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 (Case 81/87, 27 September 1988) 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).


Centros (Case C-212/97, 9 March 1999) Centros

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.


Inspire Art (Case C-167/01; 30 September 2003) Inspire Art

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.

Cadbury Schweppes (Case C-196/04, 12 September 2006) 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.

Cartesio (Case C-210/06, 16 December 2008) 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.