Between Use and Abuse: The Effect of the Proposed EU Rules Harmonizing Cross-Border Conversion and the Lessons to be Drawn from the Free Movement of Persons

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Fenna Koop (12478601)

Fenna-95@live.nl

International and European Law:

European

Competition

Law

and

Regulation

Supervisor: Dr T.A.J.A. Vandamme

26 July 2019

Between Use and Abuse

The Effect of the Proposed EU Rules Harmonizing

Cross-Border Conversion and the Lessons to be Drawn

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Abstract

Ever since the Centros ruling was handed down, further regulation of corporate mobility and the prohibition of abuse its rights have been firmly present on the EU legislator’s agenda. The

Polbud ruling gave the Commission the necessary final push and in 2018, the Commission

published its proposal to harmonize cross-border conversion and division, including ex ante anti-abuse checks. This thesis assesses the impact of Proposal 2018/0114 on the balance between use and abuse of corporate mobility rights by evaluating its provisions and the criticism it has received from various actors. Unfortunately, Proposal 2018/0114 transpires to be a slightly hasty, insufficiently clear instrument for stabilizing the balance between use and abuse of corporate mobility rights.

Consequently, this thesis turns to an assessment of the same balance of use and abuse of rights, but then in the field of freedom of persons. The Court has traditionally taken a different approach in this area than other freedoms. Additionally, there is a specific codification of the prohibition of the abuse of rights as a justification ground for measures restricting migration and market access rights in Article 35 of the Citizen’s Rights Directive 2004/38. This raises the question if the Court interprets the principle of prohibition of abuse of rights differently in this area as well, and if that could serve as an example for stabilizing the equilibrium of use and abuse of corporate mobility rights. In this thesis it will be explained why, regrettably, this is not the case. This will be done by looking at two ‘difficulties’ of use and abuse of corporate mobility rights as it now stands: the fear of regulatory competition and the lack of indications of what constitutes an abuse of rights.

Keywords: Abuse of Rights; Freedom of Establishment; Corporate Mobility; Proposal

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1. Introduction

1.1 Background

The freedom of establishment is codified in Article 49 Treaty on the Functioning of the European Union (“TFEU”) and is the basis for various EU company law rights conferred upon natural and legal persons (via Article 54 TFEU). One of these rights for legal persons is the cross-border conversion. Conversion of companies within the EU used to be a matter of national law. However, over the past couple of years the Court of Justice of the European Union (“the Court”) has started to give cross-border conversion an EU law dimension in some ground-breaking case law. The latest addition in this regard was the Polbud-case1, in which the Court decided that the sole transfer of the registered office is also covered by the freedom of establishment and therefore cannot be hindered by the home state if the company meets the host state’s national requirements for conversion.2_{Pursuing actual economic activities in the}

host state was not deemed necessary for an undertaking to be able to make use of its freedom of establishment, thus the right to convert within the EU. With this judgment, the Court took a very liberal approach to the right of cross-border conversion being embedded in the freedom of establishment. Its long awaited clarification on this point fuelled the already existing controversy, as some Member States do not (yet) recognize the possibility of cross-border conversion and had now lost their full autonomy in governing such operations subject to freedom of establishment rules.3

Building on this, the Commission has since published its proposal for harmonizing the rules on cross-border conversion (“Proposal 2018/0114”)4, which intends to enlarge the corporate mobility of companies within the EU. This might be a very welcome change since, in the current Brexit-era, a lot of companies might be looking to register their European head office

1_{C-106/16 Polbud [2017] ECLI:EU:C:2017:804.} 2_{Ibid, para 32-35.}

3_{Basova 2018, 67.}

4_{Commission, ‘Proposal for a Directive of the European Parliament and of the Council amending Directive (EU)}

2017/1132 as regards cross-border conversions, mergers and divisions’ COM (2018) 0114 final. The

Commission launched this proposal together with ‘Proposal for a Directive of the European Parliament and of the Council amending Directive (EU) 2017/1132 as regards the use of digital tools and processes in company law’ COM 2018 0113 final. These two proposals together are referred to as the ‘EU Company Mobility Package’. This thesis will only deal with Proposal 2018/0114.

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5 elsewhere.5_{But at the same time, the Proposal is being accused of risking to increase,}

amongst other things, tax abuse and infringement of workers’ rights6_{– thus risking to increase}

possible abuse of EU law.

The rather thin line between use and abuse of EU law is not limited to the area of freedom of establishment. Abuse of EU law is currently a developing concept, primarily recent in tax law, but it has been a controversial topic in the area of free movement of persons as well. In fact, the Court has taken an almost more indifferent approach to the concept of prohibition of abuse in cases of free movement of persons than in cases of other fundamental freedoms.7 Although the term ‘abuse’ is rather sensitive and shied away from in this area, the balance between use and abuse of rights of free movement of persons could give rise to some interesting insights in the same balance in the area of freedom of establishment and company law.

Against this backdrop, this thesis aims to answer the following research question:

To what extend will Proposal 2018/0114 change the balance between a company’s right to exercise free movement of establishment (and more specifically; cross-border conversion) and a Member State’s ability to prevent abuse of this right and could the attempts to prevent abuse of free movement of persons serve as an example here?

1.2 Method and Outline

Since enforcement of Proposal 2018/0114 would mean that cross-border conversion as a legal manifestation of the free movement of establishment would be harmonized in the EU for the first time, there is little ‘basic’ literature, such as handbooks, available on this topic. My research will therefore mainly focus on the Court’s case law, EU legislation and legal

(journal) articles, with EU company law being the most important research object. I also used position papers of parties that take an interest in the matter of regulating cross-border

conversion, in order to adopt a more critical normative perspective.

5_{For example: on 21 January 2019, Sony announced to convert Sony Europe Ltd. into Sony Europe bv due to}

Brexit risks. <https://fd.nl/ondernemen/1286370/sony-verplaatst-kantoor-van-londen-naar-amsterdam> accessed 10 June 2019.

6_{SOLIDAR, ‘New EU law proposal would hamper workers’ rights and favor tax abuse’ [2018]}

<http://www.solidar.org/en/news/new-eu-law-proposal-would-hamper-workers-rights-and-favor-tax-abuse> accessed 21 February 2019.

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6 The choice for a comparison between the areas of free movement of establishment and that of free movement of persons rather than involving other fundamental freedoms, has different reasons. One is, as mentioned in the introduction, that the Court’s approach of the balance between use and abuse of free movement of persons rights has been notably different from its approach in other fundamental freedom cases regarding abuse. Another reason is that the areas of free movement of establishment and persons are very much interlinked, sometimes even analysed as one concept rather than two separate ones.8 Furthermore, as will be discussed in the following chapters, both the concept of nationality of natural persons (the decisive factor for determining whether the free movement of persons applies) as that of legitimate incorporation of legal persons (thus establishing legal personality; a key factor for determining whether and how the free movement of establishment applies) are still matters of Member State law rather than EU law. Dependence on the Member States’ national laws for the explanation of such important notices makes that harmonization of these areas can be troublesome. Therefore it should be interesting to compare these areas; although it appears similar impediments would be encountered in the two fields, the Court’s approached has proven different when it comes to abuse.

