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NUMMER IUR-INFORMATION IUR INSTITUTET FÖR UTLÄNDSK RÄTT SPECIAL EDITION ARTICLE The Seat Theory and the Incorporation Theory - an Analysis of the Meaning of the Freedom of Establishment IUR-information

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NUMMER IUR-INFORMATION IUR INSTITUTET FÖR UTLÄNDSK RÄTT SPECIAL EDITION ARTICLE The Seat Theory and the Incorporation Theory - an Analysis of the Meaning of the Freedom of Establishment IUR-information utkommer med 12 nummer per år och innehåller ett kvalificerat urval av internationell juridisk information av intresse för företag, jurister, revisorer och konsulter som arbetar med internationella affärer. IUR-information innehåller fasta avdelningar med artiklar, nyhetsnotiser, biblioteksnytt samt ett ackumulerat register. Artiklarna tar upp praktiska intressanta frågor om internationell affärsjuridik inklusive internationell beskattning. Nyhetsnotiserna ger koncentrerad information om nya lagar och regler från hela världen. För mera detaljerad information finns underlagsmaterialet tillgängligt hos IUR. Biblioteksnytt innehåller uppgifter om intressanta tidskriftsartiklar, böcker och andra media som finns hos IUR. Materialet är tillgängligt för prenumeranter på IUR-information. Institutet för Utländsk Rätt, IUR, är en informationscentral för internationell affärsjuridik och skatterätt. Vi har en unik kapacitet med ca 80 löpande internationella lösbladsverk och ca 100 tidskrifter samt böcker, CD-Rom och databaser med information om lagar och regler från hela världen. Abonnemang på IUR-information innebär också tillgång till IUR:s bibliotek samt en möjlighet att utan extra kostnad få del av underlagsmaterial och därigenom kunna få djupare kunskap om regler och nyheter i olika länder. IUR:s fokus är frågor avseende internationell beskattning och internationell kommersiell rätt av betydelse för företag och individer med gränsöverskridande verksamhet. Inom dessa områden skall IUR-information ge snabb och översiktlig information kombinerad med praktiskt vägledning för berörda företag och individer och stimulera till kvalificerad analys och debatt. Samtliga artiklar och notiser är undertecknade med namn och så långt möjligt e-postadress för direkt kontakt. Varje författare svarar för innehållet och dess vederhäftighet samt att publiceringen sker utan intrång i annan persons upphovsrätt The Seat Theory and the Incorporation Theory - an Analysis of the Meaning of the Freedom of Establishment 1. Introduction Some of the Member States of the European Union apply the seat theory, others the incorporation theory. In a situation, where a limited liability company, formed under the law of a Member State applying the incorporation theory, has its actual seat in a state that applies the seat theory, the meaning of the notion secondary establishment is brought to a head. According to the seat theory, the law applicable to a limited liability company is determined by the location of its actual seat. When according to German law the actual seat of a foreign limited liability company is considered to be located in Germany, Germany has not recognised this company as existing. 1 In the Überseering case 2, the Court of Justice of the European Communities ruled on one consequence of the application of the seat theory. This judgement might, to some extent at least, be the end of the long and extensive debate particularly in German doctrine on whether the consequences of the application of the seat theory are compatible with articles 43 EC and 48 EC. The meaning of secondary establishment is linked to the requirements that according to EC law the Member States may impose on limited liability companies to let them enjoy the freedom of establishment. An analysis of the freedom of establishment according to the Segers 3, Daily Mail 4 and Centros 5 judgements shows that the Überseering judgement must not be considered to be a turning-point of European company law 6, but instead a confirmation of the three cases. These judgements clarify which requirements a limited liability company has to fulfil to enjoy the freedom of establishment, irrespectively of whether it has been formed under the law of a Member State applying the seat theory or formed under the law of a Member State applying the incorporation theory and whether it wishes to establish a branch in a state applying the seat theory or one using the incorporation theory Terminology German scholars use different notions for what here will be referred to as actual seat. 8 The precise meaning of actual seat will not be discussed. Briefly stated, decisive for the place of the actual seat of a company is the place [ ] where the main decisions of the company leadership are effectively taking the form of current business actions. 9 Below, actual seat is assumed to correspond to the connecting factor central administration. 10 States applying the incorporation theory will here be referred to as I-states. States applying the seat theory are referred to as S-states. State of origin refers to the state, under the law of which a limited liability company has been formed. Recipient state refers to the state in which such a company has located its actual seat, as well as to the state that, according to its law, considers such a company to have located its actual seat there. International private law is abbreviated ip law. Freedom of establishment refers to the freedom of establishment according to the EC Treaty. The Court of Justice of the European Communities will be abbreviated the Court of Justice. When quoting scholars who use the German abbreviation EuGH, the abbreviation ECJ will, however, be used. All references to articles refer to the EC Treaty. Most authors discuss whether the seat theory as such is compatible with articles 43 and 48. As it is possible that one consequence of its application is not compatible with these articles, whereas others are, the wording the consequence of the application of the seat theory will instead be used. 1.2 Delimitation The statements on the seat theory in this article are based on the application of the seat theory as applied according to German law. German law will, however, only be dealt with if necessary in order to examine the meaning of the practice of the Court of Justice as far as the relationship between the seat theory and the incorporation theory under articles 43 and 48 is concerned. The relationship of the seat theory to other national law will not be analysed. Attention will not be paid to specific provisions on the transfer of the actual seat found in, for example, bilateral conventions. Possible justifications of restrictions on the freedom of establishment will not be dealt with 2. The Case Law of the Court of Justice According to article 48 in the application of the rules on freedom of establishment a company formed under the law of a Member State is put on an equal footing with a national of a Member State, if it has the intention to make profit and has its registered office, its central administration or its principal place of business within the European Union. Fundamental for the meaning of the freedom of establishment to a limited liability company is whether all the connecting factors have to be in one and the same Member State. In some situations, the actual seat of a company might be its principal place of business. 