The tax dimension of the SE
EUROPEAN TRADE UNION CONFEDERATION CONFEDERATION EUROPEENNE DES SYNDICATS John Monks, General Secretary Boulevard du Roi Albert II, 5 • B – 1210 Bruxelles • Tel: +32 2 224 04 11 Fax: +32 2 224 04 54 / 55 • e-mail: firstname.lastname@example.org • www.etuc.org
1. The tax issue of the E.C.
Explaining the tax dimension of the S.E. is in fact a very easy task… Why? Because there are no specific tax laws in relation to SEs. So I would like to thank you for your attention! I could limit my presentation to this declaration, but of course you then wouldn’t be satisfied, so I will try to explain the tax situation at the European level, and what the main debates are.
The history of the S.E. and the context of the directive have already been explained so I will only repeat very quickly a few important elements, which are of interest in the tax discussion.
The SE statute entered into force on 8/10/2OO4, some call it the “flagship of European Company Law”. I wouldn’t go that far as a lot of questions remain to be answered, especially with regards to tax and to other fields.
First of all, the directive has to be transformed into national laws by the 25 Member States and let’s not forget also by the 3 Member States of the European Economic area. This means:
Integration into the national legal system Fulfil the various obligations
Carry out the diverse authorizations of the SE statute.
Now let’s concentrate a bit more on the tax discussion. If we read the Council regulations very carefully we can find only one “very limited” reference to the tax treatment of the SE (this reflects very clearly the fear of legislation for tax questions – as a result of the unanimity-clause of the EU (25 Member States) as far as tax questions are concerned this would be practically impossible to achieve).
Although the initial proposal for the Council regulation that dates from June 197O, contains some attempts to insert some tax provisions: such as the formation of a holding SE, the determination of the tax residence of an SE across borders without tax consequences and a scheme to offset losses of foreign PEs (permanent establishments) and subsidiaries. However the adopted Statute contains no special tax regime regarding the SE.
Thus an SE, in principle, should be treated and subject to tax like any other national public limited company operating throughout the E.U. (and the EEA). This means that the current mosaic of numerous tax regulations is left untouched by the SE statute as it is the fiscal sovereignty of the different Member States. Some specialists in the legal area welcome this standpoint for the following reasons: the SE is a European legal form of
business organisation rather than an individual tax planning tool, a preferential tax incentive or a political instrument regarding tax competition or tax coordination.
Therefore they can claim that any kind of discrimination of an SE compared to national public limited companies and vice versa should be prevented.
However the absence of tax provisions in the SE statute has nevertheless been extensively criticised not least by the European Commission (publication “Towards an internal market without tax-obstacles”). Their criticism is based on the following principles: the SE gives European Companies the legal opportunity to structure, reorganise and combine their pan-European operations, to transfer their corporate seat and to adapt their organisational structure throughout the EU (and the EEA) and therefore a suitable tax framework is needed to overcome existing tax obstacles and to prevent unacceptable tax costs.
To sum up these two standpoints and to be more specific: an SE is potentially subject to 28 national tax regimes (25 MS + 3 EEA MS). Besides that it is also subject to the 97 intra EU and the several intra EEA tax treaties and to the provisions that have already (some partially) transformed the 3 EC-directives on direct taxation into national law (merger directive, parent-subsidiary directive and the interest, royalties directive). Further to the fundamental freedom (freedom of establishment, free movement of capital, freedom to provide services), including several decisions of the European Court of Justice based thereon (and that are contained in the EC-treaty and in EEA-agreement) also apply to SEs.
The person who is able to find a common solution for all these problems should in my opinion obtain some kind of Nobel Prize for taxation! Anyway let’s try to make an overview of the specific tax aspects of the SE: which aspects have to be considered, analysed, discussed whenever an SE is at stake.
First of all, the issue of the residence as well as the scope of the personal tax liability of an SE has to be scrutinised.
