EU Internal Market Law – The Differneces Between Relocation of a Company and Second Establishment (Part II)

Construction and map of Europe

2. Relocation and second establishment: an interrelate analysis

Having mentioned the legal basis, focusing on several case studies and scholars opinions in order to understand the concrete development of relocation and second establishment in the EU internal market is also important. In particular, it could be relevant to mention Case 107/83 Klopp and Case C-212/97 Centros[1]. The following sub-section analyzes the state of law regarding reincorporation (2.1 “Reincorporation: transnational concerns”), harmonization  and second establishment (2.2 “Centros: avoiding the national rules” and 2.3 “Klopp: freedom of secondary establishment”).  The final section (2.4 “Interrelated aspects”) will examine the elements in the previous sections in a more comprehensive way.

2.1 Reincorporation: transnational concerns

[2]As mentioned above, company´s incorporation in one MS is a requirement to claim the rights under Articles 49 and 54 TFEU[3]. One difficulty could be a formal legal one. If a company loses its legal personality within a MS, what happens? Does it lose its right of establishment in another MS? Case 81 / 87 Daily Mail and Case C-299 /02 Commission v Netherlands (so called “Cartesio”) are about these concerns[4]. I will not focus on the details of these important two cases. I just want to mention the fact that both of them are about companies which desire to move to another MS their central management headquarters, mantaining their legal personality in the first MS. The Court points out the fact – this is relevant for our reasoning – that is a MS decision that rule the incorporation state of law. In other terms, MS define which requirements are necessary to be a State company. Companies are “[sic!] creatures of the law (…) They exist only by virtue of the varying national legislation which determines their incorporation and functioning” (Par. 19 Daily Mail). No violation, then, of Article 49 and 54 TFEU: they don´t confer to companies the right to transfer the central management headquarter while retaining their status as companies incorporated under the legislation of the first MS (Par. 24, Daily Mail). The condition for incorporation reenters in Article 49 as far as they are discriminatory. This is addressed in Case C- 378 /10 Vale[5], which concerned the Hungarian law on company conversion[6] that didn´t allow cross-border conversions (in the specific case regarding an Italian company). Although a State can determine the condition for conversions, it cannot discriminate on the ground of nationality[7].

2.2 Centros: avoiding the national rules

[8] In the previous section I have discussed about the conditions to incorporate into one MS, to maintain an autonomous legal personality in the MS of origin and to obtain the right to move in another MS. In the following paragraphs I will analyze the different possibilities to set up an economic activity in another MS. As mentioned in Section 1.1 “Definitions”, there are two different ways to move a business activity from a MS to another: relocation and setting of a secondary establishment. Undoubtedly they are included in the freedom of establishment. But what are the modalities? Is it possible to restrict, for example, the right of second establishment? Concerns about free movement of legal persons could be the fact that companies often try to avoid the strict legislation of a country setting the central administration and the place of registration in another MS. The questions are: is it possible to set a company in a State and to do the majority of the business in another State with a secondary establishment? What are the evidences and the significances of avoiding national rules? Centros is about these concerns[9].

Briefly the facts: two Danish nationals set a company in the United Kingdom (UK) because in this country there were no minimum share capital requirements. The Danish Government refused to register a branch of this company because the minimum share capital requirement was 100.000 (hundred thousand) Danish kroner. The Government argued that it was not a setting of a branch, but of a primary establishment because the majority of the business activities of the company were set in Denmark, not in the UK: the behavior of the two Danish citizens was a tool to avoid Danish strict rules about share capital requirements which were considered by the Government fundamental guarantees for creditors. For The ECJ all these arguments are not relevant. As already pointed out in Case 79 / 85 Serges[10], it isn’t possible to limit the company’s right to set up a secondary establishment obliging the company to “actually do business in the State in which is registered”[11]. Furthermore, according to the development of EU integration, it is possible to compare the situation of establishments to “Cassis de Dijon”[12] doctrine on mutual recognition of goods: as a MS must accept the goods standards of other MS, it has also to recognize companies which are considered existing and incorporated in other MS[13]. The mere fact to have economic reasons to set the legal headquarter of a company in another MS is not sufficient to hinder its freedom of establishment and it is not considered in itself an abuse of freedom of establishment. So, instrumental exercise (“legitimate circumvention”) of free movement is not considered an abuse[14]. “[T]he national courts may, case by case, take account on the basis of objective evidence  of abuse or fraudulent conduct (…)”[15] to deny companies the benefits analyzed. The needs to combat fraud of the MS and the freedom of economic actors are balanced with the requirement of an actual proof by the MS to hinder the movement of the companies. “Le droit cesse là où l’abuse commence” underlines AG La Pergola citing Planiol[16]. It is only for objective reasons, afterwards, and with proportionality, that restrictions to the freedom of establishment could be settled. A system characterized by prevention of these abuses with mutual assistance and exchange of information between MS could be more beneficial and adequate to the internal market then hindering mechanisms.

