At present, there are three supranational types of legal entities in the European Union:
- European Economic Interest Grouping (EEIG)
- European public limited liability company, or Societas Europaea (SE)
- European cooperative society (SCE).
Two proposed regulations on the creation of the following supranational European legal entities are still pending:
- European Association;
- European Mutual Society.
European Economic Interest Grouping (EEIG)
An EEIG is a body with legal personality that may be formed by at least two private individuals or legal entities from different Member States by private contract, and it does not need to have capital. The purpose of an EEIG must be to facilitate or develop the economic activities of its members and to improve or increase the results of those activities. Its purpose may not be to make profits for itself. If it does make profits, they will be taxable in the hands of its members. Its activity must be related to the economic activities of its members and may not be more than ancillary to those activities.
In the Netherlands, EEIGs are treated the same as VOFs (general partnerships under Dutch law) for tax purposes. This means that EEIGs are not autonomous taxpayers for corporate income tax purposes and that, for instance, they are ineligible for the participation exemption as referred to in Section 13 of the Dutch Corporate Income Tax Act of 1969. However, EEIGs can be subject to a limited liability to pay Dutch tax, for example if members resident in other Member States derive profits from a permanent establishment resident in the Netherlands.
An EEIG’s result is treated as the result realized by its members. Members who are private individuals are subject to personal income tax on the result, whereas corporate members are subject to corporate income tax. Since the result is taxable in the hands of the members, and the activities must be ancillary to their business activities, the members of an EEIG must attribute its assets and liabilities to their own businesses in proportion with their participations in the EEIG.
If an EEIG employs staff, it will need to withhold payroll tax from their salaries. In addition, if it carries on a business independently, it will be subject to VAT.
European public limited liability company (SE)
With effect from October 8, 2004, the Regulation on the Statute for a European company (SE) applies directly in all Member States of the European Union (EU) and the European Economic Area (EEA). This means that since this date, it has been possible to form an SE in one of the ways prescribed in the Regulation. The creation of this new legal entity enables and facilitates cross-border restructuring and cooperation operations. For example, it allows companies to form an SE by means of an international merger of companies and to transfer its registered office to another Member State.
An SE may be formed by means of a merger, by forming a holding company (commonly referred to as a holding SE), or by forming a joint subsidiary. An SE’s capital must be EUR 120,000 at a minimum. For tax purposes, an SE will be a resident of the Member State in which its management is located. Losses incurred by an SE’s foreign permanent establishment may be set off against its own profit, and may be recaptured in subsequent years. With respect to the tax treatment of losses incurred by subsidiaries, the European Court of Justice held in the Marks & Spencer case that excluding the losses incurred by a non-U.K. subsidiary from the U.K. group relief rules contravenes the principle of freedom of establishment if the relevant subsidiary is unable to set off its losses in its own EU Member State. SEs are governed by the Parent-Subsidiary Directive and the Merger Directive. Given that, in the Netherlands, they are equated with NVs (public limited liability companies under Dutch law), the Dutch Under Minister of Finance’s view is that the tax directives also apply to SEs from the outset.
European cooperative society (SCE)
Although businesses may promote certain activities in an EEIG while maintaining their autonomy, an EEIG is not suited to the specific features of cooperative aspirations. Anxious to ensure equal terms of competition and to contribute to its economic development, the EU provides cooperatives, in the Regulation on the Statute for an SCE, with legal instruments capable of facilitating the development of their cross-border activities. An SCE may be formed with effect from August 18, 2006.
An SCE must have as its principal object the satisfaction of its members’ needs and/or the development of their economic and/or social activities, in compliance with the following principles:
- Its activities must be conducted for the mutual benefit of its members, so that each member benefits from the activities of the SCE in accordance with his/her participation.
- Members of the SCE must also be customers, employees or suppliers, or must be otherwise involved in the activities of the SCE.
- Control must be vested equally in members, although weighted voting may be allowed in order to reflect each member’s contribution to the SCE.
- There must be limited interest on loan and share capital.
- Profits must be distributed according to business done with the SCE or retained to meet the needs of members.
- There may be no artificial restrictions on membership.
- Net assets and reserves must be distributed on winding-up according to the principle of disinterested distribution, that is to say to another cooperative body pursuing similar aims or general interest purposes.
In terms of tax treatment, SCEs are equated to SEs. In the Netherlands, the scope of the rules applicable to cooperatives may be extended to apply to SCEs by Order in Council, such as the provisions in the Dutch Corporate Income Tax Act of 1969 dealing with a cooperative’s profits. This ensures that SCEs are treated the same as cooperatives to the extent possible. In addition, because they are equated to SEs, SCEs will be able to benefit from the tax incentives that are available in the event of a merger.