Secondly, an analysis has to be made concerning the tax treatment of the different cross-border transfers of the registered office of an SE form one Member State to another.
Thirdly, an examination of the tax issues regarding the running of an SE operating throughout the EU and the relationships of an SE to its shareholders is necessary.
In the fourth place, there is the discussion about the several European tax aspects concerning the SE as an original European legal form of business organisation.
And last but not least, the following relevant types of tax are involved: corporate tax, trade tax, income tax, capital transfer tax, stamp duty, real property tax and VAT.
This must be heaven for tax consultants but hell for the tax authorities…! Let us run through some examples to underline the difficulties we are facing in the tax-dimension (for those amongst you who are not yet confused enough).
The SE statute provides for 4 different ways to set up an SE: Merger
Holding Subsidiary Transformation
Other speakers have explained these items, so I will not go into the legal aspects but I will only try to limit myself to the tax-issues.
Above all I must underline article 7 of the SE statute, which states that both the registered office and the head office must be located in the same Member State. What’s the idea behind this rule? In the past and valid for all multinational companies it was often the case that administration headquarters and registered headquarters were based in different Member States for only tax reasons (for example, post-office box companies in Luxemburg. If you would calculate the surface needed for the companies based in Luxemburg, it should have the size of South Africa).
Four possibilities of setting up an SE and
their tax consequences
(Country details updated June 2003)
1. Conversion of an EU public company into an SE
Conversion into an SE of a “public limited liability company” established in State A having a subsidiary in State B since at least 2 years:
Public Ltd Cy State A SE State A Sub Co State B Sub Co State B
No taxation of hidden reserves and goodwill in most countries, except in Sweden, Netherlands and Greece.
No stamp duty in most countries, except in France (€ 75), Portugal and UK in certain cases.
No real property transfer tax, except in Sweden (but deferral available for intra-group transactions).
No impact on the tax losses (subject in certain countries to domestic conditions), except in Sweden.
2. Creation of an SE holding structure
Creation of an SE holding structure by a share for share exchange resulting in the formation of a holding company promoted by “public or private limited liability companies” from at least two different EU Member States or companies, where at least two of them have a subsidiary or a branch situated in another Member State since at least two years.
No capital gains taxation in most countries (under certain conditions).
No stamp duty in most countries, except in Portugal, Finland, UK and Luxembourg (but exemptions available in certain cases).
No real property transfer tax, except in Germany. Ltd Cy State A Ltd Cy State B Se State? Ltd Cy State A Ltd Cy State B
3. Creation of an SE subsidiary
Creation of an SE subsidiary by issuance of shares in exchange for the contribution of business of any legal entities located in at least two different Member States or having, for at least two of them a subsidiary or a branch situated in another Member State since two years:
No capital gains taxation in most countries (under certain conditions), except in Greece and in Sweden (but deferral of taxation available for a foreign SE).
No stamp duty in most countries, except in Portugal and
Luxembourg (but exemptions available in specific cases), in France (but only €230 when the favourable regime applies),
and in the UK.
No real property transfer tax, except in Austria (but favourable treatment with respect to the taxable base), Greece, Germany, and Sweden.
4. Creation of an SE by way of a legal mergerCreation of a merger by way of a legal merger of at least two public limited companies in two different EU Member States.
Tax impact of the merger
Legal entity State A Legal entity State B Legal entity State A Legal entity State B SE State? PE State A PE State B Public Ltd Cty State A (Absorbing Cy) Public Ltd Cty State B (Absorbing Cy) SE State A PE State B
o The concept of mergers does not exist in the UK, nor in Ireland; cross border mergers are not allowed in Luxembourg, Netherlands and Sweden.
o Loss of the tax losses available in a company transformed into the PE of an SE.