The balance between use and abuse of the freedom of establishment and the free movement of persons has been an academic topic for some time, so for the research on these matters it was possible to make use of textbooks as well. Using all those instruments as a starting point, I applied the ‘snowball’ method to find more relevant sources.

The research question is descriptive, while also being comparative. The research focusses on law in books, but by using the position papers it also touches upon law in action or even law ‘in the making’. For answering most subquestions, I adopted an internal perspective, while an external perspective was more fitting when comparing the fields of free movement of persons and freedom of establishment.

The thesis is structured in such a way that each subquestion (except for subquestion 3 and 4) is assessed in a separate chapter with an individual conclusion. After these chapters, there is a general conclusion which summarizes the answers to the subquestions and in that manner aims to answer the research question and state my personal view on this. The subquestions scrutinized are the following:

8_{See e.g. Maduro 2003, 41.}

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7 1. What rights can undertakings in the EU currently draw from the free movement of

establishment provisions?

2. In what manner can Member States legitimately tackle the abuse of the right to free movement of establishment?

3. What does Proposal 2018/0114 entail and what does it add to the existing rules on cross-border conversion as established in CJEU case law?

4. How would Proposal 2018/0114 change the current balance between use and abuse of the EU rules corporate mobility?

5. How is the balance struck between use and abuse regarding the provisions on the free movement of persons?

6. What could be the relevance of this balance in the area of free movement of persons for the regulation of use and abuse of the freedom of establishment provisions and Proposal 2018/0114?

1.3 Delimitation

It should be noted that this thesis includes the assessment of a Commission proposal which is still subject to the legislative process and has not been adopted yet. It is possible that

(significant) amendments to this proposal will be made in the course of its adoption, which were not available during the process of writing this thesis. This process of writing ended on 26 July 2019. The current status of this proposal can be monitored on the EUR-lex website.9

Furthermore, this thesis will solely assess companies as creatures of Member States’ national laws when referencing to companies enjoying EU corporate mobility rights. Companies governed by EU law, such as the European Company and the European Cooperative Society10, will not be dealt with.

9_<_{https://eur-lex.europa.eu/procedure/EN/2018_114}_{> most recently accessed on 26 July 2019}

10_{See Council Regulation 2157/2001, [2001] OJ L 294/1; Council Regulation 2137/85, [1985] OJ L 199/1 and;}

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2. EU Corporate Mobility Rights

2.1 Introduction

Articles 49 to 55 TFEU lay down the fundamental freedom of establishment and thereto ban restrictions on the right of individuals and undertakings to temporarily or permanently

establish themselves in another Member State to create a business activity. According to these provisions, a company can establish itself freely in any Member State through primary

establishment and can accordingly set up a secondary establishment in another Member State. But there are also other rights included in the right to free establishment, as the Court has shown in its case law. This chapter aims to answer the following question: What rights can undertakings in the EU currently draw from the free movement of establishment provisions?

2.2 Freedom of Establishment in the Treaties

The freedom of establishment is one of the core principles of the EU and the right thereto is codified in Article 49 TFEU. It applies to nationals of the Member States and via Article 54 TFEU also to profit-making legal persons.

The Treaties do not contain an explanation of the term ‘establishment’, but the Court has defined it as follows: “the actual pursuit of an economic activity through a fixed establishment in another Member State for an indefinite period”.11_{The indication that this economic activity}

should be pursued for an ‘indefinite period’, is what distinguishes the freedom of establishment from the freedom of services, which is more of a temporary nature.12

Article 49 TFEU also indicates that the freedom of establishment for companies encompasses both the right to “set up and manage undertakings” (henceforth referred to as “primary

establishment”) and to “setting-up agencies, branches or subsidiaries” (“secondary

establishment”). In order to exercise those rights, Article 54 TFEU lays down two conditions that companies need to fulfil. The first condition is that the company has to be created in accordance with the national law of one of the Member States. Second, the ‘real seat’ of the

11_{Case C-221/89 Factortame [1991] ECR I-3905, para 20.} 12_{Case C-55/94 Gebhard [1995] ECR I-4165, para 26.}

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9 company or, as the Treaty provision describes it, the “registered office, central administration or the principal place of business”, needs to be located in a Member State.13_{As indicated by}

the second sentence of Article 49 TFEU, setting up a secondary establishment requires in addition that the main undertaking creating this secondary establishment should be located within the EU. Once these conditions are fulfilled, Member States cannot, in principle,

enforce national rules which directly or indirectly discriminate against nationals or companies from other Member States wanting to establish themselves in this Member State.

Varying National Laws

It should be noted that the abovementioned first condition relies on national law for the identification of companies that are able to enjoy the freedom of establishment, but the rules for setting up a company with legal personality and its functioning differ between Member States.14 To complicate things further, the Treaties allow the Member States to endorse either the incorporation doctrine or the real seat doctrine to determine the ‘nationality’ and

applicable law of an incorporated company.15 The coexistence of these two doctrines complicates corporate mobility within the EU, since they have different effects on cross-border transfers. The incorporation doctrine entails that the law of the Member State in which the company was registered, and thus incorporated, applies. The real seat doctrine accordingly implies that the company in question is subject to the law of the Member State in which its real seat, the place where the real management of the company takes place, is located. This doctrine does not distinguish between the registered seat and the real administration, which means that if a company were to transfer its central management and control to another

Member State, it would lose its legal personality in the Member State of prior incorporation.16 It should be noted that the line between the doctrines is however not as clear-cut as it might seem. The Netherlands is an example of a mixture of the two; although it endorses the incorporation doctrine, the national law does contain some requirements for companies that are incorporated in other Member States but primarily or solely conduct business in The Netherlands.17

13_{Article 54, 1st paragraph jo. 49 TFEU.}

14_{C-81/87 Daily Mail [1988] ECR I-5483, para 19.} 15_{Ibid, para 20-23.}

16_{Van Schilfgaarde a.o. 2017, No. 150.} 17_Ibid.

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2.3 Rights Derived from the Freedom of Establishment in Case Law

Although the right to primary and secondary establishment are embedded in the provisions on freedom of establishment, corporate mobility rights include more than that.18_{Since there are}

significant differences between Member States’ company laws19_{and little EU secondary law}

harmonizing the matter, the Court found itself in the role of quasi-legislator.20 In its case law, the Court has slowly developed a broader approach as to what the right to free establishment entails, although it only clarified the preferred approach in rather specific situations and consistently stressed the need for harmonization. This section will provide an overview of some of the corporate mobility rights the Court seemed to include in freedom of establishment in its landmark cases.

2.3.1 Broadening the Right to Primary Establishment

Right to Transfer of Real Seat: Daily Mail, Überseering, Cartesio

The separation of the real seat and the registered seat of a company has been discussed above. It has been mentioned that Member States are free to apply either the incorporation or the real seat doctrine; the Treaties do not entail a preference for one of the two. However, if there are no boundaries set for the appliance of the doctrines, companies are restricted in the transfer of solely their real seat since it could result in dissolution of their legal personality.

