EU Company: The Societas Europaea

The SE regulation

Council Regulation EC No 2157/2001 on the Statute for a European company (the “Regulation”), and Council Directive 2001/86/EC supplementing the Statute for a European company with regard to the involvement of employees (the “Directive”) together enable the set up of a Societas Europaea (“SE”) in any one of the Member States of the European Economic Area (which apart from the EU Member States also includes Norway, Iceland and Liechtenstein). The Regulation is directly applicable in all Member States of the European Union and in Cyprus is supplemented by Regulations contained in the secondary legislation as published in the Official Gazette on 7 July 2006. The Directive on the involvement of employees has been implemented into Cyprus law by the SE Involvement of Employees Law 277(I)/2004.

The SE is a European public limited company. Article 10 of the Regulation requires Member States to treat an SE as if it is a public limited company formed in accordance with the law of the Member State in which it has its registered office. The creation of the European Company Statute will mean in practice, that companies established in more than one Member State will be able to merge and operate throughout the EU on the basis of a single set of rules and a unified management and reporting system.

Competitive Advantages of Cyprus

The Statute on the European Company does not contain any tax provisions with the result that an SE will be taxable in accordance with the national corporate tax legislation. This enables forum shopping and Cyprus has a number of competitive advantages which place it in a unique position as an SE-friendly jurisdiction. At 10% Cyprus can boast the lowest corporate tax rate within Europe. Its participation exemption for dividends has no minimum holding period and requires a holding of just 1%. It does not tax capital gains other than on the disposal of immoveable property situated in Cyprus or the disposal of shares representing immoveable property situated in Cyprus (and then only proportionately to the property-holding shares) and specifically exempts the trading in shares, stocks or debentures from any taxation. Cyprus does not tax outgoing dividends paid to non resident shareholders wherever they may be situated. Moreover Cyprus has an extensive and growing network of double tax treaties many of which feature highly attractive (often nil rated) withholding tax rates from the contracting jurisdictions to Cyprus.

Formation

The Statute provides four ways of forming a European limited company: by merger, by formation of a holding company, by formation of a joint subsidiary, or by conversion of a public limited company previously formed under national law. Formation by merger is available only to public limited companies from different Member States. Formation of an SE holding company is available to public and private limited companies with their registered offices in different Member States or having for at least two years subsidiaries or branches in Member States other than that of their registered office. Formation of a joint subsidiary is available under the same circumstances to any legal entities governed by public or private law.

Minimum capital

The SE must have a minimum capital of 120 000 EURO. Where a Member State requires a larger capital for companies exercising certain types of activity, the same requirement will also apply to an SE with its registered office in that Member State.

Registered office

The registered office of an SE must be the place where it has its central administration, i.e. its true centre of operations. An SE may transfer its registered office to another Member State in accordance with Article 8 of the Regulation.

In the past, the transfer of a company to another jurisdiction often entailed significant tax consequences, which essentially acted as a deterrent for cross-border corporate immigrations. A migrating company would often be deemed to be liquidated in its jurisdiction of incorporation and this would lead to taxable disclosure of its hidden reserves. This has gradually changed with the enshrinement of the principle of freedom of establishment under the EC Treaty and more significantly, the wide interpretation given to the principle of freedom of establishment by the European Court of Justice (ECJ)[1] . The ECJ in its interpretation and application of the treaty has unequivocally supported a choice of forum approach and has emphasized the principle that companies registered in one Member State should be able to carry out their activities throughout the EU without being subject to the burdensome incorporation rules of the host Member State.

The Regulation has enshrined this freedom in statutory form. In accordance with Article 8, the registered office of an SE may be transferred to another Member State and such a transfer shall not result in the winding up of the SE or in the creation of a new legal person. The advantages of the transfer are twofold: (i) a company may “forum shop” for the most convenient jurisdiction in which to continue its activities whether in tax, organization, market demand or other terms; (ii) a company is permitted to effect such a move without having to go through liquidation or winding-up proceedings in its jurisdiction of incorporation. Such a transfer should produce the same effects as a cross border merger which in accordance with the Merger Directive² are tax-free.

It is worth noting that Cyprus has also implemented legislation permitting private companies to transfer to and from Cyprus³.

Cyprus Legislation

An application to set up an SE is made to the Registrar of Companies and depending on which type of SE is being set up, is accompanied by the following relevant documents:

1. For an SE formed by merger, the ED1 Form is sent to the Registrar accompanied by the Statutes of the proposed SE and an official copy of the Court Order confirming that Article 26 of the Regulation has been complied with.
2. For a holding SE, the ED2 Form is sent to the Registrar accompanied by the Statutes of the proposed SE, the written reports by independent expert/s given pursuant to Article 32(4) of the Regulation and copies of the resolutions of the promoting companies and/or SE(s) approving the draft terms for the formation of the proposed holding SE pursuant to Article 32(6) of the Regulation (required only in the case of reserved rights under the same Article).
3. For a subsidiary SE, the ED3 Form is sent to the Registrar accompanied by the Statutes of the proposed SE.
4. For an SE formed by the transformation of an existing public limited company, the ED4 Form is sent to the Registrar accompanied by the resolutions approving the draft Statutes and draft terms of conversion to SE of the plc pursuant to Article 37(7) of the Regulation, the Statutes of the SE, the copy of the certificate of experts pursuant to Article 37(6) of the Regulation and the report explaining and justifying the legal and economic aspects of the conversion pursuant to Article 37(4) of the Regulation.

As far as the provisions for worker involvement in SEs are concerned, under the Directive (transposed into Cyprus law), the creation of an SE requires negotiations on the involvement of employees with a special body representing all employees of the participating companies. This body is composed of elected or appointed members, with seats allocated in proportion to the number of employees employed in each Member State by the participating companies.

The negotiations should lead to a written agreement on the employee involvement arrangements. If these arrangements involve a reduction of existing board-level participation rights which cover a certain proportion of employees (25% of the total workforce of the participating companies in the case of SEs established by merger, and 50% in the case of SEs established by creating a holding company or subsidiary), this must be approved by a special two-thirds majority of members of the representative body (from at least two Member States). In the case of a transformation of a national company into an SE, the arrangements for worker participation applied by this national company prior to its transformation as a European Company would have to continue to apply.

The negotiations conducted must be completed within six months, which may be extended to one year by agreement. If it is not possible to reach an agreement, or if the parties so decide, a statutory set of standard rules will apply, providing for a standard representative body and for board-level participation in certain circumstances where this existed in the participating companies.

¹ Case C-212/97, Centros v Erhevers-og Selskabsstyrelsen, 1999 E.C.R. I-1459; Case C-167/01, Uberseering C-208/00, Kamer von Koophandel en Fabrieken voor Amsterdam v Inspire Art Ltd, 2003 WL 102001

² Directive 90/434/EEC

³ Law 124(I) of 2006

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