Posts Tagged Freedom of Establishment
Trust and freedom of establishment: some preliminary observations on the CJEU’s ruling in the Panayi Trust case
When I cannot add anyting sensible to others’ analysis, I let theirs speak for itself. Enjoy.
On September 14th 2017, the CJEU ruled on the Panayi Trust case (Case C-646/15), to which we have already referred in an earlier blog post. The CJEU’s ruling in the Panayi Trust case will provide ample opportunity for debate and reflection in the near future, especially with Brexit coming into view.
However, in this blog post we will restrict ourselves to a brief presentation of the case and some first observations regarding the question whether trusts can indeed come under the scope of the freedom of establishment.
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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.
Postscript for an example of where Article 4(2)m, lex fori concursus for rules relating to the voidness, voidability or unenforceability of legal acts detrimental to all the creditors, applies without correction, see C-594/14 Kornhaas.
In my posting on Lutz I flagged the increasing relevance of Article 13 of the Insolvency Regulation. This Article neutralises the lex concursus in favour of the lex causae governing the act between a person (often a company) benefiting from an act detrimental to all the creditors, and the insolvent company. Classic example is a payment made by the insolvent company to one particular creditor. Evidently this is detrimental to the other creditors, who are confronted with reduced means against which they can exercise their rights. Article 13 reads
Detrimental acts. Article 4(2)(m) shall not apply where the person who benefited from an act detrimental to all the creditors provides proof that: – the said act is subject to the law of a Member State other than that of the State of the opening of proceedings, and – that law does not allow any means of challenging that act in the relevant case.
In the case at issue, C-310/14, Nike (incorporated in The Netherlands) had a franchise agreement with Sportland Oy, a Finnish company. This agreement is governed by Dutch law (through choice of law). Sportland paid for a number of Nike deliveries. Payments went ahead a few months before and after the opening of the insolvency proceedings. Sportland’s liquidator attempts to have the payments annulled, and to have Nike reimburse.
Under Finnish law, para 10 of the Law on recovery of assets provides that the payment of a debt within three months of the prescribed date may be challenged if it is paid with an unusual means of payment, is paid prematurely, or in an amount which, in view of the amount of the debtor’s estate, may be regarded as significant. Under Netherlands law, according to Article 47 of the Law on insolvency (Faillissementswet), the payment of an outstanding debt may be challenged only if it is proven that when the recipient received the payment he was aware that the application for insolvency proceedings had already been lodged or that the payment was agreed between the creditor and the debtor in order to give priority to that creditor to the detriment of the other creditors.
Nike first of all argued, unsuccessfully in the Finnish courts, that the payment was not ‘unusual’. The Finnish courts essentially held that under relevant Finnish law, the payment was unusual among others because the amount paid was quite high in relation to the overall assets of the company. Nike argues in subsidiary order that Dutch law, the lex causae of the franchise agreement, should be applied. Attention then focussed (and the CJEU held on) the burden of proof under Article 13, as well as the exact meaning of ‘that law does not allow any means of challenging that act in the relevant case.‘
Firstly, the Finnish version of the Regulation seemingly does not include wording identical or similar to ‘in the relevant case‘ (Article 13 in fine). Insisting on a restrictive interpretation of Article 13, which it had also held in Lutz, the CJEU held that all the circumstances of the cases need to be taken into account. The person profiting from the action cannot solely rely ‘in a purely abstract manner, on the unchallengeable character of the act at issue on the basis of a provision of the lex causae‘ (at 21).
Related to this issue the referring court had actually quoted the Virgos Schmit report, which reads in relevant part (at 137) ‘By “any means” it is understood that the act must not be capable of being challenged using either rules on insolvency or general rules of the national law applicable to the act’. This interpretation evidently reduces the comfort zone for the party who benefitted from the act. It widens the search area, so to speak. It was suggested, for instance, that Dutch law in general includes a prohibition of abuse of rights, which is wider than the limited circumstances of the Faillissementswet, referred to above.
The CJEU surprisingly does not quote the report however it does come to a similar conclusion: at 36: ‘the expression ‘does not allow any means of challenging that act …’ applies, in addition to the insolvency rules of the lex causae, to the general provisions and principles of that law, taken as a whole.’
Attention then shifted to the burden of proof: which party is required to plead that the circumstances for application of a provision of the lex causae leading to voidness, voidability or unenforceability of the act, do not exist? The CJEU held on the basis of Article 13’s wording and overall objectives that it is for the defendant in an action relating to the voidness, voidability or unenforceability of an act to provide proof, on the basis of the lex causae, that the act cannot be challenged. Tthe defendant has to prove both the facts from which the conclusion can be drawn that the act is unchallengeable and the absence of any evidence that would militate against that conclusion (at 25).
