Lisbon 2 Vladivostok

_ Yuri Kofner, expert, Eurasian sector, CCEIS, Higher School of Economics, research assistant, IIASA. Munich, 4 October 2019.

Five years into its existence, the Eurasian Economic Union (EAEU) already has something to show. The most tangible of its achievements is the common labor market and customs territory. At the same time, the EAEU is still experiencing problems with free trade in the domestic market due to the persistent difficulties with removing the non-tariff barriers and the emergence of new ones. This circumstance also indirectly impedes the implementation of the goal of “promoting the modernization of national economies” declared in the EAEU Treaty.

Over the five years from 2014 to 2018, the share of intra-EAEU trade in relation to foreign trade with third countries has remained unchanged at an average of 13.5%. The share of goods with higher added value (agro-industrial products, chemicals, machinery and equipment) in the structure of mutual trade between member states has not increased either (45% on average). The situation is even worse on the foreign markets, where higher added value exports are in an inverse relation to oil prices: by 2018, they have returned to their 2014 level of 11% from a peak of 16.4% in 2016 (See Table 1).

Table 1. Structure of mutual and foreign trade in EAEU-made goods (%, 2014−2018)

2014 2015 2016 2017 2018
Mutual trade 11.7 13.5 14.2 14.5 13.5
Foreign trade 88.3 86.5 85.8 85.5 86.5

Commodity structure of mutual trade

Agricultural products (A) 13.8 15.5 16.1 15.1 14.6
Chemicals (C) 10.1 10.5 12.4 12.1 11.6
Machinery and equipment (M) 21.4 16.4 17.5 18.5 19.0
Total ACM 45.4 42.4 46.0 45.7 45.2
Minerals 30.7 33.4 27.1 27.7 28.7
Commodity structure of foreign trade
Agricultural products (A) 3.5 4.4 5.5 5.3 5.1
Chemicals (C) 5.0 6.5 6.7 6.1 5.6
Machinery and equipment (M) 2.8 3.2 4.2 3.8 3.0
Total ACM 11.3 14.1 16.4 15.2 11.0
Minerals 73.3 65.6 60.6 62.6 67.2
Average annual price of Brent (USD per barrel) 99.03 52.35 43.55 54.25 71.06

Source: ECE Department of Statistics.

As one of the ways to solve this problem, the Eurasian Economic Commission (EEC) is now eyeing the idea of ​​creating transnational Eurasian corporations and brands. But what should they be like, and what needs to be done to make this initiative work?

Societas eurasicaea

Most likely, this proposal implies the introduction of a new legal category – Eurasian company – in the EAEU supranational law and in the national legislation of member countries. This kind of commercial entity will be able to operate with the greatest freedom in all the EAEU member states without going through the national regime procedures separately in each of them.

Like many other firsts in the history of regional integration associations, these legal entities were first introduced in the European Union in 2001, defined as societas europaea (S.E.) and have proven to be relatively successful. More than 3,000 such companies were registered in 2001−2018, including world-famous brands such as Airbus , Allianz, BASF, E.ON, LVMH Moët Hennessy Louis Vuitton, SAP, Schneider Electric and others.

At the same time, the societas europaea concept has revealed a few nuances, so it might be worthwhile for the EAEU to learn from Europe’s experience.

First, the EU countries failed to agree on granting “European companies” a purely supranational status, and the so-called 28th regime has never actually worked, while the rights and obligations of S.E. companies are defined by a hybrid of European Commission directives and national legislation, which limits their originally planned freedom of action. Similarly, EAEU countries are unlikely to be more willing to give up their regulatory sovereignty in this area.

Second, at the outset, a European company was to pay taxes in the country where its head office was located (determined on the real seat principle). However, in 2005, the Court of Justice of the European Union ruled that this ran contrary to the freedom of movement of enterprises within the framework of a single economic space. Now, as a result, European companies pay taxes at the place of registration (seat of registration principle), which allows them to choose the country with the most favorable tax regime. Kyrgyzstan could benefit significantly from this principle, if adopted in the EAEU (Table 2).

Table 2. Profit Tax rates in EAEU (%, 2019)

Armenia Belarus Kazakhstan Kyrgyzstan Russia EAEU (average)
20% 18%

25 % for banks, insurance and microfinance institutions

20% 10%

5% for leasing banks, 0% for gold mining companies

20% 19.9%

Source: pwc, Deloitte and the author’s calculations.

Third, the incorporation of a societas europaea is especially beneficial in cases where it is completely exempt from profit tax or has a preferential right to receive funding from the European Commission or European financial development institutions (EIB, ERDF, EFSI). For example, a project merged into an S.E. on the basis of public-private partnership, built the Brenner Tunnel connecting Austria and Italy, funded under the Trans-European Transport Network (TEN-T) development program. With its official commitment to support “infrastructure projects with an integration effect,” the Eurasian Development Bank (EDB) could issue “Eurasian companies” soft loans for such projects in the EAEU. The heads of the EAEU member states could also consider amending the EAEU Treaty (Article 93 and Appendix 28) to entitle industrial companies registered as societas eurasicaea and operating facilities in at least three member states to receive special industrial subsidies – something they would not otherwise have been able to obtain.

Fourth, a European company can have either a two-tier (supervisory board and management) or a single-tier governance (board of directors). This choice was the reason why many national companies in Europe, which wanted to change their governance structure, reincorporated as S.E..

Fifth, it was decided that a national company’s transformation into S.E. should not worsen the situation and the rights of wage laborers. It might be appropriate to consider implementing a similar principle in the EAEU.

Sixth, the polls have shown that many incorporations as societas europaea were made for reasons of image, not the above benefits, as the company name was intended to convey the image of a large regional and international corporation. This consideration might also be of interest to companies in the EAEU countries.

Before introducing the societas eurasicaea legal category in the EAEU though, it would be a good idea to properly think about all these options. It took the European Union about 30 years to make a decision – the first proposal concerning a “European company” was made in 1970, while the official statute was adopted in 2001.

Source: http://valdaiclub.com/

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