Contents

Executive Summary. 3

1. Introduction.. 5

2. procedural issues and consultation of interested parties. 6

2.1. Procedural issues. 6

2.2. External expertise and consultation of interested parties. 6

3. Policy context. 7

3.1. Scope. 7

3.2. Nature and size of the market concerned. 8

4. Problem definition.. 10

4.1. Context. 12

4.2. PROBLEM: Burden for SMEs to set-up a subsidiary or a group of subsidiaries abroad. 13

4.2.1. Problem and its drivers. 13

4.2.2. Costs of establisHing subsidiaries abroad. 15

4.3. CONSEQUENCE: Low participation of SMEs in the Internal Market. 17

5. Baseline scenario, the EU's right to act and justification.. 19

5.1. Baseline scenario: expected developments if no action is taken. 19

5.2. EU’s right to act, subsidiarity and proportionality. 22

6. Objectives. 23

7. Policy Options and the analysis of IMPACt. 23

7.1. Discarded options. 24

7.2. Retained options. 25

7.2.1. Registration process. 27

7.2.2. Minimum capital 33

8. The Preffed options. 39

8.1. the Prefferd options and their Impacts. 39

8.2. the choice of instrument. 41

9. Monitoring and evaluation.. 42

Annex. 43

1. Tables. 43

2. Calculations. 45

3. The legal requirements for the establishement of single-mebmer companies across the eu and recent national reforms 49

4. Summary of Responses to the Public Consultation on the Single-Member companies. 59

Executive Summary

Executive Summary Sheet

IA on Single-Member Limited Liability Company

A. Need for action

Why? What is the problem being addressed?

SMEs still find it costly and difficult to be active across borders and only a small number of SMEs invests abroad. This is due to many factors, including the diversity of national company laws. Establishing a subsidiary abroad involves costs of meeting legal and administrative requirements in other countries, which are frequently different to what companies are used to “at home”. These include, for instance, necessary legal advice and translation costs. Those costs are likely to be particularly high for groups of companies since any SME parent company is faced with different requirements for each subsidiary it tries to establish in another MS.

What is this initiative expected to achieve?

The overall objective would be, through changes to national company law, to make it easier for SMEs to create subsidiaries, in particular abroad. This should encourage more entrepreneurial activity and, in turn, have a positive impact on growth, innovation and jobs in the EU.

What is the value added of action at the EU level?

It is very unlikely that MS would provide without EU intervention for national company law forms with identical set-up and operational conditions. Despite the reforms of national company laws, legal differences between MS still remain with regard to, for instance, the amount of minimum capital, articles of association or registration time and fees. This acts as a constraint on SMEs’ investment abroad. Only an EU-wide regime could help to overcome these problems.

B. Solutions

What legislative and non-legislative policy options have been considered? Is there a preferred choice or not? Why?

The IA discards at the beginning a number of options due to the lack of their feasibility and/or support from stakeholders. The retained options concern the creation of national company law forms for single-member private limited liability companies with harmonised conditions, in particular with regard to the registration process and minimum capital. The preferred choice are the policy options that provide for the possibility of on-line registration with the uniform template of articles of association and with minimum capital requirement of €1 accompanied by balance sheet and solvency statement. Compared to the other policy options it provides the best balance of effectiveness in achieving the objectives (reduction of costs for companies), efficiency and coherence with EU policies

Who supports which option?

In the 2012 consultation on the European company law a majority of stakeholders (including public authorities, trade unions, business, investors, academics) were in favour of exploring alternative measures to the European Private Company (SPE) Statute to help SMEs. These included harmonised legislation to promote EU SMEs, a revision of the European Company Statute or the creation of a simplified single-member company charter. In the 2013 consultation on single-member companies 74% of companies and business federations considered that the harmonisation of rules for single-member private limited liability companies could facilitate cross-border activities of SMEs. 79% of companies and 68% of business federations considered that such an initiative should include rules for on-line registration with one standard registration form throughout the EU.

C. Impacts of the preferred option

What are the benefits of the preferred option (if any, otherwise main ones)?

The preferred policy option would increase uniformity of requirements across the EU and, therefore, provide more legal certainty with respect to the establishment of single-member private limited liability companies. It would also reduce costs of setting up and operating such subsidiaries abroad. According to the estimates carried out for the purpose of this IA, the cost reduction for the founders of single-member private limited liability companies in one year in the EU could range from €236 to 653 million.

What are the costs of the preferred option (if any, otherwise main ones)?

The preferred policy option would lower the minimum capital requirement in 12 MS that currently have requirements higher than €1. In some of those countries it could result in a decrease in national revenue from the registration process. This option would also introduce costs (between de minimis up to €100,000 or more) for MS with regard to the establishment of a direct on-line registration procedure and making the single template for articles of association available to companies. However, this should not lead to an unreasonable burden as national authorities would need to adapt the already existing national on-line registration systems rather than creating new ones. In addition, costs would be one-off versus the resulting permanent benefits for companies.

How will businesses, SMEs and micro-enterprises be affected?

This initiative aims at facilitating cross-border business for SMEs by reducing costs they face when setting up and operating subsidiaries abroad and by providing them with more legal certainty. At the same time, bigger companies could also profit as "parents" of groups of subsidiaries across the EU.

Will there be significant impacts on national budgets and administrations?

The costs of implementing the proposed rules at national level would depend on the existing level of minimum capital and the digitalisation of national company registration processes. For many MS that already have direct on-line registration procedures and minimum capital requirements of €1, the costs should be low. The costs for other MS should not be excessive and are described in the section on costs above.

Will there be other significant impacts?

All the relevant impacts of the preferred policy option are described above.

D. Follow up

When will the policy be reviewed?

The Commission will monitor the implementation of the preferred policy option, gather information on the relevant issues and will assess in due time the progress achieved according to the objectives set (including, for instance, how the proposal was implemented in national laws, changes in the costs of set-up and operation of subsidiaries abroad and any remaining practical problems).

1. Introduction

European SMEs - small and medium-sized enterprises - have an essential role to play in strengthening the EU economy. However, they still face a number of obstacles, which hamper their full development within the Internal Market, and therefore, their full contribution to the EU’s economy.

Improving the business environment for companies and notably for SMEs is one of the key priorities in the EU’s ten-year growth strategy, the Europe 2020[1]. In particular, a number of SME-relevant actions were set out in the Communication on “An Integrated Industrial Policy for the Globalisation Era”[2], one of the Europe 2020’s seven key flagship initiatives. The review of the Small Business Act[3] and the Single Market Acts I[4] and II[5] also included actions focused on improving access to finance and making further efforts to reduce the costs of doing business in Europe.

From the perspective of company law, SMEs still find it costly and difficult to be active across borders and only a small number of SMEs invests abroad. The reasons include the diversity of national legislations, including differences between national company laws, and the lack of trust in foreign companies among customers and business partners. The lack of trust is one of the reasons why SMEs establish in other Member States (MS). They often establish subsidiaries as these provide customers with the brand and reputation of the parent company but also offer the security of dealing with a national, and not a foreign, company law form. Establishing abroad involves the costs of meeting legal and administrative requirements in other countries, which are frequently different to what companies are used to “at home” (including the necessary legal advice and translation costs). Those costs are likely to be particularly high for groups of companies since any SME parent company is faced at present with different regulatory requirements in relation to each subsidiary that it tries to establish in different MS.

The Commission aimed to address these obstacles in its 2008 proposal for a European Private Company Statue (SPE). In view of the withdrawal of the SPE proposal, the Commission continued to reflect on the potential follow-up or alternative measures to provide simple, flexible rules across the EU specifically suited to the needs of small and medium companies. The 2012 Action Plan on European company law and corporate governance[6] reaffirmed the Commission’s resolve to build on the work carried out in the preparation of the SPE proposal by further initiatives to enhance cross-border opportunities for SMEs.

This Impact Assessment (IA) analyses options for overcoming some of the above-mentioned problems that SMEs, and other companies, face when doing business within the Internal Market. It focuses, in particular, on difficulties in relation to the establishment and operation of subsidiaries abroad.

2. procedural issues and consultation of interested parties 2.1. Procedural issues

This IA was drawn up by Directorate-General for Internal Market and Services (DG MARKT)[7]. An IA Steering Group (IASG) was set up to bring in views of other services of the Commission. DG Research and Innovation, DG Justice, Secretariat General, DG Taxation and Customs Union, DG Health and Consumers, DG Enterprise and Industry and DG Communications Networks, Content and Technology accepted the invitation. The IASG met 3 times. The first meeting took place on 18 April 2013, the second - on 16 September and the third - on 30 September 2013.

The draft IA report was discussed with the IA Board (IAB) of the Commission on 20 November 2013. The comments received from the IAB are reflected in the updated report by the modification of the sections regarding:

- the problem definition and problem tree

- the size of the market

- the policy options and their impacts by using the criteria of efficiency, effectives and coherence.

In addition, the description of the situation in Member States was converted into tables and the summary of the results of the 2013 on-line consultation was added. The explanations and the tables on which calculations of impact are based were moved into the Annex.