The Daily Mail case21_{marks the beginning of the Court of Justice stepping up to fill the void}

left by absent EU harmonization in the area of freedom of establishment. The case concerned a British company that wanted to transfer its real seat to the Netherlands to enjoy a more beneficial tax system, but keep its registered office in the UK. The UK endorses the

incorporation doctrine, but UK law did require that a company wanting to transfer its central management and control outside the UK for tax purposes, needed consent from the British tax department.22 Daily Mail contested this by arguing that it could rely on its right to free

establishment and thus did not need the consent.23 The Court stated that this matter fell

18_{Article 49 TFEU indeed uses the wording “Freedom of establishment shall include […]” (emphasis added),}

indicating that the Article does not provide an exhaustive list of what rights the freedom of establishment entails.

19_{For more insight on the Member States’ company laws and their differences, see European Commission,}

‘Study on the Law Applicable to Companies’ [2016] < https://publications.europa.eu/en/publication-detail/-/publication/259a1dae-1a8c-11e7-808e-01aa75ed71a1/language-en> accessed 21 May 2019.

20_{Reich a.o. 2003, 113.}

21_{C-81/87 Daily Mail [1988] ECR I-5483.} 22_{Ibid, para 5.}

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11 outside the scope of freedom of establishment, since the particular United Kingdom law does not constitute a restriction of Daily Mail’s freedom to establish itself in another Member State. Daily Mail is free to do so, it solely needs the consent if it chooses to retain its legal personality and status as United Kingdom company.24 The Court furthermore held that a company’s existence is based on national law and the incorporating state can thus hinder the transfer of the real seat (including legal personality and form) to another Member State, if the company is still governed by the incorporating state’s national laws after transfer.25 This was later confirmed in the Cartesio case26, but that ruling also introduced a nuance that will be discussed below.

The Überseering case27 concerned the transfer of real seat as well, but the situation was different from the Daily Mail case, since now it was the host state (the Member State to which a company had transferred its real seat to) that denied that the company had legal personality there.28 The Court acknowledged this difference29 and here, it ruled that the host state is not allowed to apply the real seat doctrine to a company which has been legitimately created according to the law of the incorporation state, for that is a violation of the freedom of

establishment.30 So companies have the right to have their legal personality recognized by the host Member State if they are duly incorporated in another Member State. Justification is however possible.31

Right to Cross-Border Merger: SEVIC Systems

The SEVIC systems case32_{concerned an inbound (movement as seen from the host state’s}

position) merger; a German company wanted to merge with a Luxembourg company by absorbing the latter. German law did not allow cross-border mergers, so the case was brought before the Court. The Court ruled that taking part in a cross-border merger (or even more general; company transformation) is a way of exercising the freedom of establishment33 and that the Treaty provisions on this freedom do not allow a Member State to refuse registration

24_{Ibid, para 18.} 25_{Ibid, para 19 and 24.}

26_{C-210/06 Cartesio [2008] ECR I-9641.} 27_{C-208/00 Überseering [2000] ECR I-9919.}

28_{Ibid, para 9. The Member State in question was Germany, which endorses the real seat doctrine.}

29_{Ibid, para 62. In its case law the Court has more often distinguished between inbound (seen from the host}

state) and outbound (seen from the incorporation state) establishment cases; Barnard a.o. 2017, 412.

30_{Ibid, para 82.} 31_{Ibid, para 92.}

32_{C-411/03 SEVIC [2005] ECR I-10805.} 33_{Ibid, para 19.}

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12 of a cross-border merger if the Member State in question does allow a domestic merger.34

After the SEVIC ruling, the Courts subtle request for fitting harmonization herein35_{, was}

granted.36

Right to Cross-Border Conversion: Cartesio, VALE, Polbud

The Cartesio case37 dealt, like Daily Mail, with the incorporating state restricting a company’s rights. The in Hungary incorporated company Cartesio wanted to move its real seat to Italy, but Hungary endorses the real seat theory, so Cartesio would lose its legal personality in Hungary after the transfer and would have to re-incorporate in Italy.38 The Court mainly repeated what it had ruled in Daily Mail: the incorporation state is allowed to hinder the transfer of real seat. As long as there is no EU harmonization, the incorporation state’s laws and endorsed doctrine govern the company and thus are decisive.39 But the Court added a novelty to its line of case law as well; it made the distinction between transfer of real seat and transfer of registered seat. The applicable Member State law changes under the latter, so with the transfer of the registered seat, a company is converted into another legal form.40 The Court held that if a conversion is possible under the host state’s law, the incorporation state would violate the freedom of establishment if it hinders the cross-border conversion.41

The VALE case42 confirmed this right to cross-border conversion. The Court held that

company transformation operations are included in the freedom of establishment and this also entails cross-border conversion.43_{It furthermore ruled here that a host state hindering}

cross-border conversion, whilst at the same time allowing domestic conversions, violates the freedom of establishment.44

The latest landmark case in the area of cross-border conversion is the Polbud case.45 Polbud was a Polish company wanting to move its registered seat to Luxembourg but retain its real

34_{Ibid, para 22.} 35_{Ibid, para 26-27.}

36_{Directive 2005/56/EC on cross-border mergers of limited liability companies [2005] OJ L310/1. This}

Directive is now repealed by Directive 2017/1132 relating to certain aspects of company law [2017] OJ L169/46.

37_{C-210/06 Cartesio [2008] ECR I-9641.} 38_{Ibid, para 24.} 39_{Ibid, para 109-110.} 40_{Ibid, para 111.} 41_{Ibid, para 112-113.} 42_{C-378/10 VALE [2012] ECLI:EU:C:2012:440.} 43_{Ibid, para 24-26.} 44_{Ibid, para 36.} 45_{C-106/16 Polbud [2017] ECLI:EU:C:2017:804.}

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13 seat in Poland. Polbud’s removal from the Polish commercial register was however refused, since according to Polish law, the company needed to be, in fact, dissolved.46_{The Court held}

that the sole transfer of the registered seat falls under the scope of the freedom of

establishment and should thus be allowed, provided the converted company complies with the host state’s law.47_{Carrying out an economic activity in the new incorporation state is thus not}

required for cross-border conversion.

2.3.2 Broadening the Right to Secondary Establishment

Right to Choose the Least Restrictive Incorporation Rules: Centros

In Centros48, a Danish couple wanted to conduct business in Denmark, but avoid the Danish requirements for setting up a company. Therefore they incorporated their company in the UK and planned to set up a branch (secondary establishment) in Denmark. The Danish authorities however refused to register the branch. They argued that Centros circumvented Danish law since the UK establishment was merely a letterbox company and did not carry out any economic activity, thus the Danish branch would in fact be the primary establishment.49 The Court found the refusal to register to be a violation of the freedom of establishment50 and stated that a company enjoying the freedom of establishment is free to choose the Member State with the least restrictive incorporation rules for its incorporation.51

The Centros is particularly important in the context of this thesis and will be discussed more in depth in the following chapters.

