← zurück zur Übersicht

EGV Art. 52, 58, 177; RL 89/666/EWG Art. 1 ff; RL 78/660/EWG Art. 54

EuGH, Urt. v. 9.3.1999 -- Rs C-212/97 (HØjestret/Dänemark)

(Anm. der Red.: Der Artikel von Prof. Werlauff wird in deutscher Sprache in einer der nächsten ZIP-Ausgaben erscheinen.).

This article will consider

1. the developments in law with regard to equal treatment of foreign and domestic companies which led to Centros,

2. the Court’s decision in Centros, and

3. the consequences of the decision for company law.

This article analyses the consequences of the decision by the European Court in the Centros case for national provisions safeguarding company capital through minimum capital requirements, a ban on loans to shareholders, liability for company debts, and for the main seat criterion adopted by some Member States.

What Cassis de Dijon did for the free movement of goods, Centros will do for the free establishment of companies.

In its decision of 9 March 1999 in C-212/97, Centros Ltd., the European Court upheld the case of the Danish couple Marianne and Tonny Bryde against the Danish Companies and Commerce Agency, the authority responsible for registering companies in Denmark, including Danish branches of foreign companies. The Court found that the Agency could not refuse to register a branch of Centros, a private company owned by the couple and registered in the United Kingdom, on the grounds that Centros does not trade in the United Kingdom but conducts all its business in Denmark, and that a British company was chosen in order to avoid the Danish capital requirements for registered private companies. The judgment does not even allow for mitigating circumstances such as the possibility of imposing the Danish capital requirements applying to private companies. The only reservation mentioned in the judgment is "fraud", allowing Member States to adopt "the necessary guarantees" to protect public creditors against fraudulent conduct and to penalise any fraud committed by the company or its members "where it has been established that they are in fact attempting, by means of the formation of a company, to evade their obligations to private or public creditors established in the territory of the Member State concerned," in this case Denmark.

This article will consider (1) the developments in law with regard to equal treatment of foreign and domestic companies which led to Centros, (2) the Court’s decision in Centros, and (3) the consequences of the decision for company law.

1. The developments in law concerning companies’ freedom of establishment (Zurück zur Übersicht)

Freedom of establishment is one of the most important basic rights laid down in the EEC Treaty and the EAS Agreement. The freedom involves the right of individual persons to establish themselves in another EU or EEA state via a subsidiary, branch or agency, and thus to conduct business on the same terms applying to the nationals and companies of the state of establishment: cf. the Treaty’s Article 43 (formerly Article 52).

A comparison of Article 43 (the general freedom of establishment) with Article 48 (formerly Article 58: the requirement that commercial legal entities be given the same freedom as natural persons) shows that a company intending to establish in another state must be given the same rights applying to companies registered in the state in question: cf. also Dominic Schnichels: Reichweite der Niederlassungsfreiheit (1995).

In "EC Company Law" (1993) pp. 17ff (cf. European Business Law Review 1998 pp. 169ff, 210ff and 274ff) I summarised the rights granted to companies under the Treaty (the primary community law) in a four-point statement: (1) The right of the company to establish anywhere in the EU/EEA. (2) The right of the company’s owners to employ a company to conduct business in any EU or EEA member state from any (other) EU or EEA member state. (3) The right, in making a transborder establishment, to choose the form of establishment independently, including deciding between such forms as a subsidiary or a branch. (4) The right after establishment to enjoy the same rights as the national companies enjoy in the state of secondary establishment. This statement, to which the Advocate-General refers in his proposed decision in the Centros case (Item 12 with note 12), may be further explained as follows:

(1) The individual company’s freedom to establish anywhere it may wish in the EU and the EEA. This right is based on Article 48 of the Treaty, which grants commercial companies the same right of establishment which natural persons enjoy under Articles 48ff. In brief: what a person may do, a company may also do. Cf. Article 48: "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 purposes of this Chapter, be treated in the same way as natural persons who are nationals of Member States." "Companies" is understood as companies incorporated under private law, including co-operatives and any other legal person under public law or private law, except companies with no commercial purpose.

(2) Company owners’ right to employ a company to conduct business in one Member State from the same or another Member State.

In the Segers case, Judgment of 10 July 1986, case 79/85, instead of using a Dutch public or private company to trade in the Netherlands, Mr Segers in the Netherlands had chosen to use a British private limited company, an Ltd., with a Dutch subsidiary for his Dutch activities. The company had no genuine activities in the United Kingdom. Falling ill, Mr Segers applied for sickness benefits as manager of his company, but the application was denied because his company was not Dutch. The Court found that this was contrary to the non-discrimination and establishment rules.