2.2. External expertise and consultation of interested parties

This IA builds on the research gathered in the preparation of previous EU initiatives such as the 2008 SPE proposal and a number of relevant consultations and discussions which took place since then.

As a part of the reflection process on the future of EU company law, in April 2011 the Reflection Group of company law experts published a report with a number of recommendations.[8] The report called for intensified efforts to simplify the legal regime applicable to SMEs. In this context, it mentioned the need to simplify the formalities before a company can be established (e.g. registration, access to electronic procedures). It also proposed to introduce a simplified template for single-member companies across the EU, which could allow both single shareholder start-ups and holding companies with wholly owned subsidiaries to save on transaction costs and unnecessary formalities.

On that basis, the Commission launched a broad public consultation on the future of European company law in February 2012. Among others, it asked for stakeholders’ opinions regarding potential measures to provide further support at EU level to European SMEs. Nearly 500 responses were received, from a broad range of stakeholders including public authorities, trade unions, business federations, investors, academics and individuals. A vast majority were in favour of Commission actions supporting SMEs, but differed as to the means to achieve it. For instance, stakeholders were hesitant about the political feasibility of continuing SPE negotiations. For them the alternative measures were, in order of preference, new legislation which could promote EU SMEs (e.g. via labelling), a revision of the European Company (SE) Statute and a review of 12th Company Law Directive to create a simplified single-member company charter.

The Commission has also benefited from input from company law experts involved in the Reflection Group, e.g. as regards advice on the key aspects of the potential future Directive on single-member companies.

A more focused public on-line consultation was launched in June 2013[9] on whether the harmonisation of national rules on single-member companies could provide companies, and in particular SMEs, with simpler and more flexible rules and reduce their costs (the 2013 on-line consultation). 242 responses were received from a broad range of stakeholders including companies, public authorities, trade unions, business federations, universities and individuals. 62% of respondents who expressed an opinion (including 75% of companies and 52% of business federations) answered positively to the question whether a harmonisation of requirements concerning single-member private limited legality companies at EU level would encourage and facilitate cross-border activity of SMEs within the EU.

On 13 September 2013, DG MARKT met a number of EU business representatives[10]. Most participants supported the initiative emphasising the positive impact it could have on companies in the EU. However, they stressed that this initiative should not be considered as a fully-fledge alternative to the SPE and that the efforts to adopt the SPE should continue. Other stakeholders, such as notaries, were generally supportive of the initiative, but raised specific points with regard to the security of on-line registration of companies and the need to guarantee the appropriate level of control. In addition, in view of some stakeholders, the reduction of minimum capital should be accompanied by appropriate measures e.g. solvency test or restrictions on the distribution of dividends.

3. Policy context 3.1. Scope

In order to understand the focus of this initiative on single-member limited liability companies as a company law form suitable for the needs of SMEs participating in the Internal Market, it is essential to present the broader context in which SMEs and other companies operate across borders. This is covered in sections 3.2 and 4 of this IA.

Single-member companies have a sole member either already when they are formed or when all their shares come to be held by a single person.[11]

Single-member companies are often “wholly-owned subsidiaries” of other companies, i.e. those companies are their sole shareholders (members). Generally, a company is a “subsidiary” of another company if the latter:

· holds a majority of the voting rights in it, or

· has the right to appoint or remove a majority of the members of its administrative, management or supervisory bodies, or

· has the right to exercise a dominant influence over the former company.[12]

3.2. Nature and size of the market concerned

SMEs are the backbone of EU economy. The Commission’s annual report on SMEs in the EU estimated that in 2012 there were around 20,7 million SMEs, constituting more than 98 % of all enterprises[13]. They accounted for 67 % of total EU employment and for 58 % of EU gross value added.

SMEs, and other companies, can choose legal forms through which they develop their economic activities and participate in the Internal Market. The principal choice depends on the scope of protection of private assets against risks related to conducting business. Businesses can operate with limited liability or with unlimited liability (sole traders, civil partnerships etc.). Limited liability companies can have two types:

private limited liability (e.g. GmbH, SARL, spółka z.o.o.) or public limited liability (joint stock, e.g. AG, SA, NV).

The form of a public limited liability company was originally developed with bigger companies in mind. Those companies are often subject to more detailed internal organisational rules and higher minimum capital requirements, and can be listed on the stock exchange or on other platforms where shares are traded publicly.

The private limited liability company form was originally designed for smaller companies and its requirements are usually less demanding. Therefore, the latter tends to be more often used by smaller businesses, although this might vary across MS. In some countries a public limited liability company law form might be practically not accessible to SMEs and in others, a large number of SMEs might use it.[14]

Private and public limited liability companies are national company law forms, different in each MS, that have only been partially harmonised at EU level. In addition, there exists to date only one truly European company law form – Societas Europeae (SE). It provides a European equivalent to national public limited liability companies and therefore, an alternative to national rules.

Both private and public limited liability company forms, including SE, can have one shareholder and be single-member companies.

The diagram below illustrates different company law forms and provides an approximate overview of how many companies are likely to be SMEs. However, it needs to be stressed that there is no official estimation of how many out of 20.7 million SMEs in the EU are established as limited liability companies (private or public). Therefore, the below diagram makes some assumptions about numbers of SMEs on the basis of statistics available in other contexts and the data gathered from national authorities specifically for the purpose of this Impact Assessment. In 2010 it was estimated that there were 7.3 million SMEs with limited liability.[15] Currently, it is estimated that there are around 13.9 million private limited liability companies in the EU.[16] In 2010 the proportion of SMEs among limited liability companies was very high (around 90%)[17] and it is assumed that this proportion has not changed in the meantime. Therefore, one could assume that around 12.5 million companies with limited liability are likely to be SMEs. The remaining 8.2 million SMEs are likely to be unlimited liability enterprises (mainly civil partnerships or sole-traders).

The proportion of public limited liability companies among all limited liability companies is low. The 2005 survey of the European Commerce Registers’ Forum, prepared by the Swedish Companies Registration Office[18], estimated that only around 6% of all limited liability companies were public in the EU (25). This percentage is also used in the diagram above to show how many public limited liability SMEs are likely to exist. More recent information (from 2011 and 2012) shows that this proportion still remains low. For instance, in Germany it is around 1.5% (16.400 public limited liability companies out of 1 million of all limited liability companies). The proportion is even lower in the UK – 0.3%.[19]

With regard to the number of single-member companies, it is difficult to obtain precise figures since in some MS single-member companies are not a separate company law type and, therefore, are not independently listed in business registers. In the UK, for instance, there are around 1.2 million single member companies out of around 2.5 million of all limited liability companies[20]. In Austria, there are 66,500 single-member companies out of 127,400 private limited liability companies[21]. Although the percentage of single-member companies out of all limited liability companies varies significantly among MS – from very low in Spain and in Malta (less than 15%) to more than 70% in the Netherlands - it is estimated on the basis of the data provided by national authorities from 24 MS that around 44% of all private limited liability companies are single-member. Therefore, assuming that there are 13.9 million private limited liability companies in the EU, around 6.1 million of those are likely to be single-member (including both SMEs and bigger companies). Similarly, as regards SMEs, assuming that there are 11.75 million private limited liability SMEs, 5.17 million of those are likely to be single-member.

The percentage of single-member public limited liability companies among all single-member limited liability companies is very low (around 1% at EU level)[22] which corresponds to the generally low proportion of public limited liability companies among all limited liability companies, as mentioned above.

4. Problem definition

The problem tree below illustrates the context of the initiative, its main drivers, the problem and its consequences.

4.1. Context

The Internal Market opens up possibilities for businesses to be active across borders and therefore, allows consumers to choose from a wider range of products and services. At the same time, due to imperfect knowledge, information asymmetry or information overload, trust and familiarity with companies that customers know still play an important role.

In this context, a "country of origin effect" can be observed among consumers who often compare foreign firms with the service and reputation of the companies established in their own country.[23] The main reasons why consumers might not feel comfortable with foreign companies include psychological and practical implications of applying foreign consumer protection law, dealing with complaints, language issues and the costs of return of products.[24] This is confirmed by the results of the 2012 Commission Consumer Scoreboard[25] according to which consumers trusted local retailers/providers more than the ones from other MS. For instance, only 11% purchased goods from retailers/sellers located in other EU countries, whereas 41% bought from national operators.[26]

A similar picture emerges from the business perspective and shows the need for companies to be close to the markets in which they want to do business and in particular to be close to consumers. In the 2007 European Business Test Panel survey of companies[27], 43% of respondents indicated that operating in another MS under their domestic legal form made it more difficult to penetrate markets and gain trust of consumers and business partners. The same survey, as well as the 2011 study on Internationalisation of European SMEs[28], also show that the prime reason for SMEs investing abroad was geographic: to be close to final customers or key business partners.[29]

Even with the development of on-line sales (which, in principle, should help sellers to operate without establishing a company abroad), a presence abroad still plays an important role for companies. In fact, the current proportion of e-commerce in retail sales of European SMEs - even if gradually rising - is at present still limited (3,4 %[30]). Most retailers in the EU continue to use direct sales as their main retail channel (66 %)[31] and still treat the on-line business as a complementary one.[32] In addition, as shown by the results of the 2012 Consumer Scoreboard, while the majority of the EU population (59.2%) feel confident making domestic purchases via the Internet, a much lower percentage (35.4%) expresses confidence about cross-border purchases. Moreover, as far as actual purchases are concerned, the gap of consumers' trust between national and foreign retailers is even bigger. For example, in Germany and in the UK only 9 and 13% of consumers, respectively, purchased goods from a provider located in another EU country.

