Freedom of Establishment and the Free Movement of Services

‘interest…may, in certain circumstances and subject to certain conditions, justify restrictions on the freedom of establishment.’

Critically assess the extent to which the ECJ has permitted Member States to justify derogations / protectionist aims in light of the freedom of establishment.

Freedom of Establishment and the Free Movement of Services

In order to promote competition, the EU enacted four so called freedoms, i.e. the freedom of goods, freedom of workers, freedom of services and freedom of establishment. These freedoms serve to ensure that the market is open and deregulated and while member states can place restrictions on the transfer abroad of the administrative seat and/or of the registered office of a company (or person), any such action or restrictions must be aimed at legitimate public interest and be proportionate to the criteria established by the ECJ. Scrutinising EC secondary legislation is another of the ECJ’s original tasks, avoiding weak compromises as in the Services Directive or in matter of tax and the right to insolvency. As the European Union is steadily enlarging, law-making is becoming more and more difficult, different viewpoints and arguments, many different legal and cultural traditions have to be integrated and clear concise rulings by the ECJ are making it (the ECJ) a reliable cornerstone of European integration, with growing importance.

Articles 49 TFEU (ex 43 EU) and 56 TFEU (ex 49 EU) extend the rights of free movement to workers of another Member State, or to provide services there. These rights also apply to the legal person – i.e., the company [1] – [2] .

Especially the right of establishment has been challenged and upheld by the European Court of Justice as ‘fundamental rights’, even in the absence of implementing Community measures [3] .

In Reyners[4], one of the earliest cases concerning freedom of establishment, the ECJ ruled that Article 43 of the Treaty was directly effective, despite the fact that the stringent conditions which had been set out in Van Gend en Loos[5] did not appear to have been met[6] and the right of establishment in a Member State as addressed by the ECJ in Gebhard[7] as follows[8]:

“The concept of establishment within the meaning of the Treaty is therefore a very broad one, allowing a Community national to participate, on a stable and continuous basis, in the (economy of) a Member State, other than his state of origin and to profit therefrom, …….”.

In Centros [4] the European Court of Justice upheld the refusal of the Danish authorities to register a branch of a company of another Member State (UK), in which the UK company had its registered office, but where it had never carried out any business, contrary to Article 52 (now Article 43) and Article 58 (now Article 48) of the EC Treaty. The ECJ’s refusal of the registration was based on the ground that Centros, which was not trading in any way in the UK, was in fact seeking to establish in Denmark, not a branch but a principal establishment, but by circumventing the national UK and Danish rules concerning the paying-up of minimum capital fixed at DKK 200 000 by a Danish Law of 1991 [5] .

In its decision of 5th November 2002 in Case C-208/00 Uberseering BV v Nordic Construction Company Baumanagement GmbH [6] the ECJ has clearly rejected Member State laws, i.e. the ‘real seat or head office’ doctrine, based on the nationality of a company as main place of business of a company’s situated within the European Union[12]. The case is significant in that it appears to spell the end of the seat principle as a viable national rule of conflicts law [7] . The ruling by the ECJ in the case of Uberseering, renders the seat doctrine unworkable in practice. By characterising the case as compelling a secondary establishment, the Court was effectively denying the validity of the doctrine, because under that theory, this was, in reality, a case involving the relocation of a primary establishment (i.e. the real seat) [8] .

A Member State may continue to apply elements of the real seat doctrine to its own companies. A company, which is incorporated under the laws of a Member State, can be regarded as having been wound up if the company moves its head office or registered to another Member State (Daily Mail). A right for a company to change the company law applicable to it is secured in the Statute for the European Company, although the rule as written does not allow for a separation of the registered office and the head office (SE Regulation, Article 7) [9] .

In Commission v Germany (Case C-205/84) the Court considered the German requirement that all insurance undertakings wishing to conduct business in Germany had to be permanently established there and authorised by the German State. The ECJ denied the German position with the ruling of Commission v Germany (Case C-205/84), when the Court held Germany in violation, as it effectively called for the relocation of a primary establishment (i.e. the real seat) [10] . The ECJ effectively denied the validity of the (German) doctrine.

In Marks & Spencer (Case C-446/03) the UK provisions, did not allow a UK-resident parent company to deduct the losses incurred by its subsidiaries in other Member States, although they did allow a Company to deduct losses incurred by a resident subsidiary, were compatible with Arts 43 and 48 EC Treaty on the freedom of establishment. The ECJ held that the UK legislation constituted a restriction on freedom of establishment, in breach of Arts 43 and 48 EC Treaty, in that it applies different treatment for tax purposes to losses incurred by a resident subsidiary from that applied to losses incurred by a non resident subsidiary. This would deter parent companies from setting up subsidiaries in other Member States. However, the ECJ acknowledged that such a restriction might be permitted if it pursues a legitimate objective, compatible with the Treaty, which is justified by imperative reasons in the public interest [11] .

In Inspire Art Ltd [12] it was further submitted that the Daily Mail case decided that EC Treaty arts 43 and 48 did not disentitle Member States from determining the relevant connecting factor to their national legal order and that, in effect, it was held that freedom of establishment did not preclude the adoption under private international law of rules applying to companies falling within the ambit of Netherlands law. It was argued by the governments of the Netherlands, Germany and Italy, that ECJ case law recognises the right of Member States to implement measures designed to prevent improper or fraudulent evasion of national legislation under the cloak of Community law [13] . The Court concluded that the “reasons for which the company was formed in that other Member State, and the fact that it carries on its activities exclusively or almost exclusively in the Member State of establishment, do not deprive it of the right to invoke the freedom of establishment guaranteed by the EC Treaty, save where the existence of an abuse is established on a case-by-case basis” [14] .

