The Court of Justice of the European Union (CJEU) has expanded recently the freedom of companies to move from one EU Member State (the departure State) to another State (the destination State). The destination State cannot prohibit a company incorporated under the laws of the departure State from moving its registered office and principal place of business into the destination State and changing its legal structure into a form recognised under the laws of that State.

The Move Towards Freedom of Establishment for Companies

In Centros Ltd v Erhvervs- og Selskabsstyrelsen [1999] C-212/97, the CJEU ruled that the destination State may not refuse to register a branch of a company incorporated in the departure State, even if the company conducts all its business through that branch.

In Überseering BV v Nordic Construction Company Baumanagement GmbH [2002] C-08/00, the CJEU ruled that the destination State has to recognise a company as a legal entity, even if it remains incorporated under the laws of its departure State.

In Sevic Systems AG [2005] C-411/03, the CJEU ruled that all EU Member States have to treat cross-border mergers in the same manner as they treat a merger of companies within their jurisdiction.

In Cartesio Oktató és Szolgáltató bt, [2008] C-210/06, the CJEU ruled that the departure State may require that a company maintains its principal place of business within its territory if it wishes to maintain its status as a legal entity under the departure State’s laws. In the same judgment, however, the CJEU stated explicitly that this does not allow the departure State to prohibit companies from moving their principal place of business and registered office into the destination State, and thereby assuming a new legal form under the laws of the destination State, if this is allowed under the destination State’s law.

In the most recent ruling, VALE Építési Kft. [2012] C-378/10, the CJEU ruled that the destination State must allow a company to move its registered office and principal place of business into the State’s territory and thereby assume a legal form under its laws, if the destination State’s laws provide for transformations between the legal forms of the destination State.

On one hand, because most Member States’ laws provide for the transformation of a company’s legal form, the Cartesio and VALE judgments mean companies can move freely within the European Union and assume a legal form under the laws of the destination State. This is a definite improvement on the situation that existed previously, under which only corporations organised as a Societas Europaea (European Stock Corporation) could move between States. Alternative solutions such as crossborder mergers, which were introduced following Sevic Systems, no longer need to be used, as their procedures are more complex.

On the other hand, however, as the laws of most Member States do not provide specifically for cross-border transformations, the Cartesio and VALE judgments will be complicated to implement; the respective provisions for domestic transformations need to be applied mutatis mutandis. It is likely that the European Commission will begin to harmonise the laws on transformations between EU Member States and thereby also introduce mandatory provisions for cross-border transformations, but this process may take several years.

With respect to taxation, it should be noted that most Member States have already introduced tax rules for cross-border mergers that can be applied to cross-border transformations.