Freedom of Establishment

From Max-EuP 2012

by Oliver Remien

1. Meaning and structure

The freedom of establishment in Art 49 TFEU/ 43EC, which is directly applicable, guarantees the free movement of self-employed persons (ECJ Case 2/74 – Reyners [1974] ECR 652). The right of establishment is granted both to natural persons who are nationals of Member States and, according to Art 45 TFEU/48 EC, also to legal persons ie companies or firms constituted under civil or commercial law, including cooperative societies and other legal persons governed by public or private law, save for those who are non-profit-making. Companies which are non-profit-making, ie which pursue non-material, charitable, religious, scientific or cultural aims—the so-called ‘non-profit sector’, especially non-profit associations—are not covered. The company must have been formed in accordance with the law of a Member State and either have its registered office, its central administration or principal place of business within the Union. The nationality or domicile of its shareholders, associates or founders is irrelevant. Besides what is known as the primary freedom of establishment, the secondary freedom of establishment, ie the setting-up of agencies, branches or subsidiaries, is guaranteed (Art 49(1)2 TFEU/43(1)2 EC). From this the European Court of Justice (ECJ) has drawn far-reaching conclusions for company law in the internal market (see 4. below). Purely domestic cases do not fall within the scope of protection of Art 49 TFEU/43 EC, but the ECJ is occasionally generous in this area.

In practice, freedom of establishment is, above all, to be differentiated from freedom to provide/receive services. Establishment is defined as ‘the actual pursuit of an economic activity through a fixed establishment in another Member State’ (ECJ Case C-221/89 – Factortame [1991] ECR I-3905) ‘on a stable and continuous basis’ (ECJ Case C-55/94 – Gebhard [1995] ECR I-4165). Establishment thus implies a stronger integration in the host Member State. It allows all types of self-employed activities to be taken up and pursued (ECJ Case C-70/95 – Sodemare [1997] ECR I-3395). Article 49 TFEU/47 EC expressly provides for the issuing of directives for the mutual recognition of diplomas, certificates and other evidence of formal qualifications, as well as directives for the coordination of the provisions laid down by law, regulation or administrative action in Member States concerning the taking-up and pursuit of activities as self-employed persons. Some questions of delimitation also arise vis-à-vis the free movement of capital and payments. Article 51 TFEU/45 EC makes an exception for the exercise of official authority; however, teaching activities (ECJ Case 147/86 – Commission v Greece [1988] ECR 1637), expert and advocate activities (ECJ Case 2/74 Reyners [1974] ECR 631, 649) as well as private security undertakings (ECJ Case C-465/05 – Commission v Italy [2007] ECR I-11091) are not covered by this exception (on civil-law notaries see ECJ Case C-47/08 – Commission v Belgium, nyr).

Article 49 TFEU/43 EC prohibits direct and indirect discrimination (discrimination (general)). Furthermore, according to a very broad formula of the European Court of Justice, the freedom of establishment prohibits any national measure that is ‘liable to hamper or to render less attractive the exercise by Community nationals, including those of the Member State which enacted the measure, of fundamental freedoms guaranteed by the Treaty’ (ECJ Case C-19/92 – Kraus [1993] ECR I-1663; ECJ Case C-55/94 – Gebhard [1995] ECR I-4165). Prohibitions on setting-up secondary establishments and the re- quirement to reapply for a licence have been held to be prohibited restrictions. This prohibition on restrictions must, however, be applied with moderation and must be kept in relation to the establishment itself. The case law also shows restrictions (ECJ Case C-417/93 – Semeraro [1996] ECR I-2975), and in legal writing a restriction in accordance with the Keck-formula from the [[free movement of goods is recommended for the freedom of establishment. In the area of systems of social security, it is up to the Member States to consider the goals pursued by a particular social welfare system, while this may necessarily imply ‘that the admission of private operators to that system as providers of social welfare services is to be made subject to the condition that they are non-profit-making’ (ECJ Case C-70/95 – Sodemare [1997] ECR I-3395). Article 49 TFEU/43 EC also prohibits a Member State from hindering the establishment of one of its citizens or companies in a different Member State (ECJ Case C-438/05 – International Transport Workers’ Federation [2007] ECR I-10779, para 69).