In Factortame II, Judgment of 25 July 1991, case C-221/1989, the Court found that Community law did not permit certain British rules which, in order to prevent quota hopping (Spanish exploitation of British fishing quotas), provided that the ship’s owners, charterers, managers and operators plus 75% of its directors should be domiciled in United Kingdom, and that 75% of the share capital should be held by persons or companies resident in United Kingdom. Community law did not, on the other hand, prevent a Member State from making it a requirement of registration for fishing vessels that the vessel was managed, and its operations directed and controlled, from within the Member State, but the Court added in its premises that it would not be compatible with Community law for the Member State to refuse registration in cases of secondary establishment (branch, etc.) where the centre from which the vessel’s operations are directed in the Member State of registration acts under instructions from a decision-making centre (main company) located in the Member State of the principal establishment.

(3) The Company’s right to choose between a subsidiary and a branch. The physical person wishing to establish in another EU Member State can do so (a) primarily by moving his company or (b) secondarily by retaining his main company but establishing a subsidiary, branch or agency in the other EU member state. The company intending to set up a secondary establishment in another EU member state can also choose freely among the forms of establishment mentioned in (b). This freedom of choice is found in Article 43, paragraph 1, subparagraph 2, under which nationals of a member state resident in the territory of a member state must be given free access to establish agencies, branches or subsidiaries. This freedom is further specified in Article 43, paragraph 2, according to which the right of establishment provides access to "take up and pursue activities as self-employed persons and to set up and manage undertakings, in particular companies and firms within the meaning of the second paragraph of Article 48, under the conditions laid down for its own nationals". It follows from this that the host state cannot, either directly or indirectly, force a company from another EU member state to establish a legal entity as the instrument of establishment in the host state. The foreign company must be allowed to make an independent choice among the various forms of establishment.

In Judgment of 28 January 1986, case 270/83, The Commission versus France, France had upheld tax rules allowing certain tax reimbursements for shareholders in French companies (as partial compensation for double taxation of company earnings). The rules discriminated, however, between shareholders which were foreign companies and shareholders which were French companies, denying reimbursement to foreign companies with branches in France. The Court did not accept the French Government’s argument that the foreign company need only establish a French subsidiary, or the argument that the Court was powerless to intervene as the tax systems had not been harmonised.

In Judgment of 13 July 1993, case C-330/91, Commerzbank, the German Commerzbank AG had paid provisional tax for its branch in the United Kingdom, but as the branch’s income (interest payments from the United States) was tax free in the United Kingdom, reimbursement of the amounts paid in tax was due to the branch. In making such reimbursements, the British tax authorities added interest to payments made by British companies, but not to companies domiciled abroad. The Court stated without hesitation that this was in contravention of the Treaty’s Articles 6, 52 and 58, and the fact that foreign companies would not have been exempt from the tax in question if they had been domiciled in the United Kingdom was irrelevant to the case. After this judgment, the British tax authorities were forced to make supplementary payments dating back several years to thousands of foreign companies which had thus been discriminated against via the tax rules.

In Judgment of 6 June 1996 in case C-101/94, The Commission versus Italy, Italy was found to be in contravention of Article 52 of the Treaty, as Italian law ruled that, apart from banks, only companies domiciled in Italy can deal in securities. It is important to note that the judgment is based directly on the Treaty’s Article 43 (then Article 52), not on the Investments Services Directive, which had not yet been adopted. This means that the judgment relies on principles derived directly from the Treaty’s rules of establishment. Italy’s main defence was that it would not be possible to effectively supervise and implement sanctions against securities dealers unless their principal establishment was located in Italy. The Court rejected this argument: while an obligation to be domiciled in Italy would make supervising and controlling market operators easier, such an obligation was not the only method of securing compliance with the rules.

Following the Commission’s procedure, the Court recommended the following control options: (1) The company could agree to subject itself to control or to supply the Italian authorities with such documents and information as the latter might require to ensure that the companies were in compliance with Italian law. (2) More particularly, such companies could be required to make information and documentation available specifically with regard to activities conducted by their secondary establishments in Italy. (3) With regard to solvency, companies wishing to deal in securities in Italy could be required to provide financial guarantees in Italy as security for any trading undertaken there. (4) The Italian authorities were also invited to consider the possibility of entering into collaborative agreements on supervision of markets and operators as was done with third countries. The Court finally noted that Article 59 of the Treaty on the exchange of services had also been breached.

