Master’s degree in International and European Law
The Freedom of Establishment and the Future of the SUP – the Necessity of the
Development in the Single Market
FINAL
By
Inga Andriuskeviciute Student ID: 11416467
Master’s Thesis
Master’s Programme European Union Law Supervisor: Mr. Dr. R. H. Ronald van Ooik
Table of Contents
List of Abbreviations 3
I. Introduction 4
II. The CJEU Case Law on the Freedom of Establishment 5
1. Scope of the Freedom of Establishment 5
2. The Direct Effect of Article 49 TFEU 7
2.1. Vertical Direct Effect of Article 49 TFEU 7
2.2. Horizontal Direct Effect (Extended Vertical Direct Effect) of Article 49 TFEU 8
3. The Definition of Establishment 10
4. Real Seat v Incorporation Theory in EU 11
5. The Distinction between Inbound and Outbound Movement 12
5.1. Outbound Movement 13
5.2. Inbound Movement 16
6. Mergers 18
7. Justifications & Restrictions on the Freedom of Establishment 19
III. The SUP Directive 21
1. Legal Basis 21
2. The Main Objective of the SUP Directive 23
3. The SUP’s Contribution the EU Legal Framework 25
IV. The Future SUP and the Freedom of Establishment 28
1. Inbound Movement of the Future SUP Undertaking 28
2.Outbound Movement of the Future SUP Undertaking 29
V. Conclusion 31
VI. Bibliography 33
1. Primary Sources 33
2. Secondary Sources 37
List of Abbreviations
AG Die Aktiengesellschaft – German public limited liability company
BV
Besloten vennootschap met beperkte aansprakelijkheid – Dutch private limited liability company type
CJEU The Court of Justice of the European Union
EEC European Economic Community
EU The European Union EUR Euro
GmbH Gesellschaft mit beschränkter Haftung, German private limited liability company type
Ltd Private limited liability company type in the United Kingdom
MS Member State
plc Public limited liability company type in the United Kingdom
SE Societas Europaea
SME Small and medium size enterprise
SPE Societas private europaea
SUP The Societas Unius Persoanae (Single-member private limited company)
TEC The Treaty of Rome
TEU The Treaty of the European Union
TFEU The Treaty on the Functioning of the European Union
UG/light GmbH Unternehmergesellschaft, sub-form of private limited liability company in Germany
UK The United Kingdom
WFBV Wet Formeel Buitenlandse Vennootschappen - Formal Foreign Companies
Act
I. Introduction
The freedom of establishment is defined as one of the four fundamental freedoms of the European Union (hereafter – the EU) next to freedom of movement of goods, capital and labour. It is essential for the functioning of the internal market, cross-border business activities, and is undeniably linked to other vital freedoms of the single market. The freedom of establishment is given effect differently
depending on whether the cross-border mobility case concerns inbound or outbound movement. The CJEU case law is consistent regarding these two differentiations. As company laws in EU are very divergent due to lack of harmonization in the company law area. Different Member States have distinctive company types and this differentiation is natural. However, the question emerges whether the differentiation could still be valid regarding identical business vehicle operating in the EU that is ultimately governed by the equivalent laws. This would be the situation if the EU adopts the proposed directive for the single-member private company (SUP). Whether the proposed SUP directive complies with the CJEU case law on the freedom of establishment is of high relevance. Provided that the future SUP directive is adopted, it would replace current 12th Company Directive
2009/102/EC on single-member private limited liability companies. The proposed directive aims at making it less expensive, more efficient and easier to conduct business across the EU for the SMEs, as only a small percentage of SMEs are currently conducting cross-border economic activities, which ultimately means the SMEs are not making use of what the internal market of the EU is offering. Thus, this essay will try to shed some light on the issue of cross-border mobility by undertaking including the future SUP company type, and provide solutions regarding the concern. The essay begins with examining the freedom of establishment, its scope, direct effect, establishment definition and shortly overviews the conflicting incorporation theories. It then analyses the inbound and outbound corporate mobility including mergers (part II). The SUP proposal is further assessed where its adaptation procedure is discussed, current stance and possible added significance to the EU company law (part III). Eventually, it is examined hypothetical variations where the future undertaking SUP is exercising its right of establishment and its inbound and outbound movement is evaluated under the current CJEU case law (part IV). It is followed by conclusion (part V) and bibliography (VI).
II. The CJEU Case Law on the Freedom of Establishment
The freedom of establishment as provided in the Treaty on the Functioning of the European Union (TFEU) can be found in Article 49 TFEU and has to be interpreted in conjunction with Article 56 TFEU. Article 49 (ex Article 43 TEC) provides that:
“Within the framework of the provisions set out below, restrictions on the freedom of establishment of nationals of a Member State in the territory of another Member State shall be prohibited. Such prohibition shall also apply to restrictions on the setting-up of agencies, branches or subsidiaries by nationals of any Member State established in the territory of any Member State. Freedom of establishment shall include the right to take up and pursue activities as self-employed persons and to set up and manage undertakings, in particular companies or firms within the meaning of the second paragraph of Article 54, under the conditions laid down for its own nationals by the law of the country where such establishment is effected, subject to the provisions of the Chapter relating to capital.”
In addition, Article 54 (ex Article 48 TEC) states that:
“Companies or firms formed in accordance with the law of a Member State and having their registered office, central administration or principal place of business within the Union shall, for the purposes of this Chapter, be treated in the same way as natural persons who are nationals of Member States. ‘Companies or firms’ means companies or firms constituted under civil or commercial law, including cooperative societies, and other legal persons governed by public or private law, save for those which are non-profit-making.”
It should be noted that these provisions have not been altered for more than fifty years now and thus do not provide for clear and precise answers or reflect recent developments. Hence, the CJEU case law provides for authoritative interpretation and guidance to the freedom of establishment.
The personal scope of the freedom of establishment includes those persons who are able to benefit from the freedom of establishment provided in Articles 49 and 54 TFEU. It includes both, legal and natural persons. Natural persons have to have nationality of one of the EU Member State’s, while legal persons, as stated in Article 54 TFEU, have to be formed in accordance with the law of an EU Member State and have their registered office, central administration or principal place of business within the EU1. Furthermore, the CJEU case law regarding natural persons exercising their freedom
of establishment has undoubtedly helped to define the scope. In the Gebhard case it was stated that: 1 Article 54 TFEU.
