4.01  There is some indication that an anti-letter-box¹ company policy has taken roots in European company law. In some instances several European institutions have made explicit their willingness to take action against letter-box companies. It appears that the pro-letter-box company considerations that led to the delivery of the judgment in the Centros and Inspire Art cases have been replaced by a more reserved approach towards letter-box companies.

4.02  The beginning of this new approach was marked by the strong opposition opposition of trade unions to the first draft of the Services Directive, which was thought to encourage the use of letter-box companies. The final text of the Directive seeks to restrict access of letter-box companies to the benefits of freedom of establishment. This anti-letter-box company policy has also been recently adopted by the ECJ. On three occasions so far, the ECJ has (p. 96) denounced letter-box or brass-plate companies.² This is in stark contrast with the unsympathetic view the Court and AG Alber took in the Inspire Art case³ with regard to the argument that the Dutch WFBV provisions were a lawful measure against these kinds of companies.

4.03  This chapter presents the new European anti-letter-box policy as a specification of the doctrine of abuse and explains the reasons why this policy came into existence. It seeks to predict the impact that this new policy may have in regulatory competition in the EU and questions the merit behind it.

4.04  On 12 December 2006, the European Parliament and the Council of the European Union enacted a directive dealing with the provision of services in the internal market.⁴ This adoption marked a compromise between the European Commission and the European Parliament on what could possibly be characterized as the most controversial directive ever. Never before had a directive attracted so much public attention, as on 14 February 2005, 30,000 trade unionists from all over Europe rallied outside the European Parliament in Strasbourg in order to demonstrate their opposition to the political incentives of the Services Directive.⁵

4.05  All this might shed light on why the Court has in recent times distanced itself from the clear pro-letter-box companies approach it had taken in the Centros and Inspire Art cases. The Centros case was heavily criticized in the consultations prior to the adoption of the Services Directive.⁶ The Court was probably mindful both of the severe criticism directed against its ruling in the Centros case, and the massive demonstrations that took place outside the European institutions for the first time in such great numbers.

(p. 97) 4.06  In order to fully understand the role that the Services Directive might play in this field, attention must be paid to the circumstances and policies that led to its drafting and adoption at a time when the European Commission was realizing that some Member States markets were not as open and competitive as other markets.

4.07  The origins of the Services Directive can be traced back to the Lisbon European Council, which decided that ‘the Union has today set itself a new strategic goal for the next decade: to become the most competitive and dynamic knowledge-based economy in the world capable of sustainable economic growth with more and better jobs and greater social cohesion’.⁷ The European Council went on to remark that: ‘Rapid work is required in order to complete the internal market in certain sectors and to improve under-performance in others in order to ensure the interests of business and consumers’.⁸

4.08  In compliance with this request the Commission conducted a survey in order to examine the legal and non-legal barriers imposed by Member States on the provision of services and to assess their impact.⁹ The report showed that companies could face a number of difficulties when providing a service in another Member State. These could include inter alia quotas or numerus clausus rules, territorial restrictions, nationality and residence requirements, minimum capital requirements, and authorization and registration procedures.¹⁰

4.09  The Commission concluded that: ‘[c]ross-border establishment, which plays an important role for service providers, needs to be facilitated by removing unnecessary administrative burdens and reducing red tape.’¹¹ Almost two years later, the Commission proposed a directive that would resolve these issues and enhance the competitiveness of EU economy.

4.10  The Services Directive presents several points of interest for corporate mobility in the internal market. First, with regard to its field of application, (p. 98) it covers services supplied by providers established in a Member State.¹² It does not apply to any of the activities listed in Article 2(2); namely financial services, electronic communications services, transport, temporary work agencies, and healthcare, gambling, audiovisual, private security, and social services.

4.11  This actually limits the field of application to services that are traditionally provided by small and medium-sized enterprises (SME). These include a variety of services ranging from management consultancy and advertising to legal and fiscal advice, and tourism and leisure services.¹³

4.12  Second, it concerns service providers that are incorporated in a Member State and have their registered office, central administration, or principal place of business within the Community.¹⁴ It endorses the definition of establishment as provided by ECJ case law to include only ‘actual pursuit of an economic activity through a fixed establishment for an indefinite period of time’.¹⁵ It also adds that ‘a mere letter box does not constitute an establishment’.¹⁶

4.13  Third, the Directive also provides as a general rule that Member States should in principle abstain from subjecting the provision of services to prior authorization.¹⁷ In particular, Article 14 explicitly prohibits Member States from imposing any nationality or residence requirements on service providers, requesting the existence of an establishment in one State only, requiring service providers to choose between a primary and secondary establishment, and making the grant of authorization to provide a service dependent on economic tests that would prove an economic need or a market demand. Authorization can be required only if justified by ‘overriding reason related to public interest’.¹⁸ The Directive further places a total prohibition on ‘discriminatory requirements based directly or indirectly. . .on the location of the registered office’.¹⁹

4.14  Finally, with regard to free movement of services, Article 16 guarantees the right of service providers to access the market of a Member State other than the one in which they are established. It also allows for restrictions to this rule based only on ‘public policy public security, public health or the protection of the environment’.

(p. 99) 4.15  It is evident from the handbook on the implementation of the Services Directive issued by the Commission, that the Directive, to a large extent, is nothing more than a codification of the existing ECJ case law.²⁰ The Centros case lies behind the total prohibition of restrictions on the freedom of service providers to choose between a primary and a secondary establishment and in particular to have their principal establishment in the territory of the host Member State.²¹ The Überseering case²² is codified in Article 14(1).²³ However, the content of the ECJ ruling with regard to minimum share capital as a means for providing security to creditors in the Inspire Art case²⁴ was not included in Article 14 on prohibited requirements, but in Article 15(2)(c) on requirements that need to be evaluated by Member States, and maintained only if they are justified by public interest.²⁵

4.16  One of the most important changes introduced by the Directive is related to the limitations to the freedom of provision of services. Unlike Article 15(3) on restrictions to freedom of establishment, Article 16(1)(b) provides that all requirements of access to the market must be non-discriminatory and justified for reasons of public policy, public security, public health, and protection of the environment.