Right to Secondary Establishment without Additional Host State Rules: Inspire Art, Cadbury Schweppes

The Inspire Art case52 also concerned the setting up of a secondary establishment. The Dutch authorities claimed the registration of the Dutch branch of an English (letterbox) company was incomplete since it did not comply with certain Dutch rules for foreign entities registered

46_{Ibid, para 10-12.} 47_{Ibid, para 32-35.}

48_{C-212/97 Centros [1999] ECR I-1459.} 49_{Ibid, para 7.}

50_{Ibid, para 21-22.} 51_{Ibid, para 27.}

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14 in the Netherlands. The Court ruled that a host state applying additional rules to a company which was validly incorporated in another Member State on its secondary establishment in that host state, is an infringement of that company’s freedom of establishment.53_{The Member}

State can also not limit the company’s choice of legal form for its secondary establishment.54

In the Cadbury Schweppes case55, the incorporation state applied its tax rules to a secondary establishment outside its territory since the tax rules of the host state were more beneficial. Provided that the company genuinely carries out economic activities in the host state, the Court found this to constitute a discriminatory measure.56

2.4 Conclusion

According to Articles 49 and 54 TFEU, companies that fulfil the conditions set out in these provisions, enjoy freedom of establishment in the EU. As is evident from those Articles, the freedom of establishment entails the right to primary and secondary establishment. However, exercising these rights could be significantly hampered by a Member State’s national

company laws and application of either the incorporation or the real seat theory. For that reason, the Court got involved and gave more substance to the freedom of establishment. First, on the transfer of real seat, it limited the Treaty provisions by ruling that companies do not have the right to transfer its real seat to another Member State while retaining its

incorporation status in the home Member State (Daily Mail, Cartesio). But the Court later ruled that the freedom of establishment does include a right to have legal personality recognized by the Member State to which a company transfers its real seat if it was validly incorporated in its incorporation state (Überseering).

The Court also found that participating in a cross-border merger is a way of exercising the freedom of establishment. Member States should allow cross-border mergers if they allow domestic mergers (SEVIC).

53_{Ibid, para 105.}

54_{C-270/83 Commission v French Republic [1986] ECR I-273, para 22.} 55_{C-196/04 Cadbury Schweppes [2006] ECR I-7995.}

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15 In the field of cross-border conversions, the Court ruled that the incorporation state cannot hinder such conversion since the company will be governed by host state’s law after its conversion (Cartesio). This is also the case if the company only transfers its registered seat and not its real seat (Polbud). Accordingly, the host state should allow cross-border

conversions if it allows domestic conversions (VALE).

The Court also elaborated on the right to secondary establishment. A company is free to choose the Member State with the least restrictive incorporation rules for its primary establishment, even if it does not intend to conduct business in the state of incorporation (Centros). Once a company has incorporated in a Member State, it does not need to comply with additional host state rules for secondary establishment (Inspire Art), but the secondary establishment also cannot be made subject to more stringent taxation rules of the

incorporation state if it is genuinely established and operating in the host state (Cadbury

Schweppes).

In sum, the underlying reasoning seems to be that as long as EU harmonization is still lacking, freedom of establishment mainly and in a broad sense applies to inbound movement

(movement towards the Member State at issue), while the national laws of the incorporation state prevail in outbound cases.

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3. Tackling Abuse of Corporate Mobility

Rights

With the right to secondary establishment enshrined in the Article 49 TFEU, a company can easily register in a Member State with lenient incorporation rules and then set up a secondary establishment in the Member State in which it actually intended to do business, but which applies stricter incorporation rules. It was feared that such behaviour could lead to, on the one hand, a ‘race to the bottom’ between national systems of company law and on the other hand an abuse of EU rights.57 Although there had been case law in the field of services suggesting that this could not be the case since EU law cannot be used for fraudulent or abusive ends58, the Court ruled in Centros that taking advantage of EU rights does not necessarily amount to abuse.59 So what can Member States do to avoid cross-border migration for the sole purpose of gaining advantages that could prove harmful for the stakeholders?

This chapter aims to answer the following question: In what manner can Member States legitimately tackle the abuse of the right to free movement of establishment?

As tax avoidance is a frequent motive or purpose for possible abuse of corporate mobility rights, and for reasons of completeness, developments of the concept of abuse in the field of tax law are discussed as being part of developments in company law.

3.2 The Notion of Abuse of EU Rights

Similar to the development of corporate mobility rights, the prohibition of abuse of EU rights is very much judge-made law.60_{The Court referred to it for the first time in a freedom of}

57_{Binard a.o. 2019, 32.}

58_{Barnard a.o. 2017, 412; Reich a.o. 2003, 349.} 59_{C-212/97 Centros [1999] ECR I-1459, para 18.} 60_{Vogenauer 2011, 521.}

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17 services case from 197461_{and has since been developed in different areas of EU law.}62_The

Court only recently got somewhat consistent in its formulation63_{, but there is still no clarity on}

the definition of what, in fact, constitutes an abuse of rights in EU law.64

While summing up previous case law, the Court did seem to refer to two types of behaviour that could classify as ‘abuse’ in Centros: “attempting, under cover of the rights created by the Treaty, improperly to circumvent their national legislation or […] improperly or fraudulently taking advantage of provisions of Community law”.65 In that sense, abuse can thus take the form of (national) rule avoidance or (EU) rule appreciation.

Both rule avoidance and appreciation cases mostly concern ‘U-turn constructions’: an attempt to inject an EU or cross-border element in a national situation so that EU law can be

invoked.66 In principle, this in itself is not prohibited, EU law in fact allows for a choice between varying Member State rules.67 The abuse of rights in the context of EU fundamental freedoms is thus characterized by behaviour contrary to the objectives of an EU provision, rather than by condemning the behaviour of an individual in the light of the principle of good faith.68

3.3 The Court’s Test for Establishing Abuse

In the area of company law, Centros is the pivotal case for the concept of abuse of rights. The judgement also marked the beginning of a slow refinement of how to assess what amounts to abuse of EU rights.69_{The Court held that a Member State can take measures to prevent its}

nationals from abusing EU rights. In order to see if this is the case, the national judge should assess the objective circumstances of each case in the light of the purpose of the EU rule at

61_{C-33/74 Van Binsbergen [1974] ECR I-1299, para 13.}

62_{E.g. C-110/99 Emsland-Stärke [2000] ECR I-11569, a freedom of goods case in which the Court gives a test}

for abusive in para 52-53; C-255/02 Halifax [2006] ECR I-1609, a tax law case in which the Court mentions a ‘principle of prohibiting abusive practices’ in para 70.

63_{Kamanabrou 2018, 534.}

64_{Cerioni 2010, 783. See also R Guski, ‘The re-entry paradox: Abuse of EU law’ [2018] 24 European Law}

Journal 422.

