The European Union (EU) is the largest economic and political entity in the world.
Since its establishment in 1992, when “the Six” signed the Maastricht treaty, it grew to a union of twenty-seven independent states with 494 million people and a combined nominal GDP of €11.6 trillion in 2006. (Wikipedia, European Union, 2007, [online], # 14) To develop and maintain an effective single market is one of the main goals of the European Union and also one of its toughest challenges. (Wikipedia, Single Market, 2007, [online], # 17) Significant efforts have been made to overcome technical, regulatory, legal, bureaucratic and cultural barriers to enable free trade and free movement within the EU. (EU, Internal Market, 2006, [online], # 16) However, with regard to the free movement of companies and the right to establish themselves within the single market, obstacles remain and harmonized standards are difficult to achieve. One reason is the difference of articulation between the right of establishment under EC law and rules used by Member States in private international law, which differ from one Member State to the other. The Treaty of the European Community, or Treaty of Rome from 1957, is one of the main treaties forming the basis for EU law. It concerns economic and social rights and how European Institutions are set up. Within the legal systems of its Member States, EC law has direct effect and overrides national law in many areas. (Wikipedia, European Union Law, 2007, [online], # 15)
2. Principle Theory
The main articles concerning free movement and freedom of establishment are Articles 43 and 48 of the Treaty of Amsterdam (ex Articles 52 and 58 of the Treaty of Rome).
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 selfemployed persons and to set up and manage undertakings, in particular companies or firms within the meaning of the second paragraph of Article 48, 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.
Companies or firms formed in accordance with the law of a Member State and having their registered office, central administration or principal place of business within the Community shall, for the purpose of this Chapter, be treated in the same way as natural persons who are nationals of Member States.
‘Companies or firms’ means companies or firms constituted under civil law or commercial law, including cooperative societies, and other legal persons governed by public or private law, save for those which are non-profit-making.
(Rudden & Wyatt’s, 2004, # 1)
These Articles were defined to remove discrimination and differences within the Community. The right of establishment is granted by Articles 43 and 48. Article 43 concerns Nationals of the EU and grants the right of establishment in the territory of another Member State without restrictions. This applies fully to natural persons, whose nationality can be clearly defined. Companies can be incorporated in one Member State, but have their registered office in another. How can we define its nationality? The determination of the nationality of legal persons can be deduced from Article 48. It is stated that legal persons are to be treated in the same way as natural persons, if two conditions are fulfilled: They have to be formed under the law of a Member State and have to have their registered office, their central administration or their principal place of business within the EU. The registered office is in the location of the company’s place of incorporation. The central administration is where the company’s decision making takes place and where the organs meet. The principle place of business is the location where the firm has its principal operational facilities. (Xanthaki, H., 2001, [online], # 13)
The underlined conditions address the issue of recognition of a company and its identification with a jurisdiction of a Member State. There is a basic division between those jurisdictions which apply the Incorporation Theory on issues concerning foreign companies and those which use the Real Seat Theory.
Within the European Union, the place of Incorporation Theory is followed in the United Kingdom, Ireland, Denmark, Sweden, Norway, the Netherlands, Switzerland and the Principality of Lichtenstein. According to this theory a company is a creature of the system under which it is incorporated. The main advantage of taking incorporation as the connecting factor is the clarity of the criterion, relating to whether the company has been validly formed and whether it is recognised by Member Sates. The location of the real seat abroad does not result in the loss of nationality.
This assurance is not given under the Real Seat Theory, since the connecting factor is the company’s seat. The real seat rule is adopted by the majority of Member States. The effects of the doctrine are complex and criterions for the “real seat” differ from one Member State to the other. Generally, the company is considered a “national” of the State in which it maintains its central administration, its principle place of business, where the company’s decisions are actually taken, or where the controlling shareholder resides. For example, in France companies, who have their seat on French territory, are subject to French law. Whereas, in Austria, the real seat of a company is equivalent to the place where the company’s decisions are made. The existence of several criterions can lead to a company’s dual existence or may include re- incorporation.
The following is an example to clarify the possible problems due to the existence of the two theories. Let us assume a company is validly incorporated in a Member State A, where it has its registered office, but located its actual centre of administration (its real seat) in another Member State B. On the one hand, Under United Kingdom law, where the Incorporation Theory is applied, the company would be recognised as a valid legal entity, if A also adopted the Incorporation Theory. However, if A adopted the Real Seat Theory and held that the company was not properly registered in B, because its registered office was still in A and consequently not a valid company, the United Kingdom law would refuse recognition. On the other hand, from a German point of view, where the Real Seat Theory is used, the company would be recognised in Germany, if B used the Incorporation Theory and accepts the company, because it is validly incorporated in A. Whereas, if B took the Real Seat approach and does not considered the company to be validly registered in B, because the registered office is still in A, Germany as a consequence would not recognise the company. (Drury, Robert R. 1999, [online], # 6)
Altogether, carrying on business from a location other than that in which the company was originally incorporated can give rise to considerable difficulties. In Article 48 of the E.C. Treaty the most liberal solution to deal with the conflict of law is chosen, since the three connecting factors the registered office, the place of administration or principal place of business are placed at the same footing. Therefore, the two prevailing international legal theories are accepted equally. Where a conflict arises between EU law and the law of a Member State, EU law takes precedence, so that the law of a Member State must be disregarded. This doctrine is known as the supremacy of EU law. The European Court of Justice is empowered to define and interpret primary and secondary legislation, and to "ensure that in the interpretation and application of this Treaty the law is observed".