4.17  Thus the Directive seems to prevent Member States from taking measures that are discriminatory on grounds of nationality but justified by public policy, public security, and public health, which is a possibility conferred on Member States by the Treaty by virtue of Articles 62 and 52(1) TFEU. It also seems to prevent Member States from placing requirements that are non-discriminatory but justified by mandatory requirements or overriding reasons relating to the public interest.²⁶

4.18  The essence of this argument is to ask whether the Directive is trying to reduce the possibility of Member States to take measures against service providers who come within the ambit of its scope. This could well be the case, as it is evident from juxtaposing Articles 14, 15, and 16 of the Directive. The first two explicitly recognize mandatory requirements as ‘overriding reasons related to public interest’, whereas the third does not. (p. 100) It only refers to public policy, public security, public health, and protection of the environment.²⁷

4.19  In order to understand the changes that the Services Directive sought to bring, it is necessary to examine briefly the political and legal context in which it was drafted and put to a vote. In doing so, it is necessary to present the Commission’s proposal, the latter’s vision of the internal market for services, and the grave reactions it caused.

4.20  According to the Commission’s proposal, the Directive would ‘establish a general legal framework . . . to all economic activities involving services’.²⁸ In doing so it would require Member States to remove obstacles that might hamper the cross-border provision of services. Thus the directive was not intended to be a harmonization measure but a framework directive.²⁹ The proposal was divided in two parts, one dealing with freedom of establishment, and the other with the free movement of services. Articles 14 and 16 required Member States to abstain from taking measures that would discriminate against service providers established in other Member States.

4.21  In particular, Article 16 provided that only the Member State of origin should supervise service providers. The host Member State should inter alia abstain from obliging a provider to have an establishment in its territory, obliging providers to make declarations concerning their registration in professional bodies in the Member State of origin, requiring providers to comply with requirements, relating to the exercise of a service activity, and obliging the provider to possess an identity requirement issued by the Member State of origin with regard to the exercise of a service activity.

4.22  The thrust of the Directive would be the adoption of the ‘country of origin’ principle. The latter would subject, with exceptions, service providers only to the law of the Member State in which they are established.³⁰ With regard to its legal effects, the proposal had some academic support. Basedow argued that the principle of mutual recognition embedded in Articles 34 and 56 TFEU ‘has the characteristics of a conflict rule: it (p. 101) subjects a case to the substantive law of the country of origin of the goods or services’.³¹ He added that the rules of the host Member State could apply only if they were more favourable to the intra-EU trade of goods and services.³² In other words, Articles 34 and 56 TFEU require the implementation of the law which is more favourable to cross-border mobility of goods and services (favor offerentis). Consequently, private international law rules of the host Member State should only be implemented if their application could be justified under the doctrine of mandatory requirements.³³

4.23  A similar yet more modest argument, without a favor offerentis reservation, had been already put forward by Radicati di Brozolo. He had argued that the presumption of Article 4(2) of the 1980 Rome Convention on the law applicable to contractual obligations³⁴ is evidence of the assumption that the law of the country of origin should govern the contracts of provision of services.³⁵ It is thus possible that the application of another law could impose restrictions on the free movement of services.

4.24  However, the propositions advanced by Radicati di Brozolo and all the more so by Basedow confuse the mechanism of choice of law with the consequences of the applicable law that is designated by this mechanism. It is not necessarily the case that the choice of law rules contravene the Treaty, but the normative context of the applicable law (lex causae). After all, Article 54 TFEU does not contain a choice in favour of the incorporation theory, or any other connecting factor for that matter, and neither has the Court made such a choice.³⁶

4.25  The strongest argument against Basedow’s approach is that he takes a very narrow understanding of what the benefits to the intra-Community provision of services are. This approach tends to accord privileges to service providers at the expense of other market actors, eg consumers. This is not at all required by Treaty law or ECJ case law. Quite the contrary; measures in favour of consumers, such as the application of a law other than the law of the state of origin, do not necessarily restrict free movement of services. (p. 102) They are not restrictions of the Community policy on the provision of services but a valid part of it.³⁷

4.26  One way or the other, it may well be argued that the Commission’s proposal accommodated to some extent the views of Basedow and Radicati di Brozolo. Despite the subsequent amendments, the Directive still embodies the principle that once service providers satisfy requirements for the provision of a specific service in their country of origin, other Member States are, prima facie, required to admit the provision of services in their territory without imposing any further requirements.³⁸ It was this aspect of the proposal that provoked most of the reactions.

4.27  The proposal soon was met with great disapproval by a politically heterogeneous group of people. European left-wingers and trade unions were openly against the adoption of this directive that was thought to promote social dumping in Europe.³⁹

4.28  Not surprisingly, these political groups were joined by that part of the European right wing that wished to reduce the extent of EU legislative initiatives. The Independence/Democracy Group Member of the European Parliament, Philippe de Villiers, took the side of those opposing the Directive. He spoke of the ‘Polish plumber’ effect that the Directive would promote and characterized the Directive as a ‘lie’.⁴⁰

4.29  The Commission did not only have to face the reaction of several political groups within Parliament, but also had to confront the reaction of national Governments who could not afford the political cost of the Directive. France, Denmark, Sweden, Germany, and Belgium reacted to the Directive requesting that changes be made.⁴¹

4.30  The European Council decided that the proposal did not meet the standards of the European social model. It further requested that a broad consensus be secured in order to promote both a social model and a fully operational (p. 103) internal market.⁴² Part of the reaction against the Directive was concerned with letter-box companies; ie companies that are incorporated in one Member State but activate exclusively or almost exclusively outside that State.