65_{C-212/97 Centros [1999] ECR I-1459, para 24.}

66_{Looijestijn-Clearie 2000, 638. Examples of a U-turn constructed rule avoidance case are C-23/93 TV10 [1994]}

ECR I-4795 and C-212/97 Centros [1999] ECR I-1459. An example for rule appreciation is C-110/99

Emsland-Stärke [2000] ECR I-11569.

67_{Kamanabrou 2018, 537.} 68_{Ibid, 536.}

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18 hand.70_{In Centros the Court also ruled that choosing for a Member State with more beneficial}

incorporation rules rather than the Member State in which you intend to conduct business, does not automatically amount to abuse.71_{In Cadbury Schweppes, the Court extended this}

rationale to choosing the most favourable tax regime.72

While this was still rather vague, in Emsland-Stärke73, a tax law case dealing with export refunds, the Court presented two criteria, an objective and a subjective one, for determining whether specific behaviour amounts to abuse. It held that there should be objective

circumstances in which the purpose of EU rules has not been achieved, even though the conditions for application of these rules are fulfilled. Moreover, there should be an intention to obtain a benefit from the EU rules by artificially creating a situation in which these benefits can normally be obtained.74 Especially this latter criterion seems to be significant for the existence of abuse. In Cadbury Schweppes the Court again repeated that EU rights may be restricted in circumstances in which cross-border transfers constitute “wholly artificial arrangements aimed at circumventing the application of the legislation of the Member State concerned”.75

In a recent tax law judgement, the Court stated that national courts are to assess the existence of abuse.76 But the Court did elaborate on some indications, which, given they are objectively and consistently present, could point out that the possible abuser indeed arranged its affairs artificially so the EU rule would apply.77_{It is also worth mentioning that the Court has held}

that national courts can apply national law in order to assess whether the reliance on an EU right amounts to an abuse.78

70_{C-212/97 Centros [1999] ECR I-1459, para 24-25.} 71_{Ibid, para 18.}

72_{C-196/04 Cadbury Schweppes [2006] ECR I-7995, para 50.} 73_{C-110/99 Emsland-Stärke [2000] ECR I-11569.}

74_{Ibid, para 52-53.}

75_{C-196/04 Cadbury Schweppes [2006] ECR I-7995, para 51.}

76_{Joined Cases C‑116/16 and C‑117/16 T Danmark [2019] ECLI:EU:C:2019:135, para 99.} 77_{Ibid, para 100-114.}

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19

3.4 Combatting Abuse of Rights in EU Company Law

Is There a General Principle of Prohibiting Abuse of Rights?

As mentioned, the concept of abuse of EU rights is mainly developed in case law. There is only little and very specific mentions in secondary legislation79, which cannot be regarded as a broader prohibition of abuse of EU rights.80 There is a lot of discussion on the question whether or not prohibition of abuse of EU rights constitutes a general principle of EU law.81 It has also been argued that such broader provision could be found in Article 54 of the Charter of Fundamental Rights of the European Union (‘the Charter’), although the impact of this Article has not been very substantial yet.82

Nevertheless, in Halifax the Court finally seemed to indicate that there is, in fact, a principle of prohibiting abusive practices.83 If the prohibition of abuse of law would indeed be

classified as a general principle, this could mean that Member States can use this principle to justify adopted measures restricting the exercise of EU rights.84 The Court seemed to confirm that this is indeed the case in T Danmark.85 The Court again spoke of a ‘principle of

prohibition of abuse of rights’ which is applicable in various fields of EU law.86_{But it went}

even further by stating that this principle entails that “a Member State must refuse to grant the benefit of the provisions of EU law where they are relied upon not with a view to achieving the objectives of those provisions but with the aim of benefiting from an advantage in EU law although the conditions for benefiting from that advantage are fulfilled only formally”

(emphasis added).87_{It does not matter if there is national legislation serving as a legal basis}

for this denial of right or not, since the general EU principle would then serve as the basis.88

Justifications for Restrictive Measures

As mentioned before, in Centros, the Court held that Member States can take measures to prevent abuse of rights. And there is indeed an abundance of case law in which the Member

79_{E.g. Article 102 TFEU.} 80_{Beck 2018, 163-164.}

81_{See for example the book by R De la Feria and S Vogenauer, Prohibition of Abuse of Law: A New General}

Principle of EU Law? (1th edn, Hart Publishing 2011).

82_{Vogenauer 2011, 522.}

83_{C-255/02 Halifax [2006] ECR I-1609, para 70.} 84_{Arnull 2011, 18.}

85_{Joined Cases C‑116/16 and C‑117/16 T Danmark [2019] ECLI:EU:C:2019:135.} 86_{Ibid, para 74.}

87_{Ibid, para 72.} 88_{Ibid, para 83.}

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20 States claim a forthcoming abuse of EU rights justifies specific national measures restricting the freedom of establishment.89_{Although a company establishing itself in a specific Member}

State for the sole purpose of circumventing the national law of the Member State in which it aims to be economically active does not necessarily add up to abuse and can thus be

prevented via national measures, in Cadbury Schweppes, the Court held that if the prevention of abusive practices is serving as a justification for restrictive (tax) measures, the purpose of this national measure should be “to prevent conduct involving the creation of wholly artificial arrangements which do not reflect economic reality, with a view to escaping the tax normally due on the profits generated by activities carried out on national territory.”90 So the purpose of the national measure should be expressly to prevent abuse. If a Member State denies the possible abuser his or her rights, the burden of proof that the abuse exists, lies with the Member State.91

Furthermore, a proportionality test needs to be fulfilled. The Court has proven itself to be willing to accept that a Member State can deny rights derived from EU law if there is an abuse of those rights.92 The proportionality test that sanctions imposed by Member States need to fulfil seems even less strictly applied by the Court in cases in which the Member State tries to encounter an abuse of EU law.93

3.5 Conclusion

The notion of abuse of EU rights has been primarily developed in case law, and it now seems that the Court has firmly stated that there is indeed a general principle of prohibition of abuse of EU rights. This means that the prevention of abuse of rights can be a motive and a

justification for Member States to adopt restrictive measures that can even go as far as

denying rights. Since the principle is a general principle of EU law, a Member State can apply it regardless of what type of EU rule is abused and whether or not there is domestic anti-abuse legislation on that point. The restrictive national measure does need to fulfil a proportionality test, but the Court has been lenient in accepting that this test is fulfilled if a Member State claims to have tried to prevent abuse of EU rights. The burden of proof for establishing that

89_{See e.g. C-212 Centros [1999] ECR I-1459, para 23; C-167/01 Inspire Art [2003] ECR I-10155, para 89.} 90_{C-196/04 Cadbury Schweppes [2006] ECR I-7995, para 55.}

91_{Joined Cases C‑116/16 and C‑117/16 T Danmark [2019] ECLI:EU:C:2019:135, para 117.} 92_{Sørensen 2017, 709.}

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21 there is an abuse of rights which should be sanctioned by denying the abuser those rights, lays with the Member State.

