ECJ: restrictions on the international transfer of corporate headquarters unlawful

The court of justice of the European Union declares restrictions on the international transfer of corporate headquarters as unlawful

Until now, the legislation of some member states of the European Union was very restrictive in relation to the transfer of their societies to other countries. Such restrictions often consisted in imposing the obligation on the company to be liquidated and to become extinct before carrying out the transfer, hence it was not possible to execute the transfer without loss of its legal personality. This also implied that deferred taxes should be always taxed in the country of origin (exit tax), which eliminated the fiscal neutrality of the operation, bearing significant costs, that made relocation impracticable.

In its recent decision of the 25^th of October 2017 (case C-106/16, Polbud – Wykonawstwo sp. z o.o.) the European Court of Justice states that these restrictions infringe the freedom of establishment and are therefore incompatible with the law of the European Union.

In the case examined by the court, a Polish company had decided to relocate its registered office to Luxembourg, but maintaining its effective headquarters in Poland. The Polish corporate law did not allow the company’s registration to be cancelled without its previous liquidation, hence the Polish supreme court raised its concerns regarding the compatibility of this regulation with the freedom of establishment to the European court of justice in the preliminary ruling proceedings. The European Court of Justice confirms, that the freedom of establishment includes the right of a company of a member state to become a company subject to the law of another member state, i.e. to transfer its registered office to the latter. At the same time, freedom of establishment includes the right to maintain the effective head office in a state other than that in which the registered office is situated. According to the court, the aim of enjoying more advantageous corporate legislation (in this case, Luxembourgish law) is not an abuse in itself.

The European court of justice states that legislation, such as the Polish one, which makes the transfer of the company’s registered office dependent on its liquidation and thus the loss of its legal personality, is a restriction on the freedom of establishment. This obstacle is not justified for reasons of general interest (such as the protection of creditors interests, minority shareholders and employees) given that the liquidation obligation is foreseen in the Polish law in general and a less restrictive measure could have been chosen (such as a right of opposition to relocation, as provided by Spanish law).

The judgement deserves full approval, since it clarifies that the right of establishment includes the right to move the registered office to another Member State. It is a further step towards harmonization of the international registered office transfer at European level.

At Lozano Schindhelm we advise on commercial and fiscal matters regarding international transfers of companies registered offices and fiscal domicile, from and to Spain. Together with our partners of the Schindhelm alliance we are at your disposal with more than 200 lawyers at 25 locations in 12 countries.