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.
Court cases
Olympus
The “Olympus” case C-706/22 involved an SE (O Holding SE) established as a holding company without any employees, meaning there were no negotiations with workers at the time of establishment. The German Group Works Council brought the case to the German courts as it claimed negotiations should be conducted at the level of the SE, as the holding had later hired thousands of employees. The preliminary question the German Federal Labour Court addressed to the ECJ was whether an employee-less SE (“letterbox company”) should catch up on a negotiation procedure when it is brought to life and gets employees . In its ruling of 16 May 2024, the ECJ declared that an SE is not required to open negotiations on worker involvement in such a case, even when thousands of employees were added later, because the legislator deliberately did not mandate so. This means that a holding-SE and its group can indefinitely operate without workers’ involvement at its top management. In this way and for the first time, the ECJ ratified the possibility for corporate power to de facto opt-out from any cross-border forms of employee involvement, whether at the supervisory board or at the European Works Council level. The ruling sets a dangerous precedent for the future of the European Social Model.
The “Polbud” case C-106/16 is only one in a series of cases in which the ECJ holds that nothing should restrict a company’s freedom of establishment. In this case, a Polish company that had transferred its registered office to Luxembourg asked to be removed from the Polish Registry, despite not being liquidated, as it continued to exist as a legal person incorporated under the laws of Luxembourg. On the other hand, the Polish government refused to remove it from the National Registry, because it did not provide evidence of a successful liquidation procedure, and the conflict was brought to court. The CJEU sided with the company, even when the location of its real head office had not changed location, namely its economic activity had not followed the transfer of seat and moved from Poland to Luxembourg.
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.
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 .
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.
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.
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
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.