European stock corporations, often referred to as Societas Europaea or “SE” for short, are a relatively new legal form that is becoming increasingly popular in Germany. Many entrepreneurs who want to expand their business to another European nation consider setting up a European Company.

One of the advantages of the European Company is that you can do business in many European countries under the same regulations.

Table of contents

  1. European Company: special features
  2. Legal basis of the Societas Europaea
  3. Founding a European Company
  4. Further requirements for founding an SE
  5. Notification requirements – Publications Office EU
  6. Statutes of the European Union
  7. Choice between monistic and dualistic system
  8. Conversion of SE into AG
  9. Bankruptcy of a European Company (SE)
  10. Tax obligations of a Societas Europaea
  11. Election of members of the negotiating body
  12. Advantages of the European Company

European Company: Definition & Characteristics

The Societas Europaea (SE), like other European company forms (European Company Legislation), is the result of efforts to harmonize company law. As it is divided into shares, it is a company within the meaning of the law. A minimum capital of 120,000 euros is required for formation.

The company must have a registered office in an EU country. The decision lies between a dualistic and a monistic management structure.

On 22 December 2004, a so-called Article Law was passed in the Federal Republic of Germany, which legalizes the introduction of the European Company.

The constitution of the European Company is regulated in Article 1 of Council Regulation (EC) No. 2157/2001, which came into force on October 8, 2001. (SE Implementation Act – SEAG).

Legal basis of the Societas Europaea

As a legal form under European law, the Societas Europaea is based on both EU and national law. On the one hand, the EU Regulation on the Statute for a European Company is in force. It is supplemented by national legislation on the introduction of the European Company (SEEG). It underpins each individual provision of the Regulation.

For all other cases not covered by these special regulations, the basic requirements of the AktG and HGB still apply.

The EU Directive on the rights of employees in the European Company (SEEG) is also transposed into German law by the SEEG Act.

Founding a European File Company

The requirements for founding a European Company are listed below:

  • A minimum capital of 120,000 euros is required to set up a company.
  • A single EU country serves as both the registered office and the head office.
  • Involvement of employees in company decisions and open communication between management and trade union representatives
  • All participating companies are subject to the regulations of at least two different EU countries due to their presence in other EU countries (through subsidiaries or branches).

Further requirements for the formation of a European Company

There are 4 ways to set up a European Company, each with its own advantages and disadvantages. European Companies can be formed for commercial purposes in EU countries.

  1. Conversion of a national public limited company into a European Company (at least two years of establishment in another EU member state is required). It is not permitted to relocate the registered office of the company for the purpose of conversion.
  2. The formation of a joint subsidiary between public limited companies and/or limited liability companies which have their registered office in at least two different Member States or which have had a subsidiary or branch office subject to the legislation of another Member State for at least two years.
  3. At least two EU Member States merging their national public limited liability companies either by takeover or new formation
  4. A holding company that has been established in at least two different Member States or has had a subsidiary or branch there for at least two years, consisting of public limited companies and/or limited liability companies

A subsidiary of Europa AG that is spun off from an existing Europa AG can be added as an additional type of branch at a later date.

Notification obligation – Publications Office of the EU

If you have applied for registration, you must notify the Publications Office of the EU within one month of the date of publication of the documents you have applied for. You must provide this information:

The information about your European Company that publishes in your country: place, title of publication, date
field of activity
Name of your European company
Number, date and place of entry into force
The European headquarters of your company

The statutes of the European Union

As a two-tier system, the European Company has a general meeting of shareholders. It also consists of a management body and a supervisory body. If the SE opts for the monistic system, it is composed of only one administrative body.The dualistic system uses the German supervisory board system, while the monistic system uses the Anglo-American board system (Art. 38-45). Both systems provide for the possibility of reappointing supervisory board members for a maximum of six years (Art. 46).