The Court’s test to establish whether there is an abuse of rights, consists of an objective part (objective circumstances point out that although the conditions for application of the EU rule are fulfilled, the purpose of this EU rule is not fulfilled) and a subjective part (there is an intention to obtain the advantages of the EU rule by artificially arranging that the conditions set out for application the EU rule are met). The Court has given some indications that might help determine if there is an abuse of rights, but it is for the national court to determine this.

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22

4. Proposal 2018/0114

Cross-border conversion is a sensitive subject for a lot of the Member States, especially since the notion generates a fear for abusive practices by circumventing unappealing laws of the state in which the company still operates.94 The Court’s case law, as discussed in Chapter 2, only fuelled that fear, while also epitomizing the Court’s cry for harmonization in this field. As a result, the Commission felt the need to put an end to the legal uncertainty and draft a proposal to harmonize, amongst other corporate mobility rights, cross-border conversion and what constitutes abuse therein.95 Hence, the Proposal 2018/0114 was adopted by the

Commission on 26 April 2018.96

This chapter aims to answer the question: What does Proposal 2018/0114 entail and what does it add to the existing rules on cross-border conversion as established in CJEU case law? Furthermore, in this chapter there will be an assessment of the question: How would Proposal 2018/0114 change the current balance between use and abuse of the EU corporate mobility rights?

4.2 The Content

Apart from some extra stakeholder’s protection, the Proposal only entails minor changes to cross-border mergers. The actual novelty is that the Proposal introduces harmonized rules for cross-border conversion and division. To not overcomplicate, this section will only assess the harmonization of cross-border conversion in as far as it is further-reaching than the Court’s case law previously discussed.

94_{Binard a.o. 2019, 32.}

95_{Impact Assessment accompanying Proposal 2018/0114, 7; Biermeyer a.o. 2018, 110-111.}

96_{See the European Commission’s Press release ‘Company Law: Commission proposes new rules to help}

companies move across borders and find online solutions’ < http://europa.eu/rapid/press-release_IP-18-3508_en.htm> accessed 27 May 2019.

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23

4.2.1 Objectives

The legal basis for Proposal 2018/0114 is Article 50 TFEU, which lays down the EU competence to act in the area of company law.97_{The objectives of Proposal 2018/0114 are}

twofold98: to facilitate corporate mobility in the EU through cross-border conversions, mergers and divisions and to effectively protect the interests of stakeholders. It considers public interest by introducing safeguards to prevent undue tax benefits via artificial arrangements as well.99

4.2.2 Harmonizing Cross-Border Conversion

The Chapter on cross-border conversion (to be Title II, Chapter I in Directive 2017/1132) will apply solely to limited liability companies (Article 86a). The procedure that would apply to cross-border conversions is similar to that for cross-border mergers100 and its steps and safeguards are laid down in Articles 86d to 86i. These steps include the drawing up of draft terms (86d), the drawing up of a report on the legal and economic aspects for the company’s members (86e) and the company’s employees (86f), an assessment of these draft terms and reports by an independent expert (86g), disclosure of the documents (86h) and shareholder approval (86i). The home Member State also needs to assess the legality of the part of the cross-border conversion procedure still subject to its laws and issue a pre-conversion

certificate (86m). The conversion takes effect if registration in the host state is complete (86r).

97_{Explanatory Memorandum to Proposal 2018/0114, 12.} 98_{Ibid, 2.}

99_{Ibid, 4.} 100_{Alvarez 2018.}

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24 BusinessEurope has conveniently arranged the steps to take in a cross-border conversion process in the following illustration101_:

The legal consequences of a cross-border conversion are described in Article 86s.

4.2.3 Protection of Stakeholder’s Interests

The protection and involvement of stakeholders are codified in Articles 86j to 86l. Those Articles call upon the Member States to ensure stakeholder rights such as exit rights for shareholders that did not agree with the cross-border transfer or that have no voting right should have an exit right and will be cashed out (86j), rights for creditors to apply for

adequate safeguards (86k) and protection for employees against loss of representation on the board (86l).

4.2.4 Anti-Abuse Measures

Article 86c of the Proposal lays down that a cross-border conversion cannot be authorized if it would amount to abuse of rights. The Commission explicitly mentions the Court’s general

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25 principle of prohibition of abuse of rights as the rationale behind this provision.102_The

Proposal thereto introduces a system of anti-abuse checks executed by the home and host state, which would serve as a pre-requisite for conversion: cross-border conversion should not be allowed if it is discovered that the conversion is “an artificial arrangement aimed at

obtaining undue tax advantages or at unduly prejudicing the legal or contractual rights of employees, creditors or minority members” (86c paragraph 3).

The mechanism is already described to an extent above; a company wishing to convert has to submit their draft terms and consequence reports to an independent expert appointed by the home state (86g), whose assessment thereof aids the competent authority of the home state to carry out an in-depth assessment whether or not the conversion constitutes an artificial

arrangement (86m and 86n). Article 86n names several elements that the home Member State needs to take into account when determining the existence of artificial arrangements, such as net turnover and profit and loss, the commercial risks assumed by the converted company and, perhaps most importantly, the intent of the conversion.

4.3 Reception

In general, the Commission’s initiative to harmonize is welcomed.103_{But there have been a}

lot of commentators criticizing the specific provisions and methods of the Proposal or suggesting alternatives. This section tries to provide an overview of these comments from various perspectives.

ETUI found the Proposal to fall short in the protection of worker’s rights and avoidance of abuse and fraud. They vouched for more worker involvement prior, during and after the cross-border transfer and for further-reaching abuse checks, carried out by a public entity instead of an independent expert.104 To provide a counterview, Horak & Poljanec seem to find that the Proposal in fact represents a movement towards building social business in Europe, with a large protection of vulnerable social groups.105 Others have argued that the level of

stakeholder protection is getting in the way of an effective regulation of cross-border transfer

102_{Explanatory Memorandum to Proposal 2018/0114, 22.} 103_{E.g. Davies a.o. 2018, 1; BusinessEurope 2018, 1.} 104_{ETUI 2018, 4.}

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26 procedures.106_{BusinessEurope is for example advocating for simpler rules on workers}

participation and abandon some procedural conditions to speed up the process and make it less burdensome.107

Building on this, Binard & Schummer observe that although the two objectives of the Proposal are not incompatible, the second objective appears to have been prioritized by offering a lot of protection to stakeholders, even if their interests are not per se at stake. There is no right balance stricken between facilitating a legally certain, effective freedom of

corporate mobility and protecting certain interests. They see a problem for they fear this low degree of flexibility of the Proposal could amount to more expensive seat transfers, (small) companies trying to achieve their transfer goals outside of the scope of the Proposal or perhaps even a technical impossibility to transfer cross-border.108 Furthermore, they think there is not enough room for exemptions to specific rules, while those could be justified based on legitimate reasons.109

On this point of prevention of abuse, Alvarez point out that, when assessing the existence of abuse, it is very hard to determine ex ante that the artificial arrangements were intended to unduly avoid tax or stakeholder protection. This could even lead to arbitrary decisions, which is problematic in itself, but even more so since cross-border transfers that have successfully completed the procedure set out in the Proposal, may not be declared null and void.110_The