In Denmark, this judgment sparked a discussion on whether our stock exchange reform of 1996 contravened community law on one point (cf. Jesper Lau Hansen in UfR 1996 B pp. 96ff and 341ff) as the new rules require securities dealers to operate through registered companies, and that such companies must be Danish. Why should it be illegal for a foreign stock exchange to set up business in Denmark and to operate as a stock exchange from here? In light of the Italian judgment, I am strongly convinced that this view is correct.

A similar decision rejecting national establishment requirements (obligatory domicile) is Judgment of 29 October 1998, case C-114/97, The Commission versus Spain, in which the Court decided that it was contrary to Community law for Spain to require that authorisation to supply security services required that members of the board and management of the company in question as well as its security personnel were resident in Spain and that the company was domiciled in Spain: cf. Jesper Lau Hansen in UfR 1999 B pp. 108ff on the consequences of this decision for stock exchange law.

(4) The right of natural persons and commercial legal entities to enjoy the same rights in relation to another company in another EU member state as the nationals and companies of the host state enjoy. This right of national equality in relation to investing in a company in another EU member state is derived from two rule sets: (A) Any person establishing himself in another member state derives his right to do so from Article 48 paragraph 2 of the Treaty. (B) Any person who cannot, on the basis of owning a (majority) holding in a foreign company, be said to "trade" through the company, but who merely wishes to participate as a member of the company, is also legally entitled to the same rights in the company applying to company members from the company’s own state (including, of course, the basic right of participation as a member of the company). This follows from Article 294 of the Treaty (formerly Article 221): "Within three years of the entry into force of this Treaty, Member States shall accord nationals of the other Member States the same treatment as their own nationals as regards participation in the capital of companies or firms within the meaning of Article 58, without prejudice to the application of the other provisions of this Treaty."

In Judgment of 12 April 1994, case C-1/93, Halliburton Services NV, Dutch domestic companies were treated more leniently with regard to the payment of stamp duties on the transfer of land and property in connection with internal group restructurings than were foreign companies. The Netherlands argued that as the matter concerned the taxation of a Dutch company, no discrimination under Community law could be involved, but the Court stressed the fact that foreign companies were discriminated against indirectly in so far as the Dutch company was granted exemption from stamp duty in a property deal with another Dutch company, but not in a deal with, for example, a German company.

In the case of Singer, Judgment of 15 May 1997, case C-250/95, a foreign company with a branch in Luxembourg was taxed by the indirect method (i.e. taxable in Luxembourg on a pro rata share of global results), but when the accounts showed a loss which the branch wanted to carry forward for offsetting in subsequent years, a complete set of accounts was required for the branch. The Court found this demand to be excessive. Luxembourg could only require the company to document "clearly and precisely" that the loss was related to the activities of the branch in Luxembourg.

In Judgment of 16 July 1998 in C-264/96, Imperial Chemical Industries (ICI), the Court ruled that it was contrary to freedom of establishment for the British rules governing a company’s right to offset losses incurred by a "jointly owned subsidiary" (joint venture taxation, joint venture deductions) to make the right of deduction dependent on whether the jointly owned subsidiary was a holding company predominantly for companies domiciled in the United Kingdom or for companies outside the United Kingdom. The tax allowance (the joint venture allowance) was only available if the holding company’s exclusive or predominant activity was to hold shares in subsidiaries domiciled in the United Kingdom, and this was in contravention of Article 43 (then Article 52). The need to guard against loss of tax revenue did not constitute compelling grounds of public interest for special treatment of foreign nationals under Article 46 (then Article 56).

In conclusion, it will be seen that freedom of establishment takes on rather uncompromising features across a number of long-established national interests, such as the wish to avoid circumvention of quotas allocated on a national basis (Factortame), special tax rules (the Commission versus France, Comerzbank, Halliburton, Imperial Chemical Industries, Singer) and special supervisory interests involving certain types of qualified companies (the Commission versus Italy, the Commission versus Spain).

