European Union: Virtually Limitless Mobility

Last Updated: 9 October 2012
Article by Harald Gesell and Christoph Köhler

European Court of Justice recognises cross-border conversion/directive on relocation of corporate seat nevertheless not obsolete

The European Court of Justice (ECJ) has recognised cross-border changes of form which simultaneously preserve an enterprise's identity, and has therewith removed a further barrier against the mobility of enterprises. From a company law perspective, enterprises now have virtually limitless mobility within the EU and EEA. Cumber-some detours are no longer necessary (judgement dated 11 July 2012 "VALE", case no.: C 378/10, FAZ dated 13 July). With this judgement, the judges have once again pre-empted the European legislator, who has been working on a corresponding directive for some time now. The directive is still needed, however.

In the proceedings in question, an Italian company, VALE Construzioni Srl, had completely relinquished its activities in Italy, relocated its seat to Hungary and set up a newcompany in Hungary governed by Hungarian law. In the notification to the Commercial Register, the former Italian company was named as the legal predecessor of the Hungarian company. The Hungarian courts refused to register the new company because, pursuant to Hungarian law, a transformation which preserves cor-porate identity is only permissible for Hungarian companies.

The ECJ deemed this a violation of the European freedom of establishment. There was no justifiable reason why a Member State should only allow domestic companies to change their corporate form whilst preserving their commercial and legal identity, yet generally refuse companies from other Member States.

Through a change of form, a German limited liability company (Gesellschaft mit beschränkter Haftung, GmbH), for example, can be transformed into a stock corpo-ration (Aktiengesellschaft, AG). A characteristic feature of such a transformation is that the legal relations of the company as such ownership of shares in the company, ownership of assets by the company, contracts with third parties remain un-affected. To date, the majority of European legal systems, including the German one, has only allowed its domestic companies to change their form. Hence it was doubtful whether an English Limited could transform into a German GmbH. Such combinations are now possible within the EU and the EEA.

With the judgement, the ECJ has removed a further barrier against the mobility of European enterprises. In the past, judges had already successively broadened the scope of structural possibilities available to enterprises through several leading decisions: In the "Centros" and "Überseering" judgements they obliged the Member States to recognise corporate forms of other Member States in cases where companies had relocated their corporate headquarters beyond the national border to another Member State.

In the "SEVIC" decision the ECJ cleared the way for cross-border mergers. It held that it was important that this form of transformation is available to enterprises if the Single European Market is to function, and that it therefore is protected by the freedom of establishment. In the recently decided "Cartesio" case it ruled that Member States may not prohibit their companies from transforming into a corporate form of another Member State and therewith provided the first building block for the cross-border transformation that is now possible.

Cross-border transformations are an interesting option for various reasons, e.g. to exploit tax advantages, a better market environment or a more favourable legal framework. To date, enterprises in the EU and EEA essentially had three possibili-ties: some states allow their companies to relocate their administrative seat abroad whilst the enterprise itself remains governed by the law of the original country. This can be disadvantageous, however, because confidence in foreign corporate forms is often less than that in domestic companies.

A further conceivable option is the company's merger into an enterprise abroad with the disadvantage that the company dissolves and the transfer of assets triggers taxes, e.g. real estate transfer tax. And finally, the enterprise can be transformed into a European stock corporation (Societas Europaea, SE), which by law is expressly allowed to relocate its seat and hence its entire activities within Europe at any time whilst preserving its commercial and legal identity. This often requires several stages of transformation both into an SE and back out of it again.

According to the latest ECJ judgement, all corporate forms may basically relocate their activities to another Member State and continue their business in a legal form that is recognised there without this affecting the existence and the economic relati-ons of the enterprise or triggering transfer taxes. The scope of structuring possibili-ties of enterprises has therewith been considerably expanded.

Tax law still sets de facto boundaries, however. Many European legal systems impose an exit tax. Amongst other things this means that a taxation of hidden reserves is triggered when an enterprise moves out of the country. However, this hurdle has also been slightly alleviated by the ECJ in its decision "National Grid Indus" and, most recently, by its judgement dated 12 July 2012 (case no.: C-269/09). The majority of experts are of the opinion that companies moving out of the country are entitled to an interest-free deferment of this exit tax pursuant to EU law.

For quite some time the Commission has been planning to issue a directive on the relocation of company seats, which shall permit the cross-border change of form within the EU and stipulate the procedure to be followed in such case. Although the directive is no longer required to ensure whether this step across the border can be taken for theECJ has already resolved this it will considerably alleviate how this is to be implemented. The ECJ has not stipulated any uniform procedural provisions. For this reason, until further notice two legal systems will have to be taken into consideration incase of a cross-border transformation: that of the exit country and that of the entry country, and as a rule these are only designed for domestic changes of form.

This consequently means considerable coordination efforts with the participating registers,notaries, etc. in the run-up to a transformation à la VALE. Uniform European regulations in the directive will perceptibly simplify such procedure. And since the plans for the directive only concern corporations to date, the "VALE" decision will certainlyremain of relevance to cross-border transformations from or into a partnership.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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