CCBE on the other hand, sees a problem in the current wording of Article 86c paragraph 3 (“undue tax advantages”) which they find too broad, thus could allow cross-border conversion to be rejected for behaviour less harmful than abuse.111_{Additionally, the CCBE also seems to}

find several provisions of the Proposal unclear. It would further like to see a specification of the civil liability of administrative and management members of the transferring company.112 On a more positive note, the European Company Law Experts (ECLE) are in general very content with the Proposal, but do see some points of improvement. Although they think the Proposal is a good first step, in the end a measure of full harmonization would be needed to

106_{Biermeyer a.o. 2018, 111; BusinessEurope 2018, 13.} 107_{BusinessEurope 2018, 13.}

108_{Binard a.o. 2019, 32.} 109_{Ibid, 36.}

110_{Alvarez 2018. See Article 86u Proposal 2018/0114.} 111_{CCBE 2018, 2.}

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27 overcome the Member States’ legislative differences.113_{Also, they find it disturbing that for}

the SE, there is no corresponding regulation for cross-border merger, division or conversion. They find this to be “an invitation to circumvent application of the rule in critical cases”, which needs to be rectified urgently.114

4.4. Tipping the Balance of Use and Abuse of EU Company Law Rights?

Theoretically, with the extensive anti-abuse measures, better protection of stakeholders and harmonization of the cross-border transfer rules in general, use of those rules would be increased while abuse decreases. But, taking into account Binard & Schummer’s criticisms, it could turn out that in practice, companies would start looking for loopholes to act outside the scope of the Proposal, which would encourage abuse. In fact, as the ECLE has demonstrated, such loophole already exists in the form the non-applicability of the harmonization to the SE. More reasons for that encouragement can be derived from the fact that the proposed anti-abuse mechanism does not seem to consistent with the Commission’s objective of making cross-border transfers efficient and less costly. Furthermore, completing the process could become very lengthy and unpredictable, regarding the complexity and uncertainty of how to determine that there are artificial arrangements. Member States may exceeding the deadlines for granting authorization, and the Proposal does not offer consequences for that.115_The

assessment for artificial arrangement is also deemed to unclear, possibly resulting in Member States applying different standards for the test.116_{If that would be the case, we would be back}

to square one and the Proposal would have had a minor impact on the determination of the existence of abuse. The uncertainty would remain for now.117 And although the right to cross-border conversion would be codified for all EU Member States, the balance between use and abuse of cross-border conversion would be approximately the same.

113_{Davies a.o. 2018, 4.}

114_{Ibid, 8-9.}

115_{Biermeyer a.o. 2018, 111; Alvarez 2018; BusinessEurope 2018, 13.} 116_Ibid.

117_{Since the Member States’ reading of ‘artificial arrangements’ will be subject to the Court’s review, in time}

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4.5 Conclusion

The harmonization introduced in Proposal 2018/0114 is an historical development in ensuring a broader set of corporate mobility rights, but it is also controversial.

As was to be expected, the Proposal is primarily a codification of the Court’s case law. For example, the concept of abuse is characterized in the Proposal as cross-border conversions actually being artificial arrangements intended to enjoy tax advantages or less stringent stakeholders protection, which is comparable to what the Court explained in Cadbury

Schweppes.118 And for assessing whether there are artificial arrangements, objective factors but also the intent need to be taken into account.119 Consequently, apart from the additional protection for stakeholders and a codified procedure for cross-border conversion including an

ex ante assessment of the existence of abuse by the home state, there is not much added to the

Court’s case law.

As for the Proposal’s impact on the balance between use and abuse, most commentators agree that the Proposal was drafted too protective and unclear, and it can thus be stated that it is likely Proposal 2018/0114 can elicit repugnance amongst companies rather than facilitating a (better) regulation of cross-border mobility rights. With the addition that Member States have a significant margin of appreciation of what constitutes as ‘artificial arrangements’, the balance of use and abuse is not likely to be much impacted.

118_{The Court has now followed the Commission’s definition in Proposal 2018/0114 in Joined cases C-116/16}

and C-117/16 T Danmark [2019] ECLI:EU:C:2019:135, para 100. In that case it also used indications for artificial arrangements derived from the Proposal.

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29

5. Use and Abuse of Free Movement of

Persons Rights

Traditionally, the Court has applied divergent interpretations of free movement of persons provisions and the provisions of the other freedoms. This difference in interpretation has often been explained based on the view that there should be a different treatment of economic transactions and human beings.120_{The divergent interpretations are similarly noticeable}

regarding the relevance of the concept of abuse of rights within those freedoms, which left scholars’ opinions on whether this relevance even exists in the freedom of persons, divided.121

This only demonstrates that although it seems a general principle of prohibition of abuse is forthcoming, the concept of abuse itself is still very much dependent on the applicable field of law for its meaning.

This chapter aims to answer the following question: How is the balance struck between use and abuse regarding the provisions on free movement of persons?

5.2 Free Movement of Persons and Rights Derived

The Treaties distinguish between economically active (workers122) and non-economically active citizens of the EU123 when it comes to which free movement of persons rights apply. The rights of non-economically active citizens are primarily regulated in Article 18 TFEU and Directive 2004/38 (‘CRD’).124 These rights also apply to workers125 and include the right to

120_{De la Feria 2011, xix.}

121_{Ibid, xviii.}

122_{The Court explained the conditions for classifying as a ‘worker’ in C-66/85 Lawrie-Blum [1986] ECR I-2121,}

para 17.

123_{EU citizenship is regulated in Article 20, paragraph 1 TFEU.}

124_{Directive 2004/38/EC of 29 April 2004 on the right of citizens of the Union and their family members to}

move and reside freely within the territory of the Member States amending Regulation (EEC) No 1612/68 and repealing Directives 64/221/EEC, 68/360/EEC, 72/194/EEC, 73/148/EEC, 75/34/EEC, 75/35/EEC, 90/364/EEC, 90/365/EEC and 93/96/EEC [2004] . Henceforth ‘CRD’ (Citizen’s Rights Directive).

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30 move and reside freely within the Member States’ territories126_{and the right to equal}

treatment.127_{To a certain extent, it is also possible for an EU citizen’s family member to}

enjoy the migration rights.128_{Member States may restrict migration rights of EU citizens and}

their families based on the grounds mentioned in Article 27 CRD, safe the restriction is proportionate and not of general nature and the Member State has taken into account Article 28 CRD.

Market access rights (the right to carry out economic activities in the host Member State) entail that there may, in principle, be no restrictive measures based on (in)direct

discrimination on grounds of nationality129 or restrictions on access to the market of the host state, even if they are genuinely non-discriminatory.130 Workers also enjoy rights under Regulation 492/11. Article 7, paragraph 2 of this Regulation lays down that workers should be treated equal to nationals when it comes to social benefits. Workers also enjoy equal treatment in respect of tax advantages.131

Member States can restrict market access rights, but this again has to be justified and

proportional. Justifications can be based on overriding requirements in the general interest132, or, for workers, on grounds mentioned in Article 45, paragraph 3 TFEU.