“The right of establishment, provided for in Articles 52 [now 49 TFEU] to 58 [now 54 TFEU] of the Treaty, is granted both to legal persons within the meaning of Article 58 and to natural persons who are nationals of a Member State of the Community. Subject to the exceptions and conditions laid down, it allows all types of self-employed activity to be taken up and pursued on the territory of any other Member State, undertakings to be formed and operated, and agencies, branches or subsidiaries to be set up.”2 It follows from the case law as well, that any resident of the EU,
irrespective of his nationality, who is a shareholder in the capital of company, which is established in another Member State and has a ‘definite influence’ over the company’s decisions, and at the same time can determine its activities, satisfies the personal scope requirement for Article 49 TFEU to be applicable.3 Also, EU national living in one Member State, while holding majority of the
shares in companies established in another Member States falls within the scope of Article 49 TFEU.4 Situations falling outside the personal scope of Article 49 TFEU would concern a
shareholding by EU national in a company with a registered office in a third country.5 As regarding
the legal persons, they are to be treated in the same way as natural persons under Article 54 TFEU (48 TEC),6 however this statement does not reflect the reality accurately, or can in fact be strictly
applied because of the disparities between natural and legal persons. Legal persons governed by private or public law excluding non-profit making establishments constitute a company under Article 54 TFEU. At the same time, non-profit making companies engaged in economic activity can satisfy the scope of Article 49 TFEU.7
The material scope of the freedom of establishment covers cases with only cross-border elements, leaving wholly internal situations outside.8 However, Article 49 TFEU would still cover domestic
situation including a national intending to leave and set up an establishment in another Member State. While temporal scope of Articles 49 and 54 covers situations as of 1 January 1970, which constitutes the end of the transitional period.9
2. The Direct Effect of Article 49 TFEU
2 Case C-55/94 Gebhard v Consiglio dell'Ordine degli Avvocati e Procuratori di Milano ECR I-4165 [23].
3 Case C-87/13 X [2014] not published yet [21]; Case C-251/98 C. Baars v Inspecteur der Belastingen Particulieren/Onderneminge Gorinchem [2000] ECR I-2787 [21] – [22].
4 Case C-464/05 Geurts v Belgische Staat [2007]ECR I-9325 [14].
5 Case C-31/11 Scheunemann [2012] not published yet [33].
6 Case C-140/03 Commission v Greece [2005] ECR I-3177 [29]
7 Case C-70/95 Sodemare SA, Anni Azzurri Holding SpA and Anni Azzurri Rezzato Srl v Regione Lombardia [1996] ECR I-03395.
8 İlke Göçmen, 'The Freedom of Establishment and to Provide Services: a Comparison of The Freedoms in European Union Law and Turkey–EU Association Law' [2011] 8(1) Ankara Law Review 78.
The direct effect is the principle in EU law, which allows individuals to directly invoke a European provision before the national courts10 without relying on implementing measures. This principle is
of concern to only a specific part of EU provisions and can be applied in relation to regulations, directives, EU Treaties and decisions11. The vertical direct effect can be established between an
individual and the authorities of Member States, while horizontal direct effect can exist between private parties. The CJEU first decided upon direct effect on the freedom of movement of goods in Van Gent en Loos case setting the precedent with specific conditions to be complied with in order to rely on Article 12 EEC (Article 34 TFEU) directly before the national courts. In this case the Court observed the objective of the EEC Treaty – the establishment of a functioning Common Market, and reaffirmed it was of direct concern to interested parties in the EU.12 The horizontal direct effect,
on the other hand, was later declared by the Court to exist regarding Article 141 EC in Defrenne v. Sabena where an individual initiated the action against a private party. The CJEU when deciding whether a Treaty provision has a horizontal direct effect will also consider the intention of the Treaty makers as in Angonese case, where Articles 157 and 45(2) TFEU were found to be applicable directly against private parties.13 It is now clear that certain Treaty provisions can have
both, vertical and horizontal direct effect.
2.1. Vertical Direct Effect of Article 49 TFEU
The CJEU has decided in Reyners v. Belgium case that Article 49 TFEU has vertical direct effect. The case concerned a Dutch national who had received his legal education in Belgium and was refused the admission by the Belgian Bar Association due to his non-Belgian nationality. Despite falling short on Van Gent en Loos requirements for the direct effect (clear, precise, unconditional and no implementing measures are needed)14, and Council’s stagnant attitude towards legislative
progress after Luxembourg Accords which resulted in implementing legislation not being adopted, the freedom of establishment was granted vertical direct effect by the CJEU.15 The Court
10 Europaeu, 'Direct Effect' (Europaeu, 15 February
2017) <https://www.eurofound.europa.eu/observatories/eurwork/industrial-relations-dictionary/direct-effect> accessed 15 June 2017.
11 Ibid.
12 Anca-Magda Vlaicu, 'The Direct Effect of Treaty Provisions' [2009] 1(1) Lex ET Scientia Juridical Series 241.
13 Mirjamde de Mol, 'The Novel Approach of the CJEU on the Horizontal Direct Effect of the EU Principle of Non-Discrimination: (Unbridled) Expansionism Of EU Law?' [2012] 1(2) Maastricht Journal 115.
14 Case C-26/62 NV Algemene Transport- en Expeditie Onderneming van Gend & Loos v Netherlands Inland Revenue Administration [1963] ECR I3.
15 Paul Craig and Grainne de Burca, EU Law: Text, Cases, and Materials (6th edn, Oxford University Press 2015) 802.
emphasized that in spite of the lack of implementing directives, Article 49 TFEU provided for a precise result to be achieved by the end of transitional period – the requirement of non-discrimination on grounds of nationality.16 The desired end result was ultimately declared not
dependent on implementation of a programme of progressive measures.17 However, the directives
are of tremendous significance as they make easier the effective exercise of the right of establishment.18 Subsequently, the CJEU went further in latter cases and prevented Member States
from plainly, without further explanation, denying nationals of other Member States to perform trade or profession on the ground that their qualification was not precisely as that of the required one in the host Member State. Indeed, the Treaty articles conferred upon Member States specific positive obligations on national authorities and also professional organizations to assure the freedom of establishment, even where the EU or national law does not yet provide for equivalence or the recognition of qualifications.19
2.2. Horizontal Direct Effect (Extended Vertical Direct Effect) of Article 49 TFEU
The freedom of establishment, as one of the fundamental freedoms of the European Union, was declared to have horizontal direct effect, albeit with some specific conditions, which consequently resembles more the extended vertical direct effect. The leading case in the area is Viking case, where the issue concerned a Finnish shipping company Viking Line’s intention to re-flag its ferry Rosella and register in Estonia. The Finnish Seamen’s Union (FSU) and the International Transport Workers’ Federation (ITF) were against it as such action by Viking Line would result in laying off current workers and hiring cheaper Estonian crew members. The ITF sent a circular to its partners requesting them to refrain from negotiating with Viking Line, which resulted in Viking Line being prevented from holding talks with Estonian trade unions. While the FSU pronounced its plan to strike and demanded a mutual agreement to be settled which would assure Viking Lane’s future compliance with the Finnish employment law and retain current crew of the Rosella. Shortly after these events, Viking Line brought a claim before the Court (in the United Kingdom) and requested it to order the ITF to withdraw the circular and the FSU to refrain from infringing its right of establishment concerning its intention of moving its registered office to Estonia. The CJEU among other things had to decide whether Article 43 EC (now Article 49 TFEU) could be relied against private parties in the court proceedings before the national courts, namely whether Article 49 TFEU 16 Ibid.