4.31  One of the arguments put forward against the Directive was related to the Centros case. It was thought that the ruling of the ECJ in this latter case allowed for the spreading of letter-box companies in Europe. In turn, this subsequently led to temporary employment agencies being established in one Member State, engaging workers from another Member State to work in a third Member State. In the late 1990s, there was traffic of construction workers from the UK to Germany through letter-box companies incorporated in the Netherlands.⁴³

4.32  The expansion of this phenomenon came to be seen as a threat by trade unions. In their view, the Directive would create a ‘race to the bottom’ for letter-box companies in favour of jurisdictions where labour law is less employee-friendly than other Member States and where collective agreements guarantee lower minimum remuneration with regard to other Member States.⁴⁴

4.33  The secretary of the European Trade Union Confederation (hereinafter ‘ETUC’) illustrated the problems that the Directive would create in the example of a Polish letter-box company that would engage Polish or Ukrainian employees to work in Belgium on a long-term basis.⁴⁵ Under the Rome Convention regime that was then in force, the parties could choose Polish or Ukrainian law to govern the contract of employment. However, the Belgian mandatory rules—eg the Belgian collective agreements on minimum wages—would apply by virtue of Articles 6(1) and 6(2)(a) of (p. 104) the Rome Convention.⁴⁶ International mandatory rules of Belgium could also be given effect through Article 7 of the said Convention.⁴⁷

4.34  The ETUC thought that the ‘country of origin’ principle, if enacted as it were, would preclude the application of Belgian law. Employment relationships would be thus governed by Polish law, or Ukrainian law, if this is what the parties chose. This is even clearer if the employee does not offer his or her services habitually in one place, but is moved around Europe. Under Article 6(2)(b) of the Rome Convention, Polish law would apply because the company, even though a letter-box one, would be deemed to be established in Poland.⁴⁸

4.35  This was the argument presented by the trade unionists despite the fact that Article 17(5) of the proposal explicitly excluded matters covered by Directive 91/76/EC relating to posting of workers (hereinafter ‘Posting Directive’).⁴⁹ Trade unions thought that the country of origin principle denied the protection accorded to temporary posted workers when the workers are employees of service providers.⁵⁰ In their eyes, the Services Directive would disturb the balance between employees’ rights and employers’ interests struck by the acquis communautaire.

4.36  With regard to posting of workers, the acquis consisted of three principles recognized by ECJ case law:⁵¹ that (a) service providers may move from one Member State to another with their own personnel without having to satisfy any additional administrative requirements related to immigration or labour market regulations; (b) service providers may be required to comply with host Member State legislative requirements on minimum wages and other working conditions; and (c) service providers may not be required to comply with the entirety of host Member State social security legislation with regard to workers who actually enjoy a similar level of protection in the Member State of establishment, unless such compliance significantly improves their protection.⁵²

(p. 105) 4.37  Thus the consequences the Services Directive might have on collective agreements became a serious concern. In the past few years though, the ECJ showed some willingness to place limits on the rule that a company should respect the rules of the host Member State on minimum wages. It admitted that there might be circumstances where the application of such rules ‘would be neither necessary nor proportionate’.⁵³ Despite this, it was still thought that some collective agreements might not qualify as ‘universally applicable’ in the sense of Articles 3(1) and 8 of the Posting Directive and consequently be overridden by the country of origin principle.⁵⁴

4.38  On 16 February 2006 the European Parliament conducted the first reading of the proposal introducing several amendments. Some of the most significant ones, for the purposes of this thesis, were inter alia the definition of place of establishment to the exclusion of letter-box installations in recital 41, the exclusion of private international law rules and labour law from the field of application of the Directive in Articles 3(2) and 1(7) respectively, and the new title of Article 16, which changed from ‘country of origin principle’ to ‘effectiveness of supervision’.⁵⁵ The Commission accepted these amendments and also altered the title of Article 16 from ‘effectiveness of supervision’ to ‘freedom to provide services’.⁵⁶

4.39  The following example may illustrate the changes that the Services Directive (setting aside the doctrine of abuse for a moment) brought upon the expiry of its transposition period on 28 December 2009. A corporation like Centros Ltd, Überseering BV, or Inspire Art Ltd will not qualify as a ‘provider’ under the Services Directive.⁵⁷ However, this does not deprive them entirely of their right to move throughout the internal market. While they still enjoy the rights conferred under freedom of establishment and free movement of services by Treaty, Member States can take proportionate measures against them. In doing so they may rely both on public policy, public safety, public health etc, considerations, if the measures are discriminatory, and on mandatory requirements, in case such measures apply indistinctly.

(p. 106) 4.40  It is entirely valid to ask whether this Directive is actually taking action against letter-box companies. The answer is probably negative. On the one hand, discriminatory measures are very hard to justify and can only be taken in exceptional circumstances. On the other, the ECJ applies a very stringent proportionality test to all non-discriminatory measures that leaves little room for manoeuvre for Member States. All the Services Directive does is to exclude letter-box companies from the benefits of Articles 9–14, in particular the prevention of prior authorization regimes.

4.41  However, since the content of the Directive is a mere codification of existing ECJ case law, letter-box companies can still derive the same benefits through the way the ECJ interprets the relevant Treaty articles. In this sense, the exclusion of letter-box companies from the scope of the Directive is more of a political show than legal substance.

4.43  SMEs are the true beneficiaries of freedom to provide services. While large corporations use freedom of establishment to incorporate subsidiaries in each jurisdiction they wish to activate, SMEs cannot usually afford this luxury.⁶¹ The Commission’s proposal came to remedy this situation, contrary to the predictions of certain scholars, that Member States will react to the Centros case and its progeny by legislating at the EU level. These scholars forgot that the real seat theory was scrutinized by the ECJ in a period of regression of the European economy that the Commission sought to redress through the promotion of mobility of SME. This policy will be given effect through the removal of all barriers that would prevent SME from being established in one Member State and activating, even exclusively, in another. The extent to which this will not encourage a Delaware effect will (p. 107) depend largely on taxation policies of Member States and the harmonization of company law in Europe.

