Cross-border mobility in Polish and EU law

Thanks to freedom of establishment in the single European market, the cross-border mobility of the companies within the EU has become a common phenomenon. Despite the many ambiguities resulting from the lack of harmonisation of legislation at EU level, this practice was legitimized by the case law of the European Court of Justice (ECJ), which provides that EU member countries must recognize the legal personality of companies incorporated and existing under the laws of different Member States. Brexit may, however, adversely affect the cross-border mobility of British companies to EU countries and vice versa.

In Poland, despite the application of the European law, the issue of foreign companies and the law applicable to their legal personality is controversial due to the unclear definition of the connecting factor of “company’s seat” (that determines the law applicable to the company’s legal status) in Polish private international law. Nevertheless, the concept of “statutory seat” (i.e. seat understood as a place indicated in the company’s articles of association or in the competent registry) would currently seem to prevail over the previously used theory of “real seat” (i.e. seat understood as the place where the company’s central management is located). The traditional “real seat” approach implied that Polish substantive company law would be applicable to the corporate matters of companies if the company’s business activities and management structures were centered in Poland and, the other way round, that foreign corporate law would apply to Polish companies if they were under foreign management. Such situations may in some cases lead to a lack of recognition of foreign corporate entities and a loss of their legal personality if the seat of the company is relocated. Nevertheless, in case of the companies from the EU, there is no doubt that their legal personality and capacity will be respected regardless of what “seat theory” is applied. Polish statutory regulations expressly provide that a cross-border change of company seat within the EEA cannot lead to loss of the legal personality of such company. British companies and their legal capacity are therefore recognized in Poland regardless of where their statutory or real seat is located.

Migration of British limited companies

Enabling EU entrepreneurs to freely choose the legal form (including foreign companies) for conducting their business activities resulted in the occurrence of legislative competition between company law regimes in different countries and the migration of entrepreneurs to foreign legal forms. In particular, private companies limited by shares incorporated under the laws of England and Wales (which also fall within the scope of a broader notion of British limited companies) have gained in popularity in comparison to similar legal forms offered by continental EU countries such as the Polish “sp. z o.o.” or the German “GmbH”. This is because such limited companies are considered to be easier to establish and to operate. There are no significant formalities (for instance, the incorporation of Polish sp. z o.o. requires a form of notarial deed for the articles of association and entry in relevant registry, whereas share purchase agreements have to be certified by a notary) and the costs of operation are lower.

Poland has also observed the practice of conducting business activities in Poland by Polish entrepreneurs using an English private company limited by shares (although it should be noted that compared to Germany, for example, this was not so popular and usually concerned smaller businesses). British companies may freely operate in Poland, either based on the freedom to provide services or through establishment of branches (however, founding a branch in Poland is, as a rule, not required).

In case of “pseudo-foreign companies” (i.e. companies that are formally incorporated abroad although they conduct their business activities (almost) exclusively in Poland and have their management board in Poland), some legal scholars have expressed the opinion (based on the “real seat” approach) that such companies cannot benefit from freedom of establishment as their activities are only aimed at circumventing Polish law. Nonetheless, pursuant to ECJ case law, there are no grounds for denying such companies the recognition of their legal personality granted under foreign law (as a side note, the situation of such companies is different from a tax law perspective: Polish law generally also recognizes corporate entities which have a management centre in Poland as Polish tax residents).

Potential consequences of Brexit

Brexit could therefore adversely affect the business activities of British limited companies in Poland. British companies may be treated as foreign entities from third countries and thus may not be able to benefit from the freedom of establishment and freedom to provide services; they will most likely be forced to establish subsidiary companies in order to conduct business in Poland.

There may be also problems with regard to pseudo-foreign British limited companies that have a Polish management board. If the “real seat” approach is applied, the legal personality of such entities may be questioned (as it would not be protected as in the case of companies from the EEA countries). Moreover, it should be noted that Polish law does not currently provide (like the national legislation of many other EU countries) for a possibility of cross-border re-incorporation as or transformation of foreign companies into Polish companies (and vice versa). Some representatives of the Polish legal doctrine accept the permissibility of such operations based on ECJ case law, although due to lack of formal statutory regulations, cross-border re-incorporation may not be feasible in practice. For pseudo-British companies run by Polish entrepreneurs this may therefore mean the necessity to change the legal form by liquidating limited companies in the UK and incorporating new sp. z o.o. companies in Poland (preserving all the formal requirements such as the form of a notarial deed). This process would be time-consuming and troublesome, but it would not result in the recognition of continued existence and legal succession.

The European Commission is currently working on the harmonisation of EU company law with regard to cross-border re-incorporation/transformation (similar to the already existing directive on cross-border mergers), yet progress is slow and the future of the regulations in uncertain (and, more importantly, they will not cover the UK after Brexit). The ECJ may soon definitively dispel doubts concerning cross-border re-incorporation, as the Polish Supreme Court has referred a question to the ECJ for a preliminary ruling on the compliance of Polish regulations prohibiting outbound re-incorporations with EU law (although the ruling may not at all address the permissibility of inbound re-incorporations, which would be the case of British limited companies relocating to Poland).

Besides the consequences in the area of corporate law, Brexit may also negatively impact cross-border business activities from a regulatory perspective. It may become necessary for British companies conducting business in Poland to obtain additional permits or concessions which were not previously required and the acquisition of real property in Poland may also be hindered. In particular, this may affect some of the British financial institutions which have to date been active on the Polish market in accordance with the single passport principle.

Obviously, none of the above-mentioned problems can be considered a foregone conclusion. It is currently extremely hard to assess how Brexit will affect cross-border mobility and the activities of British companies in the EU and Poland in particular. This will depend on the results of negotiations between the EU and the UK on the terms of exit from the Community. It cannot be ruled out that with regard to the legal status of British corporate entities in Poland (and vice versa) bilateral treaties will be concluded between Poland and the UK, which may grant British companies similar rights to those from EU/EEA countries.