17 Ibid.
18 Ibid.
had a horizontal direct effect. The Court stated that Article 49 TFEU has a horizontal direct effect and can be relied against not only the authorities of a Member State, but also against private parties, such as trade unions or associations of trade unions. The Treaty freedoms would be undermined if, while preventing State barriers, associations or organizations by exercising their legal autonomy could obstruct their enjoyment by other private parties.20 Thus, as such associations and
organizations are capable of restricting the freedoms of movement due to their capacity to influence working conditions, employment of persons and establishment as such.21 This possession of
regulatory powers is the factor extending applicability of Article 49 FEU to private parties. The horizontal direct effect can be deduced only where associations, organizations or trade unions are performing in a similar manner as the public authorities, namely creating rules of any other nature aimed at regulating in a collective manner gainful employment, self-employment and the provision of services.22 Article 43 EC (Article 49 TFEU) does not apply to private actors who lack such
regulatory powers.23 In Viking the Court found that collective actions by FSU and the ITF restrict,
and at the same time make it less attractive (or even pointless), Viking’s freedom of establishment.24
AG Maduro concluded in his opinion that what seems to be implied is that the rules on freedom of movement apply directly to any private action that is capable of effectively restricting others from exercising their right of freedom of movement.25 The Court’s judgment in Mangold is of relevance,
as it provides for horizontal direct effect of the general principle of equality, which can reinforce and extend the horizontal direct effect of the fundamental freedoms of the European Union.26
3. The Definition of Establishment
“The establishment” definition is not provided for in the Treaties and thus case law offers qualitative characterization. The CJEU admitted the concept of “establishment” to be a broad one, permitting an EU national to participate on a stable and continuous basis, in the economic life of a 20 Case C-438/05 International Transport Workers’ Federation and Finnish Seamen’s Union v Viking Line ABP and OÜ Viking Line Eesti [2007] ECR I-10779 [57].
21 Ibid. [34].
22 Ibid. [33]; Case 36/74 Walrave and Koch [1974] ECR 1405 [17]; Case 13/76 Dona [1976] ECR 1333 [17]; Case C-415/93 Bosman [1995] ECR I-04921 [82]; Joined Cases C-51/96 and C-191/97 Deliège [2000] ECR 1-2549 [47]; Case C-281/98 Angonese [2000] ECR 1-4139 [31]; Case C-309/99 Wouters and Others [2002] ECR 1-1577 [120].
23 Simon Tans, 'Case Report on Laval, 18 December 2007 (Case 341/05) and Viking, 11 December 2007 (Case C-438/05)' [2008] 10 (2) European Journal of Migration and Law 268.
24 Case C-438/05 International Transport Workers’ Federation and Finnish Seamen’s Union v Viking Line ABP and OÜ Viking Line Eesti [2007] ECR I-10779 [72] – [74].
25 Opinion of Advocate General Poiares Maduro delivered on 23 May 2007 in Case C-438/05 Case C-438/05 International Transport Workers’ Federation and Finnish Seamen’s Union v Viking Line ABP and OÜ Viking Line Eesti [2007] [43].
Member State other than his State of origin.27 Regarding legal persons, as long as the company is
formed in accordance with national law of a Member State and has its registered office there, its principal place of business or central administration somewhere in the EU, it will be held to have been established in the first Member State within the meaning of the Treaty (Article 54 TFEU).28
The CJEU confirmed in Segers case that a company will be considered to have been established even if this company had no business in that Member State, but conducted its entire commercial activity through secondary establishment (subsidiary, branch or agency) in another Member State.29
In Centros case, it was held that Centros Ltd was lawfully established in the United Kingdom and thus constituted an establishment, even if the company had never been economically active there and had no intention in conducting business there as well.30
A legal person has a right of secondary establishment only if it satisfies the precondition of having its principal place of business, central administration or registered office within the EU – has a primary establishment beforehand. Thus, even and office managed for a company on a permanent basis by an independent person in one Member State would constitute a secondary establishment, where the company’s registered office or seat and the principal place of business are based in other Member States.31 Unlike the freedom of movement of capital, the freedom of establishment Treaty
provision does not extend its scope to a nationals of third states established outside the EU, and thus Article 49 TFEU cannot be relied by an establishment of a third State. 32 Nevertheless, the origin of
the shareholders of companies resident in the EU does not in any way influence their right of establishment.33As Advocate General Jääskinen in his Opinion concerning the Felixstowe Dock and
Railway Company Ltd case noted, “the status of being an EU company is based on the location of the corporate seat and the legal order where the company is incorporated, not on the nationality of its shareholders”.34
27 Case C-55/94 Gebhard [1995] ECR I-4165 [25].
28 Paul Craig and Grainne de Burca, EU Law: Text, Cases, and Materials (6th edn, Oxford University Press 2015) 810.
29 Case C-79/85 D. H. M. Segers v Bestuur van de Bedrijfsvereniging voor Bank- en Verzekeringswezen, Groothandel en Vrije Beroepen [1986] ECR 02375 [16].
30 Case C-212/97 Centros Ltd v Erhvervs- og Selskabsstyrelsen [1999] ECR I-01459.
31 Case C-205/84 Commission of the European Communities v Federal Republic of Germany (Insurance Services) [1986] ECR I-03755 [21].
32 Case C-80/12 Felixstowe Dock and Railway Company Ltd and Others v The Commissioners for Her Majesty’s Revenue & Customs ECLI 200 [39].
33 Ibid.[40]
34 Opinion of Advocate General Jääskinen delivered on 24 October in Case C-80/12 Felixstowe Dock and Railway Company Ltd and Others v The Commissioners for Her Majesty’s Revenue & Customs [2013] ECLI 699 [60].
4. Real Seat v Incorporation Theory in EU
It is important to discuss here shortly the governing conflict of law theories as regards the recognition of foreign legal persons in different EU Member States, as it will be of relevance to understand the corporate mobility issue better. The dominant theories in EU are the ‘real seat’ theory adopted by the majority of EU Member States (almost all civil law States), and the ‘incorporation theory’ adopted by only a few (The Netherlands and UK). Mainly due to this divergence in chosen corporate recognition theories, Article 54 TFEU has opted to include all rules of conflict covering the EU are. The ‘registered office’ is important connecting factor in incorporation theory mainly adopted by common law jurisdictions, the ‘central administration’ is essential factor for ‘real seat’ jurisdictions, whereas ‘the principal place of business’ (oggetto principale dell’impresa) is taken from the Italian concept of foreign companies.35 The alternatives
in Article 54 TFEU were included on equal footing to satisfy all Member States while at the same time it provides for maneuverability to undertakings, as it is not a requirement to have incorporation seat and real seat in the same Member State.36
According to the real seat theory, the governing company law to be applied is the law of the state where the undertaking is ‘the most closely connected’ and has its ‘real seat’ (management and control).37 Under this theory, undertakings are not free to choose the law that will direct them and
party autonomy is not respected. When formation requirements are not met under real seat theory, harsh sanctions will follow.38 The undertaking would lose its status as a legal person and its
managers would be deprived of restricted liability – one of the most important advantages of limited liability.39 This theory overcomes its shortcomings regarding international undertakings by using
private international law concept of renvoi – it allows undertakings to have their management and control office abroad, given the fact that the conflict of law rules of the country where the real seat is situated follows the incorporation theory.40 The real seat theory due to its requirements may be
perceived as discriminatory and unjustifiably restrictive when undertakings wish to transfer in or out real seat adhering Member State their central management.41 Despite the fact that the CJEU in
corporate mobility cases does not decided on the validity of private international rules, many
35 Paschalis Paschalidis, Freedom of Establishment and Private International Law for Corporations (1st edn, Oxford University Press 2012) 34.