Tax impact after the merger
o A tax consolidation may be available, depending on the country where the SE is located.
o No taxation at the shareholders level under certain conditions in half of the countries (Austria, Belgium, France, Greece, Germany, Italy, Portugal). Tax neutrality is subject in certain countries to the application of the merger EU Directive (Finland, Netherlands, and Denmark).
o No taxation at the absorbed company’s level in most countries, under certain conditions (Austria, Denmark, France Greece, Italy, Portugal), except in Finland, where the tax neutrality is subject to the application of the merger Directive. In several countries a distinction is made depending on the nationality of the companies in question: tax neutrality is only available if both merged companies are local entities: Sweden, Netherlands, Germany, and Belgium. o No stamp duty in most countries subject to certain conditions,
except in the UK and France (but €230 stamp duty only where the favourable regime applies).
o No capital tax in most countries under certain conditions, except in the Netherlands (unless EU capital tax Directive providing for an exemption is applicable).
o No real property transfer tax under certain conditions, except in Germany and Austria (but favourable treatment regarding the taxable base).
o Impact on the tax losses of a company transformed into the PE of an SE: loss of the tax losses in most countries, except in Ireland, UK and Austria (subject to certain restrictions). A ruling is available in France.
Running an SE
1) Tax rates
Wide range of tax rates varying from 12,5% (Ireland) to 36% (Italy)
Corporate income tax rate must however be compared to the effective tax rate and the taxable base.
2) Modalities of taxation
Worldwide income in most countries (foreign source income is included in taxable income, with a tax credit mechanism to avoid a double taxation.
Except in France where the territorial income principle is applied (foreign source income is not included in taxable income)
Losses suffered abroad through a PE are generally available to offset the profit of the SE, unless applicable tax treaty specifically provides for the exemption method
The above explanation outlines the tax dimension of the SE. Does this mean that the tax discussion at the EU level is not moving? No, on the contrary, lively discussions are going on as far as taxation is concerned; so what’s going on?
ETUC RAPPORT ON TAXATION 2004
Europe per se does not (yet) impose its own taxes, yet the European Union’s influence on taxation is increasing slowly but surely. The only tax with a more or less Europe-wide structure is VAT (national VAT legislation in each of the Member States is based on the Sixth VAT Directive and a proportion of VAT income is used to fund the EU).
A number of directives (the Sixth VAT Directive, and the directives on capital, parent companies-subsidiaries, and savings) which have been transposed by the Member States into their national legislation have prompted lively discussions on European taxation, albeit in modest proportions.
Alongside these political initiatives, the influence of the European Court of Justice (ECJ) has increased substantially. The ECJ’s main task is to interpret European law and in particular, the EC Treaty. The court’s rulings are forcing more and more Member States to completely abolish any differentiation between nationals and non-nationals (at least in terms of free movement of goods, persons and capital).
Another important principle dealt with under European law is what is known as the ‘direct effect of Community law’, which directly engenders the rights and obligations placed upon the citizens of the European Union. This means that the latter may call directly upon a European rule and this
will take precedence over national legislation. In recent times, many rulings have been issued regarding taxation provisions in application of the direct-effect principle.
It is therefore likely that in future many taxation provisions contained in national bodies of law will succumb to European law. In order to avoid such a situation, more and more bodies of national law are being adapted and this is resulting in gradual harmonisation.
It is perhaps worth dwelling for a moment on the limits of what is known as negative integration practised by the European Court of Justice and on the significance of soft law.
To date, rulings issued by the ECJ regarding direct taxation have appeared crucial in eliminating obstacles to the single market and in promoting fiscal coordination (Lisbon objectives);these decisions have led to ‘prohibitions’ and, as a result, have produced ‘negative tax integration’. Nevertheless, this ‘negative’ approach has turned out to be insufficient because it pertains to individual issues and, as a result, has not given rise to systematic legislation. This needs to be extended and what we need today is positive integration.
In the absence of binding regulations, positive integration may follow on from soft law, which would signal a way out of the taxation impasse.