There are a number of ways in which companies ensure their presence close to their clients. Many companies act via subsidiaries, branches and joint ventures.[33] Among those, the most popular form appears to be a subsidiary (42% of investment abroad) since it allows companies to control activities and profits gained abroad while creating a new legal form in the MS of investment.[34] It shields a “parent” company from liability which is important in case of entering a new market.

In contrast to branches and joint ventures, acting via subsidiaries offers clients the brand and reputation of the parent company, but at the same time the security of dealing with “their national” company. Subsidiaries, in contrast to branches, are separate companies with their own legal personality which means that they are governed by the laws of the place of registration as regards important issues for consumers such as insolvency or consumer protection laws.

It follows that companies often need a presence in the foreign markets in order to be active abroad and gain trust of consumers. For those reasons they mainly invest abroad through subsidiaries. Therefore, this IA focuses on the problems that companies encounter when they try to set up and run subsidiaries in other EU countries.

4.2. PROBLEM: Burden for SMEs to set-up a subsidiary or a group of subsidiaries abroad 4.2.1. Problem and its drivers

The founders of companies face internal and external barriers when they attempt to establish a subsidiary or a group of subsidiaries abroad.

Internal barriers relate to companies themselves, e.g. the lack of will or capability (financial, human resources, language) to participate in cross-border activities.[35] However, these barriers remain outside the scope of this IA.

External barriers are independent of companies and relate to differences in national regulatory regimes, different legal, administrative and linguistic requirements across the EU, and other issues such as accessibility of external funding. The former differences concern company law but also rules relating to, for example, tax, social security, insurance or labour laws which are outside the scope of this IA. Within company laws sensu largo audit and accounting rules are also outside the scope of this IA, since they have been subject to separate initiatives.[36] As regards the accessibility to funding, it seems from the results of the 2013 online consultation that it might not always have decisive influence on establishing subsidiaries abroad. For instance, compliance costs, trust in foreign company law forms or legal advice are seen by the companies as much more important than difficulties in having access to finance due to cross-border dimension.[37]

As regards company law in particular, most aspects of relevance for private limited liability companies (that constitute around 94% of all limited liability companies in the EU) have not yet been harmonised at EU level. Therefore, there persist differences between MS’ company laws and when founders establish companies abroad they face different legal and administrative requirements than “at home”. These differences result in costs for companies to set-up and run subsidiaries abroad. Although all companies wishing to expand cross-border are affected, these administrative and legal burdens are proportionally much heavier for SMEs and their founders, who often have smaller financial means and organisational resources than larger companies.

The costs can be direct and indirect. In this IA direct costs are understood as set-up costs primarily being generated by mandatory national legal and administrative requirements when establishing a company in a given country. These costs usually include administrative costs, and also notary fees and minimum capital requirements, where relevant.

Concerning the minimum capital requirement, this normally depends on the sector in which a future company would be active. In some sectors small or almost no capital is necessary to start business whereas other sectors could be very capital intensive. Therefore, a minimum capital requirement, at least, for some entrepreneurs, could constitute a cost, even if the capital could be transformed into assets and used by the company for running business. For some entrepreneurs this would be the cost of borrowing the required sum; for others that do not have such a possibility, minimum capital requirement would simply discourage them from setting-up a business.

The direct costs apply equally to national and foreign founders of companies but vary across MS, and therefore, can be perceived as barriers to invest abroad if they are significantly higher than what the founders of companies pay in their own country.

The indirect costs are understood in this IA as those predominantly connected with the differences between MS’ laws with regard to set-up and operational requirements on articles of association, organisation and structure of companies, compulsory annual meetings, reporting requirements, etc. These issues often necessitate legal advice (and translation) and would usually have more impact on foreign than national founders of companies, leading to higher costs for the former. Lengthy registration procedures also result in costs for the company founders, especially if they require dedicated travels from foreign countries to comply with formalities in Member States of registration.

The compliance with foreign legislation and legal advice related to set-up costs were mentioned by almost 62 % of companies and business federations in the 2013 on-line consultation as one of the biggest “company law obstacles”[38] preventing companies from expanding their activities abroad.[39] The trend has not changed since 2007, when the survey conducted for the purpose of the SPE initiative showed that for more than 60% of respondents the diversity of national legislations and the difficulties in dealing with different company law systems were the biggest obstacles to conducting business in other MS.[40]

The direct costs are, therefore, the costs of regulation which applies to all founders who want to establish a subsidiary in a given MS whereas the indirect costs are the costs of differences in regulation among MS which are more relevant for foreign founders. Ultimately, the expense of establishing a subsidiary abroad would be the sum of direct and indirect costs.

All these costs are generated if a founder wants to establish one subsidiary abroad. In case a parent company would like to create a group of subsidiaries (“daughter-companies”) in different MS, the costs would be bigger (the effect of scale). As a result of divergence in MS’ regulatory requirements, the group cannot optimise its structure across all subsidiaries and each of them has to have different articles of association.[41]

Example: A company with subsidiaries in 6 MS would have 6 different company forms, each possibly with a different organisational/management structure and a different method of creation. In contrast, a domestic group of comparable size could follow only one model/template.

4.2.2. Costs of establisHing subsidiaries abroad

It is difficult to estimate direct and indirect costs for establishing subsidiaries abroad, since they depend on many factors, including:

the legal form of the subsidiary (public or private limited liability) the complexity of its structure (one or many shareholders) and thus the complexity of its articles of association regulatory requirements in a given MS with regard to set-up and in particular, a possibility of on-line registration, need for a notary, a possibility to use a single-template, mandatory verification by the accountant, the level of minimum capital, etc. founder’s experience in dealing with the legal system concerned, thus a need and a choice of legal advice (internal or external) and/or help of the registration agent knowledge of MS language and thus a need for translation

Therefore, even the direct and indirect costs of establishment of subsidiaries in the same MS can differ significantly depending, for instance, on whether a parent company needed external legal advice, had previous experience with the legal system concerned or knew the language.

This is demonstrated by different experiences reported in the 2013 on-line consultation.[42]

Two Estonian companies reported different additional costs of setting-up a single-member subsidiary in Finland (between €1 and 4,999 and between €5.000 to 9,999) as compared to setting-up a company at home. A similar case, in terms of the difference in the set-up costs, was also reported in case of two different Estonian companies establishing subsidiaries in Spain. According to another example, one German company setting-up a single-member subsidiary in Denmark incurred additional costs below €5,000, whereas another Germany company in the same case incurred no additional costs at all.

According to some other respondents to the consultation (a Czech parent company setting up a Slovak subsidiary, a Czech parent company setting up a subsidiary in Belgium, an Estonian parent company setting up a UK subsidiary), on the basis of their practical experience, the differences between the costs of establishing a single-member private limited liability company “at home” and “abroad” could be higher and could amount to more than €20,000.

On the whole, the majority of responding companies (53%) were not able to provide any figures as regards additional costs when setting-up a single-member private limited liability company abroad. From those respondents that replied to this question, 47% considered the costs to be in the range between €1 and €4,999, whereas 25% in the range of between €5,000 and €9,999.

Some respondents provided examples of specific additional costs of legal advice associated with the set-up of a single-member private limited liability company abroad, which is one of the sources of indirect costs. These costs were estimated by one Belgian parent company which was setting up a subsidiary in France as being in the range between €5,000 and 9,999, whereas another Belgian parent company did not experience any additional costs of creating a single-member subsidiary in Spain.

The legal costs usually depend on whether companies use the standard template for articles of association. In fact, a standard creation of a company in the UK does not necessitate any legal advice since the template for articles of association is provided (the same is the case of on-line registration in Poland). In contrast, in France, according to the respondents to the 2013 on-line consultation, standard costs of legal advice with regard to setting up a company (and its articles of association) could amount to €1000. On the basis of the information submitted by the Member States (see Annex), the average cost of minimum legal advice[43] with regard to the set-up of private limited liability company can be prudently estimated to be around €387 at EU level.[44]

As regards direct costs, the overall costs of creating limited liability companies, in particular private limited liability companies, have been significantly reduced recently in many MS[45]. However, in some countries, even after most recent reforms, the costs could still be considered as high for the founders of companies.

Example: In Austria, the set-up costs, of a private limited liability company amounted to around €36,500 including the full amount of minimum capital.[46] After the June 2013 reform of company law, the same costs decreased significantly but would still amount to €11,000. These costs include the minimum capital requirement, notary fees and register fees.[47] They include a simple legal advice by a notary but do not include the costs of any additional legal advice.