11 Whether the actual seat of a company is the same as its central administration or its principal place of business is, however, without importance in this context. The fact of interest is whether article 48 requires something more of a limited liability company formed under the law of a Member State to enjoy the freedom of establishment than that its registered office is in its state of origin. Whether that is the case decides which consequences of the application of the seat theory that are incompatible with the rules on the freedom of establishment. The apprehension that the freedom of establishment of companies is not put on an equal footing with the freedom of establishment of natural persons is widely spread. For that apprehension the Daily Mail judgement plays a great role. For instance, the Proposal for a Directive on the Transfer of the Registered Office of a Company refers to the Daily Mail judgement that is considered there to state that the different connecting factors make it impossible to put companies on a par with natural persons by application of articles 43 and The Daily Mail judgement states, the Regional Appeal Court of Bavaria has held, that the consequences of the application of the seat theory are compatible with EC law. The request of a company formed under British law to register a branch in Germany had been rejected since the company did not have its actual seat abroad. Referring to the Daily Mail judgement, the German court found this consequence to be compatible with EC law. 13 Scholars are split over the meaning of the Segers, Daily Mail and Centros judgements. For instance, some scholars read these judgements as stating that all the consequences of the application of the seat theory are incompatible with EC law, whereas others find them to imply the opposite. An attempt to make the judgements compatible with each other emerges in the conclusion that the seat theory may not be applied to limited liability companies formed under the law of other Member States. This interpretation is based on the Daily Mail judgement paragraph 19, 14 i.e. the same paragraph as the one that is seen as an evidence for all the consequences of the seat theory being compatible with articles 43 and The latter opinion is the predominant one of the doctrine. Ebke, for instance stresses that [a]fter Daily Mail there can be no doubt that the ECJ lets the exercise of the freedom of establishment by a transfer of the actual seat depend on whether the company continues to exist according to the legislation, which according to the ip law of the recipient state is the applicable one. 16 It is concluded that growing harmonization in some fields of company law will not put the Court in a position to reconsider Daily Mail, 17 i.e. the judgement by which the ECJ [ ] confirmed the compliance of the seat theory in a way that cannot be misunderstood. 18 Thus, the interpretation of the Daily Mail judgement is the crucial point for how the state of law has been interpreted as far as the freedom of establishment for companies is concerned and which meaning is attached the Übersee- ring judgement. Whereas Kindler concludes the Centros judgement to be of no importance to Member States that apply the seat theory in international company law, 19 but moreover an encroachment upon the internal ip law of incorporation states, 20 other scholars are of the opinion that by the Centros judgement the Court of Justice has given the application of the seat theory as a breach of the freedom of establishment [ ] a surprisingly clear rejection. 21 Others conclude the Überseering judgement to open up new ground, 22 i.e. to revolutionize the connection of the applicable legislation at least in those Member States [ ] that like Germany until now applied the seat theory. 23 Below, the Segers, Daily Mail, Centros and Überseering cases are accounted for The Segers Case 24 The Segers case concerned the issue whether it was in accordance with EC law that sickness insurance benefits for a director depended on whether his employer, a private limited company, was Dutch or foreign. The fact that the company was formed according to British law and did not conduct any business in the United Kingdom, the Court of Justice found to be of no importance. For the application of the provisions on the freedom of establishment nothing more is required than that the company is formed under the law of a Member State and has its registered office, central administration or principal place of business within the Community. Provided those requirements in article 58 (now article 48) are fulfilled, the Court of Justice stated, it is immaterial for a company s right to enjoy the freedom of establishment that the company conducts its business through an agency, branch or subsidiary solely in another Member State. 2.2 The Daily Mail Case The Daily Mail 25 judgement is a preliminary ruling issued in a dispute between the British tax authority and the company Daily Mail. The latter claimed not to be obliged to obtain fiscal consent to its change of residence from the United Kingdom to the Netherlands. Under UK law, only companies resident for tax purposes in the United Kingdom were as a rule liable to British corporation tax. A company was resident for tax purposes at the place of its central management and control. Companies resident for tax purposes were prohibited from ceasing to be so resident without the consent of the Treasury. In paragraph 19, the Court of Justice emphasised that it should be borne in mind that, unlike natural persons, companies are creatures of the law and, in the present state of Community law, creatures of national law. They exist only by virtue of the varying national legislation which determines their incorporation and functioning. The connecting factor to the national territory required for the incorporation of a company and whether a company may subsequently modify that connecting factor varies widely in the laws of the Member States. The Court of Justice stressed that [t]he Treaty has taken account of that variety in national legislation. In defining, in Article 58, the companies, which enjoy the right of establishment, the Treaty places on the same footing, as connecting factors, the registered office, central administration and principal place of business of a company. Moreover, Article 220 [ ] provides for the conclusion, so far as is necessary, of agreements between the Member States with a view to securing inter alia the retention of legal personality in the event of transfer of the registered office of companies from one country to another. 