EU Freedom Of Establishment And The Theories Of Incorporation In The Context Of Free Movement Of MNEs

The creation of a single market with no internal borders where free mobility is guaranteed is one of the main goals of the European Union. Accordingly, along with certain fundamental freedoms, Treaty on the Functioning of the European Union (TFEU) provides the right of establishment for nationals as well as companies in a territory of another Member State. Accordingly, a decentralized nature of multinational enterprises (MNEs) involves various cross-border operations. The aim of this paper is to explore to what extent these transnational objectives of MNEs can be achieved under the freedom of establishment principle of EU law and incorporation theories of Member States. Firstly, it analyzes different scenarios of company mobility such as transfer of registered office or real seat and transnational mergers. Secondly, it examines the freedom of companies to choose legal forms of their cross-border establishment. Finally, it evaluates the most recent judgment in Polbud case in the light of decisions made in previous cases.


INTRODUCTION
Freedom of establishment concerning corporate mobility is embodied in Articles 49 (Ex Art.43 TEC) and 54 (Ex Art.48 TEC) of the TFEU.In particular, Article 49 states that '…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 The American Journal of Social Science and Education Innovations (ISSN -2689-100x) Published: December 30, 2020 | Pages: 303-312 Doi: https://doi.org/10.37547/tajssei/Volume02Issue12-53IMPACT FACTOR  2020: 5. 525   OCLC -1121105668 to restrictions on the setting-up of agencies, branches or subsidiaries by nationals…' 1 while Article 54 provides that lawfully incorporated companies in a Member State shall be treated in the same way as nationals of Member States 2 .However, unlike natural persons who gain their nationality by default at birth, companies must comply with relevant national laws so as to acquire their legal identity (nationality) and qualify for crossborder establishment rights 3 .Thus, Article 54 makes companies subject to national company laws of Member States, which vary from State to State and impose different conditions on companies for gaining and retaining their nationality.
Since the incorporation of companies' means is regulated by Member States, they are free to decide on the connecting factor between companies and their national territory. 4pecifically, Member States are unrestricted to require the presence of a particular type of seat within their territories for the incorporation of the companies and determination of the applicable law. 5 There are two types of doctrines applied by Member States to deciding the connecting factor: the real seat theory and incorporation theory.States (nine Members) following the real seat theory require the existence of central administration while those (six Members) following the incorporation theory require the presence of registered office. 6Thus, when companies are involved in cross-border operations, these two conflicting theories may result in disputes with regard to the status of companies and applicable laws, thereby causing restrictions on free movement rights.In such cases, the burden of reconciling conflicting interests falls on the European Court of Justice (ECJ), which is supposed to decide the scope of freedom of establishment and define the "restrictions" made on it by national regulations.Therefore, it is essential to strike a right balance between national regulatory autonomy and free movement.

Transfer of Registered Office or Real Seat
Economic globalization and regional integration made it common for companies to locate their central administration or economic activities ( "real seat") in a State which differs from the State of their registration/incorporation ("registered seat").Under EU law, companies are entitled to transfer their registered office or real seat by the right of freedom of establishment.However, the transfer of particular type of company's seat is influenced by the role that the seat in question plays in international private law and national company law of the Daily Mail and General Trust (DMGT) was a company incorporated in the UK, which sought to transfer its central administration to Netherlands. 8According to UK company law, although connecting factor for incorporation was a registered office 9 , companies were evaluated for tax based on the place of their "central management and control" 10 .Accordingly, transfer of central management and control was allowed only with the consent of the Treasury. 11DMGT claimed that such a "consent" prerequisite was a restriction on its right of freedom of establishment.The ECJ decided that such transfer does not fall within the ambit of Art.49 protection. 12It justified this decision by asserting that 'companies are creatures of national law and exist by virtue of the varying national legislation which determines their incorporation and functioning'. 13Moreover, it was clarified that due to the lack of harmonization of incorporation conditions, the issue concerning transfer of a real seat or registered office 7 Markovinovic and Bilic (n 5) pp.99 8 Case 81/87 Daily Mail (n 4) 9 Ibid 10 Income and Corporation Taxes Act 1970 s 487 (7) (now annulled) 11 Ibid s 482 (1) 12 Case 81/87 Daily Mail (n 4) 13 Ibid para.19 14 Ibid paras.20-25 15Case 210/06 CartesioOktatóésSzolgáltatóbt.[2008]  ECR I-9641 without losing nationality is not resolved by the freedom of establishment. 14ter, this decision was developed in Cartesio case.Cartesio was a limited partnership incorporated in Hungary that applied for transferring its operational headquarters to Italy. 15However, the Hungarian Court rejected the application based on the Hungarian law which did not allow companies to move their operational headquarters to another Member State while maintaining their status as a Hungarian company.Cartesio claimed that it constituted a restriction on the right of establishment.
It was assumed by Advocates General that Hungarian law follows the real seat doctrine, as it requires the place of registration to coincide with the place of operational administration. 16ccordingly, AG Maduro noted that the Hungarian company law restricts 'the "export" of a Hungarian legal person to the territory of another Member State' and this falls within the remit of the freedom of establishment. 17AG Maduro argued that although Member States were entitled to create their national company laws in the light of incorporation or the real seat theories, 'freedom of establishment required a minimum degree of mutual recognition and coordination of these various systems of rules so that neither could be applied to its fullest extent'. 18However, the ECJ held that should a company break off the 16 29 The ECJ held that Hungarian law was in breach of company's right of establishment.However, if the judgment in Cartesiowas followed, a different outcome could be expected. 30It was stated in an obiter dictum of the judgment 31 that conversion with an attendant change was subject to the legislation of Host State where the company was supposed to re-incorporate. 32Nevertheless, the Court inferred from the hypothetical case in Cartesio, which authorized companies for cross-border conversions within the ambit of the freedom of establishment 33 and refined its judgment by imposing non- discrimination requirement on Host States and concluded that 'national legislation which enables national companies to convert, but does not allow companies governed by the law of another Member State to do so, falls within the scope of Articles 49 TFEU and 54 TFEU.' 34 Moreover, a company is obliged to comply with the conditions of incorporation under the law of Host State before acquiring its nationality. 35hus, the judgment in Vale granted a greater freedom to companies to choose a company law under which they wish to operate.

