EU Inc proposals will simplify European business creation and accelerate growth – but complexity remains

EXPERT ANALYIS–

By Marie  Hindré, Partner at ADVANT Altana, Markus P. Linnartz, Partner at ADVANT Beiten, and Filippo Federici, counsel at ADVANT Nctm.

The new “EU Inc” proposals announced last month to create one harmonized set of corporate rules for companies operating across the European Union have the potential to be a genuine gamechanger for business success and EU competitiveness. Reducing complexity and costs will make it far easier for ambitious, innovative companies to start up, raise capital and grow so they can scale just as seamlessly within the bloc as they could if they were based elsewhere in the world in countries with lower administrative burdens such as the US or China. Yet, while this move towards greater simplification represents a major step forward, several key issues could still undermine the overall success of this important initiative. 

The rationale behind the new rules

Businesses in Europe have long benefitted from the EU’s large, mature market, but many struggle to navigate its fragmented legal landscape which comprises 27 separate national legal systems and more than 60 distinct corporate legal forms. Previous attempts to address these issues (namely via the existing expensive and complicated legal form known as the Societas Europea) have largely proved inadequate to the task. 

The challenges of scaling across Europe, with its associated bureaucracy, delays and high costs, act as a disincentive to expansion and have doubtless contributed to the decision taken by nearly 30% of Europe’s unicorns to relocate abroad in the past 20 years. Policymakers have now taken action, and the result is the proposed creation of what is effectively a “28th regime”, with EU Inc providing a uniform company form operating across Europe within a single legal framework. 

A move to simplify corporate processes

The new EU Inc regime would enable companies to be incorporated digitally within just 48 hours, with no minimum share capital requirements and at a cost of under €100. They can then interact digitally with the relevant public authorities as required throughout their lifetime via one EU-level interface. 

As a result, businesses will benefit from easier, more efficient digital processes. Under EU Inc, companies will only have to submit corporate information once because the EU-level interface connects to all the national business registers, so information is shared seamlessly. It will be possible to obtain tax identification and VAT numbers without having to resubmit paper documentation. Post-incorporation, processes such as financing operations, share transfers and liquidation procedures should become more streamlined since everything is done digitally by default.

Moreover, they will be able to operate under uniform capital requirements, with standardized investment documentation. The share transfer process will be simplified, companies will no longer be required to involve intermediaries and different classes of shares with different economic and voting rights can be created. 

Advantages for entrepreneurs, investors and talent

These provisions should make starting and expanding a business more straightforward and accelerate investment processes such as due diligence – providing clear economic advantages to entrepreneurs and investors. As well as helping to attract investment, the EU Inc regime should also make companies more appealing to talent because the rules also allow for EU-wide employee stock option plans to be established, which would only be taxed when sold, helping them stand out in a competitive global jobs market.

Another plus is that companies can choose which EU member state they want to incorporate in: the national labor and other laws of that country will apply and they will be treated equally with any other national company. So, they will get the benefit of full access to the EU single market, while enjoying all the safeguards provided by their country of registration.

Tax and regulation: hurdles remain

However, the simplification promised by the EU Inc regime only goes so far. Since it focuses primarily on company law, it currently makes no provision for easing the burden of disparate tax obligations. Tax harmonization is an extremely contentious issue, so it may be a long time (if ever) that tax barriers to cross-border activities are removed to create transparency, and uniform criteria for determining administrative headquarters are established so double company taxation is avoided. For now, the national tax regimes of member states will continue to apply within the EU Inc framework, meaning that each will retain control over its own tax rates, assessment and enforcement.

The Business in Europe: Framework for Income Taxation (BEFIT) initiative is exploring how to establish a single corporate taxation framework across the EU. However, until a solution is found, companies may simply choose to relocate their headquarters to the jurisdiction with the most favorable tax rates (a move made easier by the simplification brought in by EU Inc). In the meantime, the European Commission has proposed a Head Office Taxation (HOT) system, which would allow small and medium-sized enterprises (SMEs) to apply the tax rules of their country of origin. 

Regulatory harmonization (or lack of) is another issue – particularly in the financial services sector. Importantly, the EU Inc proposals do not offer any form of “fintech passport” or a genuine single license for financial services. Nor do they offer any EU-wide sandbox or “safe harbor” provisions, which are vital for testing innovations under a lighter-touch regulatory framework without compromising market integrity. As such, the new regime falls short of what the sector urgently needs to drive innovation across borders. 

Moreover, questions remain around how and where any legal disputes regarding the new legal form will be decided, and further scrutiny may be required to ensure EU Inc provides a suitable balance between simplification, flexibility and legal certainty.

More to do to drive EU competitiveness

There is much for businesses to welcome in the EU Inc proposals. By offering an opportunity to operate across multiple EU member states through a single corporate structure, with one set of clear and uniform rules, they can be more agile and focus more intently on embarking on and accelerating their growth journey instead of getting tied up in red tape.

But although several of the key barriers to cross-border activity will be lowered, others remain. Unless policymakers also address the fragmentation of tax and regulatory regimes across Europe, and tackle the issue of dispute resolution, progress on enhancing Europe’s competitiveness – recognized as so vital in the Draghi report – may stall. Europe’s continued economic prosperity rests on being seen to be business-friendly: with the EU Inc proposals, it’s getting there, but there’s still further to go.