Sunday, 11 October 2015

Recalling: EU Transfer of Company Seat (de facto)

European Court of Justice established some principles of law in the context of freedom of establishment and the transfer of a company’s de facto head office to other member states that have had a strong impact on national regulation of legal conflicts (incorporation theory v., seat theory).  As a result of the leading cases in this context companies can de facto transfer their head office to the member state of their choice.

  • The state to which the company moves its head office is not allowed to limit this transfer. 
  • Exceptionally there can be restrictions on the possibility of transferring the de facto head office, but they have to be in line with the strict requirements of freedom of establishment
  • The state in which the company was founded still has the power to lay down certain conditions on the emigration of a company (Daily Mail doctrine).
As a result of these decisions there has been growing interest in setting up companies registered in one member state but with their head office in another member state, usually known as letterbox companies.
  • Daily Mail (Case 81/87, 27 September 1988). Daily Mail was a tax-law case. Daily Mail plc wanted to move its  factual head office  (tax residence) to the Netherlands because for tax reasonns, though it planned also to remain a company subject to UK company law. The UK Treasury Department refused permission for the transfer of seat, which is necessary under UK law. Daily Mail referred the question to the ECJ, whether the Treaty preclude a member state from obstructing the transfer of the de facto head office from a member state.The ECJ concluded that this issue falls outside the scope of the Treaty provisions on freedom of establishment. The  ECJ added obiter dictum some comments and this judgment was confirmed by the Cartesio decision. See Judgment of the ECJ 
  • Centros (Case C-212/97, 9 March 1999). Two citizens from Danemark incorporated Centros Ltd under UK company law. The company traded only in Denmark. The founders stated that they had established Centros under UK company law solely to avoid the minimum capitalisation requirement for Danish limited liability companies. The Danish commercial registry considered this to be an unlawful circumvention of the Danish minimum capitalisation rules and so refused to register the company’s branch office in Denmark . This question was referred to the ECJ: compatibility (or not) with freedom of establishment of the refusal to register a branch of a lawfully founded company that has its registered office in another member state, but in which the company does not itself carry on any business. The ECJ ruled that under frredom of establishment Member States cannot discriminate against this company on the grounds that it was formed in accordance with the law of another member state in which it has its registered office but does not carry on any business. Further, States are not authorised to restrict freedom of establishment on the ground of protecting creditors or preventing fraud if there are other ways of countering such risks. In this leading case the ECJ took quite a liberal approach in the context of company rights. Moreover, the Court considers the conditions governing abuses of EC law restrictive.
  • Überseering (Case C-208/00, 5 November 2002) All the directors of Überseering BV, a limited liability company organised under Dutch law, were resident in Germany. The German courts decided that, owing to the location of the company’s principal office, German corporate laws apply to the company and it could not litigate as a "purported" Ducht entity. The  Überseering BV case reached the ECJ. In the judgment, the ECJ ruled that it was incompatible with the freedom of establishment for a member state to deny legal capacity (and standing to sue or be sued in courts) to a company formed in a Member State which moves its central place of administration to another Member State. Against the expectations  the recommendation of the Advocate General, the ECJ also held that where a company incorporated in another Member State exercises its freedom of establishment in another Member State, that other Member State is required to recognise the company’s legal capacity (and capacity to be a party to legal proceedings) which it enjoys under the laws of its state of incorporation. This ECJ judgment means that a company incorporated in a EU Member State is entitled to rely on the principle of freedom of establishment to contest any refusal by a host state to recognise it as a legal entity with the capacity to enter into contracts and be a party to legal proceedings. As a matter of German law, this decision signals the end of the current practice whereby the legal capacity of foreign incorporated companies is not recognised, where the effective seat of administration is in Germany Überseering.pdf. 
