Domicile Theory – Establishment Theory – Freedom of Establishment

Up until now

Foreign EU-companies from countries that follow establishment theories are recognized in Germany pursuant to freedom of establishment regulations (See AEUV Art. 49, AEUV 54).

This provides a particular to the English Limited corporate form, which is quite popular in Germany and is employed by German founders to incorporate primarily German undertakings and business concepts. The British also make use of the fact that their English Limited companies continue to be treated as British companies even when their actual seat and operational headquarters are physically located in Germany.


Depending on how the future relationship between the EU and UK develops, such companies might no longer be able to avail themselves of the advantages of freedom of establishment following the exit. In such instance, Germany would once again have the opportunity to claim domicile theory in regard to pseudo-foreign companies and to apply its own corporate laws to them.

According to German law, this would lead to a reclassification of pseudo-foreign stock corporations into German partnerships and would result in direct, personal and unlimited liability on the part of the shareholders. Companies organized according to the legal form of a British Limited should therefore sincerely consider changing their legal form or the place of their incorporation.

An alternative would be, for example, a “Norwegian model,” whereby Great Britain might join countries such as Iceland, Liechtenstein and Norway, which are not EU members but which enjoy freedom of establishment pursuant to European Economic Area (EEA) agreements.

Dentons helps:

The results of the pending negotiations between the EU and the UK cannot be entirely foreseen. Therefore, the time period leading up to the exit should be used to gain clarity with regard to alternative courses of action and to prepare a “safety net” in preparation for the ultimate Brexit. One conceivable solution is to convert such companies into German legal forms, such as a GmbH or stock corporation (“Aktiengesellschaft”). As long as Great Britain remains in the EU and remains subject to freedom of establishment, such a cross-border transition would preserve the legal identity of the entity without the requirement of a new formation.

Another viable option is a cross-border merger. In this regard, there are a number of EU member states with corporate forms similar to the British Limited (such as Ireland or, in particular, Malta), which would give full recognition due to freedom of establishment in Germany and in certain instances even particular tax advantages.

Legal risk of the Brexit in ongoing M&A-transactions

In the M&A sector, the Brexit decision has already led to numerous transactions with a UK nexus being temporarily placed on hold or even finally terminated. In some instances, buyers have been unable to aptly determine the purchase price for the respective target because of the great ensuing uncertainty regarding future economic development. In other cases, financing via a City of London bank may have become either impossible or undesirable or other unforeseen risks may have appeared.

Dentons helps:

These transactions do not need to fail. Options include simply changing the contractual currency while accounting for adjustment clauses for currency fluctuations, creating a currency hedge mechanism or changing the cooperating banks to those of an EU country.

Additionally, precise material adverse change clauses, German choice of law and jurisdiction and expert contractual amendments can help minimize associated risks.

Potentially increased future M&A business as a result of future UK incorporations

The collapse of the British Pound currently makes UK companies comparatively much less expensive, which in turn could have positive effects for transactions business. In regard to long-term development, it is even conceivable that activities stemming from Europe will increase, in particular as potential trade restrictions may render it even more important to maintain a local presence and representation within Great Britain.