A justification is explicitly provided for in Art 52 TFEU/46 EC on grounds of public policy, security or health. ‘Public health’ is defined in Art 4 and in Appendix A of Dir 64/221. A justification on grounds of public policy requires ‘a genuine and sufficiently serious threat to the requirements of public policy affecting one of the fundamental interests of society’ (ECJ Case 30/77 – Bouchereau [1977] ECR 1999). Furthermore, a justification is possible on grounds of the Cassis de Dijon doctrine which albeit was originally developed in relation to the free movement of goods but has been transferred to the freedom of establishment. A restriction is admissible if it aims at a legitimate goal that is compatible with the treaty and is justified by an overriding reason of public interest (ECJ Case C-438/05 – International Transport Workers’ Federation [2007] ECR I-10779, para 75). These public interests can be of various forms, such as qualification, rules of professional conduct and supervision of lawyers (ECJ Case C-55/94 – Gebhard [1995] ECR I-4165), protection of workers, sustaining and re-establishing cultural and artistic heritage, coherence of tax systems, but not general financial interests of the Member States (ECJ Case 270/83 – Avoir Fiscal [1986] ECR 273). Of course, the principle of proportionality has to be respected as a ‘limit-limit’ (Schranken-Schranke). In cases of admission to a profession requiring a specific qualification, an examination of whether the diploma of the country of origin is equivalent or not is necessary (ECJ Case C-340/89 – Vlassopoulou [1991] ECR I-2357).

2. Addressees and obligation of private parties

Freedom of establishment is granted for the benefit of the citizens of the Member States; a company from a non-Member State cannot rely on it even where it has a shareholding of and determinative influence in a company in a Member State (ECJ Case C-492/04 – Lasertec ECR I-3775, para 27). The freedom of establishment cannot be denied to a citizen of a Member State who at the same time possesses the nationality of a non-member country (ECJ Case C-369/90 – Micheletti [1992] ECR I-4239). A person that only possesses the nationality of a non-member country does not fall within the personal scope of protection of Art 49 TFEU/43 EC but may possibly be protected according to secondary legislation or public international law. Relatively early, the ECJ held in the case concerning the green card of motor vehicle liability insurance that it suffices that the discrimination results from rules of whatever kind which seek to collectively govern the carrying on of a business (ECJ Case 90/76 – van Ameyde [1977] ECR 1081, para 28). Today, according to settled case law, Art 49 TFEU/43 EC applies not only to the actions of public authorities but extends to rules of any other nature aimed at regulating in a collective manner self-employment and the provision of services. The reason given is the fact that working conditions in the different Member States are sometimes governed by provisions laid down by law or regulations and sometimes by collective agreements or other acts concluded or adopted by private persons and that inequality in application of freedom of establishment is to be avoided (ECJ Case C-438/05 – International Transport Workers’ Federation [2007] ECR I-10779, para 33). Therefore, the ECJ has also measured collective actions against the yardstick of Art 49 TFEU/43 EC and held that the fundamental nature of the right to take collective action is not such as to render Art 49 TFEU/43 EC inapplicable; the collective action aiming to enforce working conditions equal to those in the company’s Member State of origin has therefore been held to be a restriction (ECJ Case C-438/05 – International Transport Workers’ Federation [2007] ECR I-10779, paras 47 and 72 ff). Article 49 TFEU/43 EC is capable of conferring rights on a private undertaking which may be relied on against a trade union (ECJ Case C-438/05 – International Transport Workers’ Federation [2007] ECR I-10779, para 56 ff). Thus, regulations by professional bodies concerning services of liberal professions may also have to be tested under the freedom of establishment (ECJ Case C-309/99 – Wouters [2002] ECR I-1577). In summary, for certain situations it is acknowledged that private persons are bound by the freedom of establishment. Fundamental rights then may provide a justification for the infringement (ECJ Case C-438/05 – International Transport Workers’ Federation [2007] ECR I-10779, para 77).