When it comes to the possibility of individually designing the organizational structure of the company, the SE based in Germany is a pioneer.When founding a company in Germany, it can choose between a “dualistic system” with a Management Board and a “monistic system” with an Administrative Board that acts as both a management and supervisory body.

European Company – System: Monistic or dualistic?

The board of directors is the only corporate body apart from the annual general meeting of shareholders.

It manages the company’s business, determines the main business areas and ensures their implementation. One or more managing directors are the public face of the company. These persons are responsible for the day-to-day business of the SE.

The Board of Directors appoints the managing directors, who are subject to its instructions and can be dismissed at any time.

It is possible for the non-executive directors and the members of the board of directors to have a common identity, which opens up a variety of possibilities, particularly for family businesses.

Similar to a limited liability company, one person can hold all management and representation powers, provided he or she is also a member of the board of directors and has been appointed as managing director.

In an EU stock corporation, it is also possible to create an organizational structure that is more personalistic than the legal forms of the GmbH, which have so far been limited to German-speaking countries.

Is it possible to convert an SE into a “normal” AG?

The conversion of a European Company into a public limited company (AG) is possible in principle, but after two years at the earliest. In this case, the board of directors or the management body of the European Company could draw up a plan for conversion, which must be approved by the company’s administrative board.

Bankruptcy of a European Company

Your European company must comply with the laws of the European country in which it is registered in the event of bankruptcy, liquidation, insolvency and suspension of payments. Consequently, the laws of the country in which the company is registered govern the dissolution and liquidation of the company (Art. 62 et seq.).

Tax obligations of the European Company

As a German company, the SE must follow the same accounting guidelines as all other German companies. The SE Regulation does not contain any special tax rules, but refers to the general tax law of the member state in which the company has its registered office.

As a result, the Societas Europaea is subject to the same corporate tax requirements as other companies.

Taxation of corporations

The profits of each permanent establishment are taxed in the country in which the permanent establishment is domiciled on the basis of double taxation agreements. When profits are distributed to shareholders in the form of dividends, capital gains tax may be withheld, although this is only permitted in the country in which the Societas Europaea is domiciled.

A shareholder’s income from dividends is taxed in Germany using either the partial income method or the flat-rate withholding tax, depending on whether the dividends are from capital assets or, in the case of a parent company, from business operations.

What rules apply with regard to transfer tax?

In contrast to income tax, there is no tax-neutral deferral for the formation or transfer of the registered office of a Societas Europaea.

Tax law for restructuring

Mergers, demergers and the transfer of the registered office of a European Company are regulated for tax purposes by the European Union’s Merger Directive. The German Transformation Tax Act is largely responsible for enforcing the obligations of the Directive in Germany.

As far as possible, a cross-border merger does not lead to an acute tax burden for the company or its shareholders.

Tax neutrality: However, it must be ensured that the hidden reserves already held by the companies involved or their owners are still available to the tax authorities for later taxation and are not permanently lost.

The same rules apply to the transfer of the registered office of a Societas Europaea.

Taxation in other countries

The permanent establishment principle applies: If the Societas Europaea has more than one legally dependent branch, each branch must pay tax on its profits in the country in which it is resident, as it is mainly active across borders. Regardless of whether it is a holding company or has several permanent establishments.

How are the annual financial statements of Europa AG prepared?

The annual financial statements are prepared by Europa AG. The annual financial statements comprise the balance sheet, the profit and loss account and the report on the development of the financial year and the position of the company.

The laws of the country in which the company is domiciled are based on the laws of that country, which have essentially been harmonized by European law.

Election of members of the negotiating body

As the negotiating body represents employees from different companies and member states, it is important that the negotiating body has an appropriate composition. The members of the organization are elected in an open and transparent manner according to a specific country key.

Right to nominate trade union members

If there is no employee representation, the employees vote themselves. Otherwise, the votes are cast by group councils, central works councils and works councils.

The election committee can consist of up to 40 people.

The management must notify the prospective formation of a Europa AG within ten weeks so that it can be constituted.

