Back in the 1970s, the European Union started developing the idea of creating a European entity which would owe its existence to the European ideals of integration, freedom and mobility. This idea led to what today still raises eyebrows among legislators and businessmen alike: a transnational company.
The EEIG was created in 1985, but, as in the case of most other novel ideas, bringing this transnational company to life was much more easily said than done. What is the EEIG and why is it useful after the financial crisis?
EEIG stands for European Economic Interest Grouping and is a cross between a company and a partnership. It is intended to provide a flexible mechanism for trans-border cooperation principally between medium sized enterprises. It enjoys separate legal personality but is not itself subject to tax independently of the members that compose it.
It is very easy to form an EEIG: a contract is drawn up by the parties concerned and delivered for registration – there is no requirement as to initial capital and the official address can be anywhere in the EEA. Its objects can be the exercise of any economic activity that is ancillary to the activities of its members. For example, a group of construction workers could come together for tendering of projects to be carried out in Malta or in neighbouring countries.
The EEIG is not itself subject to tax. It is only the members that are liable to tax according to the law which applies to them depending on their domicile and place of establishment. This means that entrepreneurs are spared the headache of tax arbitrage, an element often synonymous with company formation.
Each member has at least one vote but the contract of formation can give more than one vote to certain members, provided that no one member holds a majority of votes.
The members of an EEIG can be natural persons or legal entities within the EEA with at least one member coming from a different member state. The members of the EEIG remain unlimitedly jointly and severally liable for the debts of the EEIG but creditors may turn to the members of the EEIG only if the property belonging to the EEIG is not sufficient to satisfy its debts.
For those put off by the idea of unlimited liability, this can be overcome by having economic operators participating in an EEIG via a legal structure, for instance a limited company. Their liability is then limited to the capital of this company. Put simply, the whole point of the EEIG is to constitute and encourage cooperation between European entities, for them to compete more effectively and to create economies of scale.
Because of its inherent flexibility, the EEIG allows its members to adapt to changing economic circumstances. One of the major consequences of the 2008 financial crisis is that EU legislators will aim to reduce the element of choice in the corporate law-making field. Malta, being one of the ‘friendlier’ jurisdictions in setting up a company may potentially be hit hard by this.
In this scenario companies formed between European persons in the EU may discover that costs for complying with these regulatory obligations will rise considerably so that it is no longer as profitable to operate in one country as opposed to the other. Having the option of transferring one’s seat and applicable law will therefore become more important than ever before.
However, the efforts needed to transfer one’s seat can, particularly in cases where redomiciliation is not permitted, be quite significant, in some cases requiring dissolution and reconstitution elsewhere. This may be avoided by having a body enjoying European nationality like the EEIG.
This is because one of the major benefits attached to the EEIG is the relative ease with which the EEIG can transfer its official address: that is, by simply moving its head office to another EEA state. If the official address is transferred, the grouping is de-registered and re-registered on the new register and it will thereafter be governed by the internal law of the new official address. There is no need for a winding up to take place. The EEIG therefore gives one the option of disconnecting from aspects of domestic law while making substantial savings and avoiding complex procedures.
The EEIG provides European businesses with a solid framework for participation and is particularly useful in public calls for tender. There is no doubt that the EEIG’s initial non-acceptance in the business world is bound to change and, as has always happened following a major crisis or corporate scandal such as Enron and Parmalat, the risk of radical legislative reform is now higher than ever. This risk can be reduced through the use of European corporate structures such as the EEIG.
This article is not intended to offer professional advice and one should not act upon the matters referred to in it without seeking specific advice.
Dr Ciantar is an associate at Fenech & Fenech Advocates specialising in European Law.
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