2. The Decision in Centros (Zurück zur Übersicht)

In 1992, the Danish couple Marianne and Tonny Bryde formed the private company Centros Ltd. domiciled in the United Kingdom. The company was duly registered with the British Companies Register. Next, and in accordance with the procedure established in the eleventh Company Law Directive (the Branch Directive), the couple notified the Register that Centros intended to establish a branch in Denmark. The Danish Commerce and Companies Agency requested further documentation with regard to the company capital and the company’s genuine link to the United Kingdom. The capital was GBP 100, of which no part was paid up, which is entirely in accordance with the United Kingdom’s flexible (the word used by the Advocate-General in his Opinion) company law. The couple made no secret of the fact that it had been important to them to avoid the Danish minimum capital requirement for private companies, which at that time was DKK 200,000 and is now DKK 125,000. As the couple openly declared in the high court Østre Landsret: "It’s easier to find GBP 100 than DKK 200,000." With regard to the question of genuine link, the couple did not hide the fact that the company was not involved in any trade in the United Kingdom. No attempt had been made to provide even some kind of pro forma activities in the form of options contracts or any other "link" which is available by the metre. The company’s main activities were thus in Denmark.

The Danish Commerce and Companies Agency refused registration on this basis, arguing that the establishment of a branch in Denmark, where in fact all the company’s activities were located, constituted an attempt to avoid the Danish minimum capital requirements. The case was submitted to the Agency’s appeals board (Erhvervsankenævnet) and was upheld by the Board: cf. Årsberetningen 1995 pp. 200ff. The case was then appealed to the high court Østre Landsret, which likewise upheld the decision. The Court did not submit the case to the European Court for a preliminary hearing, but was fully aware that the case contained important Community law issues. Østre Landsret reasoned that the freedom of establishment cannot stand in the way of a member state’s seeking to protect itself against attempts to evade its legislation. Its judgment states (cf. S.U. 1995:324 Ø): "Based on the evidence before it, the Court finds that [the couple] acquired Centros Limited for an amount corresponding to approx. DKK 1000 for the sole purpose of establishing a branch of this company in Denmark in order to evade the Danish minimum capital requirement rules. Further, Centros Limited does not engage in any activities of its own. The European Court Judgment of 6 October 1976 in case no. 14/1976 stated that one of the most important features of a branch is the fact that it is subject to the management and control of the principal establishment. Further, in its Judgment of 5 October 1994 in case no. C-23/1993 (TV 10) concerning the free exchange of services, the European Court ruled that a member state cannot be denied the right to take measures to prevent the exercise, by a person providing services whose activity is wholly or principally directed towards its territory, of the freedoms guaranteed by the Treaty for the purpose of avoiding the rules which would be applicable to him if he were established within that State." Østre Landsret concluded: "As the High Court thus finds that the evasion of binding Danish rules intended by the Plaintiff is not protected by the European Court’s case-law on freedom of establishment rules, the Court finds for the Defendant." An editorial comment in S.U. 1995:322 draws the conclusion that "it is no longer possible for Danish people trading in Denmark to evade the Danish statutory capital requirements by using a company in England."

The couple appealed the case to the Danish Supreme Court, which decided to submit the following question to the European Court for a preliminary ruling: "Is it compatible with Article 52 of the EC Treaty in conjunction with Article 56 and 58 thereof to refuse registration of a branch of a company which has its registered office in another Member State, which has been lawfully founded with company capital of GBP 100 (approx. DKK 1,000), and which exists in conformity with the legislation of that Member State, where the company does not itself carry out any business, but it is desired to set up the branch in order to carry on the entire business in the country in which the branch is established, and where, instead of incorporating a company in the latter Member State, that procedure must be regarded as having been employed in order to avoid paying up company capital of not less than DKK 200,000 (now DKK 125,000)?"

The Advocate-General’s Opinion was filed on 16 July 1998. The Court’s decision was given on 9 March 1999. The length of this period alone indicates that the Court was fully aware of the fundamental importance of the principle to be decided, and of the far-reaching nature of its consequences.

The answer was that the refusal to register was contrary to the fundamental freedom of establishment. In the words of the Court: "It is contrary to Articles 52 and 58 of the Treaty for a Member State to refuse to register a branch of a company formed in accordance with the law of another Member State in which it has its registered office but in which it conducts no business, where the branch is intended to enable the company in question to carry on its entire business in the State in which that branch is to be created, while avoiding the need to form a company there, thus evading application of the rules governing the formation of companies which, in that State, are more restrictive as regards the paying up of a minimum share capital."

The Court made only one reservation: "… [This] interpretation does not, however, prevent the authorities of the Member State concerned from adopting any appropriate measure for preventing or penalising fraud, either in relation to the company itself, if need be in co-operation with the Member State in which it was formed, or in relation to its members, where it has been established that they are in fact attempting, by means of the formation of a company, to evade their obligations towards private or public creditors established in the territory of the Member State concerned."