To do this, all the concepts associated with soft law may be applied: recommendations, opinions, guidelines, communications, political agreements, codes of conduct and so forth. The highest common denominator is that these measures are non-binding, they have a purely political status but of course this also means that they are openly exposed to influence from all kinds of pressure groups.
The initiatives being taken by the European Commission in this regard are certainly laudable and they are clear evidence of how seriously the Commission intends to deal with taxation but the road is long and there will be many obstacles en route.
Back in 2001 (COM(2001) 582 final),the Commission was planning to publish the ECJ’s General Principles on direct taxation, backing up the initiative with communications to coordinate these principles.
But up till now no real progress has been made.
Any policy drawn up by the European Union aims to pursue the objective of the Lisbon European Council, namely: to become the most competitive and dynamic knowledge-based economy in the world, capable of sustainable economic growth and with more and better jobs and greater social cohesion.
With this in mind, the Stockholm European Council stated (in substance) that “the taxation systems of the Member States should be adapted to
respond to the necessary market reforms and that therefore the Community should develop its taxation policy in a new direction.”
What type of taxation policy should the EU pursue to achieve this objective?
The policy should primarily serve to safeguard the four freedoms of the single market: free movement of persons, goods and capital and the freedom to provide services, in other words, any fiscal obstacles need to be levelled out. The key question we need to ask in this respect is the following: How can the EU control (harmful) fiscal competition and ensure that the provisions of the Treaty in terms of assistance to the public authorities are respected (at both European and international level)?
In addition, fiscal initiatives must ensure that the labour market operates satisfactorily. This presupposes the elimination of fiscal barriers and unsettling influences and, above all, the simplification of 25 different taxation systems, which is certainly no easy task. Just consider that to do this, we need a much more efficient collection system to compensate for the reduction in income brought about by the authorities removing obstacles;
Finally, the European Commission would like to reduce nominal tariffs and extend this tax base so that various taxation systems do not cause major economic imbalances.
When we ask the Commission how it plans to achieve these objectives, it starts getting around the problem by putting the ball back in the court of the national authorities (essentially calling on the principle of unanimity). The Commission clearly states that is not necessary to harmonise fully the taxation systems of the various Member States; it would be content for Member States to respect current Community rules and thereby to keep national budgets balanced. In other words, tax reductions could be authorised provided that public spending remains under control.
But what is the situation in terms of direct
taxes (in particular corporate taxation)?
The EU has focussed as a priority on corporate taxation in achieving the objectives of the Lisbon European Council (2000). This is certainly encouraging for trade unions, since corporate taxation is an area in which the effect of globalisation has been widely felt. In order to function efficiently, a global economy needs to set itself a number of fundamental acceptable rules by which to govern relations between public authorities and companies. The series of fiscal measures means that this issue lies at
the heart of efforts to combat harmful tax competition within the framework of the OECD and at EU level.
The Commission sets out a two-stage strategy aimed at eliminating tax barriers.
The two-stage strategy involves:
Tackling the most pressing problems in the short and medium term with well-targeted measures (for example assessing the effects of major decisions by the European Court of Justice amending the Parent companies-Subsidiaries Directive) and the Mergers Directive, withdrawing the draft Directive on cross-border loss compensation.
Publishing a communication on the need to amend some dual-taxation agreements based on OECD models.
Proposing an all-encompassing solution in the form of a consolidated tax base.
Has the Commission made any progress in terms of these all-encompassing solutions?
The Commission should be able to use the provisions of the Nice Treaty, which stipulates that there may be collaboration between a group of Member States in cases where unanimity is not possible. This principle would apply, for example, to home-state taxation, which states that collaboration is required only of Member States whose tax bases are more or less identical.
Why is this possibility provided? Because the coexistence of 25 different corporate taxation systems will provide a perfect breeding ground foot tax evasion and fraud. The measures proposed by the Commission will require mutual support and administrative collaboration between the Member States if it is to tighten up tax controls.