Furthermore, according to the information provided by the authorities, the direct set-up costs of limited liability companies can differ depending on whether companies use on-line or other type of registration. The set-up costs vary from €0 in Slovenia (on-line registration) to up to more than €900 in Austria and in Cyprus. In most countries on-line registration is cheaper than a paper one.

In conclusion, it is difficult to provide exact figures on the standard amount of direct and indirect costs since these costs vary significantly and depend on concrete situations of companies, their size, the capital and the knowledge it has of the foreign legal system. However, the above examples provide an indication that there still exists important differences between MS and that there is a potential of decreasing the unnecessary costs that hinder the establishment of subsidiaries in at least some MS.

4.3. CONSEQUENCE: Low participation of SMEs in the Internal Market

The above-described costs (and effort in terms of time and energy) create burdens for SMEs and hinder their participation in the Internal Market.

According to the available statistics, the SME participation in the Internal Market is low. For instance, according to the report on Internationalisation of European SMEs, only around 2% of SMEs establish companies abroad[48] (in the form of a subsidiary, branch or joint-venture). This results in the investment by around 500,000 companies from 20.7 million SMEs. Among all companies that invest abroad, micro-enterprises[49] constitute 2%, 6% are small enterprises[50] and 16 % are medium-sized[51] enterprises.[52] In addition, most of them limit their investment to only one country (71%)[53].

It is difficult to define what should be the optimum level of investment, since it depends on many factors unrelated to company law such as, for example, the economic growth or general business climate. However, even without making a reference to the optimal level of investment, it seems that companies are not investing enough on a cross-border basis in the EU. For instance, the level of SME participation in the Internal Market was considered as low in relation to their potential by around 86% of respondents (77% of companies and 90% of business federations) to the 2013 on-line consultation that had an opinion on the subject.[54] In particular, 67% of companies and business federations considered that it was difficult to expand commercial activities within the EU by setting-up a subsidiary or opening a branch.

Moreover, such untapped potential can be expressed not only directly in terms of the missed opportunities for cross-border establishment but also indirectly in wider terms of missed opportunities for company creation in the EU, and furthermore – for European growth and employment. Once companies establish in a Member State, they sell their products and services within the EU and interact across borders via different channels with companies and individuals from other Member States, which has impact on growth and jobs within the whole EU.

Example: There are around 10 times less limited liability companies in Poland than in the UK, even if the UK has only 1.7 times bigger population than Poland. Moreover, the establishment of a private limited liability company in Poland is more than 80 times more expensive than in the UK. This shows that at least in some MS there is a clear potential for company creation and the case for the reduction of costs.

A low participation of SMEs in the Internal Market can also have broader implications. The high costs of internationalisation (such as direct and indirect costs described in the previous section) were considered as one of the major barriers to expansion in the recent study on Internationalisation of European SMEs[55]. The lower the entry barrier to set up companies abroad, the more companies are able to provide their goods and services in other countries and therefore the volume of trade and competition in the Internal Market should increase. This should, in turn, have a positive impact on innovation.

The link between internationalisation of SMEs and innovation is particularly striking. The results of the above-mentioned study[56] confirm that companies being active outside their home countries introduce products/services and process innovations more often than non-internationally active companies. Almost 50% of the internationally active companies introduced new products or services in a given period whereas the average for all companies was 32%. A presence in another market requires competitive products. This effect is called “learning-by-internationalisation”.[57] Therefore, the expansion abroad is directly linked with innovation: the more companies expand abroad, the more innovative they have to become in order to compete with foreign products or services.

On the basis of the above, there appears to be untapped potential for SMEs to expand their business activities beyond national borders and to better take advantage of the opportunities offered by the Internal Market.

5. Baseline scenario, the EU's right to act and justification 5.1. Baseline scenario: expected developments if no action is taken

If no new initiative is taken at European level, SMEs, and other companies, will continue to be able to create subsidiaries according to national law and the currently available EU instruments.

EU level

As regards European legal forms, there exists only one European company law form i.e. the European Company (SE). The SE, being a public limited liability company with a minimum capital of €120,000, is not well-suited for many SMEs.[58] Moreover, its methods of formation require the founder to be or to convert itself into a public limited liability company. This significantly reduces the attractiveness of the SE for SMEs, which often consider SE formation as burdensome.[59]

There is currently no European legal form designed for small companies. The 2008 SPE proposal[60] aimed to offer SMEs an instrument facilitating their cross-border activities, which would be simple, flexible and uniform in all MS. It was a response to a number of calls from businesses to establish a truly European form of a private limited liability company. However, despite strong support from the business community, it has not been possible to find a compromise allowing for the unanimous adoption of the Statute among MS[61]. Some other options, e.g. the possibility of using enhanced cooperation, were also explored but have not been successful either. The Commission finally decided to withdraw the SPE proposal as a part of the REFIT exercise[62] and to replace it by an alternative one, on which it might be easier to reach compromise among Member States by changing the adoption procedure and reducing the number of contentious issues.

The European Co-operative Society Statute (SCE)[63] cannot be used either by capital companies due to specificities of cooperatives and therefore is not suitable for the creation of subsidiaries.

As regards the EU secondary legislation, many company law issues of relevance for companies are already regulated, such as the constitution and maintenance of public limited-liability companies’ capital, branches’ disclosure, mergers and divisions, minimum rules for single-member private limited-liability companies and shareholders’ rights. However, these rules often focus specifically on public limited liability companies, and therefore do not simplify the rules for SMEs, or they do not cover some of the issues which make establishing a subsidiary abroad burdensome (e.g. registration procedure).

At EU level there is already a directive on single-member private limited liability companies adopted in 1989.[64] It was amended several times[65] and finally codified in 2009.[66] However, this directive provides only for limited harmonisation of MS’ laws and does not address many key issues such as: formation, registration requirements, creditors’ protection and minimum capital requirements. It only requires that companies may have a single-shareholder (member) in all MS and regulates in two articles the powers of the sole-member in relation to a company (general meeting and contacts recorded in writing). Therefore, this Directive, as it currently stands, has no impact on the reduction of direct and indirect costs for companies.

Furthermore, the implementation of the Services Directive[67] could help to establish subsidiaries insofar as the Points of Single Contact, created by this Directive, would provide the necessary information to the founders. These points could also be used as a single gateway to national web-sites which provide for on-line registration of companies. Nevertheless, the existence of the Points of Single Contact would not reduce the regulatory costs incurred by companies when creating subsidiaries abroad. These Points do not provide companies with harmonised articles of association and registration procedure.

Finally, the implementation of Directive 2012/17/EU on the interconnection of central, commercial and companies’ registers[68] will not have influence on the creation of subsidiaries. This Directive has a different objective: to improve access to information contained in national business registers for EU citizens. It does not facilitate the registration of companies since it neither provides for any European on-line registration nor creates a single European register of companies.

In conclusion, without any additional action at EU level the problems for SMEs, and other companies, are likely to persist and only partial and fragmented remedies are likely to be proposed at national level.

National reforms of company law

Recent policy developments and trends at national level show the improvement of the business environment for European companies, in particular SMEs. A number of MS have introduced reforms simplifying the requirements for limited liability companies.[69]

Many of the reforms focused on reducing the minimum capital and on providing for a reduction of incorporation costs. However, first, not all the reforms go in the same direction: for instance, Slovakia and the Czech Republic plan to decrease the level of minimum capital requirement for certain company types from 2014 onwards, whereas Hungary plans to increase the level of required capital.

Second, even if the reforms in various Member States have, in most cases, a similar objective, the end results differ significantly, as illustrated by national examples in the below box.

Example: In France there is no legal requirement of minimum capital and a company can be established without a notary, whereas in Austria the capital required, after the reform, is still 10,000 € and the involvement of the notary is required. In Poland, the so-called “company 24” (“spółka 24”)[70] can be registered online in 24 hours without any need for a notary, if standard articles of association are chosen as a template. The minimum capital of 5,000 PLN (around € 1,200)[71] should be paid in cash (no contributions in kind). The procedure is easy, but still minimum capital requirement is higher than in simplified company law forms in France, Germany or Italy. In Germany or in Austria there is no possibility of a direct online registration by the founder and the involvement of a notary is compulsory. In Italy the notary involvement is required but it is free of charge for certain founders. In Germany an UG company type can be established with the same minimum capital requirement as in France but there is an obligation to build a legal reserve, which does not exist in France. In the Netherlands there is no requirement of minimum capital for private limited liability companies such as Flexi BV. As a consequence, various formalities, such as a bank statement for cash payment on shares and an auditor’s statement for contributions in kind are abolished.