36 Stephan Rammeloo, Corporations in Private International Law (1st edn, Oxford University Press 2001) 29-30.
37 Ibid.11.
38 Ibid.
39 Ibid.
40 Ibid.
41 Paschalis Paschalidis, Freedom of Establishment and Private International Law for Corporations (1st edn, Oxford University Press 2012) 36.
believed that after Daily Mail decision, real seat theory was guaranteed in EU company law.42
Austrian Court of Cassation made the wrong assumption as well after another corporate mobility case. It declared that ‘the real seat theory conflicts with the secondary freedom of establishment’ as it assumed the CJEU in Centros prohibited application of the real seat theory.43
According to incorporation theory, the law under which undertaking is dully established is applicable.44 The undertaking is at liberty to opt for the legal system it sees to fit it best as party
autonomy is respected.45 This continues to apply, irrespective of when an undertaking decides to
transfer its real seat to the incorporation state while maintaining its status, or when an undertaking establishes and subjects itself to a foreign system of law.46 As long as company formation
requirements are met under the chosen legal system, the undertaking will be recognized.47 It is
undeniable that incorporation theory serves internal market integration better than the real seat theory, as it recognizes foreign undertakings without invading their internal organization or performance, and transfer of management and control office to different Member State without losing limited liability is possible.48
5. The Distinction between Inbound and Outbound Movement
It is apparent from the CJEU case law on the freedom of establishment that undertakings are treated differently when they are emigrating from their host Member State from the situation when they and immigrating to another Member State. The difference exists depending on whether the CJEU decides from the perspective of host or receiving Member State’s perspective. Explicitly, undertakings wishing to leave their Member State are subjected to more stringent application of Article 49 TFEU than undertakings wishing to enter another Member State. This differentiation will be further analyzed and described as inbound and outbound movement of establishment. Corporate mobility cases by mergers will be examined as well.
42 Ibid.
43 Re Registration in Austria of a Branch of an English Company S v Companies Registar, Graz (Case number 6Ob 124/99z) [2001] 1 CMLR 38.
44 Stephan Rammeloo, Corporations in Private International Law (1st edn, Oxford University Press 2001) 16.
45 Ibid.
46 Ibid.
47 Ibid.
5.1. Outbound Movement
The Court of Justice of the European Union adopted a restrictive approach when interpreting Article 49 TFEU in the preliminary ruling procedure regarding Daily Mail and General Trust plc allegation that its right to freedom of establishment was infringed by the UK Treasury’s refusal to allow transfer of seat before settling its taxes in the UK. This case concerned an undertaking – Daily Mail and General Trust plc (henceforth – Daily Mail plc), that wished to transfer its central management to the Netherlands for the sole purpose of selling its non-permanent assets and use those profits to purchase its own shares without having to pay the tax to which such transactions would make it liable under United Kingdom tax law, in regard in particular to the substantial capital gains on the assets which the applicant proposed to sell.49 After establishing its central management and control
in the Netherlands the applicant would be subject to Netherlands corporation tax, but the transactions envisaged would be taxed only on the basis of any capital gains, which accrued after the transfer of its residence for tax purposes.50 Under the UK legal system, Section 482 (1)(a) of the
Income and Corporation Taxes Act 1970 prohibited companies resident for tax purposes in the United Kingdom from ceasing to be so resident without the consent of the Treasury.51 The Daily
Mail plc thus, after declaring its intention to transfer its central management, was requested by the Treasury to sell at least part of the assets before transferring its residence for tax purposes out of the United Kingdom.52 However, Daily Mail plc did not intend to comply with it, as it undermined their
whole purpose of transfer to begin with. It stated that Articles 52 and 58 of the EEC Treaty (Articles 49 and 54 TFEU) gave it the right to transfer its central management and control to another Member State without prior consent or the right to obtain such consent unconditionally.53 The CJEU refused
that the Treasury’s conditional refusal amounted to an unlawful restriction on their freedom of establishment. It established that “companies are creatures of national law, and they exist only by virtue of the varying national legislation which determines their incorporation and functioning”.54
Daily Mail plc was an undertaking registered in England, and thus English law could govern its actions. The CJEU also noted the methods on how companies usually establish themselves in another States by focusing on Article 49 TFEU, which extends freedom of establishment to “the setting-up of agencies, branches and subsidiaries by nationals of any Member State established in the territory of any Member State”. Daily Mail would not be precluded by the UK to opt for 49 Case C-81/87 The Queen v H. M. Treasury and Commissioners of Inland Revenue, ex parte Daily Mail and General Trust plc. [1988] ECR I- 05483 [7]. 50 Ibid. 51 Ibid. [5]. 52 Ibid. [8]. 53 Ibid. 54 Ibid [18]
secondary establishment in the Netherlands. It was concluded that now Articles 49 and 54 TFEU did not confer a right on a company incorporated under the legislation of a Member State and having its registered office there to transfer its central management and control to another Member State.55 This case is highly criticized for such outcome, as it did allow in principle for host Member
State to require winding up the company in determined pursuit of transferring its business activities.56 It is questionable as well why the Court perceived that it was necessary to give an
international company law answer to an international tax law question.57 In any event, it is believed
that the Daily Mail case could be decided differently in present times. It can be presumed from the decision in National Grid Indus case, where it concerned a compatibility of the Dutch tax law provision with the right of establishment. The Dutch tax law specified that all hidden assets of an undertaking that moves its central administration into another Member State have to be instantly taxed in the Netherlands.58 Whereas the transfer of seat had no effect on National Grid Indus’s
status as an undertaking under Dutch law.59 Thus, the CJEU decided that cross-border seat
relocation has no effect in such case at hand under Dutch law on the undertaking’s option to claim the freedom of establishment, and concluded that there had been a restriction60 and refused to accept
mandatory requirements of public interest as justification.61 The Dutch exit tax itself did not infringe
EU law, and thus, EU State can continue to tax unrealized capital gains when an undertaking transfers its residency to another EU State. The requirement of a permit by the UK Treasury in Daily Mail, similarly as cumbersome provision of Dutch tax law in the National Grid Indus case is to be seen as a framework condition of establishment that would be considered a restriction of establishment under the freedom’s current stance and would barely satisfy permissible justifications.62 Despite speculating Daily Mail’s outcome before the CJEU, its reasoning stands
still, as it was confirmed in Cartesio case, concerning yet another undertaking wishing to relocate its head office but ultimately barred from realizing its transfer. The Cartesio case was expected to deviate from the Daily Mail’s obiter dictum and pronounce more liberal approach in interpreting Article 49 TFEU for outbound movement. The Cartesio decision did not only upheld the Daily 55 Ibid [24]
56 John Armour and Wolf-Georg Ringe, 'European Company Law 1999–2010: Renaissance and Crisis' [2011] Common Market Law Review 133.
57 C Timmermans ‘Impact of EU Law on International Company Law’ [2010] 18 European Review of Private Law 549-554.
58 Case C-371/10 National Grid Indus BV v Inspecteur van de Belastingdienst Rijnmond/kantoor Rotterdam [2011] ECR I- 12273 [4]-[9].
59 Behme Caspar ‘The Principle of Mutual Recognition in the European Internal Market With Special Regard to the Cross-Border Mobility of Companies’ [2016] 13 (1) European Company and Financial Law Review 48.
60Case C-371/10 National Grid Indus BV v Inspecteur van de Belastingdienst Rijnmond/kantoor Rotterdam [2011] ECR I- 12273 [40]-[41].