  • Inspire Art (Case C-167/01; 30 September 2003). A Dutch Businessman established the company Inspire Art Ltd under the laws of England and Wales and requested the registration of the company’s Dutch branch office at the commercial registry in the Netherlands. The registry decided that specific Dutch rules for foreign entities registered in the Netherlands applied. As a consequence, Inspire Art Ltd would have been required, inter alia, to use a company name indicating its foreign origin, and comply with the minimum capitalisation rules for Dutch limited liability companies. The ECJ decided in favour of freedom of establishment by holding that rules submitting pseudo-foreign companies to the company law of the host state were inadmissible. It laid down that a foreign company is not only to be respected as a legal entity having the right to be a party to legal proceedings, but rather has to be respected as such, that is, as a foreign company that is subject to the company law of its state of incorporation. Any adjustment to the company law of the host state is, hence, not compatible with European law. Insipre Art.pdf 
  • Cadbury Schweppes (Case C-196/04, 12 September 2006). The Cadbury Schweppes group had established two subsidiaries in Ireland so that profits related to the internal financing activities of the Cadbury Schweppes group might benefit from the more favourable Irish tax regime. In the view of the national court, the subsidiaries were incorporated in Ireland in order not to fall within the application of certain UK tax provisions on exchange transactions and the national tax authorities demanded the corporation tax, Cadbury Schweppes appealed. In the end the relevant UK court referred the case to the ECJ to clarify the EC law implications. The question referred to the ECJ was whether freedom of establishment precludes national tax legislation, under certain conditions, from imposing a charge upon a parent company on the profits made in a foreign subsidiary. The ECJ indicates that it is necessary to examine the behaviour of a taxpayer who incorporates a company in another member state in light of the aim of freedom of establishment in order to assess whether the behaviour at stake is a mere exercise of freedom of establishment or a legal abuse. So, national measures restricting freedom of establishment may be justified where they specifically relate to wholly artificial arrangements aimed at circumventing application of the legislation of the member state concerned.The ECJ considered that freedom of establishment requires a stable and continuing basis in the economic life of a member state other than the state of origin.Therefore a company cannot invoke freedom of establishment in another member state for the sole purpose of benefiting from more advantageous legislation unless the establishment in the other member state is intended to carry on genuine economic activity. According to the ECJ a restriction of freedom of establishment is therefore possible in cases of a ‘letterbox’ or ‘front’ subsidiary.The ECJ seems to move away from Centros, where the company founders set up a company that had never engaged in any economic activity in its founding state and was aimed solely at avoiding Danish company law Cadbury Schweppes.pdf.   
  • Cartesio (Case C-210/06, 16 December 2008). Cartesio is a Hungarian limited partnership whose application for registration of the transfer of its seat to Italy (only de facto) was rejected by the Hungarian Court of Registration as Cartesio intended continuing to operate under Hungarian company law. The refusal to register de de facto transfer was referred to the ECJ, to determine whether Articles 43 and 48 EC Treaty preclude a member state from imposing an outright ban on a company incorporated under its legislation transferring its de facto head office to another member state without having to be wound up in Hungary first, and to have the seat transfer entered in the Hungarian Company Register. Cartesio case is to a considerable extent similar to the ECJ’s Daily Mail Decision, since it also raises the question of the transfer abroad of the de facto head office. The Court did not overrule its ‘Daily Mail’ decision, which allows member states to restrict the transfer of the central administration of a company abroad. On the contrary, the ECJ reaffirmed its Daily Mail doctrine: ‘Articles 43 EC and 48 EC are to be interpreted as not precluding legislation of a Member State under which a company incorporated under the law of that Member State may not transfer its seat to another Member State whilst retaining its status as a company governed by the law of the Member State of incorporation.’ In an obiter dictum it was stated that freedom of establishment also covers the possibility of a company converting itself into a company governed by the law of another member state – which is de facto the transfer of the registered office (para 111–113). This announcement contrasts with a statement in the same judgment, some paragraphs previously, in which the Court says: ‘It should be pointed out, moreover, that the Court also reached that conclusion on the basis of the wording of Article 48 of the EEC Treaty ... the question whether – and, if so, how – the registered office (siège statutaire) or real seat (siège réel) of a company incorporated under national law may be transferred from one Member State to another as problems which are not resolved by the rules concerning the right of establishment, but which must be dealt with by future legislation or conventions’ (para 108). As a result, the consequences of this obiter dictum for board-level participation rules have not been finally clarified. However, there are good reasons for saying that the obiter dictum applies only if national law completely forbids any kind of transfer of seat to another member state. As long as one form of transfer is allowed under national law, Art. 43 and 48 EC do not apply. Cartesio.pdf