26 The Court of Justice found that a company incorporated under the law of a Member State and having its registered office there is not entitled to transfer its central management and control to another Member State. 2.3 The Centros Case In the preliminary ruling Centros 27, a private liability company registered in England and Wales was refused to register a branch in Denmark. Centros, which had been formed by two Danish nationals, had not conducted any business since its formation. British law did not impose any requirement on limited liability companies to have a minimum paid-up share capital. Centros application for registering a branch was rejected by the Danish authorities inter alia since Centros was considered in fact to seek to establish a principal establishment, and, accordingly, to circumvent the national rules concerning, in particular, the paying-up of a minimum share capital. Referring to its Segers judgement the Court of Justice stated it to be immaterial for the right of a company to set up a branch in another Member State that the company had been formed in a Member State merely for the purpose of establishing business in another Member State, where its main, or entire, business was to be conducted. The location of a registered office, central administration or principal place of business, the Court of Justice stressed, serves as the connecting factor of a company to the legal system of a Member State in the same way as the nationality is decisive as far as natural persons are concerned. 2.4 The Überseering Case The Überseering 28 judgement is a preliminary ruling in a case referred to the Court of Justice by the Bundesgerichtshof. The dispute was between Überseering BV, a Dutch company, and the German company Nordic Construction Company Baumanagement GmbH (NCC). In 1996, Überseering brought an action against NCC. This action was dismissed since Überseering was considered to have transferred its actual seat to Germany as two Germans residing in Germany had acquired all its shares. In accordance with German law, an action shall be dismissed as inadmissible if a party lacks the capacity to be a party to legal proceedings. A party has such capacity if it has legal capacity. The legal capacity of a company is determined by reference to the law applicable in the place where its actual centre of administration is established. The first question referred to the Court of Justice was whether it is compatible with articles 43 and 48 that a company, formed under the law of a Member State in which its registered office is located, is denied legal capacity in another Member State and, accordingly, the capacity to bring legal proceedings before national courts in order to enforce rights under a contract with a company established in the latter Member State, on the ground the company is deemed to have moved its actual centre of administration to that state. If it would not be compatible, the national court asked whether the freedom of establishment of a company requires that the company s legal capacity and its capacity to be a party to legal proceedings are determined according to the law of its state of origin. The Court of Justice found articles 43 and 48 to be applicable. Article 293 does not constitute a reserve of legislative competence vested in the Member States. So far as is necessary in article 293 refers to if the provisions of the Treaty do not enable its objectives to be attained. 29 Consequently, the exercise of freedom of establishment is not conditioned by conventions entering into force pursuant to article 293. Nor does it depend on the adoption of such harmonisation directives provided for in article 44. According to articles 43 and 48 companies formed under the law of a Member State have the right to conduct business in another Member State. Thereby their registered office, central administration or principal place of business decides their affiliation to a Member State in the same way as nationality does for natural persons. Accordingly, there is an obligation on a Member State to recognise a company s legal capacity and its capacity to be a party to legal proceedings according to that Member State s law under which it was formed and where it has its articles of association, when it exercises its freedom of establishment in the former state. 3. The Relationship between the Judgements In the doctrine, the relationship between the Daily Mail and Centros judgements has been concluded to imply that all the consequences of the application of the seat theory are compatible with articles 43 and 48. The reasoning by Neville et al. may illustrate how this predominant part of the doctrine puts the leading cases in relation to each other. Segers is considered to support the application of the incorporation theory. According to this judgement, the entitlement of a company to freedom of establishment is not affected by the fact that the company does not maintain a link to the Member State, under the law of which it is formed. The Daily Mail judgement was, however, issued after Segers. In contrast to the Daily Mail judgement, conflicts of law rules were not referred to in the Segers judgement. Rules on con- flicts of company law were explicitly dealt with in the Daily Mail judgement. The Centros judgement that in time and order followed the Daily Mail judgement is considered to be of no importance to S-states since the Daily Mail judgement was not mentioned in the Centros judgement, the Centros judgement did not deal with rules on conflicts of company law and Denmark applies the incorporation theory Since the Court of Justice in the Daily Mail judgement is considered to have held that the consequences of the application of the seat theory are compatible with EC law and the Centros judgement is assumed not to have changed that state of law, 31 the relationship between the Daily Mail and Centros judgements will be dealt with. At first, the argument will be examined that the Daily Mail judgement concerned rules on conflicts of company law 32. Then the two other arguments submitted for the consequences of the application of the seat t
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