EU Inc. as a new European form of business organisation - Classification under company and tax laws
The proposal for a so-called EU Inc., which was recently published by the EU Commission, is a new attempt to make it much simpler for companies to use the European Single Market. In essence, this concerns the introduction of a unified, optional legal framework for companies that is intended to exist in parallel with the present national company legislation. The aim of this initiative is to make it significantly easier for companies to be formed and to expand within the EU and, at the same time, to make Europe more attractive in the face of international competition - especially for start-ups and fast-growing businesses.
The basic idea - A standard company for Europe
The aim is for the EU Inc. to function as a quasi standard European corporation. A key feature here is the systematic digitalisation. The intention is to enable investors to form, operate, grow and also terminate their companies throughout the EU without having to adapt to different national systems. The fully digitalised formation process aims to be completed within a maximum of 48 hours while limiting the formation costs to a maximum of €100; moreover, there is no minimum share capital requirement.
Company law aspects
From a company law perspective, the EU proposal brings about innovations that, from a German perspective, are noteworthy. First of all, the EU Inc. has been designed as a modern, flexible corporation that differs significantly from the traditional German GmbH [limited liability company]. While the GmbH is highly formalised (in particular, because of notarial certification, minimum share capital and detailed registration procedures), by contrast the EU Inc. focuses on standardisation and simplification. The intention is for company formation to be carried out entirely digitally and to be completed in a very short time. This will likewise reduce the organisational burden considerably.
Furthermore, the EU Inc. offers greater freedom to determine ownership and governance structures. For growth-oriented companies, in particular, it is helpful to be able to provide different share classes and flexible models in respect of the right to a share of profits and voting rights. Another relevant aspect is systematic digitalisation. Notary appointments, written resolutions, in-person meetings, etc. will be replaced by digital processes. For companies that operate internationally, this means a major simplification in everyday operations.
Although, the EU Inc. is not a fully harmonised system, but rather a hybrid model. While the key provisions of company law will be specified at the EU level, in the non-harmonised areas the national regulations of the country where the company is headquartered will continue to apply. This concerns, in particular, employment law and parts of the insolvency legislation.
Classification for tax purposes with the focus on employee stock options
First things first however, the introduction of the EU Inc. will not result in the harmonisation of company taxation in the EU. Tax rates, assessment bases and taxing competencies will continue to be regulated at the Member State level. For companies this means that, for the time being, there will be little change to the basic tax principles. Taxation will continue to be based on criteria such as registered office, management or the permanent establishment.
An interesting aspect is the planned regulation for employee stock options. This provides that, normally, taxation will only take place when the shares are sold. For start-ups and young companies this is an important advantage because the typical liquidity problems at the employee level (‘dry income’) would be avoided. Furthermore, the taxation is likely to be limited to the amount of withholding tax, whereas under current law, depending on the circumstances of a case, the personal tax rate may also be applied. All in all, employee stock options will consequently become significantly more attractive.
Cross-border transformations …
Under the current law, from a German perspective, each cross-border transformation is a complex event. Irrespective of whether this is a merger, a change of legal form, or the relocation of the registered office, different national legal systems apply and this frequently leads to parallel procedures in multiple jurisdictions, extensive documentation (transformation reports, audits, etc.) as well as high transaction costs and the corresponding time needed for this.
The EU Inc. can be applied here as a specific countermeasure. As it is based on a uniform European company statute, in the case of purely ‘EU internal’ structural measures some of these interruptions in the system will be omitted. Likewise, if a company that is already organised as an EU Inc. relocates the centre of its economic activity to another Member State, it will continue to operate under the same legal framework.
… as the preferred area of application
From a German perspective, facilitations may result, for example, when relocating the administrative headquarters or the registered office to other Member States. Under current law, difficulties prevail, in particular, due to uncertainties under company law (registered office theory vs formation theory). With the EU Inc., relocating a registered office could become much easier, as the company’s legal form would remain the same.
Another important aspect is the issue of “entering and exiting“ this system. There is growing evidence that existing national companies could be ‘transformed’ into EU Incs. and that, conversely, switching back into national legal forms is also likely to be possible. Depending on the specific situation of a given company, switching between the legal forms could constitute a strategic option (e.g., start as an EU Inc. to swiftly scale up internationally and, later, switch into a GmbH or an AG [a German joint stock corporation] where the structure is more strongly nationally oriented, or conversely, transfer national structures to a more flexible EU regime).
A road map for going forward
Referring to the crucial importance for the EU’s prosperity, the EU Commission has called on the European Parliament and the Council to reach an agreement on this proposed EU Inc. regulation by the end of 2026. In the best case, the legislative process could be completed by the beginning of 2027. Through publication in the Official Journal of the EU, the regulation would then formally come into force and take effect directly in the EU Member States. Unlike EU Directives, national transposition of the regulation would not be required.
However, practical implementation can probably only be expected from 2028/2029 because, firstly, political delays may arise and, secondly, the rules are not intended to be applied in practice until after a transitional period.
