Frequent Questions - Taxation of the SE
by Martin Wenz, professor at the Institute for Financial Services at the Liechtenstein University of Applied Sciences in Vaduz
Are there any differences in tax treatment between SEs and other public limited companies under national law?
In principle, European as well as national legal forms of business organisation are subject to the same national, European and international laws of taxation without differences. However, a different tax treatment of an SE is possible according to its specific legal structure and/or in the case of a transfer of its seat across borders.
Do SE provisions make Europe more attractive for foreign investment? How far could national tax obstacles be overcome by formation of an SE?
Because of the legal and economic advantages of an SE as such, the different possibilities to use an SE on a European level and the different tax treatment of an SE according to its specific legal structure across borders, the SE Statute makes Europe a much more attractive location for foreign direct investments from overseas.
Does the SE framework contain a special tax regime? How far is it necessary to give SEs their own taxation fundament at EU level to make them run better?
In general, the SE Statute does not contain any provisions on tax law, although the different proposals for an SE Statute in 1970, 1975, 1989 and 1991 contained various or at least one fiscal provision on the tax treatment of an SE. According to a Study by Deloitte in 2004, no discriminatory legislative tax laws should be adopted to improve the fiscal status of an SE compared to similar national legal forms of business organisation. However, a suitable tax framework is needed to solve existing cross-border problems of an SE. Therefore, the Council Directive 2005/19/EC of 17 February 2005 amending the Merger Directive (Amendment Directive) contains a provision with regard to the tax treatment of a cross-border transfer of the corporate seat of an SE – or a Societas Cooperativa Europaea (SCE) – from one EU member state to another.
From a taxation point of view how is the SE related to other EU Directives on company law? For e.g. the 10th Directive on cross-border mergers?
The SE is the European Model and Basis for all future Directives on company law (European compromise). It comprises cross-border aspects, aspects of Corporate Governance and aspects of co-determination. Therefore, one may say that European Company Law is SE Law.
How far could the introduction of the SE increase the attractiveness and competitiveness of European economies?
The aim of the SE is the completion of the European Internal Market. The introduction of the SE therefore increases the cross-border mobility and flexibility of companies and groups within the EU and the EEA, tax competition within the EU and the EEA, the tax attractiveness of EU and EEA member states and the tax competitiveness of EU and EEA member states.
The tax issues regarding the running of an SE are the determination and taxation of income and capital gains of an SE, the taxation of profits of foreign Permanent Establishments of an SE, the taxation of dividends, interests and royalties of an SE Group, transfer pricing issues of an SE Group and the cross-border balancing of profits and losses of an SE entity or Group. Further tax issues are the tax consolidation of an SE Group, thin capitalisation issues within an SE Group, the application of Controlled Foreign Companies Legislation regarding non-active subsidiaries of an SE and the taxation of the shareholders of an SE.
In accordance with the Amendment Directive, the transfer of seat of an SE across borders (including its shareholders) is treated tax neutrally. In this case there is no taxation at all, either in the outbound state or in the inbound state. However, it is necessary that a Permanent Establishment of the transferring SE remains and is subject to tax in the outbound state.
As mentioned before, the SE Statute does not contain any provisions on tax law. With regard to the intention of the “SE being tax neutral”, this means that there should be no discrimination between European and national legal forms of business organisation. Furthermore, according to the provisions of the Merger Directive and the Amendment Directive, an SE gives European companies and groups the possibility of a tax neutral formation across borders and a tax neutral transfer of its corporate seat throughout the EU.
An SE may be used for tax planning purposes because of several tax advantages with regard to its specific legal structure and/or its ability to transfer its corporate seat across borders. One of the tax advantages is the use of a more comprehensive network of tax treaties and the use of the credit versus exemption system to prevent international double taxation. Furthermore, an SE may contain the possibility to offset losses of foreign Permanent Establishments or Subsidiaries from domestic profits in the state of residence of the respective SE. Other tax planning aspects result from the avoidance of 5% add-backs on received dividends from foreign or domestic subsidiaries and of withholding taxes on dividends, interest and/or royalty payments within an SE Group. An SE may also be used for tax neutral transfer of assets across borders between different Permanent Establishments of an SE. Furthermore, the SE is an appropriate instrument for the avoidance or the use of more generous thin capitalization provisions. Other tax advantages are the reduction of the tax burden of future income and capital gains and the avoidance of Controlled Foreign Companies legislation.
The cross-border formation of a Merger SE is treated tax neutrally, on the level of the foundation companies (if a Permanent Establishment remains in the respective outbound states), on the level of their shareholders and on the level of the SE. An SE may also be formed tax neutrally as a Holding SE; at the level of the shareholders of the foundation companies and at the level of the SE the formation is treated tax neutrally. With regard to the Subsidiary SE there are also no taxation issues concerning the level of the foundation companies and the level of the SE. Furthermore, in the case of a Transformation SE formation takes place tax neutrally at the level of the converting company, the SE and at the level of the shareholders.
The relevant EU Directives concerning taxation respected by an SE are the EC Parent–Subsidiary Directive (including Amendments), the EC Merger Directive (including Amendments), the EC Interest-Royalties Directive (including Amendments) and the EC Mutual Assistance Directive (including Amendments).
According to the various national laws of taxation of the 25 EU and the three EEA member states, all kinds of taxes are concerned, for example, taxation of income and capital gains, taxation of substance and taxation of transfers of all kinds.