Moreover, due to different legal requirements, national digital administrative capacities and vested interests, it is still impossible to cheaply and quickly register companies in all MS. The 2010 Council's "Action Plan for a Small Business Act for Europe" already asked MS to bring down start-up times of companies to 3 working days.[72] Similarly, the conclusions of the 31 May 2011 Competitiveness Council included a call to MS "to reduce the start-up time for new enterprises to 3 days and the cost to € 100 by 2012".[73] Yet, in a number of MS it is still not possible to register a company within that deadline. Instead, in 2012 the average time of starting up a private limited liability company was 5.4 days[74], ranging from a few hours in case of an electronic registration up to more than 5 days in case of a paper one. The registration fees in a number of MS have not yet been reduced to the level of €100 either. Even in situations where on-line registration is used, the total fees vary between €0 in Slovenia to more than €150-360 in countries such as Poland or Portugal. Overall, in 2012 only three countries complied with the targets regarding the time, costs and one stop shop related to registering a business (Denmark, Romania and Slovenia).[75]

These examples illustrate that some countries are very advanced and companies can be created cheaply and quickly with low capital at the start whereas that is still impossible in other Member States. They also show that actions are taken by MS autonomously in their own national context, which means that the requirements concerning the formation, registration and operating of companies still continue to differ. This is also likely to remain the case with potential future national reforms.

On the basis of the reforms undertaken autonomously by Member States so far and any future planned developments, it would still not be possible to have identical requirements for a particular company type across the EU and award a label that would be recognised across the EU.

5.2. EU’s right to act, subsidiarity and proportionality

The EU competence in the area of company law is based on Article 50 of the Treaty on the Functioning of the European Union (TFEU) regarding freedom of establishment. In particular, Article 50(2)(f) TFEU provides for progressive abolition of restrictions on freedom of establishment as regards the conditions for setting-up subsidiaries.

The solutions adopted so far by individual MS with regard to the reduction of set-up costs have not been so far coordinated at EU level. Such coordination among Member States, which would aim at introducing in national legal systems identical requirements for a particular national company law form, although theoretically possible, also appears unlikely in the near future. Instead, it is likely that individual actions by MS will continue to result in divergent outcomes, as illustrated in detail in the section on national reforms of company law above.

In particular, individual actions by Member States most often focus on their specific national context and usually would not seek to facilitate the cross-border establishments. For instance, a requirement of a physical presence before the notary or any other authority of MS of registration, although not directly discriminatory, has a different impact on residents and non-residents. The costs for foreign founders are likely to be more significant than for domestic founders. Also, on-line registration accessible in practice only to nationals or residents, which appears acceptable in the national context, would generate costs for foreign companies, which are not incurred by domestic ones.

In the light of the above, it appears that, without any action at EU level, with only non-harmonised national solutions being available, SMEs would continue to face barriers making their expansion abroad more difficult and the resulting costs would in particular affect foreign founders. The simplification resulting from harmonised rules is unlikely to be achieved by MS acting individually. In this context, the targeted EU intervention appears to comply with the principle of subsidiarity.

The principle of proportionality will be analysed in sections dealing with policy options.

6. Objectives

The general objective of the future initiative would be – through changes to national company law rules - to facilitate and encourage SMEs to carry out their activities in other MS and therefore, seize the untapped opportunities offered by the Internal Market. Allowing companies to more easily create subsidiaries abroad should encourage more entrepreneurial activity and in turn, might have a positive impact on growth and innovation in the EU.

The future initiative should particularly benefit SMEs, given their economic importance and the difficulties they face when trying to be active across borders. However, it should be attractive not only to individual SMEs, but also to groups consisting of SMEs and larger companies.

The specific objective would be to contribute to the reduction of some direct and indirect costs related to the set-up of subsidiaries in other MS.

The operational objective would be to harmonise some relevant aspects of national laws in order to reduce the differences in legal and administrative requirements between MS when setting up subsidiaries abroad.

The hierarchy of objectives is illustrated by the following graph.

7. Policy Options and the analysis of IMPACt

This section contains a description of policy options that have been considered with regard to attaining the objectives set out in the previous section: those that have been discarded after an initial analysis and those retained for a more detailed evaluation. For the latter, the analysis of impacts focuses on the extent to which they would fulfil the targeted objectives, their proportionality, their efficiency and coherence with EU policies.

These options follow the logic of company law in which, at its present stage of development, the discussion on the substance of the options is inseparably linked with the company form chosen (e.g. public or private limited liability companies, single-member or multi-shareholder). The options focus at the same time on the specific and operational objectives i.e. on the comprehensive reduction of differences in legal and administrative requirements between MS with regard to the set-up of subsidiaries abroad, which should lead to a reduction of direct and indirect costs for the founders.

7.1. Discarded options

The following options have been discarded:

Establishment of a new European legal form or improvement of the existing ones (e.g. SE) Harmonisation of company law related to the establishment of subsidiaries limited only to SMEs as founders Harmonisation of company law related to the establishment of subsidiaries in the form of both public and private limited liability companies.

The current IA follows a similar logic and considers similar policy options to the ones presented in the SPE IA (e.g. harmonisation of various aspects of company law across the EU). However, there are some differences.

First, a starting point for this IA is broader, since subsidiaries can be established both in the form of public and private limited liability companies whereas the SPE IA focused specifically on the latter.

Second, the current IA does not analyse the possibility of using European legal company forms adopted on the basis of Article 352 TFEU - either improving the existing ones (SE or SCE) or introducing new ones. The SE and SCE Statutes are not well-suited to the needs of SMEs and it has not been possible to find agreement allowing for the unanimous adoption of the SPE proposal among MS (see section 5.1).

Third, an option providing special rules only for SMEs is discarded. Introducing a distinction between SMEs and other founders of companies would neither be practical nor desirable. It would depart from the common practice in company law that different rules apply to different company forms, but not to the size of enterprises which can change from time to time.[76] Moreover, excluding natural persons and bigger companies would unnecessarily limit the scope of the measure without any reasonable justification. Finally, since there is no one common legal definition of SMEs in EU law, the discussion on the substance could be undermined by a difficulty to reach agreement on this point. By providing rules suitable for SMEs in options 2 and 3 below, the Commission would cater for the concern expressed in the 2013 on-line consultation that a potential initiative should include special rules for SMEs. In any event, 78% of companies were in favour of an initiative specifically for SMEs but 52% of business federations and MS, all trade unions and 90% of universities were against it. This is also in line with the developments in MS, since if there are special rules being introduced at national level, they grant favourable treatment to natural persons as the founders, and not to SMEs.

Fourth, the option aiming at the full harmonisation of company law related to the establishment of subsidiaries is also discarded. Such an extensive harmonisation would have to concern any company law form in which subsidiaries operate, e.g. both private and public limited liability companies. Yet, the differences of rules between public and private limited liability companies are significant since public limited liability companies, in contrast to private ones, can and often offer their securities to the public[77].

For example, as regards the minimum capital requirement, according to Directive 2012/30/EU it shall not be less than € 25,000 for a public limited liability company whereas much lower amounts apply in general to private limited liability companies. Therefore, creating one set of rules for both types would not be realistic or desirable. It was also the view of the majority of stakeholders (business federations, universities, trade unions and public authorities) in the 2013 on-line consultation. They considered that the initiative should not cover public limited liability companies.

In any event, such a harmonisation would not be proportionate. It would go beyond what is necessary to achieve the objectives set, i.e. to primarily benefit individual SMEs or groups consisting of them, since SMEs in the overall majority of cases are private limited liability companies (see section 3.2). Lastly, an extensive harmonisation would require substantial changes in the national frameworks and would, therefore, run into strong opposition from MS.

7.2. Retained options

This section first focuses on the scope of harmonisation and then analyses different policy options as regards its content, since the substance is closely related with the chosen company law form

Scope

In view of the above reasons for discarding options in point 7.1., the retained options should concern the company law form that would have the most impact with regard to the establishment of subsidiaries abroad.

One of the decisive factors when establishing a subsidiary is the desire of a parent company to equip a "daughter company" with a separate legal personality while keeping, as a parent, the full control over the subsidiary and its profits. The single-member (wholly-owned) subsidiary would be a natural choice for a "parent" company if it wants to expand its business abroad or in its own country. The "parent" company, being a single shareholder of a subsidiary, would then exercise the fullest possible control over the management and the profits. Due to these characteristics there is some evidence that single-member (wholly owned) subsidiaries perform better than joint ventures with local companies[78], in which case the cooperation with foreign partners might be difficult due to cultural differences or different business visions or strategies.

Single-member companies can be established both by SMEs and larger companies and can be used for creating a group/holding of SMEs with subsidiaries in many countries. In fact, studies show that the probability of establishing a single-member company does not necessarily increase with the size of a founding company.[79] Instead, it is linked to the structure of the business, i.e. companies have to rely upon suppliers and service providers and often take control of their supply chain by establishing wholly-owned (single-member) subsidiaries. For example, a car manufacturing company could have several wholly owned subsidiaries supplying it with different car parts in order to be independent of external contractors.[80]

The above explanation shows that it would be appropriate to focus the harmonisation of company law related to the establishment of subsidiaries on single-member private limited liability companies in order to achieve the objectives of the measure, since, in most cases, subsidiaries tend to be wholly-owned by a single-member being another company. Such an initiative could also have a more general positive impact on increasing entrepreneurship since, in addition to single-member private limited liability companies being created by legal persons, some may also be created by natural persons as start-ups.