However, (at 27) ‘although Article 13 of the regulation expressly governs where the burden of proof lies, it does not contain any provisions on more specific procedural aspects. For instance, that article does not set out, inter alia, the ways in which evidence is to be elicited, what evidence is to be admissible before the appropriate national court, or the principles governing that court’s assessment of the probative value of the evidence adduced before it.‘
‘(T)he issue of determining the criteria for ascertaining whether the applicant has in fact proven that the act can be challenged falls within the procedural autonomy of the relevant Member State, regard being had to the principles of effectiveness and equivalence.’ (at 44)
The Court therefore once again bumps into the limits of autonomous interpretation. How ad hoc, concrete (as opposed to ‘in the abstract’: see the CJEU’s words, above) the defendant has to be in providing proof (and foreign expert testimony with it), may differ greatly in the various Member States. Watch this space for more judicial review of Article 13.
Postscript 7 December 2015: Bob Wessels has annotated the case here.
Postscript for an example of where Article 4(2)m, lex fori concursus for rules relating to the voidness, voidability or unenforceability of legal acts detrimental to all the creditors, applies without correction, see C-594/14 Kornhaas.
This post has been some time in the making, notwithstanding my promise to have it up soon. Let’s just say I got distracted.
The wide interest in Lutz, Case C-557/13, illustrates the increasing relevance of the actio pauliana in protecting creditors from their debtor’s insolvency. The core underlying issue for Lutz is that, in the absence of considerable capital in companies (arguably a direct result indeed of the regulatory competition in Member States’ corporate law following the ECJ’s case-law on freedom of establishment), civil law mechanisms have become more relevant than classic recourse to companies’ liability, relying on their capital.
If one relies on more classic modes of securitisation, one may want to have more predictability in what law will apply to those securitised agreements. That is where the Insolvency Regulation comes in, in providing for a mechanism which allows parties to choose applicable law for the relevant agreements.
Article 4(2)m of the Insolvency Regulation (in the new Regulation this is Article 7(m) – unchanged) makes the lex concursus applicable in principle: lex concursus applies to ‘(m) the rules relating to the voidness, voidability or unenforceability of legal acts detrimental to all the creditors.’ However Article 13 (16 new – unchanged) insulates a set of agreements from the pauliana: ‘Article 4(2)(m) shall not apply where the person who benefited from an act detrimental to all the creditors provides proof that: – the said act is subject to the law of a Member State other than that of the State of the opening of proceedings, and – that law does not allow any means of challenging that act in the relevant case.’
The crucial consideration in Lutz was whether the absence of means of challenge in the lex causae, relates to substantive law only, or also to procedural law. Randi summarise the time-line and relevant distinction in German and Austrian law as follows:
- “17 Mar 2008-Austrian court issues an enforceable payment order in favour of Mr Lutz against the debtor company
- 18 April 2008-debtor files application for German insolvency proceedings
- 20 May 2008-attachment of three Austrian bank accounts of the company
- 4 August 2008-German insolvency proceedings opened (as main proceedings) in respect of the company
- 17 Mar 2009-Austrian bank pays monies to Mr Lutz
Under German law, any enforcement of security over the debtor’s assets during the month preceding the lodging of the application to open proceedings is legally invalid once proceedings are opened. Under Austrian law, an action to set aside a transaction must be brought within one year after the opening of proceedings, failing which it becomes time-barred. By contrast, the limitation period under German law is three years. Although the attachment order was granted before the application to open main proceedings was filed, the actual attachment itself took place after that filing and the subsequent payment of monies by the bank took place after main proceedings were opened in Germany. Mr Lutz argued that art 13 applied and that the payment could no longer be challenged by the German liquidator under Austrian law as the one-year limitation period had expired.”
(Randi also have good review of the questions in Lutz relating to rights in rem and Article 5, triggered in the case at issue by the attachments of bank accounts).
Essentially, the Court expresses sympathy for the cover of procedural limits to fighting detrimental acts to be determined by the lex causae. (It dismissed any relevance of Article 12(1)d of Rome I Regulation, which provides that prescription and limitation of actions are governed by ‘the law applicable to a contract’: for the Insolvency Regulation is most definitely lex specialis). However leaving the matter up to the lex causae would cause differentiated application of the Insolvency Regulation across the Member States.
Consequently the ECJ opts for autonomous interpretation, ruling (at 49) that Article 13 of Regulation No 1346/2000 must be interpreted as meaning that the defence which it establishes also applies to limitation periods or other time-bars relating to actions to set aside transactions under the lex causae.’
The ECJ’s judgment essentially confirms the EFTA Court’s views on the similar proviso in Directive 2001/24 on the winding-up of credit institutions (Lbi hf v Merrill Lynch). A pity the ECJ did not refer to that finding. Geert.
