Case law | Worker Participation

ECJ JURISPRUDENCE ON THE TRANSFER OF DE FACTO COMPANY HEAD OFFICES

In recent years the European Court of Justice has, in a series of decisions, established some principles of law in the context of freedom of establishment (Art. 43, 48 EC Treaty) and the transfer of a company’s de facto head office to other member states that have had a profound impact on national regulation of legal conflicts (incorporation theory and seat theory). The leading cases in this context are the following: Daily Mail, Centros, Überseering, Inspire Art and Cartesio. The main outcome of these decisions is the possibility for companies to transfer their de facto 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 are some restrictions of the possibility of transferring the de facto head office, but they have to be in line with the strict requirements of freedom of establishment (Art. 43, 48 EC Treaty). On the other hand, 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 so-called pseudo-foreign companies, which are companies registered in one member state but with their head office in another member state (letterbox companies).

This practice could have a major impact on the rules on workers’ participation. More particularly, this is a new loophole enabling circumvention of mandatory board-level participation rules. For example, it is now possible to operate a company without any rules on board-level participation in countries where national law usually foresees board-level participation for domestic companies. Some famous examples are Air Berlin and H&M.

Daily Mail

Daily Mail was a tax-law case. Daily Mail plc wanted to move its de facto head office (tax residence) to the Netherlands because of the more favourable tax regime there, while at the same time it planned 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.

EC LAW IMPLICATIONS

Because of the refusal of the UK Treasury Department to allow the transfer of the de facto head office, Daily Mail referred the question to the ECJ, whether Articles 43 and 48 EC Treaty preclude a member state from obstructing the transfer of the de facto head office from a member state.

DECISION OF THE COURT

The ECJ concluded that this issue falls outside the scope of the Treaty provisions on freedom of establishment. Moreover, the Court added obiter dictum some comments regarding several conflicts of law questions. The Daily Mail judgment was recently confirmed by the Cartesio decision (see below).

Link:

Judgment of the ECJ

Centros

Two Danes established Centros Ltd under UK company law. The company was trade only in Denmark, however. The incorporators clearly stated that they had established the entity 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 .

CENTROS (CASE C-212/97, 9 MARCH 1999)

EC LAW IMPLICATIONS

Once again the question of compatibility with the provisions on freedom of establishment (Articles 43 and 48 EC Treaty) are at stake. In particular the question was referred to the ECJ whether it is compatible with freedom of establishment to refuse registration of 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.

DECISION OF THE COURT

First, the ECJ ruled that where a company exercises its freedom of establishment under the EC Treaty, the Member States are prohibited from discriminating against this company on the ground 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. Second, a state is not authorised to restrict freedom of establishment on the ground of protecting creditors or preventing fraud if there are other ways of countering fraud or protecting creditors. Besides, the Court points to the availability to member states of the option of adopting EC harmonising legislation in this area of company law. 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.

LINK:

Judgment of the ECJ

Überseering

The ECJ went further in the Überseering case. All the directors of Überseering BV, a limited liability company organised under Dutch law, were resident in Germany. As a consequence, in accordance with current thinking on company seats, the German courts decided that, owing to the location of the company’s principal office, German corporate laws apply to the company. The Dutch corporate entity was therefore dismissed from court proceedings in Germany.

ÜBERSEERING (CASE C-208/00, 5 NOVEMBER 2002)

In the judgment, the European Court of Justice ruled that it was incompatible with the freedom of establishment guaranteed in Arts. 43 and 48 EC 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 of many legal commentators and 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.

Following this ECJ judgment, 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. It is also certain to provoke much academic discussion on the question of whether, and if so the extent to which, the accepted phenomenon of full recognition of the legal capacity of the ‘pseudo-foreign company’ within the single market will be extended to other areas of company law.

Judgment of the court Überseering.pdf 153.26 kB

Inspire Art

A Dutchman 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 took the position that specific Dutch rules for foreign entities registered in the Netherlands were to apply to the company. 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.

INSPIRE ART (CASE C-167/01; 30 SEPTEMBER 2003)

The European Court of Justice (ECJ) continued its tendency of deciding 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.

Judgment of the court Insipre Art.pdf 179.87 kB

Cadbury Schweppes

Cadbury Schweppes is another tax law case. The Cadbury Schweppes group had established two subsidiaries in Ireland solely in order that profits related to the internal financing activities of the Cadbury Schweppes group might benefit from the more favourable tax regime there. 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. After 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.

CADBURY SCHWEPPES (CASE C-196/04, 12 SEPTEMBER 2006)

EC law implications

Once again, freedom of establishment (Articles 43 and 48 EC Treaty) was at issue in this case. 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.

Decision of the court

In Cadbury Schweppes 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. In this context, 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.

With this ruling 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.

Judgment of the court Cadbury Schweppes.pdf 138.69 kB

Cartesio

Cartesio is a Hungarian limited partnership whose application for registration of the transfer of its seat to Italy was rejected by the Hungarian Court of Registration. Cartesio intended only to transfer its de facto head office to Italy, while continuing to operate under Hungarian company law.

CARTESIO (CASE C-210/06, 16 DECEMBER 2008)

EC-law implications

Because of the refusal to enter transferral of the de facto head office in the Hungarian Company Register the question 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. It should be underlined that the 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.

Decision of the Court

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. he court stated: ‘As Community law now stands, 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.’

Slightly surprising was the obiter dictum statement 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.

Judgment of the court Cartesio.pdf 179.96 kB