4.44  If it will be indeed the case that the Services Directive will not have a serious impact on letter-box companies, it still needs to be examined whether the use of such corporate vehicles will actually be impaired by the recent pronouncements of the ECJ directed against letter-box companies. In the Eurofood case, the Court held that the presumption that the centre of main interests of a company for the purposes of the Insolvency Regulation will lie at the place where the registered office is located can be rebutted in favour of another place if the debtor is a letter-box company.⁶²

4.45  In the Planzer Luxembourg case the Court held that letter-box companies are fictitious establishments and as such cannot qualify for the benefits of the Thirteenth VAT Directive. The Court found that Article 1(1) of the Thirteenth Directive must be interpreted ‘as meaning that the place of a company’s business is the place where the essential decisions concerning its general management are taken and where the functions of its central administration are exercised’.⁶³

4.46  The most significant of these cases is the Cadbury Schweppes case where the Court appeared to be revisiting the doctrine of abuse. This book refers to abuse of law as a doctrine. Whether the prohibition of abuse of law should be considered as a new general principle of EU law is immaterial for present purposes.⁶⁴ The focus is rather on the normative content of the doctrine.

4.47  On 12 September 2006 and exactly three months before the promulgation of the Services Directive, the Grand Chamber of the Court delivered its judgment in a case that elaborated the doctrine of abuse in the context of taxation law.⁶⁵ The Cadbury Schweppes case concerned the taxation of Cadbury Schweppes Overseas by the UK in respect of the profits made in (p. 108) 1996 by Cadbury Schweppes Treasury International, a subsidiary of the Cadbury Schweppes group established in the International Financial Services Centre in Dublin, Ireland. The Court was asked to decide whether freedom of establishment precludes national tax legislation which provides under certain conditions for the imposition of a charge upon the parent company on the profits made by a controlled foreign company.

4.48  The Grand Chamber did not actually decide the matter. It only provided the referring court with the tools to make the right decision. The Court confirmed that the abuse test has two limbs, one objective and one subjective. The subjective element of wishing to evade provisions of national law that would normally apply to the individual is not enough per se to constitute an abuse.⁶⁶ Objective circumstances should confirm that despite formal observance of EU law, the objective pursued by freedom of establishment has not been achieved.⁶⁷

4.49  The Court made it clear that there can be no abuse if incorporation reflects economic reality.⁶⁸ On the other hand, relying on its previous case law,⁶⁹ including the Centros case, it declared that ‘incorporation must correspond with an actual establishment intended to carry on genuine economic activities in the host Member State’.⁷⁰ It concluded that the finding that a corporation should qualify as a letter-box company should be ‘based on objective factors which are ascertainable by third parties with regard, in particular, to the extent to which the controlled foreign company physically exists in terms of premises, staff and equipment’.⁷¹

4.50  It is very strange that the Court, in making this statement, chose to rely on the Centros case, even indirectly.⁷² In fact the Court in the Centros case did not make any reference to the pursuit of an actual economic activity. One would be inclined to say that if the Centros case had been followed in the Cadbury Schweppes case, then there was nothing that could have been wrong with the establishment in Ireland. Centros Ltd was the paradigm letter-box company. It had no contact whatsoever with the UK, except for its incorporation there. It is, therefore, plain that it was inaccurate for the Court in the Cadbury Schweppes case to rely on the Centros case in support (p. 109) of the proposition that letter-box companies are prone to be characterized as wholly artificial arrangements.

4.51  This may lead to three possible conclusions. First, the Centros case has to be narrowed to its facts, namely to the evasion of minimum capital requirements. Second, the Cadbury Schweppes case has altered the application of the doctrine of abuse in the sphere of company law by qualifying the Centros case. Third, the Cadbury Schweppes ruling has not affected or qualified the Centros case, because in the latter there was an establishment in Denmark. In the Cadbury Schweppes case though, the Irish subsidiary had no real establishment in Ireland or in any other Member State. The first proposition is not entirely implausible given that one may very reasonably wish to doubt that minimum capital requirements actually serve any realistic purpose. The second view was taken by AG Maduro in the Cartesio case.⁷³

4.52  The third proposition deserves individual attention. It relies on the fact that in the Centros case the Court appears to be inconsistent in its treatment of the company. Sometimes it referred to the company itself and some other times to the Danish nationals who incorporated it. If England did not choose to take action against Centros then, it can be argued, no other Member State should be entitled to do so. The reason is that the establishment in Denmark is a real one. Thus Denmark should be precluded from objecting to it. By contrast, in the Cadbury Schweppes case it is likely that the Irish subsidiary did not have a real establishment anywhere in the Community. The UK sought to restrict freedom of establishment of the English mother company which established the Irish subsidiary. In doing so, it objected to an alleged abusive practice of its own nationals.

4.53  There is considerable force in this argument. It takes a very pragmatic approach. In the Centros case, the primary establishment is in reality in Denmark and the secondary one in England.⁷⁴ In the Cadbury Schweppes case it appears that there was no real establishment. However, it first seems to neglect that the terms ‘primary’ and ‘secondary’ establishment are not meant to reflect economic reality. Rather they connote priority in time. Incorporation is always the primary establishment. Any subsequent establishment is a secondary one. Second, it confuses the true meaning of the doctrine of abuse. The latter is a mechanism that should exist in particular for the benefit of any Member State other than the one which somehow accommodated the alleged abuse. Its very purpose is to restrict the use of abusive mechanisms that are tolerated by other Member States.

