The Free Movement of Companies Within the European Union: An Overview

1. Introduction

The European Union (EU) is founded on the principles of free movement of goods, persons, services and capital. One of the most controversial issues concerning the free movement of capital has been the free movement of companies within the EU. The EU company law seeks to create a level playing field for all companies operating in the EU internal market by ensuring that companies can freely establish themselves in any Member State and enjoy equal treatment with regard to taxation and other matters. However, there have been differing interpretations of what this entails in practice, in particular with regard to the question of where a company is considered to be established for the purposes of company law and taxation. This paper will give a brief overview of the historical debate on this issue, before discussing recent decisions of the European Court of Justice (ECJ) on the free movement of companies within the EU. Finally, it will analyse the current state of the law on this issue and its implications for businesses operating in the EU internal market.

2. Historical overview of the debate on the free movement of companies within the EU

2.1 The real seat doctrine

The real seat doctrine was originally developed in German company law and states that a company is only considered to be established in a Member State if it has its headquarters or “real seat” there. This theory was followed by several other Member States, including France, Italy and Spain. The main advantage of this theory is that it provides greater certainty as to where a company is considered to be established for tax purposes. However, it also has several disadvantages. Firstly, it can lead to double taxation if a company is considered to be established in more than one Member State. Secondly, it can discourage companies from relocating their headquarters to another Member State, as they may fear that they will lose their tax status in their home Member State. Thirdly, it can create difficulties for companies with cross-border operations, as they may find it difficult to determine which Member State’s laws apply to them. Finally, it can result in unfair competitive advantages for companies whose headquarters are located in low-tax jurisdictions.

2.2 The incorporation theory

In contrast to the real seat doctrine, the incorporation theory states that a company is only considered to be established in a Member State if it is incorporated there according to that Member State’s company law. This theory was first developed in English company law and has since been adopted by several other Member States, including Belgium, Denmark, Sweden and the United Kingdom. The main advantage of this theory is that it avoids double taxation and enables companies to relocate their headquarters without losing their tax status in their home Member State. However, it also has several disadvantages. Firstly, it can create difficulties for companies with cross-border operations, as they may find it difficult to determine which Member State’s laws apply to them. Secondly, it can result in unfair competitive advantages for companies whose place of incorporation is located in a low-tax jurisdiction. Finally, it can lead to forum shopping by companies seeking to take advantage of more favourable tax regimes in other Member States.

3. Recent decisions of the European Court of Justice on the free movement of companies within the EU

3.1 The Cadbury-Schweppes and Centros decisions

In its landmark judgments in the cases of Cadbury-Schweppes and Centros, the ECJ held that the freedom of establishment prevents a Member State from refusing to recognise a company which has been validly incorporated in another Member State. The ECJ held that the real seat doctrine is incompatible with the freedom of establishment, as it can result in double taxation and can discourage companies from relocating their headquarters to another Member State. The ECJ also held that the incorporation theory is compatible with the freedom of establishment, as it avoids double taxation and enables companies to relocate their headquarters without losing their tax status in their home Member State.

3.2 The Inspire Art decision

In its judgment in the case of Inspire Art, the ECJ held that the freedom of establishment does not prevent a Member State from taxing profits which have been earned by a company which is established in another Member State but which has no genuine economic activity there. The ECJ held that the concept of “genuine economic activity” must be interpreted narrowly and that it does not include activities such as holding shares or other financial assets, making loans or managing a company’s own funds.

3.3 The Sevic and Bermicourt decisions

In its judgments in the cases of Sevic and Bermicourt, the ECJ held that the freedom of establishment does not prevent a Member State from refusing to recognise a company which has been validly incorporated in another Member State if that company’s sole or principal purpose is to avoid taxes which would otherwise be due in the first Member State. The ECJ held that the incorporation theory is compatible with the freedom of establishment, as it avoids double taxation and enables companies to relocate their headquarters without losing their tax status in their home Member State. However, the ECJ also held that the incorporation theory cannot be used to circumvent national tax laws and that it is for each Member State to determine whether a company has been validly incorporated in another Member State for the purpose of avoiding taxes.

4. Analysis of the current state of the law on the free movement of companies within the EU

The current state of EU law on the free movement of companies is summarised as follows:
– A company which has been validly incorporated in one Member State must be recognised as such in all other Member States;
– A company which is established in one Member State but which has no genuine economic activity there may be taxed on its profits in that Member State;
– A company which is established in one Member State but which is solely or principally operated for the purpose of avoid taxes in another Member State may be refused recognition in that second Member State.

5. Conclusion

The current state of EU law on the free movement of companies provides a certain degree of certainty for businesses operating in the EU internal market. However, it also leaves some important questions unanswered. In particular, it is not clear how Member States will determine whether a company has been validly incorporated in another Member State for the purpose of avoiding taxes. This issue is likely to be the subject of further litigation in the future.

FAQ

There are a few reasons why companies might relocate within the European Union. One reason could be to be closer to suppliers or customers. Another reason could be to take advantage of lower labor costs in another country. Additionally, some companies may relocate to escape high taxes in their home country.

This can impact employees of these companies in a few ways. First, they may have to move to a new country if they want to keep their jobs. Additionally, their salaries may change if they are paid in the currency of the new country. Finally, they may have to learn a new language if they are moving to a non-English speaking country.

There can be some benefits for countries when companies move within their borders. For example, it can bring new jobs and investment into the country. Additionally, it can help diversify the economy and make it less reliant on one industry or sector.

This can create more opportunities for businesses in Europe as there will be more demand for goods and services from these relocated companies. However, it can also create more competition as other businesses will try to compete for these same customers and contracts.

This can affect consumers of products and services from these companies in a few ways. First, the prices of goods and services may change if the company is using a different currency. Additionally, the quality of products and services may change as the company adjusts to its new location. Finally, consumer choice may be reduced if there are fewer companies offering similar products or services in the market.

There are a few things that can be done to encourage or discourage company movement within the EU. One way to encourage it would be to offer tax incentives for companies that relocate to another country within the EU. Another way to discourage it would be to put restrictions on how much money companies can move out of their home country.