5.3 Abuse of Free Movement of Persons Rights 5.3.1 Codification in Secondary Legislation

The abuse of EU citizen’s rights is expressly mentioned in Article 35 CRD, which states that Member States can “refuse, terminate or withdraw any right conferred by this Directive” if abuse of rights or fraud is at hand. It seems from the provision’s wording, that abuse of rights or fraud133 constitutes a justification ground on its own. This appeared to have been confirmed

126_{‘Migration rights’ are laid down in Article 21, paragraph 1 TFEU, harmonized in the CRD.}

127_{‘Market access rights’ are laid down in Article 18, paragraph 1 TFEU and/or Article 24 CRD. For workers,}

those rights are codified in Article 45 TFEU and partially harmonized in Regulation No 492/2011 on freedom of movement for workers within the Union Text with EEA relevance [2011].

128_{Based on Article 3, paragraph 3 in conjunction with Article 2, paragraph 2 CRD.} 129_{Barnard a.o. 2017, 387-388.}

130_{See e.g. C-415/93 Bosman [1995] ECR I-5068, para 96.} 131_{See Barnard a.o. 2017, 390-391.}

132_{Ibid, para 104.}

133_{‘Fraud’ is here likely to refer to situations in which declarations that a condition for the right is fulfilled, such}

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31 in the Metock case, in which the Court named public policy, security, health and abuse of rights or fraud justifications grounds for restricting the rights in the CRD.134

5.3.2 The Court’s Approach

Ziegler distinguishes between two grounds for claim of abuse which have been subject to the Court’s interpretation in different ways: relating to an objective ‘time-or-scale element’ or relating to a subjective ‘motive element’.135_{The first ground sees to situation in which it}

seems disproportionate to grant rights since the worker barely or only very recently qualified as a worker. The Court has recognized that there can be abuse of rights in such situations136, but effectively, citizens objectively classifying as workers are entitled to the accompanying rights. Furthermore, the concept of worker is constructed broadly, leaving only little room for scenarios of potential abuse.137 The second ground sees to situations in which the worker entered a Member State with the goal of obtaining further EU worker’s rights. For these situations, the Court has outright rejected the relevance of motive for the claim of abuse of rights. 138 There are exceptions though, such as the codified example of marriages of convenience.139 In sum, the Court has outlined the concept of abuse of rights in the free movement of workers very narrow and it is thus hard to use as a justification. The Court has however stated that it is up to the national court to assess whether a specific situation amounts to abuse of rights.140

For non-economically active citizens, the Court’s case law amounts to a similar conclusion. In

Zhu & Chen141_{for example, a Chinese woman had come to Ireland to give birth to her baby,}

who would accordingly obtain the Irish citizenship. The woman then claimed a derived right of residence in the UK since her presence, as the mother of the baby, was necessary to give effect to the baby’s right to live. The UK claimed this was an abuse of EU law, but the Court rejected this claim entirely, since the objective criteria to obtain the Irish nationality were fulfilled and conditions for nationality are in principle a matter of national law.142 Then in

Alokpa, the Court did allow Luxembourg to refuse family residence for French-born Togolese

134_{C-127/08 Metock [2008] ECLI:EU:C:2008:449, para 74-75.} 135_{Ziegler 2011, 301.}

136_{E.g. C-39/86 Lair [1988] ECR I-3161, para 43.} 137_{Ziegler 2011, 305.}

138_{Ibid, 302.} 139_{Ibid, 309.} 140_{Ibid, 303.}

141_{C-200/02 Zhu & Chen [2004] ECR I-9925.} 142_{Ibid, para 35-41.}

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32 children, as they did not have the sufficient resources and health insurance required by the CRD.143

So with the exception of Article 35 CRD, the Court has barely applied or given scope to the prohibition of abuse of rights. It is merely holding on to the objective conditions that need to be fulfilled in order to enjoy specific EU citizen’s rights. If those are fulfilled, it is rather difficult for a Member State to prove that restricting citizen’s rights is justified on grounds of abuse. This can possibly explained by the Court’s incentive not to frustrate the Member States’ strict duty to recognize the nationality designations of other Member States, which would preclude claims of abuse in obtaining nationality.144 A potential confirmation hereof, can be derived from the small amount of cases that were actually referred to the Court in comparison of the amount of national cases dealing with abuse of rights.145

5.4 Conclusion

The free movement of persons confers upon EU citizens, inter alia, migration rights (right to entry, exit and residence in Member States’ territories) and market access rights (right to carry out economic activities in another Member State). Member States can restrict those rights, but there always need to be a justification ground and the measure needs to be proportionate. Since abuse of rights is codified in Article 35 CRD as a justification ground for restricting the citizen’s rights, one would suspect that abuse of rights is a well-developed concept in the Court’s case law. Although the Court has accepted the possibility of abuse of citizen’s rights, it has refrained from giving it scope in the free movement of persons. Instead, it has often referred the situation back to the national court. This could be explained by the fact that conditions for obtaining nationality are primarily for the Member State itself to decide and there should be mutual recognition of designated nationalities between Member States.

143_{C-86/12 Alokpa [2013] ECLI:EU:C:2013:645, para 31. See the same reasoning with regard to equal treatment}

to obtain social benefits in C-333/13 Dano [2014] ECLI:EU:C:2014:2358, para 73-78.

144_{Costello 2011, 352-353.} 145_{Szabados 2017, 99.}

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6. Lessons to be Learnt

In the previous chapters it was assessed what the balance between use and abuse of corporate mobility rights is and what this balance looks like for free movement of persons rights. While the balance for company rights can be seen as perhaps unsteady while it is still very much in development in case law and legislation, it seemed that in freedom of persons, the facilitation of the use of rights has over a considerable period carried more weight than prevention of the abuse of rights. Moreover, the freedom of persons provisions include a codification of the prohibition of the abuse of rights in Article 35 CRD. In the area of corporate mobility rights, we might be heading towards such codification with Article 86c Proposal 2018/0114. Could there be anything in the Court’s approach of the prohibition of the abuse of rights in freedom of persons that could benefit the equilibrium for corporate rights?

This chapter aims to answer the following question: What could be the relevance of the balance of use and abuse of rights in the area of free movement of persons for the regulation of use and abuse in EU company law and Proposal 2018/0114?

In order to do so, this chapter will deal with one shortcoming of the use of corporate mobility rights (regulatory competition and the fear for a race-to-the-bottom) and one ambiguity regarding of the abuse of corporate mobility rights (who can best determine whether there is an abuse?). Both difficulties will be assessed in the field of freedom of persons as well, to see if there are lessons to be drawn.

6.2 The Comparison of the Equilibria of Use and Abuse in Company Law and Freedom of Persons

As has been described in the previous chapters, there has been a difference in the Court’s approach of the concept of the prohibition of abuse of law. For the development of the concept in company law, the Court’s case law has been essential. It took a very liberal

approach (e.g. the Court went further in Polbud than the Advocate General suggested)146 and