The intention to impose consolidated accounting on companies listed on an EU stock market as from 2005 should help to develop a Community tax base.
The Commission fully supports the idea of a joint, consolidated dbase because it believes that this is the best way to limit administrative costs for companies.
Current taxation in the new Member States
tax VAT rate
Personal income tax
income tax Taxes on social security 2004 2003 rate in () if different Standard rate, lower rate) Minimum rate Maximum
rate Maximum rate
Income in excess of Income in excess of Euro Euro Employer Worker 10% 30% 10
-15% 18% 6.3% Cyprus 5%, 15% 17,000 34,200 28% 15% 32% 35% 12.5% Czech Republic (31%) 5%, 19% 1,000 10,100 26% 26% Estonia 26 /74 33% 4% 5%,18% 1,000 1,000 16% 18% 38% 29% 12.5% Hungary (18%) 5%,15%,2 5% 0 4,800 15% 25% 25% Latvia 24.09% 9% (19%) 5%, 18% 0 0 33% 33% Lithuania 15% 5%,9%,18 31% 3% % 0 0 15% 35% Malta 35% 10% 10% 5%, 18% 7,200 15,900 19% 29% 40% Poland 26.12% 18.7% (27%) 3%,7%,22 % 0 15,600 19% 19% 19% Slovakia 19% 34.7% 13.4% (25%) 2,000 2,000 17% 50% Slovenia 25% 8.5%, 16.1% 22.1% 20% 1,200 35,500
The new Member States have high hopes: economic growth is the watchword and preferably within the shortest possible time. The experience of other countries, such as Ireland, has shown, though, that it takes 10 to 15 years of constant growth to raise national income
to the European average. Accession to the EU certainly facilitates economic wellbeing but is no guarantee.
The most significant benefit for the 10 new Member States is the dismantling of state monopolies, promotion and competition on the market and the limiting of state intervention in the economic life of the country. The new Member States will have to adapt as quickly as possible in terms of VAT, excise duties and customs, the three areas in which EU legislation is at its most advanced.
It is important to realise that six of the new Member States are not members of the OECD and that consequently they are not governed by OECD taxation principles. In recent times, too, there has been much discussion of the low tax rates in the new Member States (see table). There are real concerns over unfair competition and tax dumping. In fact, the majority (six) of the new Member States have tax rates of below 20%, while in Estonia business profits are exempt from tax until they are actually used.
This, combined with low labour costs and countless investment incentives make the new Member States a very attractive proposition in business terms; just think how many companies might relocate (there is the threat of relocation, at least). It will be extremely difficult to adapt the tax system in some countries to make it compatible with the majority of EU systems.
Cyprus: as from 2005, a tax rate of 10% will be introduced for companies in Cyprus and this combined with the absence of withholding tax will make Cyrus particularly attractive to holding companies, financial firms and international sales offices;
Malta: Malta also offers advantageous tax situations which are not always reflected in the rates published
• For example: Malta taxes international sales offices and financial services companies at a rate of 35%. This might seem high at first glance but if the profits are not fully distributed, it is possible, thanks to an ingenious system of tax credits, to reduce tax rates to 4.17% for financial and commercial companies, 2.5% for other businesses and services and even 0% for holding companies.
These examples show that while on the one hand the EU is trying (e.g. with the Savings Directive in Luxembourg) to conclude agreements to neutralise these significant tax advantages, it has to deal, on the other, with modern-day "Blackbeards" who are vigorously (and apparently within the framework of the EU) trying to secure the status of tax haven.
Will the directives (merger, parent subsidiaries…)come into immediate effect for the new Member States or will we have to approach this transition with our eyes wide open and pay careful attention to developments?
As regards the Parent companies-Subsidiaries Directive (90/435/EEC), there are hardly any exceptions because Estonia alone is affected by a transition period until the end of 2008, during which a rate of 26% will continue to apply to distributed profits if the share package is less than 20%.