3. General private law as well as the acquisition of real estate and the freedom of establishment

For rules of general private law freedom of establishment so far has developed importance as to specific points only. National rules concerning the transcription of Greek names have been measured against the freedom of establishment (ECJ Case C-168/91 – Konstantinidis [1993] ECR I-1191). The special protective regulations for lessees of business premises in the propriété commerciale in France were extended to citizens of other Member States in 1969 in order to prevent an impermissible discrimination. A prohibition on the payment of remuneration on sight accounts in euros at a credit institution which is a subsidiary of a company from another Member State was seen as a restriction on the freedom of establishment by the ECJ (ECJ Case C-442/02 – Caixa Bank [2004] ECR I-8961). According to the ECJ the access to the market is hindered since competing by rates of interest constitutes one of the most effective methods to enter the market of a Member State; the grounds put forward for justification by the French government were rejected. Following the Caixa Bank decision the European Commission sued Italy because it considered a nationwide obligation to contract for undertakings providing motor vehicle liability insurance to be a restriction on the freedom of establishment and the free movement of services; the ECJ has subsequently held that there is a restriction, but that it is justified (ECJ Case C-518/06 Commission v Italy). Also, in matters of the acquisition of real estate, the freedom of establishment could be applicable, but in practice it is the [[free movement of capital and payments which plays an important role in this context. An area where, according to case law, the freedom of establishment is of special relevance is company law in the internal market.

4. Company law and the freedom of establishment

The freedom of establishment can have importance for company law (company law (international); competition between legal systems), but this field is also impacted by the freedom of movement of capital and payments. The prohibition of the use of a trade name as the specific designation of an undertaking is a restriction on the freedom of establishment, but such a restriction is justified by overriding requirements of public interest pertaining to the protection of industrial and commercial property if the primary aim of the restriction is to safeguard trade names against the risk of confusion (ECJ Case C-255/97 – Pfeiffer [1999] ECR 2835). For other cases, the effect of the freedom of establishment on the application of trade name laws of the state of establishment on foreign corporations is uncertain.

Article 50(2)(g) TFEU/44(2)(g) EC provides the competence to coordinate the protective provisions that are dictated to the corporations in the interest of shareholders and third parties, and the Union has already made use of this to a considerable extent. Nevertheless, company law has for a number of years become one of the main areas in which the fundamental freedoms have taken effect in private law. In the Daily Mail case, which concerned the consent of the British treasury to the movement of a company’s central management and control from the United Kingdom to the Netherlands, the ECJ was still of the opinion that the problems of the connecting factor in the area of international corporate law could not be solved by the provisions on freedom of establishment but only by legislation. Freedom of establishment confers ‘no right on a company incorporated under the legislation of a Member State and having its registered office there to transfer its central management and control to another Member State’ (ECJ Case 81/87 – Daily Mail [1988] ECR 5483, para 25).

A series of seminal decisions on the freedom of establishment have stimulated the area of European company law. Centros was especially groundbreaking in this sense. The registration of a branch of a company incorporated under the law of another Member State in which it had its registered office without conducting business in that Member State may not be denied (ECJ Case C–212/97 – Centros [1999] ECR I-1459). The fact that the English limited (private limited company (England and Wales)) had been founded by the Danish entrepreneurs only in order to evade the application of the Danish rules governing the formation of companies and avoiding the payment of a minimum share capital is, according to the ECJ, of no relevance. This judgment can be strongly criticized but without doubt, it is settled case law. If a corporation has moved its central management and control to another Member State, Arts 40 and 54 TFEU/43 and 48 EC preclude the other Member State from denying the company legal capacity and, consequently, the capacity to bring legal proceedings before its national courts for the purpose of enforcing rights under a contract (ECJ Case C-208/00 – Überseering [2002] ECR 9919).