61 Behme Caspar ‘The Principle of Mutual Recognition in the European Internal Market With Special Regard to the Cross-Border Mobility of Companies’ [2016] 13 (1) European Company and Financial Law Review 48.
Mail’s logic, but extended it as well. To begin with, Cartesio was (and still remains) a limited partnership under Hungarian company law that wanted to relocate its seat to Italy, but remain a Hungarian limited partnership.63 Its request to relocate was rejected by the Regional Court (sits as
Commercial Court as well) based on that the current Hungarian law did not allow a company incorporated in Hungary to transfer its seat abroad while continuing to be subject to Hungarian law as its governing law.64 Such a transfer, if realized completely, would require the company first to
cease to exist and then reincorporate itself in compliance with the law of the country where it wishes to establish its new seat.65 It was repeated that ‘companies are creatures of national law’,66 as
well as that ‘the freedom of establishment of Articles 43 EC and 48 EC (Articles 49 and 54 TFEU) does not include the right, for a company incorporated under the legislation of a Member State and registered therein, to transfer its central administration, and thus its principal place of business, to another Member State whilst retaining its legal personality and nationality of origin, should the competent authorities object to this.’67 The CJEU continued stating that a ‘Member State thus has
the power to define both the connecting factor required of a company if it is to be regarded as incorporated under its national law and as such capable of enjoying the right of establishment, and that required if the company is to be able subsequently to maintain that status.’68 A Member State is
allowed, in the case of an undertaking incorporated under its law, to make the company’s right to retain its legal status under the law of that State subject to restrictions on the transfer abroad of the company’s place of effective management.69 Nevertheless, as the formation and dissolution of
undertakings are within the scope of freedom of establishment, to this regard, the requirement of winding up of a company in order to prevent relocation is considered to be incorporation state prohibition under Article 49 TFEU and can only be justified by serious overriding public interest requirement.70 What the CJEU clarified is that it is not permitted to force undertaking to wind up the
company in order to relocate its effective management within the EU, and a Member State cannot prohibit its own companies from converting into a company that is governed by the law of another Member State.71 According to Cartesio, Daily Mail and National Grid Indus cases, the structuring of
63 Case C-210/06 Cartesio [2008] ECR I-9641 [23].
64 Ibid. [24].
65 Ibid. [103]
66 Ibid. [104]
67 Ibid. [105]
68 Ibid. [110]
69 Ibid. and Case C-208/00, Überseering BV v. Nordic Construction Company Baumanagement GmbH (NCC) [2002] ECR I-9919 [70].
70 Case C-210/06 Cartesio [2008] ECR I-9641 [112]-[113].
71 Vossestein, Gert-Jan ‘Cross-Border Transfer of Seat and Conversion of Companies under the EC Treaty Provisions on Freedom of Establishment’ [2009] 6 (3) European Company 115.
companies by the national law of their State of origin is a premise for their exercise of the freedom of establishment.72
5.2. Inbound Movement
The CJEU when having to decide on freedom of establishment regarding undertakings wishing to transfer to a host Member State could be said to have adopted a less restrictive approach. The landmark Centros Ltd and Erhvervs- og Selskabsstyrelsencase was the case where it involved two Danish nationals who had established an undertaking under the UK law – Centros ltd, and sought to exercise its management and control of the company through a branch in Denmark. The founders of Centros ltd were avoiding minimum capital requirement in Denmark, and thus did not create Centros ApS73 originally. The Danish authorities refused to register Centros ltd branch in Denmark,
based on the fact that it did not carry any economic activity in the UK and ultimately was seeking to establish primary establishment in Denmark.74 It was considered as purely internal situation, as the
goal was to circumvent minimum capital requirement for Danish anpartsselskab and Central ltd had no real existence outside Denmark.75 However, as Centros ltd was formed in accordance with
English law, it was granted a status of a legal person by it, and by their own right, Centros ltd could invoke freedom of establishment. The CJEU rejected that avoiding Danish minimum capital requirement constituted an ‘abuse’ of freedom of establishment and stated that ‘the fact that a national of a Member State who wishes to set up a company chooses to form it in the Member State whose rules of company law seem to him the least restrictive’ could not be possibly interpreted as an abuse76. Such statement in Centros case had subsequent repercussions in the entire EU, as it
ultimately triggered the ‘race to the bottom’ on the company formation rules between different Member States. It is believed that it had influence on emergence of flex BV in the Netherlands, or light GmbH (or UG) in Germany where such business vehicles provide for more favorable formation conditions. The CJEU in Centros ltd case ultimately decided that ‘the refusal of a Member State to register a branch of a company formed in accordance with the law of another Member State in which it has its registered office on the grounds that the branch is intended to enable the company to carry on all its economic activity in the host State, with the result that the secondary establishment escapes national rules on the provision for and the paying-up of a 72 Behme Caspar ‘The Principle of Mutual Recognition in the European Internal Market With Special Regard to the Cross-Border Mobility of Companies’ [2016] 13 (1) European Company and Financial Law Review 36.
73 Anpartsselskab – private limited liability company under Danish company law.
74 Case C-212/97, Centros Ltd v. Erhvervs- og Selskabsstyrelsen, [1999] ECR I-1459 [16][17].
75 Case C-212/97, Centros Ltd v. Erhvervs- og Selskabsstyrelsen, [1999] ECR I-1459 [16].
minimum capital, is incompatible with Articles 52 and 58 of the Treaty’.77 Furthermore, looking
from the perspective of Centros ltd judgment to the Cartesio case, where, if Hungarian law had permitted the company to relocate its seat and retain the status as a Hungarian undertaking, Italy would have to recognize such move, as the refusal would otherwise infringe the freedom of establishment.78 Likewise, another outbound relocation example – Überseering BV v. Nordic
Constr. Co. Baumanagement GmbH was the case where the freedom of establishment fully protected the ‘migrating’ company. It essentially was a straightforward situation, where a Dutch Uberseering BV was acquired by German nationals,79 and in the unrelated compensation action
before the German court was refused the locus standi as it failed German company formation requirements80. As it was previously elaborated, in the real seat theory adhering Member State,
undertaking failing formation requirements would lose its status as a legal person. After acquisition, new owners of Uberseering BV exercised central management and control from Germany, whereas the company remained incorporated under Dutch law. However, German courts in applying national company laws deduced that Uberseering BV is a German company, which has ultimately failed to incorporate and register according to German rules. In the preliminary ruling procedure, the CJEU gave its answer to the German Federal Court of Justice that ‘where a company formed in accordance with the law of a Member State (`A') in which it has its registered office is deemed, under the law of another Member State (`B'), to have moved its actual center of administration to Member State B, Articles 43 EC and 48 EC preclude Member State B from denying the company legal capacity and, consequently, the capacity to bring legal proceedings before its national courts for the purpose of enforcing rights under a contract with a company established in Member State B.”81 It meant the Germany in applying real seat doctrine to Uberseering BV breached the freedom
of establishment by not providing it with the legal standing.82 The Überseering case decision
confirms the essential reasoning of Centros by founding that local ‘real seat’ rules are inappropriate to the activities of an undertaking formed in another Member State, even where the location of the undertaking’s central management would normally subject it to local corporate law.83 Furthermore,
while it took Uberseering decision for German scholars to decide on the incompatibility of the real seat theory with the Treaty, it took Inspire Art for the French colleagues to arrive to the same 77 Ibid. [30]
78 John Armour and Wolf-Georg Ringe, 'European Company Law 1999–2010: Renaissance and Crisis' [2011] Common Market Law Review 139.