It will be seen that the intention, the desire to "evade" the de facto home state’s more stringent minimum capital requirements, does not affect the freedom of establishment. It will also be seen that the judgment goes beyond the question of proportionality: it does not advise the adoption of less restrictive measures in the form of capital requirements which must be fulfilled before registration is refused. The freedom of establishment and, within that context, the right to register the branch is absolute. Fraud alone may be prevented or penalised and in its reasoning (premise no. 37) the court explicitly mentions the possibility of introducing measures allowing public creditors to require "the necessary guarantees". The form such guarantees might take is not discussed. It goes without saying that they must, if adopted, be applied without discrimination to both foreign and national companies.

The Advocate General, the Commission and the judges were all aware that this case concerned other and broader principles than the mere circumvention of Danish capital requirements. The entire question of recognition of the main seat criterion adopted by some member states is also thrown open, i.e. the application by some member states of binding rules under national company law in cases where a foreign company has its de facto main seat in that state. The Commission’s response to this issue was to allow the branch state to apply its own minimum capital requirements, but the Advocate-General rejected this possibility (Points 10, 20 and 22 of the Opinion). This rejection moves the judgment beyond the mere issue of proportionality, i.e. about member states using less restrictive measures than the refusal to register, and makes it a categorical judgment in its unconditional upholding of the freedom of establishment and recognition of foreign companies, although the entire business of such companies may be aimed at the branch state.

The argument that general interests, as provided by Article 46 (formerly Article 56) of the Treaty, justified the refusal to register was rejected by both the Advocate-General and the Court. In refreshingly simple terms, the Court states (premise no. 35) that refusal would not even have had the effect claimed for it, "since, if the company concerned had conducted business in the United Kingdom, its branch would have been registered in Denmark, even though Danish creditors might have been equally exposed to risk." In other words: given the fact that if the company had traded in the United Kingdom, its Danish branch would have had a right to registration in Denmark, why then should registration in Denmark, when the company did not trade in the United Kingdom, weaken the position of the creditors? One could almost be tempted to add: quite the opposite.

3. Consequences for Company Law (Zurück zur Übersicht)

The Danish Commerce and Companies Agency’s refusal to register the branch did not materialise from thin air. It was part of a consistent effort to prevent the establishment of legal entities with an inadequate capital base. The minimum capital requirements for public and large private companies, aktieselskaber, is DKK 500,000, and for small private companies, anpartsselskaber, DKK 125,000, then DKK 200,000. The two company Acts, Aktieselskabsloven and Anpartsselskabsloven, are not only closely interrelated, but also integrated into the overall Danish legislation on commercial enterprises. Commercial enterprises can be formed without a minimum capital if established as co-operatives, associations etc., but they will be closely scrutinised in order to ascertain whether they have the requisite genuine link to the kind of undertaking under which they wish to register. If, for example, somebody wants to register a co-operative, the Commerce and Companies Agency will make a careful check to ensure that the company is a genuine co-operative, both in terms of its formal objects and in actual fact. Under the rules, a small number of commercial enterprises are not allowed to use a co-operative with no capital base, but are required to employ a registered company in the form of an aktieselskab or an anpartsselskab with the requisite capital requirements. This restrictive line has been approved by the Agency’s appeals board (cf. Årsberetningen 1993 pp. 254ff).

In order to prevent circumvention of capital requirements through the choice of a non-regulated company type, for which of course no capital requirement can be made, Danish case law has been exceedingly restrictive in its recognition of alternative company types – so restrictive, in fact, that the situation in law approximates a state of compulsion with regard to type, Typengesetzlichkeit, cf. TfS 1993:606 Ø, TfS 1997:287 Ø and TfS 1997:288 Ø. Companies have also been refused recognition in cases where liability limits etc. have not been transparent to the public: cf. UfR 1998.1088 Ø and TfS 1998.644 V.

There is a straight line of logic from this practice to the practice which the Agency attempted to apply in the case of Centros, but which was rejected by the Court. This does not necessarily imply, however, that all attempts at protecting capital are wasted, but as the situation applying to any person about to chose a company form for his business can be compared to that of communicating vessels in which water will seek its own level, the possibility of using a foreign company for national activities has now become a realistic alternative.

If the consequences of this case had merely been that a few rigorous capital requirements would have to be eased in a couple of member states, Centros would hardly have been an important case. But its implications are far greater than that, making it, in my view, an epoch-making decision. The written observations submitted in the Centros case by Denmark, France, the Netherlands, Great Britain and the Commission also show awareness of the implications of the issue at stake. Other consequences of the judgment are discussed below, but I point out that it may well be long before the full consequences of this judgment are clear to us.