Postscript 2 October 2014: the AG opined along similar lines in Q, with respect to a question also referred by the hoge Raad, as follows: ‘Does the importance of the conservation of national natural heritage and cultural heritage, as addressed in the Natuurschoonwet 1928 (Law on nature protection 1928), constitute an overriding reason in the public interest which justifies a scheme whereby the application of an exemption from gift tax (recovery facility) is limited to estates situated in the Netherlands?’
In X, Case C-87/13, the Hoge Raad of the Netherlands asked in essence whether EU law, in particular the rules on freedom of establishment and on free movement of capital, preclude[s] a resident of Belgium who, at his request, is taxed in the Netherlands as a resident and who has incurred costs in respect of a castle, used by him as his own home, which is located in Belgium and is designated there as a legally protected monument and village conservation area, from deducting those costs in the Netherlands for income tax purposes on the grounds that the castle is not registered as a protected monument in the Netherlands?
Kokott AG opined on 4 September last (the Opinion at the time of writing was not yet available in English) and suggested The Netherlands should be allowed to go ahead with such distinction. She focussed her opinion on the free movement of establishment, suggesting the same analysis applies mutatis mutandis for free movement of capital.
A summary of the Court of Justice’s case-law on the main exceptions to the free movement of capital (and, also per Kokott AG, similarly applicable to free movement of establishment), may be found in par. 42 of Jaeger, Case C-256/06:
According to the case-law, in order for national tax legislation such as that at issue in the main proceedings, which, for the purposes of calculating inheritance tax, distinguishes between assets situated in another Member State and those situated in Germany, to be considered compatible with the provisions of the Treaty on the free movement of capital, the difference in treatment must concern situations which are not objectively comparable or be justified by overriding reasons in the general interest.
The Advocate General suggested the Court find the two situations objectively comparable, given that listed property in both countries is likely to be subject to various restrictions. Simply quoting budgetary reasons for limiting the possibility of tax offset to assets in the State of taxation is not enough under EU law. However she did find merit in the argument that the limitation to listed property in The Netherlands, is in the general interest: in contrast with other cases (e.g. Petersen C-544/11), the general interest identified by the Member State concerned, cannot be met by market participants in other Member States (at 41): allowing set-off for maintenance of listed property in another Member State, does not serve the goal of preserving Dutch national heritage, a relevant interest illustrated eg. by the references to national heritage in Articles 36 and 167 TFEU.
If adopted by the Court, the AG’s Opinion in my view would be very welcome. The EC have been using an extensive interpretation of the free movement of capital essentially to skate around its limited progress in tax harmonisation (which is subject to national veto).
Of Vikings, airlines and trade unions – The High Court in British Airways leaves a treasure trove of questions on ‘civil and commercial’
In British Airways v Sindicato Espanol de Pilotos de Lineas Aereas – SEPLA, crucial consideration was whether the court had jurisdiction under the Brussels I Regulation to determine the claim brought by BA against SEPLA, a Spanish trade union, for damages and declaratory and injunctive relief alleging that strikes of Spanish airline pilots organised by SEPLA were unlawful under Spanish law in that they were in breach of the Claimants’ right to freedom of establishment and to provide cross border services under Articles 49 and 56 TFEU. The international federation of airline pilots association acted as anchor defendant (being domiciled in the UK at the time the action was introduced (it had since moved to Canada) and the case against both arguably being closely linked within the meaning of Article 6 of the Jurisdiction Regulation).
The High Court accepted the ‘knock-out point’ of defendant: that the matter was not ‘civil and commercial’ and therefore not within the scope of application of the Regulation. Field J argued with reference to the ECJ’s judgment in Viking (or more specifically, the AG’s Opinion in same) that ‘it remains the case that the source of the fundamental freedoms are treaty provisions imposing obligations on states‘, and that ‘a court having to decide whether SEPLA was in breach of Articles 49 and/or 56 TFEU will have to conduct a sensitive balancing exercise in which it weighs SEPLA’s constitutional right to strike and the fundamental right to strike which forms part of the general principles of Community Law against the fundamental freedoms enshrined in Articles 49 and 56. In my judgment, such an exercise will involve a resort to notions of public law rather than to private law.‘
I am not so sure. Firstly, the horizontal (i.e. between individuals) direct effect of the Treaty Articles concerned is quite established. Moreover, under the Eurocontrol and subsequent case-law formula, the public authority (here: merely a private organisation, a trade union, perhaps carrying out duties of a quasi-public law nature (the right to strike)) involved needs to have acted iure imperii. It is only if the legal relationship (not: the underlying applicable law) between the parties to the action is of a public law nature, giving one of them extraordinary authority which the other lacks, that the Regulation may not apply. There was no indication that the trade union in the specific case acted in some kind of iure imperii matter. This was not acte claire I would have thought, but the High Court evidently thought otherwise.
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.