79 Case C-208/00, Überseering BV v. Nordic Construction Company Baumanagement GmbH (NCC) [2002] ECR I-9919 [7].
80 Ibid. [9].
81 Ibid. [95].
82 Martin Didier, Alogna Forrest ‘A European Delaware: The Nascent Regulatory Market in Europe’ [2007] Corporate Finance & Capital Markets Law Review 12.
conclusion.84 The Kamer van Koophandel en Fabrieken voor Amsterdam v. Inspire Art Ltd. case
was very similar to Centros Ltd. case, except the host state was the Netherlands. According to Dutch legislation WFBV (Law on Formally Foreign Companies), undertakings registered abroad, but conducting business only in the Netherlands had to add a suffix to their name specifying their status as a pseudo foreign company.85 Burdensome consequences would follow the status, like
attaching personal liability to the directors for failing to satisfy minimum capital requirements.86
The CJEU upheld the reasoning of Centros and Uberseering cases by affirming that when an undertaking’s status as such has been recognized under the laws of formation Member State, Article 54 TFEU provides that Article 49 TFEU freedom of establishment is applicable.87
6. Mergers
It has to be discussed the freedom of establishment of mergers, as merger as such may constitute the easiest way of relocating the entire company to another Member State. Whereas, SEVIC judgment is of relevance to indicate that the CJEU considers discriminatory restrictions on cross-border mergers as inconsistent with the principle of freedom of establishment.88 The SEVIC case
considered the refusal by the German court to register the merger of a Luxembourgian and a German company.89 The CJEU stated that completely precluding the possibility of a merger
between undertakings established in different Member States precludes them from using a single act to perform a complex financial operation and constitutes a restriction of freedom of establishment.90
The SEVIC Systems AG wanted to merge with Security Vision Concept SA and be registered in Germany, thus resembling more inbound movement, as the newly created undertaking is protected form host State refusal to recognize such merger. The SEVIC case, on the other hand, indicates a cross-border merger can already achieve the wanted reincorporation.91 This is allowed based on
SEVIC case combined with of the general acceptability of internal mergers under the Third
84 Paschalis Paschalidis, Freedom of Establishment and Private International Law for Corporations (1st edn, Oxford University Press 2012) 35.
85 John Armour and Wolf-Georg Ringe, 'European Company Law 1999–2010: Renaissance and Crisis' [2011] Common Market Law Review 135.
86 Ibid.
87 Ibid.
88 Case C-411/03, Sevic Systems AG, [2005] ECR I-10805 [23].
89 Ibid. [2].
90 Ibid. [21]-[22].
91 John Armour and Wolf-Georg Ringe, 'European Company Law 1999–2010: Renaissance and Crisis' [2011] Common Market Law Review 141.
Company Law Directive92 or based on the Cross-Border Mergers Directive93. There is also another
option – namely the creation of a Societas Europaea94 (SE), this was also suggested to undertakings
in Cartesio case by the CJEU as acceptable transfer of governing law95. However, formation of an
SE has its own specific requirements, and is not suited for undertaking, especially wishing to remain a private limited company, as it ultimately establishes a public undertaking. Nevertheless, it is believed that if a company, for any reason (tax related or not) wishing to relocate to another EU Member State can accomplish it performing a reverse vertical merger.96 This is the case where
already established undertaking X in one Member State establishes a subsidiary Y in a Member State that it intends to relocate, and with the help of Cross-Border Mergers Directive 2005/56/EC, undertaking X pulls itself into Y’s host Member State.97 The performed merger results in X’s
disappearance and Y’s continuity, and shareholders of X get shares of Y as a consideration of such merger.98 This type of merger is vertical, as it is performed between parent company and its
subsidiary, and it is reverse, as it is a parent company, not a subsidiary, that is declared to cease to exist (usually parent company absorbs its subsidiaries).99
7. Justifications & Restrictions on the Freedom of Establishment
The restrictions that are distinctly applicable can be justified by official authority exception provided for in Article 51 TFEU, or based on public policy, public security or public health as specified in Article 52 (1) TFEU. The proportionality has to be respected as well, as the restriction cannot exceed what is necessary to achieve the objectives. The restrictions that are indistinctly applicable can be justified only if it satisfies the Gebhard case test: national measure is justified if they (1) apply in a non-discriminatory manner, (2) are justified by imperative necessity in the public interest, (3) are also suitable and do in fact attain those objectives and (4) are strictly limited in nature to only those necessary provisions in order to attain the objective of regulation.100 The
measures that have as their objective the prevention or punishment of fraud are also allowed.101 In
92 Directive 78/855/EEC OJ L 295, 20.10.1978. 93 Directive 2005/56/EC, O.J. 2005, L 310/1.
94 Council Regulation (EC) No. 2157/2001 of 8 October 2001 on the Statute for a European Company (SE), O.J. 2001, L 294/1 (“SE Regulation”).
95 Case C-210/06 Cartesio [2008] ECR I-9641[115]–[118].
96 Erik Werlauff, 'Relocating a Company within the EU' [2008] 5(3) European Company Law 138.
97 Ibid.
98 Ibid.
99 Ibid.
100 Case C-55/94, Gebhard v. Colsiglio dell’Ordine degli Avvocati e Procuratori di Milano [1995] ECR I-4165 [37].
Paletta II case it was held that ‘the national courts may, case by case, take account - on the basis of objective evidence - of abuse or fraudulent conduct on the part of the persons concerned in order, where appropriate, to deny them the benefit of the provisions of Community law on which they seek to rely, they must nevertheless assess such conduct in the light of the objectives pursued by those provisions’.102 It is also true that according to the CJEU case law a Member State is entitled to
take measures designed to prevent certain of its nationals from attempting, under cover of the rights created by the Treaty, improperly to circumvent their national legislation or to prevent individuals from improperly or fraudulently taking advantage of provisions of Community law.103 Nevertheless,
it is accurate to believe that ‘all measures which prohibit, impede or render less attractive the exercise of the freedom of establishment must be regarded as restrictions on that freedom’.104 Still,
the freedom of establishment does not cover ‘wholly artificial arrangements’ as was established in Cadbury Schweppes case, where the undertaking had established a shell company in Ireland only to minimize its taxes due in the UK.105 The CJEU ultimately stated that the restriction of freedom of
establishment by the UK was justified on the grounds of overriding public interests and that ‘wholly artificial arrangements aimed at circumventing the application of the legislation of the Member State concerned’.106 The Treaty freedom underlying reasoning is to allow establishment in other that
their own Member State and which constitutes ‘an actual pursuit of an economic activity through a fixed establishment in that State for an indefinite period’107. However, the freedom of establishment
in a sense is far reaching, as it will protect an undertaking even in tax deduction differentiation. In Marks & Spencer case the CJEU recognized that an exclusion of group relief - deduction of losses by a subsidiary established in another Member State (which does not conduct any trading activities in the parent undertaking’s Member State) is ‘of such a kind as to hinder the exercise by that parent company of its freedom of establishment by deterring it from setting up subsidiaries in other Member States.’108 The CJEU went even further and established that ‘the provisions concerning
freedom of establishment also prohibit the Member State of origin from hindering the establishment in another Member State […] of a company incorporated under its legislation.’109 A domestic rule
under Community Law’ [2000] 25(2) European Law Review 161–163.