(p. 110) 4.54  Therefore, if the Centros and Cadbury Schweppes cases are read together, a Member State can take proportionate measures against both its nationals and legal persons, equally when they seek to set up an artificial arrangement in another Member State (Cadburry Schweppes), and when this artificial arrangement subsequently seeks to set up an establishment in the Member State of its founders (Centros). It is clear from the TV10 case that U-constructions are abusive.⁷⁵ In both scenarios the Court applied the doctrine of abuse. The definition that was given to the term ‘establishment’ in the Cadbury Schweppes case also extends to cover the Centros type of case.

4.55  The Cartesio case concerned a company incorporated under the laws of Hungary that wished to move its registered office to Italy while still retaining its capacity as a Hungarian company governed by Hungarian law.⁷⁶ In his Opinion, AG Maduro argued in favour of a significant change in the law.⁷⁷ He proposed to narrow the scope of the Centros case by excluding letter-box companies from the scope of freedom of establishment. He thus suggested the enlargement of the scope of the doctrine of abuse and the incorporation of the Daily Mail case within it. In such a way he would discard the distinction between inbound and outbound cases, as enunciated in the Überseering case. Instead, a Member State, either the Member State of incorporation or the Member State in which the corporation seeks to activate, could restrict the said company’s freedom of establishment, subject to a proportionality review. His analysis can be divided in two parts.

4.56  First, he surveyed the case law concerning the distinction between inbound and outbound cases. Second, based on the assumption that the Daily Mail case was no longer good law—at least in the way it had been interpreted thus far—he sought to construe the law in an efficient and reasonable manner that would be consistent with the Treaty. In doing so, he revisited the doctrine of abuse as established in the Centros and Inspire Art cases. He relied on the Cadbury Schweppes case to declare that companies that are ‘wholly artificial arrangements, which do not reflect economic reality’ and are aimed at circumventing national legislation,⁷⁸ should be excluded from the scope of freedom of establishment.⁷⁹

(p. 111) 4.57  In his view, the Cadbury Schweppes case had qualified the doctrine of abuse, as pronounced in the Centros case, although it would still be applied with restraint by the Court.⁸⁰ Thus the doctrine of abuse should be enlarged to cover companies like Centros Ltd and other letter-box companies. In this context, he sought to draw the line between the rights conferred on companies under freedom of establishment and the prerogatives of Member States. In doing so he pointed out two significant factors. First, Member States are free to adopt any choice of law rule for corporations, even the real seat theory.⁸¹ Second, there should be some degree of mutual recognition between States that adhere to the real seat theory and the incorporation theory respectively.⁸² Consequently, neither of the two theories should be applied in extremis.⁸³ No Member State has been granted a ‘carte-blanche’ with respect to corporations, even the ones it considers its nationals.⁸⁴

4.58  This proposition he thought to be beneficial for SMEs. The transfer of the headquarters to another Member State can be a very cost-effective means of taking up genuine economic activities in another Member State, which should not be obstructed.⁸⁵ However, Member States, especially the Member State of origin, may be able on certain occasions to make the transfer subject to certain conditions being satisfied.⁸⁶ This subjection to prior proportionate conditions that need to be satisfied is analogous to the condition set by HM Treasury on the Daily Mail in order to grant leave to move out of the jurisdiction. The paradigm example is that of the State that considers that it will no longer be able to exercise any effective control over the company. It could thus require that the company amends its constitution and ceases to be governed by the full measure of the company law under which it was constituted so that is fully governed by the law of the host Member State.⁸⁷

4.59  Action against letter-box companies is not a new trend. The real seat theory itself was adopted by the French courts towards the end of the nineteenth (p. 112) century for the very purpose of combating the use of English letter-box companies by French businessmen.⁸⁸ The real seat theory came as a reaction to the stiff regulatory arbitrage that was taking place between England and France. In the language of the French courts, regulatory arbitrage was prompted by the wish to avoid some mandatory rules of French company law concerning ‘the subscription of the capital, the payment of one fourth of the capital and the issue and negotiation of shares’.⁸⁹ The loi de 24 juillet 1867 and the loi de 1 août 1893 introducing criminal sanctions for the breach of these rules would only apply to French companies.⁹⁰ Thus, the French courts devised the real seat theory in order to declare companies that were French from every aspect, except for the place of their incorporation. This characterization would trigger the application of these laws.

4.61  It is easy to see the parallels between the West Canadian and Centros cases. In both cases, the court of Lille and the ECJ declared the liberty of parties to incorporate in any jurisdiction. Both judgments are characterized by a spirit of liberalism, characteristic of Europe both in the years before the outbreak of the First World War and the 2008 crash. In both instances the courts declared the existence of a doctrine of abuse, but found no abuse in the facts of each case.

(p. 113) 4.62  These cases can be contrasted with the Universal Gaz and Cadbury Schweppes cases. In both instances, the court of Paris and the ECJ made the same proclamation against letter-box companies. In both instances the courts found that a company can only validly establish itself in another State provided that it maintains there a real establishment, ie incorporation in that jurisdiction is a real and natural choice, in the wording of the court of Paris, or it pursues a real economic activity in that State, in the wording of the ECJ.

4.63  The Opinion of AG Maduro encourages some sort of action to be taken against letterbox companies under the abuse doctrine. He takes the view that ‘the right of establishment does not preclude Member States from being wary of “letter box” or “front” companies.’⁹³ This implies that on certain occasions Member States are allowed to take action against letter-box companies. It is unclear in his Opinion which these circumstances are.

4.64  Before plunging into the details of this analysis, it is useful to summarize the core of the dilemma. The court of Lille has done that successfully: ‘the danger that had to be avoided was to paralyze all initiatives from the view point of commercial growth under the pretext of efficient protection of the shareholders’ interests who know that they enter into a foreign company’.⁹⁴ In other words, to the extent that shareholders are aware of the fact that they are dealing with a foreign company, one should be wary of employing the doctrine of abuse in a manner that upsets economic development.

