Europe: European court of justice declares restrictions on the transfer of the registered office as unlawful

Until today, the legislation of some Member States of the European Union is very restrictive with regard to the transfer of the company headquarters in other Member States. It is often required that the company in the country of origin must be completely liquidated before the change of domicile. This is therefore inevitably associated with the loss of the legal personality of the company. In addition, deferred taxes must always be taxed in the country of origin (exit tax), so that a tax-neutral transfer of the registered office is not possible and due to the considerable costs, the implementation no longer makes economic sense.

In its judgment of 25/10/2017 (Case C106-16, Polbud - Wykonawstwo sp. z. o.o.), the European Court of Justice ruled that these restrictions violate the freedom of establishment and are therefore contrary to Community law.

In the specific case, a Polish company had decided to transfer its registered office to Luxembourg, but to keep the place where it actually carries out its economic activity in Poland. Polish company law did not permit the company’s entry in the Commercial Register to be deleted without first having liquidated it. The Polish Supreme Court wanted the ECJ to clarify the compatibility of this rule with the freedom of establishment in the preliminary ruling procedure.

In its ruling, the ECJ confirms that the freedom of establishment of a company of one Member State includes the right to transform itself into a company governed by the law of another Member State in which its registered office is being relocated. At the same time, freedom of establishment includes the right to maintain the place of effective economic activity in the country of origin. For the ECJ, the intention to benefit from a more advantageous national regulation of company law (in the specific case of Luxembourg) is not improper per se.

The ECJ notes that legislation which, like Polish law, links the possibility of transferring the registered office to liquidation and thus the loss of legal personality, restricts the freedom of establishment. This is not justified by overriding reasons of general interest, such as the protection of creditors, minority shareholders and employees, since it is a general obligation and less restrictive measures, such as a right of opposition to the transfer of the registered office, as provided for by Spanish law, could have been chosen.

The judgment deserves full approval because it clarifies that freedom of establishment includes the right to transfer the registered office of the company to another Member State. This is a further step towards harmonising the transfer of the company’s headquarters in Europe.

It is precisely in this spirit that the European Commission recently presented a proposal to introduce harmonised procedures for intra-Community transfers, mergers and divisions. The draft will contain “specific measures” to enable national authorities to prevent abuse through ex ante controls.

Autoren: Fernando Lozano, Carlos Fernández & Konrad Schampera