Content

Such harmonisation would ask Member States to provide in their national legal orders for a national company law form that would follow the same rules in all Member States and would have a common label - SUP (Societas Unius Personae). 57% of stakeholders in the 2013 on-line consultation (53% of companies and 67% of business federations) supported such an EU-wide abbreviation.

In practice, it would depend on MS whether a new national company law form would co-exist with other national company law forms that could be used by the founders of single-member private limited liability companies or whether the “harmonised form” would be the only single-member form available in that MS. In case MS decide to have more than one “single-member company law form”, it would depend on the founders themselves whether they would find the SUP attractive to use.

This approach is in line with the views expressed by Member States in discussions with the Commission. The majority of them would like to keep their national company forms, which would be possible in the proposed model. The concerns of the other MS who were afraid of “too much choice” in company law forms were also taken into account by allowing MS to create only one form that would be available for single-member private limited liability companies.

For this initiative, the following policy options have been considered as regards its content:

Registration process

1. No policy change – baseline scenario

2. Model A – registration of an SUP only possible on-line

3. Model B – registration of an SUP possible both on-line and on paper

4. Model C – the same as model B but with the compulsory use of the template of Articles of Association when the company is registered on-line

Minimum capital

1. No policy change – baseline scenario

2. Model A – Minimum capital requirement equivalent to the EU average

3. Model B – Minimum capital requirement equivalent to € 1

4. Model C – the same as model B but with the introduction of balance sheet test and solvency statement to protect creditors

The options will be compared by listing their benefits and costs and using the following criteria.

Effectiveness - the extent to which options achieve the objective of the proposal Efficiency - the extent to which objectives can be achieved for a given level of resources/at least cost Coherence – the extent to which options are coherent with overarching objectives of EU policy, and the extent to which they are likely to limit trade-offs across the economic, social and environmental domain.

7.2.1. Registration process

Option I. 1. No policy change

Description

In 16 MS there is a possibility of direct on-line registration via digital accounts without the necessity of the prior involvement of a notary/attorney. This is the case in Bulgaria, Denmark, Estonia, Finland, France, Ireland, Latvia, Lithuania, Malta, Poland, Portugal, Romania,[81] Slovakia, Slovenia, Sweden and the UK.[82]

In most of these countries there seems to be no formal, company law related restriction with regard to the nationality or residence of the founder. However, in many cases the use of specific national e-signatures or e-identification is necessary. In general, an on-line registration procedure is quick and can be completed in 18 minutes (in Estonia) or 1 hour (in the UK) in comparison to paper registration, which can take up to 5 days (in Estonia).

In the remaining 12 MS (Austria, Belgium, Croatia, Cyprus, Czech Republic, Germany, Greece, Hungary, Italy, Luxembourg, the Netherlands and Spain) there is no possibility of direct on-line registration.[83] The applicants have to appear in person before a notary or a legal advisor who verifies, e.g. founder’s identity, the chosen name and either prepares the articles of association (Cyprus) or puts them in a notarial deed (the remaining MS).

Assessment

Maintaining the status quo would deprive the initiative of a significant part of its usefulness and attractiveness. It would not allow for simple registration procedure based on the same criteria in all MS. It would not decrease the differences in legal and administrative requirements with regard to registration and would not generate any decrease in costs for the founders of companies, therefore not meeting the objectives set out above.

Option I. 2. Model A – registration of an SUP only possible on-line

Description

In this option the SUP could only be registered on-line by any founder resident or having a seat in the EU. The paper registration would not be possible. The registration system (including the verification of identity, checking the company name and signing the articles of association) would need to make it possible for EU founders (legal and natural persons) to establish a company in another MS directly from their computer without a need for travel to the MS of registration for the purpose of registering the company. The identification of the founder could be done electronically by using e-signature or any other means as it is the case now in those MS that have already direct on-line registration available to foreign founders; in addition, the authorities of the place of registration of a company could, for example, apply the technical solutions referred to in e-IDAS[84] proposal or provided under the Internal Market Information system (IMI) in order to exchange information about the identity of the founders.[85]

This policy option would require changes in the registration procedure in those MS that require a physical presence of the founder before the company can be registered but MS would be free to choose the forms and means of introducing these changes as long as the aim of direct on-line registration without physical presence was achieved. The registration would remain at national level, since there is no common European register of companies.

Furthermore, it would be proposed to harmonise the registration requirements (e.g. which information can be required from the founder) so that the registration process would be simplified and maximally uniform, allowing foreign founders to register a company in another EU country without full proficiency in the foreign language. The registration web-sites could be, for instance, accessed by the already existing Points of Single Contact under the Services Directive. It would also be required that MS provide on their registration web-sites the links to registration web-sites of other MS. This should enable the registration of single-member private limited liability companies in a number of MS in a few clicks.

Assessment

This option would allow to decrease the legal and administrative difference as regards the registration requirements between MS and therefore, to diminish the costs for the founders of companies. It would significantly simplify the registration process and make it more uniform, having one registration form identical in all MS.

Being able to directly register online would benefit domestic company founders (in MS which did not provide for online registration so far) by making the procedure simpler, quicker and less costly. In addition, direct on-line registration could also save travel and costs for foreign founders who would not need to travel specifically to prove their identity before foreign authorities; these cost savings would vary from MS to MS but could amount to hundreds of euros for a company founder.

Member States already now can request the translations of documents from other MS, so in this respect nothing may change for the foreign founders of companies. However, MS would need to ensure that the registration process would allow founders to submit the documents electronically directly to the registration body instead of sending them by post or being required to sign them in person before the registration body.

It would also be in line with the view of the stakeholders expressed during the 2013 on-line consultation, since

64% of respondents (80% of companies, 67% of business federations,) considered that a potential initiative on single-member companies should include simple rules for on-line company registration with one common standard registration form throughout the EU.[86]

The changes required in those MS that do not currently have direct on-line registration would depend on how MS would like to structure their registration process, on the existing level of digitalisation of registration process, human resources available and MS choices with regard to the level and intensity of control they would like to have over companies’ founders. These costs could either be covered by the authorities themselves or by third parties involved in the registration process, and they could be spread over a number of years.

For example, in Poland the cost of introducing on-line registration for all private limited liability companies with no need for the involvement of a notary was estimated to be around €100,000. In other countries that introduced a direct on-line procedure, the costs varied from €42,000 in Ireland, around € 120,000 in Latvia, around €1.1 million in Slovenia and around € 1.9 million for the whole system of registration in Lithuania. The costs in Poland encompassed building the whole on-line registration system which may not be the case for 12 MS (Austria, Belgium, Croatia, Cyprus, Czech Republic, Germany, Greece, Hungary, Italy, Luxembourg, the Netherlands, and Spain[87]), since all of them have already in place an "indirect electronic registration" i.e. electronic registration by an intermediary (notary or legal advisor). Moreover, these costs occur only once, while the benefits of an easy registration for companies would continue in the years to come.

In addition, this initiative would not impose on MS any requirements on how registration web-site should look like or who could run it – registration courts, notaries, attorneys, private companies, etc. Lastly, MS would, sooner or later, anyway need to adapt their registration procedures for companies in order to implement the European eGovernment Action Plan 2011-2015 and achieve its objectives (e.g. to make it possible to develop cross-border business regardless of the place of residence of the company founders, including through the use of Points of Single Contact under the Services Directive).

There is evidence that in MS that introduced direct on-line registration (in addition to paper one) companies have experienced savings in terms of time and direct set-up costs. In the UK, for instance, on-line registration is cheaper than paper one (£15 instead of £40) and is 3 working days faster. If a “fast-track” paper registration is chosen (the same day), then the costs increase nearly 7 times in comparison to on-line registration (from £15 to £100). In Ireland[88] and in Slovakia[89] on-line registration is 50% cheaper than a paper one.

The risk of the misuse of direct on-line registration procedure for fraudulent aims potentially exists, but it must be offset against the benefits of the creation of companies and positive economic and social impacts connected with the increase of entrepreneurship in the EU. Each new company is a potential source of new jobs and growth. Moreover, such risk already exists, and was taken into account, by those 16 MS that already have a direct on-line registration procedure. There is not data available that the fraudulent activity has increased due to the direct on-line registration of companies in those MS.

This option, however, has a serious drawback, since it limits the creation of SUPs. The founder of a company would be obliged to create it on-line. On-line procedure may not be suitable for all kinds of registrations, in particularly more complex ones with the contributions other than in cash etc. Moreover, there is no reason to limit the choice of the founders. Those MS that introduced direct on-line registration procedure still left the possibility of "standard registration".

Option I. 3. Model B – registration of SUP possible both on-line and on paper

Description

This option would oblige MS to ensure that there would be a possibility of registering SUPs directly on-line but would not make it the only available registration procedure. The registration on paper/via an intermediary, but also on-line via an intermediary, would also be possible. The company founder would have the option to register a company directly on-line or to do it on paper, and he could ask a notary or legal advisor or any company creation agent for help in either case.

