How Would the European Commission’s Draft Proposal for the EU Inc. Affect German Employers?

On March 18, 2026, the European Commission published its proposal for an EU-wide legal framework establishing a new form of limited-liability company – the EU Inc. With this draft, the Commission aims to promote start-ups and scale-ups by creating a new European legal form. Digitalization, standardization and greater flexibility in company law are at the forefront.

Codetermination as the key touchstone for the EU Inc.

From an employment law perspective, the EU Inc. offers significant structuring potential with regard to corporate codetermination, while also reflecting familiar tensions. A distinction must be drawn between EU Inc.s that are newly incorporated and those formed through conversion transactions.

New incorporation: codetermination based on the statutory seat

For newly incorporated EU Inc.s, the draft provides that the codetermination regime of the Member State of the statutory seat (registered office) shall be decisive. Because the draft (as is already the case for the SE¹) does not require an economic nexus between the statutory seat and the place of the company’s actual activities, it would be possible to establish an EU Inc. with its registered office in a Member State with limited codetermination requirements and to operate – on a permanent basis – in Germany without codetermination.

This would make it legally possible, even where employee headcount exceeds the thresholds under Germany’s One-Third Participation Act or Codetermination Act, to operate entirely without employee representatives on the supervisory or management body. In particular as a managing holding company, or in combination with group structures not subject to codetermination, the EU Inc. could therefore be attractive for certain corporate concepts.

However, this is only a limited novelty. Comparable effects can already be achieved today by using companies from EU Member States that fully adhere to the incorporation theory. The EU Inc. draft is nevertheless likely to simplify such structures and provide additional legal certainty.

Conversion: continuation of established protective mechanisms

The situation is different where an EU Inc. is formed, by way of a conversion transaction, from an existing company. In such cases, the draft expressly refers to the system applicable to cross-border conversions. Accordingly, the instruments familiar from the formation of an SE and the corresponding German implementing legislation would apply: an election body, a special negotiating body, a negotiation procedure and – if no agreement is reached – statutory fallback codetermination provisions.

In these cases, codetermination is therefore not “cut off”; rather, it is continued under the familiar freeze and/or continuation model. At the same time, it becomes clear that the EU Inc. does not establish a uniform EU-wide codetermination regime. The approach discussed in advance – a harmonized codetermination framework across Europe for the new legal form – is not reflected in the Commission’s draft.

This can be summarized as follows:

1. In the case of new incorporations, the EU Inc. opens up scope for structuring without codetermination.
2. In the case of conversions, the established codetermination safeguards continue to apply.
3. Genuine European harmonization of codetermination remains absent.

Employee share participation programs as an employment-law location advantage

The employment-law assessment of the provisions on employee share participation programs is positive. The draft provides for an EU-wide Employee Share Option Scheme (EU-ESO), which may be of considerable importance particularly for growth-oriented companies.

Tax focus: moving away from the taxation of “dry income”

In practice, employee share participation programs in Germany have been hindered less by company law considerations than by tax obstacles. While the national legislator has, in recent years, introduced significant relief through section 19a of the German Income Tax Act (§ 19a EStG) and has, in many cases, deferred immediate taxation of the taxable benefit in kind, restrictions nevertheless remain – for example due to size and age thresholds for the eligible undertaking and maximum time limits for the deferral of taxation.

The EU Inc. draft goes a significant step further. Under the proposed concept, employee shareholdings would be taxed only upon actual disposal – regardless of the company’s size or age. This would permanently and comprehensively mitigate the deterrent effect of taxable “dry income.”

Especially in the competition for qualified employees and executives, this may generate substantial advantages. Employee participation thereby gains not only company-law or tax-law significance, but also employment-law relevance as an instrument for incentivization and long-term retention. Teams operating across Europe could be treated in a transparent and comparable manner.

For employers, this means:

1. Employee share participation could be structured in a significantly more attractive way across the EU than under current national regimes.
2. The EU Inc. strengthens participation programs as an employment-law remuneration and retention instrument.
3. Start-ups and scale-ups in particular benefit from increased flexibility and planning certainty.