4.65  Would Centros Ltd or another company that just seeks to avoid minimum capital requirements of the Member State in which it seeks to activate satisfy the test? One may well wish to doubt that minimum capital requirements actually provide some real protection to creditors,⁹⁵ ‘as a firm’s initial capital is likely to be long gone before it files for bankruptcy’.⁹⁶ Even if the initial capital cannot be legally repaid to shareholders, it is in most cases not so significant that it could possibly suffice to satisfy all creditors.

(p. 114) 4.66  In any event, the question that needs to be answered here is concerned with the definition of a letter-box company. The ECJ has never provided a definition for the term in question, nor has any other EU institution or national court attempted to define it.⁹⁷ The reason probably is that the task of providing such a definition is rather difficult. There is a great deal of distance between a mere letter-box and the real seat. It is not clear where one should draw the line. The West Canadian case is of great assistance in this regard. There should be an abuse ‘when a company will have been established abroad so that all things would indicate that it should have been French and when it will be clearly shown that the company had no connection whatsoever abroad’.⁹⁸ It is beyond doubt though that a company that merely preserves a registered office, which is nothing more than a postal address, should qualify as a letter-box company.⁹⁹

4.67  This observation could lead to the reasonable conclusion that any company that does not possess a substantial connection with its jurisdiction of incorporation should be considered a letter-box company. In determining whether there is such a substantial connection between the corporation and the place of incorporation, courts may feel free to hold that any presence of a corporation that falls short of the definition of establishment, as provided by the ECJ and the Services Directive, will be deemed to constitute a letter-box company. Thus, any corporate presence in a jurisdiction that does not actually pursue a real economic activity should be classified as a letter-box company.

4.68  Given the consequences that such a classification will have for a corporation, it should be only with a great degree of caution that a court should characterize a corporation as a letter-box company. How compatible could this be with regard to the ruling of the ECJ in the Inspire Art case? In this latter case, the Court had held that the Dutch WFBV was contrary to freedom of establishment, despite the fact that Inspire Art’s only connection (p. 115) with England was its incorporation there. The Court did not respond to the argument made in favour of placing restrictions on the use of brass-plate companies. It is evident that the policy against letter-box companies would be an effort to impose limits on the holdings of the ECJ in the Centros and Inspire Art cases.

4.69  If it is a correct interpretation of the law that letter-box companies be excluded from the benefits of freedom of establishment, either via a restrictive definition of establishment or via an expansive interpretation of the doctrine of abuse, one can only wonder how much of the Centros ruling has actually survived. As pointed out earlier,¹⁰⁰ the Centros case lies behind the total prohibition of restrictions on the freedom of service providers to choose between a primary and a secondary establishment and in particular, have their principal establishment in the territory of the host Member State. But this is so only with regard to establishments that actually pursue a real economic activity. Therefore, it may well be the case that to the extent to which Centros Ltd was a letter-box company, companies of this sort will no longer be able to rely on the Centros case, all the more so if the Services Directive is interpreted in a way to ban letter-box companies completely from freedom of establishment.

4.70  It is argued though that it is not the principle of the Centros case that is attacked, but its application to the facts of that particular case. This will be the basis upon which confusion is created about the relation between the meaning of ‘establishment’ and its application of the doctrine of abuse in this particular area of law. The Court in the Cadbury Schweppes case, perhaps foreseeing the advent of the Services Directive, held that ‘incorporation must correspond with an actual establishment intended to carry on genuine economic activities in the host Member State’.¹⁰¹

4.72  In deciding whether abuse has been committed or not, the Court defined freedom of establishment. The outcome is that, on one reading of the judgment, letter-box companies lie outside the scope of freedom of establishment. (p. 116) This grammatical reading cannot be correct. The Treaty guarantees freedom of establishment to all companies, regardless of whether they are letter-box companies or not. Thus, letter-box companies are not excluded from freedom of establishment. Neither can the Services Directive be read in such a way as to reach this conclusion.

4.73  The aspiration of both that directive and the Court is simply to restrict the extent to which letter-box companies can enjoy the benefits of freedom of establishment. Hence, it is impermissible for the courts of a Member State to disregard entirely the legal personality of a company, even if it is a letter-box company. All it can do is restrict its enjoyment of freedom of establishment under the doctrine of abuse.

4.74  One way or the other, it has to be admitted that the reasoning of the Court is problematic. It has sought to refine the doctrine of abuse by reference to the very definition of establishment. It has thus created a circle. The question whether letter-box companies constitute an abuse has become a question of what constitutes an establishment. It is submitted that it would have been preferable for the Court to have applied the doctrine of abuse without reference to the meaning of establishment.

4.75  The doctrine of abuse needs to be clarified by the Court on these points. It is submitted that it should be shaped in a way that it is clear that not every evasion of any provision of national law should suffice to constitute an abuse. Particular regard should be paid to the nature of the national provisions in question. It should be ensured that only provisions that are aimed at safeguarding an interest pertaining directly to the State itself, as in the tax cases, can qualify for consideration under the abuse doctrine. Minimum capital requirements and other corporate rules that have a purely internal effect, not affecting the State or the general public, should by themselves not qualify for consideration under the doctrine of abuse.

4.76  This would mean that reliance on such internal corporate rules cannot suffice to establish an abuse when the company engages in ordinary commercial transactions such as the sale of commodities. Things should and could be different if the company in question is exercising an activity, which, albeit private in its nature, affects the State and the general public as a whole. This should be the case for companies who exercise activities that require rigid State supervision.¹⁰³ The finding of an abuse is, therefore, (p. 117) a fact-driven analysis. A general rule ‘that applies irrespective of the concrete facts of each case’ will, on all probabilities, constitute an unlawful restriction to freedom of establishment.¹⁰⁴

4.77  In order to examine how it is possible to refine the doctrine of abuse in relation to letter-box companies, it is necessary to examine the relation between two leading cases in the field of abuse. Identifying the underlying principles of abuse will assist in redefining abuse in a manner which independent of the meaning of establishment.