The various member states hold divergent views on a number of company law issues, especially with regard to the question of which interests should be protected, and how. Far-reaching harmonisation has been introduced in a number of areas, mainly with regard to registered companies, e.g. in the areas of disclosure, protection of capital and annual accounts, and the Court refers to these (Premise no. 28 of the judgment): "in this connection, the fact that company law is not completely harmonised in the Community is of little consequence. Moreover, it is always open to the Council, on the basis of the powers conferred upon it by Article 54(3)(g) [now Article 44] of the EC Treaty, to achieve complete harmonisation." In other words, the difference in company legislation which Centros sought to exploit is a consequence of incomplete harmonisation. If this is deemed to be undesirable, there must be more harmonisation.

Major differences exist from state to state in the views held on issues such as loans to shareholders, contributions of non-liquid assets to private registered companies, employee representation on company boards, etc.

Restricting ourselves merely to these areas of law, it is possible to point, first of all, to the rules governing loans to shareholders. These are harmonised with regard to only one point, the internal financing of share acquisitions: cf. Article 23 of the Second Council Directive (the rules which have played a significant role in Denmark in connection with cases of company tax fraud). Other types of loan from a company to its shareholders, board members etc. are not harmonised, except with regard to their manner of inclusion in the annual accounts. On this point, Denmark has some highly restrictive provisions, which – apart from an unwritten exclusion of general internal trade conducted entirely on market terms – prevent companies from providing loans, guarantees etc. to their shareholders etc. Given the absolute nature of the reasoning in the Centros case, it must be assumed that registration cannot be refused in a case where company members wish to choose a company governed by legislation which does not prevent such loans. In other words, Danish company members will be able to select a company registered under a legislation which is more liberal on this point than the Danish legislation. As it is the legislation of the company’s home state which decides the legality of shareholder loans, the choice of such a foreign company could involve significantly greater access to loans and guarantees from the company. If a state wants to restrict this access, it will not be able to do so via company law, but presumably through tax law (cf. below).

Contributions of non-liquid assets to a company in formation or a company in the process of increasing its capital are governed by harmonised provisions on valuation and independent assessment of such contributions (cf. Articles 10 and 27 of the Second Council Directive). No harmonised provisions apply, however, to contributions to small private companies (anpartsselskaber) with a statutory minimum capital of DKK 125,000 (except in cases where such a company is being restructured to an aktieselskab, a private or public company requiring a minimum capital of DKK 500,000), and the rules governing such small private companies therefore depend on the national legislation of each member state. In Denmark, the rules governing contributions of non-liquid assets to anpartsselskaber have been brought into conformity with those applying to aktieselskaber, but if company members have no wish to be bound by the Danish rules, they could select a small foreign company registered in a member state with a more lenient legislation in this regard.

National provisions in Denmark give employees the right of representation on the boards of both large and small companies if, as a minimum, the company has had the equivalent of 35 full-time employees on average over the preceding three years. It has not yet been possible to harmonise this issue, which requires the Council’s unanimous vote, and if harmonisation is achieved it will only affect the aktieselskab. A directive on European works councils in transnational groups, Directive 94/45, has, however, been adopted. The EU is clearly aware of the need to protect employee representation, as is evident from various rules including those on merger taxation. Tax exemption can be refused if a structural change is partly motivated by a desire to evade the rules on employee representation: cf. Article 11 of Directive 90/434, and of the 14th draft directive on transnational relocations of a company’s main seat. But this does not mean that a principle of so fundamental a nature as the freedom of establishment can be refused if the choice of the company’s nationality was motivated in part by the desire to select a state imposing no obligation on companies to facilitate employee representation. Such national provisions may therefore also be circumvented through the choice of company nationality.

The special procedure under intellectual property rights by which the legality of a company name is currently tested upon registration cannot proceed in similar fashion when the registration involves the branch of an already existing company. In future, protection against abuse will more likely have to be sought in marketing law and in general intellectual property right provisions, i.e. with subsequent adoption of legal measures under civil law.

Centros will also have consequences in the area of specially qualified company types, e.g. share companies such as securities dealers, securities centres, clearing houses etc. As we saw in the decisions cited in the cases of the Commission versus Italy (securities dealers) and the Commission versus Spain (security companies), and also in a sense in Factortame (fishing quotas), even in heavily regulated areas where quite specific considerations apply, arguments claiming that national companies may be more reliably supervised than foreign companies can have no bearing on the freedom of establishment. National authorities must instead be advised to require guarantees, co-operation with the authorities of the home state, etc. The line from this back to Centros is clear and direct. While, before Centros, it would hardly have been possible to argue that freedom of establishment should extend beyond a secondary establishment, i.e. beyond the establishment of the branch of a company where the company is engaged in active trading in its home state, a strong argument can now be made that no step can be taken to prevent the establishment of a branch in a state where the company wishes to place its main activity.