[17]To conclude this section, I just want to point out the fact that an open market without an adequate harmonization could raise the risk of abuse of tax benefits and of advantages on the labor market: the States could be lead to a “Delaware effect”[18] or to a race to the bottom[19]. In fact, companies are more attracted by States with the least onerous requirements and that could lead to disparities between MS (e.g. delocalization of the production). As mention by para. 29 of Centros, it is open to the Council to achieve complete harmonization; this, in my opinion, could be considered a sort of invite from the ECJ to regulate the matter. But also a complete harmonization could be risky[20]: if on one hand prevents competition between MS, in the other hand it could eliminate any national autonomy, that is fundamental to face particular reality (in summa, it could lead to a lack of subsidiarity, central principle of the EU[21]). The solution I propose, according to  Deakin[22], is to balance these different needs, such as harmonization, experimentation in the legislation, spontaneous solutions and local needs with a “reflexive harmonization”:

In this model, the process by which states may observe and emulate practices in jurisdictions to which they are closely related by trade and by institutional connections is more akin to the concept of `co-evolution` than to convergence around the evolutionary peak´ or end-state envisaged by Tiebout´s general equilibrium model.

I am deeply convinced that only with this framework the freedom of establishment and the internal market could be really effective and leading to an authentic and sustainable development of the people of Europe.

Arnaldo Mitola

Hearthfelt thanks to Professor Claes Granmar

Con amicizia letto da Valeria Schiavo

[1] Case 107/83 Ordre des Avocats au Bareau de Paris v Klopp [1984] ECR 2971; Case C-212/97 Centros v Erhvervs-og Selskabsstyrelsen [1999] ECR I-1459.

[2] This section is based on Chalmers D., Davies G., Monti G., European Union Law, Cambridge University Press, Cambridge, 2014, pp. 884 – 887.

[3] See supra Section 1.2.1 “The Treaties”.

[4] Case 81 / 87 R v HM Treasury ex parte Daily Mail (1988) ECR 5483 and Case C-299 /02 Commission v Netherlands (2004) ECR I-9761.

[5] Case C- 378/10 Vale, Judgement of 22 July 2012.

[6] For the meaning of conversions, see supra Section 1.1 “Definitions”.

[7] See supra note 13.

[8] This section is based on Chalmers D., Davies G., Monti G., European Union Law, Cambridge University Press, Cambridge, 2014, pp 887 – 890.

[9] For further reading see Case C 157 /01 Kamer van Koophandel en Fabrieken voor Amsterdam v Inspire Art [2003] ECR I- 10195 and Case C  208 /00 Űberseering v NCC [2002] ECR I  9919; for natural persons see Case 115 /78 J. Knoors v Staatssecretaris vanEconomische Zaken [1979] ECR 399.

[10] Case 79/85 Serges v Bestuur van de Bedrijfsvereniging voor Bank-en Verzekeringswezen, Groothandel en Vrije Beroepen [1986] ECR 2375.

[11] Opinion of Advocate General La Pergola on Case C-212/97 Centros v Erhvervs-og Selskabsstyrelsen [1999] ECR I-1459, delivered on 16 July 1998, para. 4.

[12] Case 120/78 Rewe-Zentral v Bundesmonopolverwaltung für Branntwein [1979] ECR 649.

[13] Opinion of Advocate General La Pergola on Case C-212/97 Centros v Erhvervs-og Selskabsstyrelsen [1999] ECR I-1459, delivered on 16 July 1998, para. 20.

[14] Nic Shuibhne N., The Coherence of EU Free Movement Law, Oxford University Press, Oxford, 2013, p. 91.

[15] Case C-212/97 Centros v Erhvervs-og Selskabsstyrelsen [1999] ECR I-1459, para. 25.

[16] Opinion of Advocate General La Pergola on Case C-212/97 Centros v Erhvervs-og Selskabsstyrelsen [1999] ECR I-1459, delivered on 16 July 1998, para. 20; and C. Nizzo, L’abuso dei diritti comunitari; un quesito non risolto, in Dir. Comm. Internaz., 1997, pp.776 ss.

[17] The conclusion of this section are based on D. Chalmers, G. Davies, G. Monti, European Union Law, Cambridge University Press, Cambridge, 2014, pp. 697 – 702.