4.78  The reason for which the ECJ felt compelled to find an abuse in the TV10 case¹⁰⁵ and not in Centros is not entirely clear. TV10 was a case in which a public limited company had been incorporated in Luxembourg for the purposes of avoiding Dutch rules on broadcasting that were applicable to Dutch broadcasting companies. The Court found that the Dutch Government could rely on the abuse doctrine to justify the characterization of TV10 as a Dutch broadcasting company for the purposes of subjecting it to the statute governing the provision of radio and television programmes, the Mediawet. However, in the Centros case, the fact that the company in question had been incorporated in England for the mere and explicit purpose of evading the Danish provisions on minimum capital requirements was not thought to constitute an abuse of EU law.

4.79  This contrast shows that the Court draws an implicit line between national rules which come within the core of the freedom in question, and thus cannot be imposed upon a migrating company and the national rules that do not come within this core. Therefore, national rules which actually regulate the exercise of commercial or other activities can be imposed upon a company under the doctrine of abuse, provided that they are suitable and necessary to achieve some legitimate aim.

4.80  More specifically, Denmark in the Centros case sought to impose its domestic rules on capital requirements on Centros Ltd. The ECJ understood those rules to come within the core of the freedom. This means that the very (p. 118) purpose of the freedom of establishment is to allow companies to choose that national company law, which is more appropriate for their purposes.¹⁰⁶ In other words, national rules on minimum capital requirements are among the factors that business people are expected to look at in order to choose the jurisdiction of incorporation. Thus it held that an evasion of minimum capital requirements per se does not amount to an abuse of EU law. By contrast, in the TV10 case the provisions of the Mediawet were meant to regulate the provision of radio and television broadcasts. Thus they expressed the vested interest of a State in preserving diversity in local media.

4.81  A similar line of reasoning can be traced in the Van Binsbergen case.¹⁰⁷ The latter was a case concerning the Dutch provision that prevented a legal representative, with a right of appearing before courts where representation by an advocaat is not required, from residing outside the jurisdiction. In that case, the legal representative had moved to Belgium. Under the said provision, he could no longer appear as a legal representative before Dutch courts. The ECJ held that the abuse doctrine can be employed against persons who seek to avoid national professional rules of conduct by moving to another State. However, in that particular case, the fact that there was no required qualification for a person to act as a legal representative demonstrated that the evasion of national professional rules would not actually have any consequence for the Netherlands. Thus the Dutch prohibition imposed on legal representatives to reside abroad was held to constitute a measure unsuitable to achieve the otherwise legitimate aim of safeguarding the administration of justice through professional rules of conduct.

4.82  What the Van Binsbergen case shows is that the rules in question actually concern the protection of a vested interest the State has in the administration of justice. National professional rules of conduct do not come within the core of the freedom in question; ie they are not what a person actually looks at when he or she decides to move to another Member State.

4.83  It is probably not accidental that in both the TV10 and Van Binsbergen cases the rules whose evasion in the former case sufficed to establish an abuse, and in the latter came close to doing so, were actually public law provisions.¹⁰⁸ By contrast, in the Centros case, the national rules in question were private law provisions. This does not mean that the avoidance of private (p. 119) law rules will never amount to an abuse, but it will be harder to show an abuse in such instances. The reason is probably that private law actually strikes a balance of interests among private parties, whereas public law is meant to pursue interests of whose the State is the direct beneficiary.

4.84  This distinction is admittedly a very fine one, and perhaps slightly artificial. However, it remains a plausible explanation for the different conclusions reached by the ECJ in the Centros and TV10 cases. In both cases it is explicit that national rules which were in conformity with EU law, such as the Danish minimum capital requirements and the Dutch provisions of the Mediawet, were evaded and that incorporation abroad has taken place for the very purpose of evasion. Therefore, the real reason must be related to the nature of the national rules in question. If this distinction is rejected, it is hard to see what the compelling reason is for the Court to have found in favour of an abuse in the TV10 case and against it in the Centros case.

4.85  The question to be asked here is: how does this analysis of the doctrine of abuse affect the realm of company and insolvency law; ie what are the implications of the Cadbury Schweppes case in relation to letter-box companies. This latter case is about tax evasion; ie evasion of public law rules aimed to safeguard interests that pertain to the State itself. It is evident from the Court’s ruling in that case that there is nothing impermissible in selecting the State of incorporation for its low tax rates.¹⁰⁹

4.86  Indeed the Court has held that any advantage resulting from the low taxation to which a subsidiary established in a Member State other than the one in which the parent company was incorporated cannot by itself authorize that Member State to offset that advantage by less favourable tax treatment of the parent company.¹¹⁰ It has also held that the need to prevent the reduction of tax revenue is not even a matter of overriding general interest which would justify a restriction on a freedom introduced by the Treaty.¹¹¹

4.87  What can really make a difference in the justification of a national measure that restricts freedom of establishment is the nature of company in question as a ‘wholly artificial arrangement aimed at circumventing the application of the legislation of the Member State in question’.¹¹² Thus in deciding whether the abuse doctrine can be invoked, it is crucial to establish that the aim of the freedom has not been met.

