that a Member State shall not introduce specific rules or impose obligations on foreign companies even if those rules are simple formalities. Then in the Sevic case, the Court decided against a Member State that refused a company resulting from a cross-border merger to be registered. Since that, it is required that all Member States should recognize the validity of cross-border mergers. This jurisprudence represents an important progress in the freedom of movement of companies. However the court recognized the validity of cross-border mergers only on the basis that the TFEU allows companies to establish ‘agencies, branches and subsidiaries’ in the internal market, companies were, in reality, unable to move freely in the EU.14 So mobility is one of the substantive particularities that the SE company has compared to other companies. SE Regulation is beneficial for the banking and insurance sector, financial and insurance companies under the form of SEs are dominant, and this is due to the facility of managing their capital with total flexibility through their branches, as they can report only to the authority which is at the level of the holding SE and reduce thereby the external capital control requirements.15 This article discusses these relevant tax issues of the SE . On the tax level, the SE is to be subject to the fiscal law of the country of residence, however, when the company will exercise its taxable activities by the intermediary of entities situated in another country, the losses suffered by these entities will be deducted from the profits of the SE.16 As the legal characteristics of an SE will vary depending on the state where the company is registered, this concludes to the fact that different interpretations concerning tax treatment of an SE apply, since it will be mainly governed by the domestic tax laws as the SE Regulation contains no rules concerning tax law.17 So, the question is, is there a role for the national regimes in preparing a harmonized treatment in order to prevent obstacles that can face the establishment of an SE in another Member State?18 What kind of tax treatment does the SE get when it is created? And what are the problems faced during the running of an SE?