Cross-border Mergers
The judgment in SEVIC Systems 36 case added a new element to EU case law concerning the protection of cross-border mergers under the freedom of establishment.Security Vision Concept (SVC) was a company established in Luxemburg, which intended to merge into a German company, SEVIC Systems AG (SEVIC), by method of acquisition.German law required mergers to be registered in the commercial register at the relevant place of incorporation of both absorbing and absorbed company.Since only one of the companies was located in Germany, SEVIC sought to register it at its place of incorporation.However, local court rejected the application for registration based on German law on transformations, which was designed only for domestic mergers.SEVIC appealed to German High Court, which asked for preliminary ruling about the question 32 Borg-Barthet (n 30) 33

Freedom of Choice Concerning Legal Forms of Transnational Establishment
The ECJ stressed the freedom to choose the most suitable organizational structure in the Saint-Gobain Case by confirming that companies can freely choose an appropriate legal form for their economic activities in another Member State under the freedom of establishment principle. 41Previously, the ECJ addressed the freedom of choice concerning legal forms of transnational establishments in the avoir fiscal judgement 42 .This case involved French tax law which provided shareholders of domestic companies (with a French subsidiary) with tax credits on distributed dividends while leaving foreign companies with French subsidiary subject to the full company tax. 43he Commission argued that tax provisions in question amounted to "an indirect restriction" on the choice of corporations relating to the form of establishment (branch or subsidiary). 44he ECJ held that this provision was a discriminatory treatment that violated the principles of the freedom of establishment. 45e freedom of establishment relating to choice of organizational structure was developed by the judgments of subsequent Denmark by setting up a branch there but registration of the branch was refused by Danish authorities based on the reasoning that it was an abuse of freedom of establishment and unlawful way of national law evasion.However, AG La Pergola highlighted the right of Centros Ltd to choose legal form of its establishment by setting a branch or a subsidiary and argued that since a subsidiary would be an independent entity separate from its parent company, it would be subject to national law (including minimum capital requirement) and therefore rejection of the registration amounted to a restriction on the freedom of choice concerning form of establishment. 47The ECJ held that since the incorporation of a company in a State 'whose rules of company law seem the least restrictive and to set up branches in other Member States' is considered to be inherent right in the TFEU, the action of Centros Ltd could not be an abuse of law. 48Although this judgment extended the scope of freedom of establishment, it severely restricted the competence of States over overseas corporations especially those following the real seat theory.
December 30, 2020 | Pages: 303-312 Doi: https://doi.org/10.37547/tajssei/Volume02Issue12-53factor, the right of establishment could not be invoked against the loss of its legal identity.19Itreliedonthe reasoning in Daily Mail and noted that company's entitlement to the freedom of establishment can only be determined by applicable national law 20 and a Member State has a power not to allow a company governed under its law to maintain its legal status if company intends to transfer its connecting factor to another Member State .21Nevertheless, the ECJ complemented this statement by giving an example of a different situation in which this Published:connecting power is restricted.In particular, when a company intends to move to another Member State "with an attendant change as regards the national law applicable", Home State is prohibited to require the liquidation of the company based on its national law.22Itfound that this type of actual conversion of the company would fall within the ambit of freedom of establishment to the extent that the law of Host State allows such conversion.23Thejudgment made in Cartesiocase resulted in controversial discussions among legal scholars, as it subjected the transfer of company's real seat to international private law (incorporation or real seat theories) of Member States, which differs from each other and consequently, brings about various outcomes with regard to the right of establishment.According to Gerner-Beuerle and Schilling, the criteria employed by the ECJ to determine the remit of articles 49 and 54 of the TFEU cause "arbitrary