The Judgment of the Court of Justice of the European Union (“CJEU”) of the 25th of April 2024, (ECLI:EU:C:2024:348), analyses the framework of the freedom of establishment in the European Union.
1.- Context
The limited liability company based in Italy, called AT, managed a piece of real estate (a castle) which was its only asset. In 2024, AT changed its name to STA, moved its registered office to Luxembourg, where it was converted into a Luxembourgish company called STE, and continued to make use of its sole asset. In 2010, by means of a General Meeting, STE designated S.B. as sole director, and that company appointed a general representative with Powers of Attorney, who transferred the title of the piece of real estate to a company S.T., which in turn transferred title to E.W.
2.- Litigation
In 2013, STE filed a lawsuit against S.T. and E.W., requesting the voiding of both transfers of title, arguing that S.B.’s appointment of general representative was illegal. The Court of First Instance dismissed the claim, but this ruling was overturned by the Court of Appeal. The Supreme Court (“SC”) asked whether the incorporation of STE as a Luxembourgish company implied that its management activities were required to be subject to Luxembourgish Law, despite keeping its principal place of business in Italy.The reason behind this was:
- Italian law applies to companies whose principal object is in Italy.
- The Board of Directors may only delegate functions to its members, and not to third parties.
- According to jurisprudence of the CJEU, freedom of establishment includes the right of a company incorporated in accordance with the Law of a Member State to be converted into a company of another Member State, provided that the requirements of the second Member State are complied with, as well as the connecting element provided by said second Member State. If only the registered office is moved (not the central administration or the principal place of business), then the applicability of freedom of establishment is not excluded as such.
- This jurisprudence affects not only the incorporation but also the management of companies, with the understanding that they must be subject to Luxembourgish legislation.
3.- Preliminary Issue
The SC asked the CJEU if articles 49 and 54 of the TFEU ran contrary to the hypothetical case of a Member State, in which a limited liability company had been incorporated, applying the provisions of National Law relating to operation and management, when, after moving its registered office and then reincorporating itself under the law of the destination Member State, it kept its principal place of business in the origin Member State, and the acts of management had a decisive bearing on the activity of the company.
The TJEU rephrased the question, asking itself whether articles 49 and 54 of the TFEU would run contrary to a piece of regulation of a Member State which provided for, in general terms, the application of its National Law to the acts of management of a company established in another Member State, but which exercised the main part of its activity in the State of origin.
4.- Important Points
First. Whether the case in dispute under these litigation proceedings falls under the purview of freedom of establishment.
The answer is yes, on the understanding that:
(i) Article 49 recognises the freedom of establishment in respect of companies incorporated under the laws of a Member State whose registered office, central administration or principal place of business is located within the European Union;
(ii) Freedom of establishment includes the incorporation and management of companies, under the laws of the Member State where such establishment is effected, for its own companies;
(iii) Said companies have the right to carry out their activities in another Member State, using their registered office, central administration or principal place of business as connecting factors;
(iv) The definition of the connection requirement is a matter to be decided by each Member State.
Second. Whether a Member State, whose regulation provides for the application of its National Law to the acts of management of a company established in another Member State, upon the exercising by the company of the main part of its activity in the State of origin, commits a restriction of the freedom of establishment.
The answer is yes, since the cumulative application of two regulatory systems could frustrate the management of said company.
Third. Whether said restriction could be justified. It could be, in the following circumstances:
- For overriding reasons of common interest, like, for example, the safeguarding of the interests of shareholders, workers, creditors and/or third parties. Nevertheless, the restriction should be adequate, even if it is not applicable to this case.
- For the purposes of combatting abusive practices which create corporate structures with no economic value, and pursuing tax evasion and fraud. However, it should be noted that, setting up a registered office in a Member State with more advantageous laws is not in itself an abusive practice, and the act of carrying out your main corporate function in a different Member State cannot form the basis of a general presumption of fraud.
5.- Conclusion.
The CJEU published its ruling, in which it was declared that articles 49 and 54 of the TFEU must be interpreted in the sense that they oppose a regulation of Member States which provides for, as a blanket policy, the application of its National Law to the management activities of a company established in a different Member State, and which exercises the main function of its business in the first Member State.
Mireia Bosch
Vilá Abogados
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5th of July 2024
