Posts Tagged Corporate migration
The Pfizer /Allergan collapse: An end to Celtic Cash and a source of inspiration for EU rules on outgoing corporate mobility?
I shall keep this post short for otherwise it risks developing into a book. In a week which also saw the Panama papers blow a hole in the use of tax havens for individuals, the collapse of the Pfizer Allergan merger may be the beginning of the end for the Irish (and similar) corporate tax Nirvana. The US treasury’s new rules on outgoing corporate mobility mean re-incorporation in Ireland has become an awful lot less attractive.
I realise there are caveats and one may be comparing cheese and chalk. Also, tax lawyers no doubt will have to chew over this, yet: may this not also be the moment for the EC to reconsider similar issues in EU law, kicked off some time back by the Daily Mail case?
(Handbook of) European Private International Law 2nd ed 2016 Chapter 7.
Mirror, mirror. Cartesio obiter clarified in Vale. The Court of Justice further completes the corporate migration jigsaw.
Postscript 22 December 2016. Corporate migration also often triggers issues of ‘exit taxation’. Core reference is C-371/10 National Grid Indus (other than Daily Mail of course; referred to below). Grid Indus was referred to extensively by Kokott AG yesterday (21 December) in Case C-646/15 Panayi. Do trust enjoy the protection of the four freedoms even if they do not have distinct legal personality? (Answer Yes). What is Member States’ freedom of manouevre for exit taxation. (Answer in principle untouched. But since such taxation impacts upon freedom of establishment, tax treatment needs to be proportionate).
In family law, the status and capacity of a natural person is largely determined by a person’s nationality, which generally stays with it for life, or, particularly in common law countries, by a person’s domicile, which is less fixed but nevertheless assumes strong links with a particularly State. The corporate equivalent of nationality and domicile is the lex societatis. It is the ‘personal law’ or corporate identity of companies [Hartley, T.C., International Commercial Litigation, Cambridge, CUP, 2009, 506.]. It often determines ‘whether the company had been validly created; what its constitution is; what the powers are of its organs, officers and shareholders; whether it has been merged with another company; and whether it has been dissolved.’ [Ibid] These in others words are the corporate equivalents of life and death, capacity, marriage, divorce, adoption etc.
Just as individual may want to change nationality, or acquire another, and face the consequences of their choice under States’ nationality laws, so, too, do companies want to migrate for all sorts of reasons: shareholder structures, fiscal, directors’ liability, etc. They, too, face consequences: the original State (the ‘home’ State) may not want to let go, and put in place al sorts of hurdles for the company to migrate. The new State (the ‘host’ State) may equally be unimpressed with and unwelcoming to the newcomers’ arrival. States’ willingness or not to welcome new arrivals and to say goodbye to those wishing to leave, loosely translates into two main models: the real seat theory, and the incorporation theory.
In the EU, these issues play a particular role as they come within the purview of the freedom of establishment, laid down in Article 49 of the Treaty on the Functioning of the EU (‘TFEU’):
(ex Article 43 TEC)
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.
Article 50 TFEU foresees harmonisation to accompany the principal freedom. However the Union legislator (and the Community legislator before it) has not got all that far.
It has therefore, largely been the Court of Justice which has had to establish how far Member States’ freedom of manoeuvre reaches in obstructing corporate migration. In Daily Mail, the Court gave a lot of leeway to Member States on the outbound corporate migration side: the home Member States have a lot of freedom in determining the consequences of corporate migration. By contrast, in Centros, Ǜberseering, and Inspire Art, the Court was much stricter for inbound corporate migration: the host Member State has to have very good, ad hoc reasons for obstructing freedom of establishment (and services) by insisting on incorporation and /or refusing commercial activities of affiliates, if all the company concerned wants to do, is to do business in the host Member State (rather than actually incorporating). All these cases are referenced in Jääskinen AG‘s Opinion.
In Cartesio, the Court stuck to its perceived dichotomy between in- and outbound migration, despite a plea by Maduro AG to approximate the two. The court then added an obiter in para 112:
‘In fact, in that latter case, the power referred to in paragraph 110 above, far from implying that national legislation on the incorporation and winding-up of companies enjoys any form of immunity from the rules of the EC Treaty on freedom of establishment, cannot, in particular, justify the Member State of incorporation, by requiring the winding-up or liquidation of the company, in preventing that company from converting itself into a company governed by the law of the other Member State, to the extent that it is permitted under that law to do so.’
[the English version of the text in fact is not the clearest]
That obiter got many excited, and confused: do the final words of para 112 imply that the host Member State can choose whether to accept such re-incorporation, or rather, does Article 49 TFEU imply that the host Member State has no choice but to accept such re-incorporation?
In Cartesio, a company incorporated in Hungary wanted to change its operational headquarters to Italy but keep Hungarian incorporation. Hungarian corporate law does not allow for this: a company can keep its Hungarian incorporation but only if it moves headquarters within Hungary. Otherwise it has to dissolve in Hungary and incorporate elsewhere.
The case decided yesterday, Case C-378/10 Vale, is a mirror image (see also Stefan Rammeloo’s bullet-point overview of issues here): an Italian company wants to dissolve in Italy and re-incorporate in Hungary, and it wishes its Italian predecessor to be recognised as its legal predecessor, meaning all rights and obligations of the old company transfer to the new. A procedure which is perfectly possible for Hungarian companies, within Hungary: in particular, by changing company form. Vale’s application for registration was rejected. The obiter in Cartesio led to speculation whether the host Member State is under a duty to co-operate with such conversion (as opposed to Cartesio, which sought to establish the limits to obstruction by the home Member State).
The Court in my view /in my reading of the judgment took a perfectly logical approach to the obiter: ‘to the extent that it is permitted under that law to do so‘ refers to the existence of a national conversion procedure. If nationally incorporated companies may convert and transfer all rights and obligations to the new company, any restrictions on foreign companies employing this mechanism come within the reach of Article 49 TFEU.
There may be reasons for the host Member State to restrict this possibility in specific instances (for reasons of e.g. protection of the interests of creditors, minority shareholders and employees, the preservation of the effectiveness of fiscal supervision and the fairness of commercial transactions: see para 39 of Vale), however none of these apply here: Hungarian law precludes, in a general manner, cross‑border conversions, with the result that it prevents such operations from being carried out even if the interests mentioned in paragraph 39 above are not threatened in any event (para 40).
The host Member State must therefore open the possibility of conversion to foreign registered companies, (only) if it has such conversion possibility in its own corporate laws. Any conditions imposed by national law (documentation, proof of actual economic continuity of operations etc) may also be imposed on these foreign companies, provided this is done in a transparent, non-discriminatory fashion, and in a way which does not jeopardise the actual freedom of establishment.
It is interesting to note that the Court recycled (as it did in Cartesio), the very core Daily Mail quote which explains its hesitation effectively to harmonise corporate law itself, through too drastic an interpretation of Article 49 TFEU:
‘companies are creatures of national law and exist only by virtue of the national legislation which determines their incorporation and functioning‘(Vale, para 27).
No doubt many corporate law implications escape me (see, on the AG’s Opinion, rather excellently Thomas Biermeyer and Thore Holtrichter in the Columbia Journal of European Law here) and will lead to further cases at the Court.