102 Case C-206/94 Brennet AG v Vittorio Paletta [1996] ECR I-02357 [25].
103 Case C-212/97, Centros Ltd v. Erhvervs- og Selskabsstyrelsen, [1999] ECR I-1459 [24]; Case 33/74 Van Binsbergen v Bedrijfsvereniging Metaalnijverheid [1974] ECR 1299 [13]; Case 115/78 Knoors [1979] ECR 399 [25], and Case C-61/89 Bouchoucha [1990] ECR I-3551 [14].
104 Case C-371/10 National Grid Indus BV v Inspecteur van de Belastingdienst Rijnmond/kantoor Rotterdam [2011] ECR I- 12273 [36]; also Case C-442/02 Caixa Bank France [2004] ECR I-8961 [11].
105 Case C-196/04, Cadbury Schweppes plc v. Commissioners of Inland Revenue, [2006] ECR I-4585.
106 Ibid. [51].
107 Case C-196/04, Cadbury Schweppes plc v. Commissioners of Inland Revenue, [2006] ECR I-4585 [53]–[54]; also Case C-221/89 Factortame, [1991] ECR 3905 [20]; Case C-246/89, Commission v. United Kingdom, [1991] ECR I-4585 [21].
108 Case C-446/03 Marks & Spencer plc v HM’s Inspector of Taxes [2005] ECR I-10837 [32]-[33].
that allows a parent undertaking to set-off losses incurred by resident subsidiaries, but does not provide for the same possibility to the losses incurred by subsidiaries incorporated in another Member State will breach the freedom of establishment.110 Such exclusion advantage concerning
the losses incurred by a subsidiary established in another Member State, which does not conduct any trading activities in the parent company’s Member State is of such a kind as to hinder the exercise by that parent company of its freedom of establishment by deterring it from setting up subsidiaries in other Member States.111
III. The SUP Directive
1. Legal Basis
The Directive on single-member private limited liability company (Societas Unius Personae), if adopted, will be based on Article 50 (2) (f) TFEU that provides for progressive abolition of restrictions on freedom of establishment as regards the conditions for setting-up subsidiaries. Article 50 TFEU provides for the legal basis for the EU competence to legislate in the area of company law, whereas Article 50 (1) TFEU states that: ‘in order to attain freedom of establishment as regards a particular activity, the European Parliament and the Council, acting in accordance with the ordinary legislative procedure and after consulting the Economic and Social Committee, shall act by means of directives.’112 Article 50(2)(f) TFEU further clarifies the procedure and states
that: ‘the European Parliament, the Council and the Commission shall carry out the duties devolving upon them under the preceding provisions, in particular […] by effecting the progressive abolition of restrictions on freedom of establishment in every branch of activity under consideration, both as regards the conditions for setting up agencies, branches or subsidiaries in the territory of a Member State and as regards the subsidiaries in the territory of a Member State and as regards the conditions governing the entry of personnel belonging to the main establishment into managerial or supervisory posts in such agencies, branches or subsidiaries’113. The ordinary
legislative procedure is prescribed and has to be followed as specified in Article 294 TFEU. The Commission has referred its legislative proposal on the SUP to the European Council, the European
110 Gert-Jan Vossestein, 'Exit restrictions on Freedom of Establishment after Marks & Spencer' [2006] 7(4) European Business Organization Law Review 874.
111 Case C-446/03 Marks & Spencer plc v HM’s Inspector of Taxes [2005] ECR I-10837 [33].
112 Article 50(1) TFEU
Parliament and published it on 9 April 2014.114 The SUP legislative proposal was referred to the
Parliament’s Legal Affairs Committee (JURI) on 16 April 2014 and was confirmed on 20 October 2014 following the European elections of that year.115 However, the EP’s Committee on
Employment and Social Affairs advised to reject the Commission's proposal.116 Within this
Committee, opinions on single-member private limited company directive are intensely divided on the subjects such as its overall necessity and enactment, and agreement by the majority is highly implausible, thus the Rapporteur has tactfully abstained from submitting a draft report.117
Nevertheless, the European Council has managed to agree and reach common ground on a compromise text for a draft directive on 28 May 2015.118 The Council succeeded in overcoming its
divergences and settled on a general approach that is expected to serve as the core document for upcoming negotiations with the European Parliament.119 Perhaps, unlike the unsuccessful SPE
Regulation120 that required unanimity under Article 352 TFEU (ex Article 308 TEC), the qualified
majority (Article 238 TFEU) required in the ordinary legislative procedure (Article 294 TFEU) for the single-member private limited company directive provided the Council with the necessary margin for manoeuvre to reach acceptable arrangement for the Member States. The European Council was satisfied with the agreed compromise text, as in its current stance it ‘provides for a whole set of guarantees related to on-line registration, is without prejudice to anti-money laundering rules (and even improves them), leaves the question of seat of companies to national laws, and allows Member States to control distributions and to oblige companies to build up legal reserves’121. Provisions related to the splitting of the company's seat have been scratched from the
original Commission proposal in pursuit to preserve Member States' competences and traditions.122
Likewise, aspects concerning labour law will continue to be covered by existing national laws of 114 Proposal for a Directive of the European Parliament and of the Council on Single-Member Private Limited Liability Companies COM/2014/0212.
115 Europaeu, 'Legislative Train Schedule' (European Parliament, 2017) < http://www.europarl.europa.eu/legislative- train/theme-deeper-and-fairer-internal-market-with-a-strengthened-industrial-base-financial-services/file-single-member-private-limited-liability-companies>accessed 15 June 2017.
116 Draft Opinion of the Committee on Employment and Social Affairs for the Committee on Legal Affairs on the proposal for a directive of the European Parliament and of the Council on single-member private limited liability companies (COM(2014)0212 – C7-0145/2014 – 2014/0120 (COD))
117 Europaeu, 'Legislative Train Schedule' (European Parliament, 2017) < http://www.europarl.europa.eu/legislative- train/theme-deeper-and-fairer-internal-market-with-a-strengthened-industrial-base-financial-services/file-single-member-private-limited-liability-companies>accessed 15 June 2017.
118 Council General approach on the Proposal for a Directive of the European Parliament and of the Council on single-member private limited liability companies (DRS 39 CODEC 706) 21 May 2015.
119 Consilium, 'European Council' (Single-member private limited liability companies: Council agrees on general approach, 28 May 2015) < http://www.consilium.europa.eu/en/press/press-releases/2015/05/28-29-compet-single-member-private-companies/> accessed 15 June 2017
120 The withdrawal of the SPE proposal was announced in the Annex to the Communication on “Regulatory Fitness and Performance (REFIT): Results and Next Steps”, COM(2013)685, 2.10.2013.