The Interest and Royalties Directive (Council Directive 2003/49/EC of 3 June 2003 on a common system of taxation applicable to interest and royalty payments made between associated companies of difference Member States) on the other hand, is more problematic: of the 10 new Member States, five – the Czech Republic, Latvia, Lithuania, Poland and Slovakia – have asked for a transition system on account of the specific economic situations in these countries. This system will enable them to withhold tax on royalties (all five countries) and interest (only Latvia and Lithuania) for a period of six years.
This directive has only had limited impact on the five other new Member States, since Hungary and Malta generally do not withhold tax on cross-border payments of interest and royalties and Cyprus does not withhold tax on interest.
The Mergers Directive (Council Directive 90/434/EEC of 23 July 1990 on a common system of taxation applicable to mergers, divisions, transfers of assets and exchanges of shares concerning companies of different Member States), which aims at exempting mergers, divisions, transfers of assets and transnational exchange of shares from tax, has prompted some of the new Member States to apply the same principle in their national legislation. Moreover, there has been much detailed discussion about this directive in fiscal circles since, for example, it is unclear whether certain restructuring projects may be classed as "mergers".
Clearly these directives are designed to eliminate several taxes which constitute an obstacle to the economy but we should not forget that tax revenue is what makes the state go round. Some countries are already experiencing problems in this respect and are endeavouring, via transitional systems (see above), to gain some breathing space in which to try to find solutions to their budgetary difficulties.
The reduction in fiscal pressure should lead to the creation of more jobs but to date too few have been created. This may be due to the fact that in its directives the Commission imposes too few obligations on the economy to obtain, in return for all these simplifications and cost reductions, a commitment to create jobs. All too often the argument is put forward that "the market" will automatically create employment opportunities.
Trade unions must exert more pressure on the Commission to conclude agreements with industry to create jobs. And in the context of the Information and Consultation Directive, trade unions must focus more attention on company tax matters, which is quite possible, since they have the right to information on the company's economic situation. Further trade union training on company taxation will be vital.
Eliminating obstacles which are likely to lead to dual taxation is one thing but will not automatically resolve the problem of tax evasion and/or tax fraud. It is the responsibility of the Commission to take charge of the possible consequences of its legislation in this area and to provide Member States with the tools they need to fight tax fraud. In its report dated 28 January 2000 (COM/2000/28), the Commission proposes close administrative cooperation; this was the result of work carried out by an ad hoc working group. Administrative cooperation, mutual assistance and exchanging information were the working group's main recommendations.
The unanimity rule and the apparent absence of political will to move forward in the area of taxation has resulted in the fight against tax fraud be waged extremely slowly. The Commission is making laudable proposals and is encouraging Member States to cooperate and collaborate but seldom do its efforts result in concrete action.
Nevertheless, the Commission does have one key tool at its disposal in its attempts to progress: the well-known infringement proceedings whereby tax rules which run counter to the Treaty or to Community legislation may be brought before the European Court of Justice. However, the Commission has made little use of this mechanism and as a result increasing numbers of citizens are taking matters into their own hands and are bringing cases before the ECJ themselves. The possibilities for adopting a non-legislative (see above) or soft-law approach are not being sufficiently used. However, this is a method which could prove particularly effective if there is a solid legal base founded on decisions by the Court.
An administrative and legal approach to fraud would be effective and is necessary but the important aspect is that individual countries become involved and actual checks are made more effective. In relation to the latter, there is considerable responsibility on the new Member States since they now find themselves responsible for a significant proportion of controls on the EU's external borders. In this context, the Commission must provide adequate and detailed training (see the Fiscalis Programme).
Discussing fraud is always a delicate task, not least because very few statistics are available on the subject, but also in general because it is
felt that such fraud must be fairly large-scale and causes economic and social distortions in a country or region. And because of this social aspect, the fight against fraud must be given constant attention by trade unions – they should not lose sight of this in their training activities and in their discussions with the public authorities and employers.