The EU 28th Regime for Innovative Companies Needs a Dual-Instrument Architecture to stimulate a Coherent Tax Treatment

The European Union currently comprises twenty-seven Member States, each maintaining its own rules on company law, labour relations, insolvency and taxation. The European Commission’s proposal for a “28th Regime for Innovative Companies” would introduce, at EU level, an optional legal framework operating in parallel with national law1. Companies choosing this regime could incorporate and operate under a single set of European rules rather than navigating twenty-seven different national systems. The European Commission’s Work Programme 2026 places this initiative at the centre of the Union’s competitiveness agenda2. Its aim is straightforward: to create an EU-wide corporate form that facilitates scale-ups, removes cross-border frictions and integrates innovation incentives into the Single Market. It would also be desirable to include a fiscal dimension, since a coherent tax treatment would make the regime more attractive for firms seeking to expand across borders. Behind this political ambition, however, lies a complex legal reality: while an EU Regulation can create such an optional legal form, it cannot by itself harmonise taxation.

1. An EU Regulation Is Not Enough

The Commission’s Call for Evidence for an Impact Assessment (July 2025) confirms that the 28th Regime will take the form of a legislative proposal by Q1 2026, aiming to create a “single, harmonised set of EU-wide rules’, for company, insolvency, labour and tax law3. The document itself recognises that while a Regulation under Articles 50 and 114 TFEU could establish a common company-law framework, taxation falls under the internal market competence of Article 115 TFEU, which requires a Directive and unanimity. The Commission therefore implicitly concedes that an EU Regulation alone cannot introduce fiscal measures. Fiscal measures should be adopted through an EU Directive.

The need for accompanying tax measures to ensure the success of the 28th Regime for Innovative Companies is underscored in the European Parliament’s legal research. The European Parliament’s JURI study Identification of Hurdles that Companies Face in the EU (2025) notes that cross-border scale-ups continue to face ‘differences in corporate income tax regimes, R&D tax credits, VAT treatment, transfer pricing and withholding tax procedures generate high compliance costs and legal uncertainty’, adding that ‘these issues disproportionately affect smaller firms that lack the legal, fiscal, or administrative capacity to navigate 27 national frameworks, resulting in a de facto barrier to operating at scale within the Single Market”4.

2. A Dual-Instrument Architecture

A legally robust solution would combine two complementary legislative instruments:

a.      A 28th Regime Regulation (Articles 50 or 114 TFEU)

This instrument would define the legal form, eligibility criteria and operational framework for “innovative companies.” It would establish governance standards, investor-protection rules and a one-stop registration portal at EU level, using digital tools such as the EU Company Certificate and Business Wallet envisaged by the Commission5.

At its core, the Regulation could deliver the company-law backbone of the regime:

- Fully digital incorporation and filing, within 48 hours, verified under eIDAS (Electronic Identification, Authentication and Trust Services)6;

- Model articles of association and shareholder agreements harmonised across Member States, lowering transaction costs for founders and investors;

- Multiple share classes (including multiple-voting and non-voting shares) and purpose clauses enabling long-term stewardship structures;

- Simplified cross-border mobility (conversion, merger, division) without re-incorporation;

- A unified company identifier (EUID) linked to the EU Business Register Interconnection System (BRIS7) 2.0, ensuring automatic recognition of legal capacity throughout the Union.

b.      A Fiscal Innovation Directive (Article 115 TFEU)

This Directive would articulate how Member States must treat 28th Regime entities for tax purposes. It could introduce:

1. EU-wide loss relief with carry-back
   - Opt-in format: e.g. a one-year carry-back up to a cap (percentage of profit/turnover), with uniform definitions and light administrative requirements.
   - Objective: provide liquidity for start-up companies without a profit history and reduce insolvency risk.
   
2. Pre-profit R&D credit as a refundable grant
   - Conversion of a negative tax position into a cash grant up to a cap; uniform qualification of R&D expenses; fast payment via a single administrative window.
   - Prevents benefits from accruing only to profit-making firms and aligns with the innovation objective of the 28th regime.

3.      Uniform, light equity allowance (DEBRA-light) for seed / Series-A stages
- Notional deduction for newly injected equity with a low administrative burden and a hard cap (temporary, e.g. five years).
- Addresses the well-known debt bias; builds on the earlier EU Debt-Equity Bias Reduction Allowance (DEBRA)-proposal8, but is simpler and tailored to start-up enterprises.

4. Micro safe harbours for transfer pricing and permanent establishment risks in remote teams
   - Transfer pricing: cost-plus ranges (e.g. 3–8%) for small intra-group services and development centres below defined thresholds.
   - Permanent establishment: clear time- and revenue-based thresholds for remote workers to avoid unintended PEs under remote, hybrid, or nomadic work arrangements (issuing of negative PE rulings); 
   - Objective: radically reduce compliance costs and create legal certainty in early growth phases (instrumental within the opt-in framework of the 28th regime, which is designed to address key scaling pain points).

3. The Other Building Blocks of Competitiveness

While company law forms the structural backbone of the 28th Regime, the initiative can only succeed if supported by coherent labour, tax, insolvency and capital-market measures. Drawing on the Commission’s consultation, the Parliament’s JURI analyses and expert feedback from the European Law Institute (ELI) and European Business and Innovation Centre Network (EBN), the most impactful elements could include:

1.      Labour and employment law
A one-stop hiring interface linking employment registration and social-security contributions across borders; mutual recognition or coordination of employee share-ownership schemes (ESOPs) to ensure consistent tax deferral until a liquidity event; a simplified and optional EU-level framework for employee participation, providing a predictable alternative to national co-determination systems; and a “Start-up Talent Visa” to attract third-country specialists.

