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The EEIG: How can it help your business after the Financial Crisis?

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The article sets out the main elements of the European Economic Interest Grouping, the manner in which this is set up in Malta, and identifies the ways in which the EEIG shall become more beneficial following the recent financial crisis.

The article sets out the main elements of the European Economic Interest Grouping, the manner in which this is set up in Malta, and identifies the ways in which the EEIG shall become more beneficial following the recent financial crisis.

Back in the 1970s, the European Union started developing the idea of creating a European entity which would owe its existence to the European ideals of integration, freedom and mobility. The idea was to create a truly European company with full mobility regulated by a regime that would not change if mobility was exercised. The idea was to create what today still raises eyebrows among legislators and businessmen alike: a transnational Company.

As in the case of most other novel ideas, putting this idea into practice was much more easily said than done.

The first experiment led to the European Company Statute, but even before that, progress was made in the EEIG sector. EEIG stands for 'European Economic Interest Grouping' and was modelled on the French GIE (groupement d'intérêt économique) which was quite popular in France and Belgium at the time. These discussions led to the adoption in 1985 of a Regulation which is directly applicable and binding in its entirety and therefore creates a direct level of uniformity among the Member States. Malta implemented this Regulation upon its accession to the European Union by virtue of Legal Notice 271 of 2003.

So what is the EEIG and why is it useful to you after the financial crisis?

The EEIG is a cross between a company and a partnership. It is intended to provide a flexible mechanism for trans-border cooperation principally between medium sized enterprises. It is therefore particularly attractive to Maltese businesses. More importantly, it enjoys separate legal personality but is not itself subject to tax independently of the members that compose it.

It has in fact been very effective in other smaller members of the European Union such as Luxembourg and Belgium and this because it is so flexible in many ways: management, mobility, and formation. 

It is very easy to form an EEIG: a contract is drawn up by the parties concerned and, in the case of Malta, delivered to the Registrar of Companies for registration - there is no requirement as to initial capital and the official address can be anywhere in the EEA (which includes, all the EU Member States and Norway, Liechtenstein and Iceland). Its objects can be the exercise of any economic activity that is ancillary to the activities of its members. For example, a group of construction workers could come together for tendering of projects to be carried out in Malta, the EU or in neighbouring countries. It gives you the advantage of bidding together and setting up an activity and benefit from economies of scale advantages too.

The EEIG is not itself subject to tax. It is only the members that are liable to tax according to the law which applies to them depending on their domicile and place of establishment. This means that entrepreneurs are spared the headache of tax arbitrage, an element often synonymous with company formation: there is no room for forum shopping for tax purposes with EEIG's.

The members of an EEIG can be professionals, natural persons exercising any industrial, commercial, craft or agricultural activity, legal entities, or partnerships within the EEA and at least one member must come from a different Member State.

The members of the EEIG remain unlimitedly jointly and severally liable for the debts of the EEIG but this is subject to the benefit of discussion which means that creditors may turn to the members of the EEIG only if the property belonging to the EEIG is not sufficient to satisfy its debts. The unlimited liability of the members makes it easier for the EEIG to obtain credit. For those put off by the idea of unlimited liability, this can be overcome by having economic operators participating in an EEIG via a legal structure, for instance a limited company endowed with an adequate capital. Their liability is then limited to the capital of this company.

Each member has at least one vote but the contract of formation can give more than one vote to certain members (for example, if one member has subscribed a great share of the capital or expertise). However, the EEIG Regulation requires that no one member holds a majority of votes which may be of practical concern to members seeking to form an EEIG made up of members making unequal contributions thereto.

Put simply, the whole point of the EEIG is to constitute and encourage cooperation between European entities, for them to create economies of scale not only to compete with other European entities but also to act more effectively outside the European Union.

Because of its inherent flexibility, the EEIG allows its members to adapt to changing economic circumstances and is essential for strategic business planning following the economic crisis for the following reasons.

One of the major consequences of the 2008 financial crisis is that EU legislators will aim to reduce the element of choice in the corporate law-making field. Malta, being one of the friendlier jurisdictions in setting up a company may potentially be hit hard by this. EU Member States may re-discover a protectionist and regulatory approach to Company law in which case the legislative 'race to the bottom' in Europe would, as a consequence, be likely to diminish.

In this scenario, companies formed between European persons in the EU, may discover that costs for complying with these regulatory obligations will rise considerably so that it is no longer as profitable to operate in one country as opposed to the other. Having the option of transferring one's seat and applicable law will therefore become more important than ever before. However, the efforts needed to transfer one's seat can, particularly in cases where redomiciliation is not permitted, be quite significant, in some cases requiring dissolution and reconstitution elsewhere. These costs will most likely put businesses off the whole idea and instead lead them to suffer the costs of regulatory reform over the costs of redomiciliation. This is a high cost to pay and may be avoided by having a body enjoying European nationality like the EEIG.

This is because one of the major benefits attached to the EEIG is the relative ease with which the EEIG can transfer its official address: this must be in an EEA state and it has to be the place where the head office is. If the official address is transferred, the grouping is de-registered and re-registered on the new register and it will thereafter be governed by the internal law of the new official address. There is no need for a winding up to take place and national laws cannot place restrictions on this move. The EEIG therefore gives you the option of disconnecting from aspects of domestic law regulating the EEIG (including laws on bankruptcy, insolvency and liability), whilst making substantial savings and avoiding complex procedures.

The benefits of forming an EEIG have been recognised by the growing number of EEIGs set up in Europe. One of the more famous EEIG is the Franco-German television channel ARTE. Others include Eurostar, Thalys, and EURESA.

The EEIG provides European businesses with a solid framework for participation and is particularly useful in public calls for tender, whether these are in the context of national public contracts or support programmes financed from EU funds. There is no doubt that the EEIG's initial non-acceptance in the business world is bound to change and, as has always happened following a major crisis or corporate scandal such as Enron and Parmalat, the risk of radical legislative reform is now higher than ever. This risk can be reduced through the use of European corporate structures such as the EEIG.

Dr. Jeanette Ciantar
Fenech & Fenech Advocates

The author is an associate at Fenech & Fenech Advocates, specialising in European Law. This bulletin is not intended to offer professional advice and you should not act upon the matters referred to in it without seeking specific advice.

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