This line of argument will also affect some types of legal entities which no directives have harmonised, but which enjoy the same freedom of establishment as companies, provided their purpose is commercial. Thus the freedom of establishment instituted for companies etc. in Article 48 (formerly Article 58) of the Treaty applies not only to companies, but also to other commercial legal entities, even to enterprises which do not require a proper legal personality, e.g. the German OHG, Offene Handelsgesellschaft. This means that trusts and other independent bodies are also included, provided their purpose is commercial. It follows from this that it will not be possible to maintain the rigorous enforcement in Danish law of certain requirements applying to commercial and non-commercial trusts regarding capital and independence from the founder. Danish trust law and trust tax law principles are applied so stringently that the Danish concept of trust is perceived as mandatory for non-national trusts as well: cf. Erik Werlauff in UfR 1997 B pp. 96ff and European Taxation 1997:159ff and 1998:143ff; but in so far as this practice implies that the legal personality of a foreign trust is automatically set aside if the trust is not in conformity with Danish requirements, the practice will have to be abandoned. This is not to say that any foreign capital formation posing as a "trust" in translation must necessarily be recognised as such. There may well be "trusts" and other capital formations which have no intention of establishing a company or trust, or indeed any other form of undertaking or legal entity.

Centros would, however, appear set to exert its greatest influence on the so-called main seat criterion. We have two mutually exclusive criteria for determining a company’s nationality on the basis of which the company’s governing law is determined:

Under the incorporation criterion, the deciding factor in determining a company’s nationality, and hence its governing law, is the national legislation under which the company is registered. If a company is to be registered with the registration authority of a country applying the incorporation criterion (in Denmark the Danish Commerce and Companies Agency in Copenhagen), the company must be structured and founded in accordance with Danish company law. This makes the company a Danish company under Danish private international law. The incorporation theory was developed in England in the 1700s. According to this theory, a company may be established and continue to exist under the law of the country in which it is incorporated, whether or not the company is active in that country. The incorporation theory was adopted by the United States. In the EU and the EEA, it applies, albeit in highly variant forms, in the United Kingdom, Ireland, Denmark, Sweden, Norway, Finland and the Netherlands.

Under the main seat criterion, on the other hand, the decisive element in determining a company’s nationality, and hence its governing law, is the question of the country in which the company has its genuine main seat (i.e. its central administration, typically involving management, board etc.). According to this criterion, a company having its genuine main seat in Germany would be deemed to be a German company, even if it gained its legal personality by registration in another state (which may have adopted the incorporation criterion). The main seat criterion also applies with considerable internal variation to the majority of EU and EEA member states. The main seat theory was developed in France and Germany in the 1800s on the basis of the nation state concept. In the EU it applies, with varying nuances, in Germany, Austria, France, Belgium and Luxembourg.

With the judgment in Centros, it is difficult to see how the main seat criterion can be maintained. If a member state cannot, even in clear cases of evasion, excepting only fraud, apply its company law to foreign companies, it can hardly do so on the basis of an automatic procedure as implied by the main seat criterion. It is not, in this context, viable to argue that the country is free to define the company’s nationality as domestic, thus allowing it to apply its entire company law, including e.g. capital requirements, employee representation, ban on loans to shareholders, etc. The state cannot undermine the freedom of establishment by recourse to its principles under private international law, thus re-qualifying the company from the nationality it claims pursuant to its lawful formation in another country to a domestic nationality. If a state cannot bring its own legislation to bear in cases of evasion, neither can it do so automatically.

This aspect may well prove one of Centros’ most essential qualities in the longer term. It has long been argued, e.g. in the German legal literature, that the main seat criterion is incompatible with Community law: cf. among others Peter Behrens in Rabels Zeitschrift 1988 pp. 498ff and Matthias Schümann in EuZW 1994 pp. 269ff; and a decisive judgment on this point has long been foreseen. In effect we have it now, albeit not as a direct test of the main seat criterion, but rather as a more indirect a fortiori test of it. There can hardly be any doubt that among the reasons for the many months which the judgment took to prepare after the Advocate-General’s opinion had been filed are its far-reaching implications. As noted, the Commission made a token concession to the main seat criterion by proposing that Denmark may apply its minimum capital requirements, but this was rejected by the Advocate-General, and without mentioning the issue directly, but by its categorical wording, the Court has now closed the door on this possibility.