Assessment

This option would have the same advantages for companies, both domestic and foreign, as Model A but would not have its disadvantages of limiting the choice of registration procedures. It would enable those founders (and in particular foreign ones) that would be confident enough to use direct on-line registration procedure and save on the registration costs but it would allow others (often domestic founders who have become used to the existing procedures) to use standard registration procedures if they so wished.

In terms of the impact on Member States, it would require them to introduce the same changes as Model A, however, where the paper registration procedures were used, they would remain in place with some necessary adaptations. The nature of changes would be more incremental and more focused on the choice given to company founders that should reassure MS and would not substantially change the situation of the notaries or legal advisors who might be involved in both procedures. MS could, for instance, decide to leave notaries as registration points in both procedures (paper and on-line), as long as anyone from the EU who wanted to complete all the formalities by electronic means and at a distance, would have that possibility.

Option I. 4. Model C – the same as model B, but with the compulsory use of the template of Articles of Association when the company is registered on-line

Description

This option would offer the same choice for company founders as Model B. In addition, it would provide for a harmonised template of articles of association which would be identical all over the EU. It would be translated in all EU languages and would contain the necessary elements to run single-member private limited liability companies. The substance of the template would be determined by this initiative, but its precise content and format would be established by the Commission in delegated legislation, in close cooperation with MS, to guarantee that it would not get outdated too quickly and that it could be amended in reasonable time without the need of engaging the full ordinary legislative procedure.

The use of such template would be compulsory when an SUP would be directly registered on-line. In other registration procedures, where in many MS, as indicated above, the participation of a lawyer is in one form or another compulsory, the use of the template would not be obligatory but highly recommended.

Currently many MS provide templates for articles of association for standard set-ups of private limited liability companies. The use of templates in some countries is closely connected with the on-line registration process, e.g. in Poland[90]. In other countries, including those that do not currently provide for direct on-line registration, they are provided by business organisations such as the Chambers of Commerce[91] or can be downloaded from the relevant web-sites[92] but are not considered an essential element of the registration process.

Assessment

This option would have all the advantages of model B and it would provide additional savings for company founders, especially in case they used the on-line registration procedure. It would provide founders in many MS with easier set-up procedures and gains in terms of costs and time as compared to the current situation. As the same template of articles of association could be used for the registration of SUPs in all MS, it would in particular decrease the costs (mainly of legal advice and translation costs) for foreign founders and specifically for groups of companies with subsidiaries to be established in many countries. Such a template would also provide more legal certainty.

The frequency of the use of the template of articles of association would depend, first, on whether SUPs would be the only available form for single-member private limited liability companies in a given MS. Second, it would depend on the popularity of the on-line registration procedure and also its perceived usefulness, as compared to other registration procedures. As indicated to the Commission by some notaries, they would see the uniform template as a big advantage which would enable them to explain to their clients the requirements they need to follow to form a company.

Naturally, a possible impact of this option on companies would vary across the EU. The introduction of the single EU-wide template would facilitate company set-ups across the EU but it would have the biggest impact on the founders of companies established or wanting to establish subsidiaries in MS that do not currently provide for direct on-line registration and where there are no publicly available templates of articles of association. It would also vary between domestic and foreign company founders, to the extent that the latter might be more interested in using online registration and the compulsory template as these would make establishing subsidiaries abroad much easier, and therefore, would be likely to benefit from the measures proposed to a larger extent.

The costs of making the template available by MS would just constitute a small addition to the costs of introducing the direct on-line registration. MS would have to make changes to their existing registration procedures allowing for direct on-line registration with the template of articles of association.

Comparison of options

|| Effectiveness || Efficiency || Coherence

I. 1. No policy change || 0 || 0 || 0

I. 2. Model A - registration of an SUP only possible on-line || + Effective, decrease in costs for the founders of companies || + The objective can be achieved at a certain level of engagement of MS resources, but in some MS that already have on-line registration the costs should be de minimis || - Not in line with EU polices, which do not usually require solely the use of on-line procedures, limitation of effects by excluding other forms of registration suitable at least for some companies

I. 3. Model B - registration of an SUP possible both on-line and on paper || + The same effectiveness as Model A || + The same as model A || + In line with the realisation of EU Digital Agenda, providing an on-line registration possibility

I. 4. Model C - the same as model B but with the compulsory use of the template of articles of association when the company is registered on-line || ++ Most effective, biggest cost reduction, a possibility of registration in a number of MS with the same template || + The same as model A || + In line with the realisation of EU Digital Agenda, providing an on-line registration possibility, with the single template

Impacts on stakeholders

|| Companies || Member States || Notaries/Legal advisors

I. 1. No policy change || 0 || 0 || 0

I. 2. Model A - registration of an SUP only possible on-line || + Providing on-line registration would have positive impact, but excluding other forms of registration could have a negative one. The overall impact would probably be still positive || - No or de minimis costs for those MS that already provide for on-line registration. There would be costs for 12 MS that currently do not have direct on-line registration || -/+ Only one form of registration excluding notaries or other lawyers would have negative impact on them, unless MS decided to that notaries would be the "points of single contact" or registration body for on-line registrations

I. 3. Model B - registration of an SUP possible both on-line and on paper || ++ Positive impact on companies in terms of cost reduction but also choice of registration process The same effectiveness as Model A || - The same as model A || -/+ Impact difficult to predict, depends on how MS would organise on-line registration procedures. Possible increase of income due to more company registrations, but also possible loss of income due to increased number of on-line registrations

I. 4. Model C - the same as model B, but with the compulsory use of the template of articles of association when the company is registered on-line || +++ Biggest positive impact with the a possibility of using the template and yet not being forced to use it in all circumstances || - The same as model A || -/+ The same as in model B

7.2.2. Minimum capital

Option II. 1. No policy change

Description

Under this option, each company founder would have to comply with a different system of minimum capital in each MS in which it would like to set-up a company.

In the last years many MS introduced special sub-types of private limited liability companies with minimum capital of €1 or even no minimum capital required at all. Since many existing SMEs were concerned about the reputation of the legal forms in which they were incorporated, the legislators introduced special sub-types to cater for this concern.[93] This leads to a situation in which there is still in the same country, on the one hand, a mandatory capital requirement for the main types of private limited liability companies (e.g. GmbH in Germany) and, on the other hand, the minimum capital has been abolished by the introduction of a sub-type (e.g. UG in Germany). Single-member private limited liability companies can, therefore, be required to have thousands of euros of minimum capital if they choose a standard type or just €1 if they choose a sub-type.

There are currently 16 MS in which it is possible to establish a single-member company with minimum capital/share value of €1 or less.[94] In addition, it is likely that the number will be increased to 17 MS, since Slovakia plans to lower its minimum capital requirements in 2014. Among the MS that already provide for €1 or less, there is some variety of approaches, e.g. there are MS which only provide for such a possibility with regard to founders that are natural persons (e.g. Estonia, Latvia) and also MS (e.g. Belgium, Germany) that allow to form companies with €1 but require that the capital be paid or built gradually over the life of a company.

In the remaining MS the minimum capital varies from around €45 in Romania to around €12,400 in Luxembourg. For details see Annex.

Assessment

Maintaining the status quo would deprive the initiative of a significant part of its usefulness and attractiveness. This option would not result in meeting the objectives of decreasing the differences in legal and administrative requirements with regard to minimum capital requirements and would not generate any decrease in costs for the founders of companies.

Option II. 2. Model A – Minimum capital requirement equivalent to the EU average

Description

In this option the level of minimum capital required for the set-up of an SUP would be harmonised and would amount to the EU average of €2200.[95]

Assessment

For the majority of MS that already have a €1 or no minimum capital requirement, the obligation to introduce in their legal system a requirement of €2200 would be a burden without any clear advantage for companies. For those MS that have a significantly higher minimum capital requirement, lowering it to €2200 might be difficult to accept in any event since for some of them it would rather be a question of principle than a question of a specific amount.

The data shows that, under this policy option, there would be a reduction in costs for the company founders in 9 MS with capital higher than €2200 and this requirement would be attractive to entrepreneurs there. At the same time, the minimum capital requirement would increase in 19 MS (with Slovakia in 20 MS) and it would result in a substantial cost increase for the founders in these countries. This increase would not, most likely, be offset by the advantages that on-line registration and the single EU template of articles of association could bring. Therefore, it seems unlikely that a regime with this level of minimum capital would be chosen by entrepreneurs in those MS.

Option II. 3. Model B – Minimum capital requirement equivalent to € 1

Description

In this option, the level of minimum capital would be decided freely by a single-shareholder but cannot be less than €1 (or equivalent in the national currencies for those MS that do not have euro). This option would be equivalent to the one preferred in the 2008 IA for the SPE proposal.

Assessment

This option would offer savings for company founders in MS where the level of minimum capital is higher than €1. There is available evidence that relatively small differences in minimum capital requirements can make a large difference in the rate of new company formation.[96] The existing research also shows that MS reforms which cut the statutory minimum capital requirements, stimulated start-up activities rather than “attracting companies away from other legal forms”.[97] For example in France, Germany and Poland there was a significant surge in incorporations after the reforms which lowered the minimum capital.[98] The lowering of the minimum capital requirement should have the effect on both foreign and domestic founders, but on the basis of available data it is difficult to predict which of them would benefit more.

