In a highly publicized ruling dated October 25, 2017—Polbud[1], the Court of Justice of the European Union allows companies to subject themselves to the law of another Member State by transferring their registered office, even if their actual economic activity continues in the Member State of origin. Thus, the Court allows companies to freely choose the applicable corporate law, provided they comply with the rules and formalities of the host country.
It may be advantageous for a company to transfer to another country either its place of management and actual operations (“actual headquarters”) or its place of registration, which typically entails a change in its nationality (“registered office”). There are many reasons for such a change, often driven by the search for the most attractive corporate or tax regime. Within the European Union, such transfers of headquarters were not always—and in some cases still are not—permitted by all Member States and may result in the—disastrous—dissolution of the company or a change in its legal form.
Under the principle of freedom of establishment, European law has gradually expanded the possibilities for such transfers. On the one hand, secondary European law has for years sought to harmonize corporate law, particularly through provisions concerning mergers, demergers, conversions, and international transfers of registered offices. While it is true that cross-border mergers are provided for by a directive only for corporations, the Societas Europaea (SE) was created with the notable feature of allowing it to transfer its registered office and establish itself in another Member State by a simple decision of the management or administrative body. A directive concerning the transfer of the registered office or international conversion has not yet been adopted.
Furthermore, the Court of Justice of the European Union has consistently upheld the principle of freedom to transfer a company’s registered office and to restructure between Member States through transfers of registered office or mergers since 1988[2].
The distinctive feature of the Polbud decision lies in the fact that the Court of Justice recognized that the principle of freedom of establishment in the transfer of a registered office within the European Union extends to cases where the statutory registered office —the place of registration—is transferred to a new host Member State, even if the company’s actual place of business remains unequivocally in the Member State of origin.
1. The transfer of the statutory headquarters without relocating the actual headquarters, protected by the freedom of establishment
At the heart of this ruling is Polbud, a company incorporated under Polish law, which decided to transfer its registered office to Luxembourg while maintaining its principal business activities and its de facto headquarters in Poland. After being registered in Luxembourg as a Luxembourg company, Polbud requested to be removed from the Polish commercial register, where it was still registered. This request was rejected by the registration court, which made removal from the registry contingent upon the company’s dissolution following a liquidation proceeding (which obviously entails administrative, tax, and financial obligations).
In response to a request for a preliminary ruling, the CJEU examined the issue of compliance with European law, particularly with regard to the freedom of establishment[3], of the Polish provisions making the removal from the register of a company transferred to Luxembourg contingent upon its liquidation.
According to the CJEU ruling, the company had validly transferred its registered office as long as the conditions for establishment required by the host state were met, regardless of the location of its actual economic activity. The home state was not entitled to require the company’s liquidation since Polish domestic law allowed companies organized under national law to change their legal form without prior liquidation. The underlying principle is not new, but the CJEU has significantly expanded the freedom of establishment.
Compared to previous case law[4], the Polbud case thus provides the CJEU with an opportunity to rule on a situation involving the transfer of a registered office while maintaining legal personality, which presents two novel aspects:
- In this case, unlike in most other rulings on this subject, the CJEU had to rule on restrictions imposed not by the host country, but by the country of origin.
- The issue here was whether Polbud could rely on the freedom of establishment to oppose its liquidation, given that it claimed (at least initially) to want to maintain its actual place of business and its principal activity in its home country.
With its ruling in favor of Polbud’s mobility without restrictions regarding its actual place of business, the CJEU reaffirms its very broad approach to the scope of the freedom of establishment. According to the CJEU, the expanded scope of this freedom thus also covers the case of a company that merely wishes to adopt a different legal form without changing its actual place of business.
2. Rejection of restrictions other than those imposed by the host Member State
Any restriction that the home Member State wishes to impose on the freedom of establishment must be justified and proportionate to an objective of general interest. Unsurprisingly, the CJEU dismissed the objective of protecting creditors, minority shareholders, and employees invoked in this case, and held that requiring liquidation prior to the company’s dissolution was disproportionate since the host Member State allows the company to continue operating. It is true that the interests of creditors, employees, or minority shareholders could be jeopardized by the company’s dissolution. However, they could be protected by measures less restrictive than liquidation (for example, a duty to publish or consult, or the mandatory provision of security, etc.).
3. Risks and Prospects for Relocating a Company’s Headquarters Within the European Union
In its Polbud ruling, the Court of Justice rejects any notion of an abuse of rights in the exercise of the right of establishment for the purpose of benefiting from more favorable legislation[5] despite the often artificial nature of the separation between the registered office and actual economic activity. This very lenient stance is bound to encourage forum shopping. Due to the lack of harmonization among national laws regarding the connecting factors that determine a company’s nationality, it is advisable to examine the specific circumstances of each individual case before implementing cross-border mobility.
Companies wishing to take advantage of this freedom will therefore need to carefully verify whether the host country in question permits such adoption of its law by companies that still have their actual headquarters in the home Member State. Furthermore, it is important to note that this form of “forum shopping” in corporate law is limited by the rules governing matters subject to other connecting factors, such as insolvency law or labor law, …
For the time being, French law considers the registered office to be the primary criterion[6] but this is supplemented by the criterion of the actual conduct of business, in particular to prevent abuse. Conversely, however, the actual registered office alone does not, in principle, require registration; thus, the registered office of a company registered in France could be moved to a host Member State without affecting the company’s actual business activities.
Due to the difficulties arising from this conflict over the criteria for determining tax jurisdiction among Member States, impact assessments on the draft14th Cross-Border Transfer Directive were recently presented; however, they have not yet convinced the European Commission to put forward a proposal for a directive.
In the absence of uniform European regulations, it is certain that “competition” among national corporate laws—each seeking to attract the relocation of foreign corporate headquarters and promote its own domestic law—will undoubtedly intensify further following the publication of this ruling.
Dr. Antje Luke and Jessica Noy-Gsell
[1] Judgment of October 25, 2017, Polbud, C-106/16, ECLI:EU:C:2017:804.
[2]Daily Mail Judgment (ECJ, Sept. 27, 1988, Case C-81/87), Centros (March 9, 1999, Case 212-97), Überseering (Nov. 5, 2002, Case C-208/00), Inspire Art (Sept. 30, 2003, Case C-167/01), SEVIC (Dec. 13, 2005, Case C-411/03), Cartesio (Dec. 16, 2008, Case C-210/06), and VALE (July 12, 2012, Case C-378/10).
[3] Articles 49 and 54 of the Treaty on the Functioning of the European Union.
[4] In particular, the Cartesio judgment of December 16, 2008, C-210/06, ECLI:EU:C:2008:723.
[5] Judgment of October 25, 2017, POLBUD, C-106/16, ECLI:EU:C:2017:804, paragraph 40: “the mere fact of establishing a company’s registered office or actual place of business in accordance with the laws of a Member State for the purpose of benefiting from more favorable legislation does not in itself constitute an abuse.”
[6] Article 1837 of the Civil Code or Article L. 210-3 of the Commercial Code.