Therefore, besides doing for companies what Cassis de Dijon did for goods and services, Centros is also the epitaph of the main seat criterion. At the very core of this criterion lies the attitude of the state that a string of national legal principles, e.g. concerning capital requirements, loans to shareholders, employee representation etc., are so crucial to the state that any company wishing to have its principal establishment in that state must respect them. This attitude is no longer tenable.

The question must then finally be asked whether the state is powerless in the face of de facto circumvention of requirements which it considers essential. Although the Court apparently only opens the door to protection against "fraud" per se, i.e. a very limited area, the answer must be that the state is not powerless. To understand this, we need to make a fundamental distinction between establishment and operations. Establishment is sacrosanct; operations can well be fenced in by precautionary measures aimed at protecting some of the interests involved here, as long as such measures are applied in a manner which does not discriminate on the basis of nationality.

Some such precautions can be applied via case law, while others will require legislative change.

The question of the circumstances under which company members may become liable for the company’s debts is one of the case law issues. Precisely those member states which allow their companies to operate on a very slender capital base have developed fundamental principles for lifting the veil or piercing the veil. In my book "Selskabsmasken" (1991) I attempted to analyse the state of law on this issue, and found it to be developing on highly uncertain and casuistic grounds. However, Danish courts have now also accepted lifting of the veil as a legal reality: cf. TfS 1997:780 H, Midtfyns Festivalen. The financial affairs of two companies had become so intermingled that the scope for profit-making was concentrated in one while the risks were isolated in the other, and on this basis the favoured company was found liable for the other company’s debts "at least in relation to the Danish Customs and Tax Authorities, which were involuntary creditors of the company". The main shareholder’s personal affairs had, however, been kept separate from the companies, and there was nothing to indicate that operations should have stopped earlier, so the person, now his widow, was cleared of both liability and responsibility. The judgment does not restrict itself merely to the issue of the merging of capital, but is a genuine statement on liability.

As the question of initial capital protection and subsequent liability and responsibility are communicating vessels, the need to develop basic principles on lifting the veil will become more urgent as Centros and its consequences begin to be felt. Legislation may well be considered (cf. Swedish law).

With respect to any preventive measures to protect public creditors, it would be possible (cf. the Court’s comments) to introduce a requirement for bank guarantees to be provided by companies and other legal persons whose capital is below a set limit, provided that the requirement is applied so as not to discriminate on the basis of nationality. Danish law already contains provisions under which a company can be required to make security available for tax-at-source etc. with regard to any person associated with the company if the person has been involved in the collapse of a company resulting in a loss to the state within the last five years: cf. Section 56A, paragraph 2 compared with Section 85 of the Danish tax-at-source act (Kildeskatteloven). Provisions of this kind could be given broader scope as required.

With respect to loans to shareholders, one might take this opportunity to consider whether the Danish rules have become too restrictive. If the decision is made to retain them, and it is found that they can be undermined by the employment of a foreign company, the problem must be solved via taxation, e.g. by taxing all dividend payments for which no counter service has been rendered in the form of work performed, sales etc.

To some extent, Employee representation can also be secured in foreign companies as well. It requires merely that employee relations be tied to company operations rather than to the company per se, i.e. employee influence must be tied to operations, decisions etc., possibly based on Directive 94/45, but with much lower threshold values.

In summary, it will be seen that all Centros requires from us is another mode of thinking in the formulation of national law. Such law may not be directed against the establishment phase, where it contravenes freedom of establishment, but it may be directed against the operations phase.

Finally, it will be necessary to reassess aspects of the Danish tax legislation. Briefly, this applies, for example, to the tax law provision that any company restructuring involving the tax free investment of a personally owned business enterprise in a company must, in order to be eligible for the exemption, employ a Danish public or private company: cf. the Act’s Section 1 Item 1 (an "aktie- or anpartsselskab registered in this country"). This requirement must be abandoned. The security required by the state that the latent tax liability resting on both the company through succession (via the purchase sum paid for the assets) and on the shareholder (via the purchase sum paid for the shares) is not lost to the state may well also be secured in cases involving the establishment of a foreign company. If such a company establishes a Danish branch, the tax burden can be carried by the branch: cf. the principle contained in the Merger Directive, 90/434. The shareholder will thus continue to be a Danish tax subject, and thus

liable for Danish capital gains tax on shares.

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