Inspire Art is significant because the ECJ confronted substantive company law issues. The legality of national laws which impede the exercise of EC Treaty freedoms will be tested by reference to four conditions: they must be non-discriminatory; they must be necessary in order to protect a public interest objective; they must be suitable for securing the attainment of the objective they are designed to address; and they must be proportionate [15] .

The decisions also represent an important step in the evolution of the ECJ’s jurisprudence in so far as the Court is now beginning to apply internal market principles within the realms of company law and private international law. While the ECJ might in the past have been accused of taking an overly cautious approach towards conflict issues, it has now come down decisively in favour of giving priority to internal market principles by rejecting arguments based upon the perceived need of Member States to ring-fence Company and conflicts laws [16] .

The Role of the ECJ

The role of the ECJ is to make clear concise rulings which, in the process, will make it the cornerstone of European integration.

Any speculation as to whether the European Court of Justice (ECJ) is or is not consistent in its jurisprudence on (inter alia) freedom of establishment predicates a preliminary recognition of the role it has been entrusted with by the Treaty: that is to say, o “ensure” that “in the interpretation and application of (the) Treaty the law is observed” (Art. 220)1..

From this position, the Court has propelled the process that is commonly referred o as “negative integration” among Member States (MSs), that is to say an integration pursued by enforcing compliance of national legislative provisions or administrative practices with the relevant EC legal framework2.

It should however be noted that, as a consequence of its supremacy over national law and its direct applicability, the interpretation and enforcement of community law is carried out daily also by national courts, which are, therefore, in this respect, “community courts” on their own merit. Indeed, national courts are the “frontline” interpreters of community law and thus actors in the negative integration process, given the number of cases that are continuously dealt with by each of them3.

Scrutinising EC secondary legislation is another of the ECJ’s original tasks. As was shown in recent academic literature, especially in the field of EC company law, secondary law issued by the EC itself has often turned out to be “trivial” rather than really substantial.23 This is related to the fact that EC secondary legislation in most cases turns out to give birth to rather weak compromises, as recently happened to the ambitious project of the Services Directive.24 As the European Union is steadily enlarging, law-making is becoming more and more difficult, given the fact that different viewpoints and arguments of many different legal and cultural traditions have to be integrated. Clear concise rulings by the ECJ are making it, steadily, a reliable cornerstone of European integration.

The steady, almost predictably pro-integrationist decisions of the ECJ have recently even led to criticism arguing that the ECJ is being too “pro-European”, thereby losing all objectivity.25 and that European case law has proven to be more integrationist rather than legislation, which adds an interesting flavour to the “compromise” clause of Article 7 of the Regulation. However hard Member States try to overcome legal differences— often through compromise, the Court is not forced to consider political difficulties. It can afford to decide one way or the other without being “politically incorrect”.

Arguably, the ECJ could therefore be more willing to overcome the compromise that is represented by Article 7 of the Regulation.

One can expect to see the roll of the ECJ coming more and more to the fore in matters based on “grounds of public interest” which are vague and subject to interpretation.

Power of a Member State to Oppose a Transfer on Public Interest Grounds

As regards an SE registered in Member State, the law of that Member State may provide that the transfer of a registered office shall not take effect if any of that State’s competent authorities opposes it within a two-month period after the publication of the transfer proposal (Article 8(14) of the Regulation). Such opposition may be based on “grounds of public interest”. The main problem connected with this issue is its vague definition. The “public grounds” are a regrettably uncertain term.94 A wide definition could lead to a conflict with the freedom of establishment. Therefore, as the definition of “public interest” remains uncertain, only case law by the ECJ will bring legal certainty in this regard.

This right to oppose can already be found in the Regulation on the European

Economic Interest Grouping.89 Here, it was the British delegation who wished to incorporate this stipulation.90 It is based on the particularities of English law which allows a right to oppose for tax authorities. Even within Great Britain, until 1988 the right to migrate for companies was denied unless all tax and social security debts were fully paid. This, incidentally, was the reason for the famous ECJ case Daily Mail.91.

The EC law for freedom of establishment, irrespective of the interpretation of Daily Mail, allows “outbound” transfer of the administrative seat and/or of the registered office. This means that: (1) the theory according to which the country of incorporation is free to liquidate a company, when it transfers abroad, the administrative seat or the registered office is not compatible with freedom of establishment; (2) also the transfer abroad of the registered office is covered by freedom of establishment; (3) Member States can place restrictions to the transfer abroad of the administrative seat and/or of the registered office, providing that these restrictions are aimed at legitimate public interest and are proportionate to the criteria established by the ECJ.

Indeed, freedom of establishment does not grant to natural persons, establishing themselves in another country, a right in front of the original country to change nationality. If we place the nationality of a natural person at the same footing with the lex societatis of a legal person, we should conclude that Member States do not have a duty to allow national companies to change voluntarily the applicable company law, preserving their legal identity129.

Despite this conclusion, freedom of establishment covers the transfer abroad of the registered office; therefore, the country of incorporation can neither liquidate the emigrating company nor consider the transfer as ineffective, unless this is proportionate to achieve a legitimate public goal. This in turn should be established on a case by case basis and the same rule applies to the seat transfer, if this leads to a company law change.

If, by general and abstract legislation, a Member State imposes on companies

formed in accordance with the law of another Member State a duty to comply

with mandatory company law rules of the Member State of establishment, this

involves an unjustifiable restriction on the companies in question (Inspire Art).

Such a procedure is therefore an infringement of the right of establishment. Only in those cases where the existence of an abuse is established on a case-by-case basis, can a Member State deprive a foreign company of the right to invoke the freedom of establishment, which is otherwise guaranteed by the Treaty, or impose a duty on the foreign company to comply with company law rules of the Member State of establishment.