Parliament draft report adds EU Inc safeguards to prevent fraud and regime shopping

EU Inc, a proposed legal framework that would allow businesses to incorporate in a single, EU-wide register, should include more safeguards to prevent regime shopping and protect national labour laws, according to Rene Repasi, the European Parliament rapporteur on the regulation. 

EU Inc is intended to help boost the European innovation ecosystem by allowing start-ups to set up shop quickly across all 27 EU member states at once.

In a new draft report on EU Inc, Repasi has introduced a number of amendments to the European Commission proposal from March designed to offset worries that EU Inc could be used to circumvent national labour laws.

“I am convinced that my changes will make EU Inc even more attractive,” Repasi told Science|Business. “They ensure that EU Inc will become a seal of quality and discourage all those founders that solely want to make use of the country-of-origin principle with the intention to circumvent protection standards.”

The country-of-origin principle imposes requirements on EU Inc applicants to work in their country of registration. It is one of many articles that have been tightened in the draft report.

The report also stresses the right of EU countries to impose rules on EU Inc participants and gives the Commission the power to keep a list of non-innovative economic activities that are likely to circumvent national labour laws and should be excluded from EU Inc. Examples could be “cleaning activities, hospitality services or residential care activities,” said Repasi, who sits with the Socialists and Democrats group in the Parliament.

Pascal Canfin, shadow rapporteur on EU Inc for the Renew Europe group, welcomed the draft report’s attention to labour law and to the dangers of circumventing fiscal processes. 

“EU Inc should be a proof of strong European start-ups that wish to scale in Europe, not of letterboxed companies,” he told Science|Business, adding, however, that he looked forward to submitting amendments on topics such as the exclusion of certain sectors from the proposal.

Employee stock ownership

Although the report attempts to address concerns that EU Inc may be used to circumvent national labour laws, not all of Repasi’s amendments went the way labour unions had hoped. 

Ahead of the draft report, the European Trade Union Confederation said that EU Inc could become “a deregulation tool open to large multinational groups,” with risks of regime shopping, social dumping and fiscal and social fraud. 

To avoid this, labour unions had called for EU Inc to be open only to start-ups and scale-ups, keeping large multinational companies out of the regime. This recommendation was not followed in the Repasi report. 

“The risk of social dumping is not properly addressed by limiting the scope to start-ups since start-ups could potentially engage in social dumping,” Repasi said, warning that such a limitation could hurt growing companies. “If founders in the period of scaling up have to change the corporate form, it could slow down the scaling up massively,” he added.

The draft report also maintains a section of the Commission proposal that introduced employee stock options for companies incorporated under EU Inc, a section labour unions worry will be used by companies to lower employee salaries. 

However, Repasi also added a warning about the risk of circumventing mandatory domestic protections and stressed that employee stock options should be voluntary and must not be used to replace salaries.

In addition to employee stock options, a scheme which gives employees only the right to purchase stock, the draft report also introduces the idea of employee share ownership, which would allow companies to offer stock ownership directly as part of compensation packages. This idea has been called for by European start-ups who want to attract foreign talent and are struggling to compete on salaries alone.

“I believe that an employee who receives shares in his employer’s company should also receive the voting rights that come along with it,” Repasi said, explaining that the new scheme also allows employees not only to pay for stocks in cash but also to receive them as a “top-up” to their labour. 

Excluded sectors

The grassroots EU Inc initiative, which pushed the proposal onto the political agenda, welcomed certain elements of the new draft report, such as employee stock ownership and a central digital register, but was critical of others. 

“I am concerned that the report risks moving EU Inc away from its original purpose,” Iwona Biernat, legal counsel for the EU Inc initiative, told Science|Business. 

“EU Inc was meant to be a company law and digitalisation project: a clean European vehicle for incorporation, governance, financing, share issuance and scaling. It should govern the corporate structure; it should not reopen wider labour law or social policy questions that already exist across the single market,” she went on. 

Biernat was particularly concerned about giving the Commission the power to exclude certain sectors from the EU Inc regime, which she said should be removed. “A founder, investor or acquirer should not have to ask whether the company’s current or future business model may later fall into an excluded category,” she said.

Among other concerns, Biernat mentioned Repasi’s tightening of the country-of-origin principle, which could allow countries to shape EU Inc company boards and structures. If EU Inc becomes too reliant on national systems, it will be treated as a “future add-on,” not as core infrastructure, she said.  

Better reliability of data

The core idea of EU Inc is that it should be possible to register a company across all EU countries within 48 hours, fully digitally, for less than €100 and with no requirements for minimum share capital.

Announced by Commission President Ursula von der Leyen in January, EU Inc was soon backed by a report in Parliament. In March, the Commission presented its official proposal, which was generally supported by start-ups, industry and MEPs. 

But as it becomes tangible legislation, several sticking points threaten to limit the ambitions of the proposal. In addition to labour protections, these include concerns that a digital register would weaken the reliability of company information held by authorities. 

The German Federal Chamber of Notaries criticised the Commission’s EU Inc proposal in this respect, and is pleased with some of the changes in Repasi’s draft report. “We welcome the stronger emphasis on preventive controls, identity verification and anti-money laundering safeguards,” spokesperson Sophie Godt-Nordhues told Science|Business.

“The report now explicitly refers to risks such as money laundering, sanctions evasion, concealment of beneficial ownership and identity fraud,” she went on. “It also introduces the possibility for member states to require checks relating to identity, legal capacity, beneficial ownership and [anti-money laundering] compliance during company formation, share transfers and capital measures.” 

Doubts over legal basis

Repasi also expressed concerns about the legal basis chosen for EU Inc, which only requires a qualified majority among EU member states to pass. “The legal base for the proposal chosen by the Commission tests the limits of Union’s competences,” his draft report reads. It goes on to say that the legal design “warrants careful scrutiny.”

However, having expressed these concerns, Repasi chose not to suggest amendments to the legal basis due to “the time constraints set by the EU institutions.

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The draft report also reintroduces the option of steward ownership, a corporate governance model which prioritises a company’s mission over its profits, and adds a new mechanism for dispute settlement. This, Repasi says, will allow EU Inc to compete with the popular US incorporation scheme Delaware General Corporation Law.

“My draft report brings EU Inc even closer to Delaware Inc in that it proposes to introduce an alternative dispute resolution mechanism for business-to-business disputes involving an EU Inc. In doing so, we want to create fast and highly specialised dispute settlement, which is one of the most important elements of the Delaware effect of the Delaware Inc,” Repasi said.