121 Council General approach on the Proposal for a Directive of the European Parliament and of the Council on single-member private limited liability companies (DRS 39 CODEC 706) 21 May 2015
Member States.123 Ultimately, the Council concluded that ‘as the text currently stands, any risks
related to SUP are not bigger than they are for any other national company law types’.124
2. The Main Objective of the SUP Directive
The SUP proposed directive mainly targets to make it easier and less expensive to establish private undertakings in different EU Member States.125 Especially, it is aimed at encouraging small and
medium size enterprises (SMEs) to pursue economic activities in Member States other than their home Member State.126 It can also support larger undertakings or SMEs groupings by providing
them the possibility to establish single-member private subsidiaries based on the same underlying requirements throughout the entire EU.127 As the most commonly used approach to establish itself
in another Member State is by using subsidiaries, the focus is placed on subsidiaries as well.128 It
was stated in Europe 2020 ten-year growth strategy that in particular SMEs are targeted as beneficiaries of improving business environment in the EU.129 In the Communication on ‘An
Integrated Industrial Policy for the Globalisation Era’130 one of Europe 2020’s seven key flagship
proposal involved numerous actions applicable to SMEs were envisaged. It is currently believed that it is time consuming, costly and problematic to conduct business activities in different Member State and thus only a small share of EU’s SMEs even invests abroad.131 Next to internal barriers
such as the lack of motivation or ability (financial, human resources, language) to participate in cross-border activities, external barriers that constitute differences in national regulatory regimes, different legal, administrative and linguistic requirements across the EU, and accessibility of external funding produces highly unfavourable business environment for the undertaking attempting to establish a subsidiary or a group of subsidiaries abroad.132 Numerous aspects of relevance for
123 Ibid.
124 Ibid. 3.
125 Europaeu, 'Proposal for a Directive on single-member private limited liability companies – frequently asked questions' (Europaeu, 9 April 2014) <http://europa.eu/rapid/press-release_MEMO-14-274_en.htm> accessed 15 June 2017
126 Ibid.
127 Ibid.
128 Ibid.
129 Commission Communication EUROPE 2020 A strategy for smart, sustainable and inclusive growth COM/2010/2020.
130 Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions an Integrated Industrial Policy for the Globalisation Era Putting Competitiveness and Sustainability at Centre Stage COM/2010/0614.
131 Proposal for a Directive of the European Parliament and of the Council on single-member private limited liability companies COM/2014/0212.
132 Commission Staff Working document executive summary of the Impact Assessment accompanying the document proposal for a directive of the European Parliament and of the Council on single-member private limited liability companies (COM(2014) 212 final) (SWD/2014/0123 final) 13 (hereafter – Impact Assessment).
private limited liability companies have not yet been harmonized at the EU level, and thus these differences amount to expenses for companies to establish and run subsidiaries in another Member States.133 For example, minimum capital requirement could constitute a cost, as it varies across the
EU (see Annex 1.1.) and can discourage SMEs to invest abroad.134 The indirect costs are linked to
the differences between Member States’ laws regarding the establishment and operational requirements on articles of association, organisation and structure of companies, compulsory annual meetings, reporting requirements.135 In such case, the legal advice and translation is necessary and
would normally have lesser impact on domestic founders of undertakings than foreign, resulting in higher costs for the latter.136 Furthermore, in case a parent undertaking would like to expand abroad
and establish a group of subsidiaries in different Member States the cost would be even higher. As a result of divergent regulatory regimes within the EU, the group cannot optimise its structure across all subsidiaries, as each of them will need to have different organisational/management structure and a different method of establishment, whereas domestic groupings of undertakings would need to use only one model.137 These overall costs burdens SMEs and hinder their participation in the
common market. According to Internationalisation of European SMEs report, only 2% of SMEs establish companies abroad138 (by means of a subsidiary, branch or joint-venture), in addition, the
majority limit their investment to only one country (71%)139. 140 Apart from hurdles for SMEs that
cover the expansive range of national legislations in the EU (in particular company laws), the lack of confidence in foreign undertakings among consumers and businesses additionally hinders cross-border activity.141 The lack of trust in foreign undertaking can be circumvented by establishing a
subsidiary in another Member State, as it offers clients the brand and reputation of the parent company and also the security of dealing with ‘their national’ company.142 However, the first
hurdle, namely difference in national company laws, remains intact. In the current Union state, establishing an undertaking in another Member State still includes meeting the differentiated costs of legal and administrative nature and the research into another Member State’s company law requirements for chosen vehicle is necessary for a successful establishment.143 Considering every
133 Ibid. 14.
134 Ibid.
135 Ibid.
136 Ibid.
137 Ibid.15.
138 Final Report on the Opportunities for the Internationalisation of European SMEs (2011) 21, available at
<http://www.oxfordresearch.dk/media/87691/web_internationalisation_opportunities_for_smes_final_report_aug_2011 _en.pdf> last visited 25 July 2017.
139 Ibid. 21.
140 Impact Assessment 17.
141 Ibid.
142 Ibid.13.
aspect of establishing an undertaking in another Member State for SMEs it amounts to unnecessary business liability where the groupings of undertakings are placed in the most disadvantageous position. Currently, SMEs in the EU are precluded from realizing their full potential in the common market that results in missed opportunities of EU wide growth, employment and innovation.144
Originally, the Commission intended to tackle large part of impediments by its proposal for the European Private Company Statute (Societas Privata Europaea).145 However, the European Council
could not reach unanimity that was required due to vastly divergent opinions on a several controversial issues such as minimum capital, employee co-determination and the separation between central administration and registered office.146 Accordingly, the Commission had to
withdraw the SPE regulation proposal in its REFIT exercise.147 The SUP proposal takes form of a
Directive, and unanimity is avoided by choosing different legal base. The SUP proposal serves as an alternative rout to solve same problems in the EU’s internal market, yet, it is still perceived that the SPE regulation was better suited to tackle same problems than the second option of adopting the SUP directive.148 Nevertheless, the SUP proposed directive and its aims are consistent with the 2012
Action Plan on European company law and corporate governance149, and reaffirms Commission’s
stance to make cross-border economic activities by SMEs more attractive. Though the SUP directive is a substitute for the SPE proposed and withdrawn regulation, the equivalent overall objectives can be indicated in the current directive, especially to provide any future company founder with the easiest option to set up companies in other EU Member States.150 It is expected and
particularly aimed at fostering entrepreneurship, growth, innovation and employment in the EU.151
The new business vehicle in EU will be available to establish in all Member States. The reduction of costs is resolved by the harmonized registration procedure, possibility of an online registration, availability of a uniform template of articles of association and low minimum capital requirement.152
144 Ibid.18.
145 Proposal for a Council Regulation on the Statute for a European private company, COM(2008) 396.
146 Iris Wuisman,‘The Societas Unius Personae (SUP)’ [2015] 12 (1) European Company Law 35.
147 European Commission (2013), ‘Annex to the Communication from the Commission to the European Parliament, The Council, The European Economic and Social Committee and the Committee of the Regions on “Regulatory Fitness and Performance (REFIT): Results and Next Steps”’, COM (2013)685, p. 9 and European Commission (2013), ‘”REFIT – Fit for growth”: Examples how EU law is becoming lighter, simpler and cheaper’, Memo 13/833.
148 Proposal for a Directive of the European Parliament and of the Council on single-member private limited liability companies COM/2014/0212.
149 Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions Action Plan: European company law and corporate governance - a modern legal framework for more engaged shareholders and sustainable companies COM (2012) 740.
150 Proposal for a Directive of the European Parliament and of the Council on single-member private limited liability companies COM/2014/0212.
151 Ibid.