It has six months to make a decision. This period can be extended to a total of twelve months.

Globalism in practice

There are a number of reasons why an SE is a good choice for a company. The European image of the Societas Europaea allows its owners to present themselves as a modern and progressive company while demonstrating their global outlook.

As a European legal form standard, the European Company makes it possible to relocate the company headquarters across national borders without losing its legal status.

Participation in the decision-making process

Another reason for the SE is the unique form of employee co-determination in Germany. The SE is not protected by the requirements of German co-determination laws, as it is not explicitly included in these regulations. Instead, the concept of negotiated employee involvement applies.

The employees or their representatives must be involved in the formation of the SE in order to reach an agreement on operational and corporate co-determination, among other things.

You can contractually stipulate that no employee representatives belong to the company’s supervisory body if you want to completely exclude employee participation in the negotiations.

In order to conclude a co-determination agreement, you must observe the statutory provisions. A procedure for informing and consulting employees must be defined in the co-determination agreement for company co-determination.

In most cases, there are no regulations for corporate co-determination. However, if the legal form is changed to an SE, the previous level of co-determination must be maintained.

Co-determination as a fall-back solution by the legislator

If the contracting parties cannot agree on a participation agreement, the legislator has created a fall-back solution: The co-determination of the original company(ies) in the SE must be maintained through the formation of an SE works council.

This means that if the founding companies were not subject to co-determination, the European Company is exempt from including employee representatives on the Management Board or Administrative Board.

If the company’s workforce grows beyond the limits set out in the One-Third Participation Act and the Co-Determination Act, co-determination remains in place at the level set out in the co-determination agreement or the subsidiary regulation by law.

This rule does not apply to structural changes that are likely to restrict employees’ co-determination rights. It is therefore necessary to regulate co-determination anew. If a co-determined GmbH is merged into a non-co-determined SE, the employees of the GmbH lose their co-determination rights.

Legal consequences of the fall-back solution

The co-determination rights are protected by the basic standards. They take effect from the time of registration and have a variety of effects. In the event of a conversion, the co-determination rights in the national stock corporation are retained (§ 34 para. 1 lit. a SEBG).

The situation is somewhat more difficult in the event of a merger. In this case, Europa AG can obtain the highest quality of national co-determination. The prerequisite for this is that co-determination rights already exist in at least one of the companies involved and that these rights apply to at least 25 percent of the entire workforce.

This also applies if the negotiating body has passed a resolution equivalent to co-determination for less than 25 percent of the total workforce (Section 34 (1) (b) SEBG).

As with the usual criteria for the holding company and the subsidiary SE, 50 percent of the total workforce must be entitled to co-determination. The co-determination of Europa AG is also assessed here on the basis of the company with the largest co-determination share (§ 34 para. 1 no. c SEBG).

European Company – the advantages

The Europa AG is a sensible alternative to the traditional legal forms for multinational groups. Only a thorough analysis, taking into account the economic and tax implications, can show whether this makes sense. Some of the advantages of working with a European Company are listed below:

International merger

A Europa AG can be formed for the first time through the merger of stock corporations from different EU member states.

European stock corporation = European brand

To the outside world, the term Europa AG stands for a company with global reach and high status.

Standardized group structure

A German stock corporation can benefit from the monistic structure of Europa AG. Instead of a supervisory board and a management board, only one management board is required. The founders could also apply the same management style throughout the company.

Uncomplicated relocation of the company’s registered office

Once a Europa AG has been established, it can move its registered office to another member state without having to dissolve or re-establish the company.

A German Europa AG can become a UK Europa AG by transferring its registered office to the UK. Although UK law applies in addition to the European Regulation if the company is incorporated in Germany. This allows the founders to benefit from the competition between the European legal systems.

Less effort due to simple structures

Each of the 27 EU member states may establish its own Europa AG. This can reduce the effort involved in managing subsidiaries in other EU countries.