European Companies (SE’s) can solve complex issues faced by businesses around Europe; why though, only about 65 SE’s have been registered so far? Areti Charidemou, Cyprus Lawyer and Business Advisor, addresses the main issues of registering a European Company and why a European Company registered in Cyprus can be more beneficial.
The main purpose stated by the European Commission on the necessity to regulate the creation and operation of a European Company was the following:
“…to create a “European Company” with its own legislative framework. This will allow companies incorporated in different Member States to merge or form a holding company or joint subsidiary, while avoiding the legal and practical constraints arising from the existence of fifteen different legal systems. To arrange for the involvement of employees in the European company and recognise their place and role in the company”http://europa.eu/scadplus/leg/en/lvb/l26016.htm
The most important is that European Companies should be regulated under a common legal framework which eliminates bureaucracy on the free movement of companies throughout the European Union. However, there are a number of constraints under the existing legislation, which we will address here and refer to the benefits of Registering an SE in Cyprus, as an alternative vehicle to do business in the EU.
The main advantages of a European Company are the following:
- Companies that are operating in various Member States, mainly through branches or subsidiaries, can now form a European Company and operate throughout Europe under a common regulatory framework. This would mean great savings on regulatory and other compliance issues/matters in various countries.
- The registered office of a European Company can be moved freely from one Member State to another. Currently the situation is that if a company was to change its registered office, it must be dissolved from the state of registration and incorporate another entity in the other Member State.
- The status of a European Company can be beneficial in terms of reputational value, instead of a company registered in a Member State. It might show a stronger company status which will assist in establishing a good brand name.
- One company can have its Registered Office in one Member State, while its actual seat can be in another Member State. This enables companies to move their seats according to their operations, without the need to move the registered office at the same time. Therefore, a European Company can have its Registered Office in Cyprus, while operating throughout EU freely.
The free movement regime of the European Union leads to the need to create a vehicle with which businesses could move around Europe easily. Companies registered in a Member State can generally now operate freely throughout Europe without the bureaucracy previously faced. Instead of having a number of subsidiaries or branches registered in EU Member States, a European Company would solve those issues. A European Company registered in Cyprus can have a place of business in the UK for example, without the need to register a branch or subsidiary in the UK.
The easy movement of the registered office may be a fact of significant importance for some businesses as they can move their registered office to any Member State. Having the registered office and the administrative office in Cyprus though, can satisfy the requirement of being a tax resident in Cyprus with all the associated benefits explained below.
Less than 65 SE’s registered throughout Europe – why?
The formation of a European Company however, is not as simple as for any other private company. The methods that a European Company can be formed are briefly the following:
merger of two or more public companies or European companies, creation of a holding European company by two or more public companies or European Companies or limited liability companies, establishment of a subsidiary European company (joint-venture European company), transformation of a public company established under the laws of any of the Member States of the EU,as a subsidiary company of an already existing European company.
It is obvious that the procedure is not simple and straight forward and it may also be time-consuming and costly. A newcomer in business is impossible (or rather extremely difficult) to form a European Company due to the constraints referred to above.
The freedom to have the registered office in one place and the seat in another may not be of a great significance. The tax status of a company is not based on the location of its registered office, but rather of its management and control. Tax issues are not addressed in the European Company statute and they have been left to be ruled by national laws and regulations.
Furthermore, the European Company must have a minimum capital of 120 000 Euros. A Cyprus company for instance, may be formed with a share capital of 1.000 Euro.
There are a number of other practical issues facing the operation of European Companies that could deter one from incorporating a European Company, one being the tax status which, as mentioned above, is not addressed by the legislation and was left to the national laws. VAT issues, capital gains and transfer pricing, can also be some of the complex aspects that a European Company can face when it operates in various Member States.
Cyprus as a tax base country
Given the fact that one and possibly the main factor determining the choice of the base of a European Company is the tax regime of the country, Cyprus may be one of the best options. Cyprus’ low tax rates, together with the extensive network of double taxation agreements can be very advantageous to register or even move an existing European Company.
As referred to previously, the European Company statute does not address tax issues in relation to the European Company. Tax was left out and it is subject to various national laws so a Cyprus based European Company will be liable to Cyprus taxation.
A European Company resident for tax purposes in Cyprus, will be taxed under the tax laws in effect which are summarised below:
Low corporate tax of 10%:
Corporate tax rate is currently 10% and applies to all companies. There is no distinction of local companies, European Companies or International Business Companies ( previously referred to as “offshore companies”). European Companies being tax resident in Cyprus will be subject to the low rate of 10%.
Profits from disposal of shares (or from trading in securities) are not taxable:
Profits realized by the Cyprus holding company from the sale of shares of a subsidiary or from the sale of any shares, are exempt from Cyprus corporation tax. A European Company being tax resident of Cyprus will avoid any tax on any investments in shares. This can be a significant advantage for investment companies or companies that need to have subsidiaries in third countries.
Dividends received are not taxable (in most cases):
Dividends received by a Cyprus resident company are not taxable in Cyprus under income tax. (Defence Tax may apply in certain cases). Cyprus has signed very beneficial double taxation agreements between many countries in the world, the effect of which is a very low (or sometimes nil) withholding tax in the country of the dividend paying company (subsidiary). In addition, the EU Parent Subsidiary Directive has been adopted by Cyprus and therefore subject to certain conditions, any dividends received by an EU subsidiary are paid in Cyprus without any withholding tax. These facts constitute Cyprus a very attractive place to incorporate the Cyprus Company or even a European Company.
Credit is provided against Cyprus tax on taxes withheld at source even where no treaty exists between the paying state and Cyprus. Unlike Cyprus, other holding company regimes only reduce or exempt withholding taxes on outgoing dividends where there is a double taxation treaty in force between the holding company jurisdiction and the ultimate parent company jurisdiction or, where both the holding company and the parent corporation are resident in the EU.
- Group relief rules are in place.
- Losses can be carried forward indefinitely.
- There is no withholding tax on dividend payments, royalties and interest payments:
- A European Company resident in Cyprus can pay the dividend to its non-resident shareholders without any withholding taxes.
- There is no capital gains tax in Cyprus on the sale of assets located abroad:
This is an issue with the European Companies that normally assets located in countries other than its tax base, will be taxed in the country where the assets are located. However, if the European Company is tax resident in Cyprus, in most cases any tax paid on these profits will be available for set-off against tax payable in Cyprus.
Wide double tax treaty network in place for the benefit of Cyprus SE’s.
Move to Cyprus?
Thus, the formation of a European Company (SE) or move of an SE in Cyprus may as well prove to be most profitable, advantageous and beneficial from a business perspective and importantly from a tax perspective given the tax system of Cyprus.