The exercise of the freedom of secondary establishment of a company may not be made dependent on certain conditions provided for in domestic law, such as minimum capital and the liability of directors (ECJ Case C-167/01 – Inspire Art [2003] ECR 10155). Cross-border mergers of companies must be permitted, as held in the case of a merger of a German and a Luxembourg company into one German company (ECJ Case C-411/03 – Sevic [2005] ECR 10805). Unlike Daily Mail, these cases always involved restrictions applied by the new host state of establishment (moving in, company entering the jurisdiction). In Cartesio, conversely, the ECJ had to decide on a case involving the restrictions applied by the (former) state of incorporation (moving out, Wegzugstaat, company leaving the jurisdiction) (ECJ Case C–210/06 – Cartesio [2008] ECR I-09641). In this case the registration of the moving of the de facto central management and control of a Hungarian company to Italy had been denied by the Hungarian authorities.

Following and expanding on Daily Mail, the ECJ ruled that companies are creatures of national law and exist only by virtue of the national legislation which determines their incorporation and functioning. A Member State is able to make the company’s right to retain its legal personality under the law of that Member State subject to restrictions on the transfer to a foreign country of the company’s actual centre of administration, and it also has the power to define the connecting factor in international corporate law with regard to its own companies. That power includes the possibility for each Member State not to permit a company governed by its law to retain that status if the company intends to reorganize itself in another Member State by moving its seat to the territory of the latter (ECJ Case C-210/06 – Cartesio [2008] ECR I-09641 paras 99 ff). This means that according to the ECJ, the freedom of establishment does not take effect where a company moves its de facto central management and control to another Member State but preserves the company law status of its country of origin. Nevertheless the ECJ has emphasized that it does constitute an obstacle to the freedom of establishment if the Member State of incorporation requires the winding-up or liquidation of the company, in preventing that company from converting itself into a company governed by the law of the other Member State, to the extent that it is permitted under that law to do so (ECJ Case C-210/06 – Cartesio [2008] ECR I-09641, paras 111 ff). The lively discussion of this judgment does not come as a surprise.

The case law of the ECJ before Cartesio was followed by the German courts, eg concerning the rejection of personal liability of a company director of a letter box company (BGH 14 March NJW 2005, 1648). Accordingly, it must be permitted for a company validly incorporated in another Member State to take the status of the fully liable partner society in a German limited partnership with the consequence that a Ltd & Co KG is possible. A legal liability based on appearances by reason of the omission of the company affix has been held not to be a restriction on the freedom of establishment (BGH 5 February 2007 NJW 2007, 1529). The impact on, for example, the law on company names appears to be doubtful. The competition of legal systems developed in the judgment in Centros has already given rise to adaptations of Member State company laws. The fact that the European Union at the same time is creating types of supranational companies by enacting regulations based on Art 352 TFEU/308 EC is a different matter.


Gerhard Kegel, ‘Es ist etwas faul im Staate Dänemark, Europäisches Wirtschafts- und Steuerrecht’ [1999] Editorial Heft 8; Friedl Weiss and Frank Wooldridge, Free Movement of Persons within the European Community (2002); Oliver Remien, Zwingendes Vertragsrecht und Grundfreiheiten des EG-Vertrages (2003); Horst Eidenmüller (ed), Ausländische Kapitalgesellschaften im deutschen Recht (2004); Torsten Körber, Grundfreiheiten und Privatrecht (2004); Stefan Grundmann, Europäisches Gesellschaftsrecht (2004); Christoph Teichmann, Binnenmarktkonformes Gesellschaftsrecht (2006); Christian Tietje, ‘Freedom of Establishment’ in Dirk Ehlers and Ulrich Becker (eds), European Fundamental Rights and Freedoms (2007); Catherine Barnard, The Substantive Law of the EU—The Four Freedoms (2nd edn, 2007); Mads Andenas and Frank Wooldridge, European Comparative Company Law (2009).

Retrieved from Freedom of Establishment – Max-EuP 2012 on 14 July 2024.

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