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.
- 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
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