2.      Insolvency law
A fast-track, digital pre-insolvency procedure allowing founders a second chance; simplified creditor communication; and EU-standard protection for directors acting in good faith.

3.      Finance and capital markets access – a pillar for scale-ups
Perhaps the most transformative dimension for practice is the financing pillar. The 28th Regime could:

-          Introduce a standardised EU-convertible instrument to ease early-stage equity investment;

-          Provide a single pan-EU framework for crowdfunding9 and tokenised finance10;

-          Simplify listing requirements for 28th Regime companies on SME Growth Markets;

-          Grant access to European Investment Bank (EIB) and European funding windows dedicated to such entities; and

-          Create a recognised “EU Innovative Company” label to increase visibility and investor confidence.

As the EBN Position Paper (2025) notes, access to capital is the decisive test of Europe’s competitiveness; without a capital-markets channel integrated into the Regime, the policy would remain a legal abstraction rather than an engine for growth11.

4. Precedents for a Regulation–Directive Combination

Mixed legislative models are well-established in EU law. The Carbon Border Adjustment Mechanism Regulation (2023/956) complements the Emission-Trading-System Directive (2003/87/EC); the GDPR operates alongside the e-Privacy Directive; and the Unitary Patent Package couples Regulations with an intergovernmental agreement.

The European Law Institute’s 2025 Response likewise advocates a modular approach, combining “a supranational corporate form” with “targeted harmonisation’ in tax and insolvency to ensure legal coherence while respecting competence boundaries12.

5. A New Form of EU Market Integration

If executed coherently, the 28th Regime could mark a turning point in EU fiscal and corporate integration. Instead of mandatory harmonisation, it would create voluntary convergence through a Regulation creating the corporate vehicle and a Directive aligning its tax treatment. The design aligns with the European Commission’s Competitiveness Compass (COM (2025) 30 final), which calls for a “single harmonised set of EU-wide rules” for innovative firms while situating the initiative within the Innovation and Competitiveness Pillar of the 2026 Work Programme13.

Institutional craftsmanship will be essential. The Commission should avoid promising fiscal simplicity without a proper legal foundation. Only a Regulation-and-Directive combination can deliver both the legal uniformity and the fiscal legitimacy required by the Treaties.

Conclusion

The 28th Regime’s promise to empower innovative firms through a seamless European corporate framework is compelling. A Regulation alone would be a half-measure: elegant in form, empty in fiscal substance. If the EU wants a regime that truly integrates start-ups across borders, it must pair regulatory ambition with fiscal coordination and ensure that capital-market access becomes an integral part of the package. Only the inclusion of a coherent tax and finance dimension can make the 28th Regime not only legally sound but also competitive and attractive to the innovative companies it aims to serve.

• 1European Commission, Call for Evidence for an Impact Assessment: 28th Regime – EU Corporate Legal Framework (DG JUST, July 2025).
• 2See: Commission work programme 2026, Europe’s Independence moment, Communication, 21.10.2025, COM(2025) 870, final and see; Communication from the Commission, A Competitiveness Compass for the EU, 29.1.2025, COM(2025) 30 final, p. 5.
• 3European Commission, Call for Evidence for an Impact Assessment: 28th Regime – EU Corporate Legal Framework (DG JUST, July 2025).
• 4European Parliament, Identification of Hurdles that Companies, especially Innovative Start-ups, Face in the EU Justifying the Need for a 28th Regime, Policy Department for Justice and Civil Liberties, PE 775.947 (July 2025), p. 27.
• 5European Commission, Call for Evidence for an Impact Assessment, ibid., sections B and C.
• 6Regulation (EU) No 910/2014 of the European Parliament and of the Council of 23 July 2014 on electronic identification and trust services for electronic transactions in the internal market and repealing Directive 1999/93/EC.
• 7Directive 2012/17/EU 13 June 2012 amending Council Directive 89/666/EEC and Directives 2005/56/EC and 2009/101/EC of the European Parliament and of the Council as regards the interconnection of central, commercial and companies registers, 16.6.2012, L156/1.
• 8Proposal for a COUNCIL DIRECTIVE on laying down rules on a debt-equity bias reduction allowance and on limiting the deductibility of interest for corporate income tax purposes, COM/2022/216 final.
• 9Regulation (EU) 2020/1503 of the European Parliament and of the Council of 7 October 2020 on European crowdfunding service providers for business, and amending Regulation (EU) 2017/1129 and Directive (EU) 2019/1937, OJ L 347, 20.10.2020, pp. 1–49. 
• 10Regulation (EU) 2022/858 of the European Parliament and of the Council of 30 May 2022 on a pilot regime for market infrastructures based on distributed ledger technology, and amending Regulations (EU) No 600/2014 and (EU) No 909/2014 and Directive 2014/65/EU, OJ L 151, 2.6.2022, pp. 1–33.
• 11European Business and Innovation Centre Network (EBN), Position Paper: The 28th Regime – A Strategic Necessity for Scaling European Innovation (2025).
• 12European Law Institute, Response to the European Commission Public Consultation on the 28th Regime (30 September 2025).
• 13European Commission, COM (2025) 30 final – Communication on the EU Competitiveness Compass (Brussels, 29 January 2025).