This option would be in line with the ideas of stakeholders expressed in the recently published 2013 “Manifesto for Entrepreneurship and Innovation to power growth in the EU”[99], which called for a possibility to create on-line companies with low minimum capital and unified requirements across the EU in order to make it easier for cross-border investments to flow from investors in one country to companies in another.

As explained in section 4.2.1., the founder of a company must have some capital to run a business or needs to borrow it regardless of the level of minimum capital required by national legislation. However, the minimum capital requirement can constitute a barrier for many founders if they have to pay in more capital than they would normally put into business if there had been no requirement. Sometimes, due to difficulties in financing, especially cross-border financing, a founder might not be able to easily borrow the capital needed to meet the requirement. Moreover, MS rules differ significantly as regards the moment in which the capital should be paid in and in which form.

This option would be likely to be acceptable to the majority of MS that already have a €1 minimum capital requirement (or lower), since the initiative would propose the same solution that these countries effectively have in place at national level. MS that have not yet decreased minimum capital requirement might support it, if they planned to do so anyway in the future (e.g. Slovakia).

Some or all of 11 MS where the minimum capital is still higher than €1 might be against, as was the case in the negotiations on the SPE proposal. Some of MS that already have €1 for natural persons may not be in favour of allowing the same conditions for legal persons as the founders of companies. In addition, some of them may fear the reduction in national revenue since in some MS the amount of registration fees/tax is dependent on the amount of minimum capital. However, this impact would be essentially limited to two MS (Austria and Poland) in which the state revenue is dependent on minimum capital and which do not yet provide a possibility of establishing a limited liability company with €1.

One of the other main reasons why some MS could be against this option would be the lack of compensatory measures for the protection of creditors. MS that still have high level of minimum capital are usually of the view that minimum capital constitutes the adequate protection of creditors and "the price to be paid" for limited liability. However, it should be stressed that the lack of minimum capital requirement should not have any effect on the amount of actual capital needed to run the business. The capital necessary for normal operations would be determined by a founder in the business plan. Second, there would not be any impact on creditors and other stakeholders in MS where there is already no statutory minimum capital requirement.

Overall, this option would bring advantages for companies in terms of the reduction of costs, but would have a disadvantage of not taking into account the legitimate concerns of certain MS and other stakeholders such as notaries with regard to the appropriate standard of creditors’ protection.

Option II. 4. Model C – the same as model B, but with the introduction of balance sheet test and solvency statement to protect creditors

Description

This option would provide for the same requirement of minimum capital as Model B, but would introduce additional instruments for the protection of creditors such as balance sheet test and solvency statement.

In this option, the initiative would require the management of the company to apply the balance sheet test before any distribution of profits to the single member, i.e. to compare assets and liabilities, prohibiting the distribution to the single-member resulting in liabilities exceeding the assets.

Moreover, it would require the management to sign a solvency statement, in other words a liquidity statement in which the management would guarantee that it had made a full inquiry into the affairs and prospects of the SUP and formed the opinion that the SUP would be able to pay its debts as they fall due in the normal course of business in the year following the date of the proposed distribution.

Such a statement should be provided to the single-member who should not order a distribution violating the balance sheet test and/or solvency statement. The single member who received undue distributions would have to return them to the SUP. The decisions on the distributions could not be delegated by the single-member to other parties.

Assessment

This option would offer the same advantages for companies in relation to minimum capital as Model B. However, it may generate additional costs with regard to the compliance with cumulative balance sheet and insolvency test as companies would have to measure the future liquidity which they may not do on regular basis. The cost of meeting the requirements of the cumulative test would be partially mitigated by the lack of special format imposed on companies. For instance, there would be no formal requirement of consulting the auditor or an accountant before signing the solvency statement. In certain circumstances the companies may want to do that, but for the purpose of distributions it would be enough, if the statement was signed by the management. Moreover, medium-sized and large companies may not bear additional costs, since future solvency may be part of "a fair review of the principal risk and uncertainties" a company is obliged to do under EU Accounting Directive.

At the same time, this option would offer more security to creditors and for that reason it is likely to be more acceptable to MS than Model B. Creditors are generally more interested in whether they would get paid their claims rather than being an unsecured creditor in insolvency proceedings in which the remaining assets would need to be valued and distributed among creditors. Also, the regular measurement of liquidity could be beneficial for the company and single-member as it would allow the company to be run in a more sustainable way.

The responsibility of management and the duty of care of the single-member, which should promote shareholders’ engagement in company affairs, would aim to guarantee the high standard of creditors’ protection and, therefore, to offset the decrease in minimum capital requirement in those MS where it is currently higher than €1.

However, it should be remembered that the existence of even high minimum capital at the time of set-up does not necessarily ensure that the same level will be available to creditors at a later date. For instance, even in the MS with high minimum capital requirement, the capital does not have to be paid in full at the time of set-up. Moreover, in principle, it does not have to be kept in the closed bank account. It can be transferred into tangible and intangible assets and the real value of those assets in case of insolvency proceedings might be different to the book value, or these assets might be destroyed and never recuperated.

Moreover, some creditors, such as banks, often insist also on other means of additional protection be it a personal guarantee, a mortgage or any other form of security. This happens in dealings with businesses in all MS, including in those where the minimum capital requirement is high. Therefore, high minimum capital requirement does not seem have an impact on contractual terms faced by shareholders in dealings with creditors who ask for guarantees no matter how high the minimum capital requirement is.

In MS which already have €1 minimum capital, there usually already exist additional means to protect the creditors either by the cumulative balance sheet and solvency test and/or the obligation to introduce capital reserves built each year from companies’ profits, and therefore the measures proposed would be in line with what is already included in the national legislation and would not impose too much additional cost for companies.

Comparison of options

|| Effectiveness || Efficiency || Coherence

II. 1. No policy change || 0 || 0 || 0

II. 2. Model A – Minimum capital requirement equivalent to the EU average || - Not effective, increase of costs for founders in 19 MS, capital not adapted to business needs || - Creditors are only partially protected by higher minimum capital requirement, since capital turned into assets does not guarantee the liquidity, which is important for creditors || - Not in line with EU polices of encouraging entrepreneurship and not in line with Manifesto for Entrepreneurship and Innovation to power growth in the EU

II. 3. Option I. 3. Model B – Minimum capital requirement equivalent to €1 || ++ Very effective, decrease of costs of founders in 11 MS, flexibility as to the level of capital needed for business, no other burdensome obligations imposed || - The objectives could be fully achieved, but at the expense of adequate creditors’ protection || +/- In line with EU policies encouraging entrepreneurship and with Manifesto, but not in line with policies of high standard of consumer and creditors’ protection

II. 4. Model C – the same as model B, but with the introduction of balance sheet test and solvency statement to protect creditors || + Less effective than model B for cutting the costs for companies, since additional burden of meeting the balance sheet and solvency test || + The objectives could be fully achieved, but guaranteeing at the same time the adequate creditors’ protection || + In line with EU policies encouraging entrepreneurship and with Manifesto and with policies of high standard of consumer and creditors’ protection

Impacts on stakeholders

|| Companies || Member States || Notaries/Legal advisors || Creditors

II. 1. No policy change || 0 || 0 || 0 ||

II. 2. Model A – Minimum capital requirement equivalent to the EU average || - Not effective, increase of costs for founders in 19 MS, capital not adapted to business needs || - Negative impact on those MS in which capital is below EU average (19 MS) – need to increase. Also negative impact on those MS (9) in which capital is above average – need to decrease. || +/- Depends on whether their fees are dependent on the amount of minimum capital || +/- Positive impact on creditors if it is considered that minimum capital requirement is a creditors’ protection instrument.

II. 3. Option I. 3. Model B – Minimum capital requirement equivalent to €1 || ++ Very effective, decrease of costs of founders in 11 MS, flexibility as to the level of capital needed for business, no other burdensome obligations imposed || +/- Neutral impact in those MS having already minimum capital requirement equivalent to € 1, negative impact on MS having higher requirement || +/- The same as model A || - Negative impact, since there is no creditor’s protection instrument available

II. 4. Model C – the same as model B, but with the introduction of balance sheet test and solvency statement to protect creditors || + Less effective than model B for cutting the costs for companies, since additional burden of meeting the balance sheet and solvency test || +/- Neutral impact in those MS having already minimum capital requirement equivalent to €1 and having creditors’ protection measures, negative impact on MS having higher requirement and no other creditors’ protection measures || +/- The same as in model A, but would generate more support than option B due to creditors’ protection mechanisms || + Positive impact on creditors – real creditors’ protection in terms of liquidity.

8. The Preffed options

The policy options are chosen on the basis of the comparison of their benefits and costs and their effects on different stakeholders.

8.1. the Prefferd options and their Impacts

With regard to the question of registration, the baseline scenario would not achieve the objective as it would not reduce the costs for the founders of single-member private limited liability companies. Any possible reforms of national