[18] The name come from the state company laws in the State of Delaware  in 1960s. See Chalmers D., Davies G., Monti G., European Union Law, Cambridge University Press, Cambridge, 2014, p. 885; Bernard C., Social dumping and the race to the bottom: some lessons for the European Union from Delaware?, (2000) 25 ELRev. 57; and Gary W., Federalism and Corporate Law: Reflection upon Delaware (1974) 83 Yale Law Journal 663.

[19] Chalmers D., Davies G., Monti G., European Union Law, Cambridge University Press, Cambridge, 2014, pp. 864-6.

[20] See Majone G., The Common Sense of European Integration” (2006) 13 Journal of European Public Policy 607, 624.

[21] Article 5 TEU.

[22] Deakin S., Legal Diversity and Regulatory Competition: Which model for Europe?”, (2006) 12 European Law Journal 440, 444-5.

References

Chalmers D., Davies G., Monti G., European Union Law Cambridge, Cambridge University Press, Cambridge, 2014

Imbriani C., Lopes A., Macroeconomia: mercati, istituzioni finanziarie e politiche, UTET Università, Torino, 2013

Shuibhne N., The Coherence of EU Free Movement Law, Oxford University Press, Oxford, 2013

Wahl N. (red.), Treaty on European Union, Stockholm, Norstedts Juridik AB, 2010

Wittgenstein L., Tractatus logico-philosophicus e quaderni 1914 – 1916, Einaudi, Torino, 2009

Bernard C., Social dumping and the race to the bottom: some lessons for the European Union from Delaware?, 2000 25 ELRev. 57

Deakin S., Legal Diversity and Regulatory Competition: Which model for Europe?”, 2006, 12 European Law Journal 440, 444-5

Gary W., Federalism and Corporate Law: Reflection upon Delaware (1974) 83 Yale Law Journal 663

Maduro M. P., Interpreting European Law-judicial Adjudication in a Context of Constitutional Pluralism, Instituto de Empresa. Law School, IE, 2008

Majone G., The Common Sense of European Integration, 2006, 13 Journal of European Public Policy 607, 624

Marenco G., The notion of Restriction on the Freedom of Establishment and Provision of Services in the Case-law of the Court, (1991) 11 Yearbook of European Law 111

Mundell R., A Theory of Optimum Currency Areas, American Economic Review, vol. 51, nº 4, 1961, pp. 657-665

Nizzo C., L’abuso dei diritti comunitari; un quesito non risolto, in Dir. Comm. Internaz., 1997, pp.776 ss

Consolidated version of the Treaty of the European Union and the Treaty of the Functioning of the European Union [2008] Official journal of the European Union (OJ) C 115/47

Directive 2006/123/EC on services in the internal market, Official journal of the European Union (OG) L 376/36

Case 26/62 Van Gend en Loos v Nederlandse Administratie der Belastingen [1963] ECR 1

Case 115 /78 J. Knoors v Staatssecretaris vanEconomische Zaken [1979] ECR 399

Case 120/78 Rewe-Zentral v Bundesmonopolverwaltung für Branntwein [1979] ECR 649.

Case 107/83 Ordre des Avocats au Bareau de Paris v Klopp [1984] ECR 2971

Case 79/85 Serges v Bestuur van de Bedrijfsvereniging voor Bank-en Verzekeringswezen, Groothandel en Vrije Beroepen [1986] ECR 2375

Case 96/85 Commission v France [1986] ECR 1475

Case 270/83 Commission v. France [1986] ECR 273

Case 81 / 87 R v HM Treasury ex parte Daily Mail (1988) ECR 5483

Case C-351/90 Commission v Luxemburg [1992] ECR I-3945

Case C-55/94 Gebhard v Consiglio dell’ordine degli avvocati e procuratori di Milano [1995] ECR I-4165

Case C-212/97 Centros v Erhvervs-og Selskabsstyrelsen [1999] ECR I-1459

Case C 208 /00 Űberseering v NCC [2002] ECR I 9919

Case C 157 /01 Kamer van Koophandel en Fabrieken voor Amsterdam v Inspire Art [2003] ECR I- 10195

Case C-299 /02 Commission v Netherlands (2004) ECR I-9761

Case C-150/04 Commission v Danmark [2007] ECR I-1163

Case C- 378/10 Vale, Judgement of 22 July 2012

Opinion of Advocate General Sir Gordon Slynn on Case 107/83 Ordre des Avocats au Bareau de Paris v Klopp [1984] ECR 2971, delivered on 10 May 1984

Opinion of Advocate General La Pergola on Case C-212/97 Centros v Erhvervs-og Selskabsstyrelsen [1999] ECR I-1459, delivered on 16 July 1998

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