(p. 120) 4.88  The Court has made it plain that the objective of this particular freedom is to allow a national of a Member State to set up a secondary establishment in another Member State. In doing so, he or she will assist economic and social interpenetration within the EU in the sphere of activities as a self-employed person.¹¹³ ‘To that end, freedom of establishment is intended to allow a Community national to participate, on a stable and continuing basis, in the economic life of a Member State other than his State of origin and to profit therefrom’.¹¹⁴ In the case of companies, this requires ‘actual establishment of the company concerned in the host Member State and the pursuit of genuine economic activity there’.¹¹⁵

4.89  The Court then made a statement that probably constitutes a serious blow at the very heart of its ruling in the Centros case. It held that for the doctrine of abuse to be successfully invoked in order to justify a restriction to freedom of establishment, ‘the specific objective of such a restriction must be to prevent conduct involving the creation of wholly artificial arrangements which do not reflect economic reality’.¹¹⁶ If minimum capital requirements are to make any sense, they should be viewed as a way in which entrepreneurs demonstrate a serious commitment to their project.¹¹⁷ They could be a suitable measure to prevent the creation of wholly artificial arrangements, albeit debatable whether they would be necessary or proportionate. Nonetheless the Court held that the mere evasion of minimum capital requirements is not an abusive practice. It did not go as far as addressing proportionality, as in the Cadbury Schweppes case.¹¹⁸

4.90  Centros was a company with no connection with England other than its incorporation there. It was from every aspect a letter-box company. So far as it can be told from the judgment of the Court, it pursued no economic activity in England. The relevant commercial activities were meant to be conducted in Denmark. If this is indeed the case, it can hardly be seen how the Centros case would be still decided in exactly the same way. It is not though the principle in the Centros case that is contested here, but its application to the facts. In light of the foregoing observations, Centros Ltd would qualify as a wholly artificial arrangement according to the Cadbury Schweppes test.¹¹⁹

(p. 121) 4.91  It may be argued that Centros was not an artificial arrangement, because the ECJ did not hold so back in 1999. However, the general perception of artificial arrangements has been slightly modified by the Services Directive and the ruling of the Court in the Cadbury Schweppes case. For the reasons exposed earlier, it is more accurate to say that Centros would qualify as an artificial arrangement. There is of course another view, according to which the tests in the Centros and Cadbury Schweppes cases are different.¹²⁰ It is argued though that the test is one and the same. The difference in the outcome is caused by the different objectives pursued by the individuals in each of these cases and the nature of the evaded national provision.

4.92  The characterization of a company as an artificial arrangement does not end the inquiry. If Centros would be classified as a letter-box company, and it is submitted that it should, the critical issue would then be whether the Danish minimum capital requirements would be considered to constitute a proportionate restriction to the freedom of establishment of letterbox companies. Proportionality has a great role to play in this area, especially if one considers that the ECJ in the Centros case could have simply glossed over in its analysis of the abuse doctrine what was in reality a proportionality test. The answer to this question can only be speculated. There are reasons that could warrant both possible conclusions to be reached.

4.93  A positive answer to the question posed earlier could be based on the argument that minimum capital requirements act as ‘a rough-and-steady screening mechanism for the “seriousness” of entrepreneurs, by forcing them to commit a non-trivial amount of money to their project’.¹²¹ Taking into account the three steps of the proportionality test—suitability, necessity, proportionality stricto sensu—minimum capital requirements are clearly suitable.

4.94  Are they necessary though? One could say that it is hard to imagine a less onerous measure than minimum capital, which, although it cannot be repaid to shareholders, can be used by the company in a productive way. What else could be easier and simpler in avoiding the formation of wholly artificial arrangements than rules on minimum capital? One could anticipate that Member States that are now abolishing their minimum capital (p. 122) requirements will soon face the problem of being unable to rely on them in order to take anti-letter-box companies measures, in case they wish to do so. On the other hand, the States that preserve them may now have more chances in opposing them to letter-box companies.

4.95  However, there are two problems with this view. First, it assumes that the prevention of formation of letter-box companies is in itself a mandatory requirement in the public interest. Indeed, there is good reason to believe that the Court would be willing to hold so. The relevant authority would be the Cadbury Schweppes case. However, it is argued that the Court should not uphold minimum capital requirements as a necessary measure. The major reason is that minimum capital requirements are actually counterintuitive. They achieve none of the aims they are supposed to pursue.

4.96  First, they are generally not of a size appropriate to ensure creditor protection. In fact, they have a negative impact on entrepreneurship and generate few benefits for creditors.¹²² It is hard to see how sums ranging from E2,500¹²³ to E60,000 are enough to protect creditors, especially when a company can incur liabilities that amount to millions. Second, the benefit of demonstrating the seriousness of entrepreneurs in establishing a company in a particular jurisdiction is overridden by the relevant cost. If minimum capital requirements were thought to constitute a necessary measure, this would actually mean that entrepreneurs from jurisdictions with minimum capital requirements could no longer incorporate their companies in jurisdictions with no minimum capital requirements. This would place dynamite at the foundations of freedom of establishment and the internal market. The Court has rightfully held in the Centros case that the evasion of minimum capital requirements cannot in and of itself constitute an abuse.

4.97  Therefore, believing that the evasion of minimum capital requirements constitutes an abuse actually implies that the formation of letter-box companies is contrary to freedom of establishment. This cannot be the case. The whole purpose of the proportionality test here is not to eradicate letter-box companies. A measure that seeks to eradicate the behaviour which is being restricted is probably by definition disproportionate. The whole point of the proportionality test in this context is to identify the measure that can restrict the use of letter-box companies rather than ban them altogether.

(p. 123) 4.98  In any event, the payment of minimum capital in no way guarantees in and of itself that a company participates in the economic life of the Member State of incorporation as required by the definition of establishment delivered by the ECJ.

4.99  Concluding this point, the Centros and Cadbury Schweppes test requires two issues still to be addressed. First, it needs to be decided if the company in question is a serious establishment or a letter-box company. Second, the degree of scrutiny will depend on the outcome of the previous inquiry. If the company is a letter-box company, it will be relatively easier for the Member State to impose a restriction and justify it. If the company is a serious establishment then it will be more difficult for the Member State to impose such a restriction and justify it. Member States that wish to have a better chance of success should seriously consider challenging a letter-box company not on the evasion of company law, but tax law. This might lead to decrease of the Centros type of cases and the increase the Cadbury Schweppes type of cases being brought for adjudication.

4.100  Be that as it may, the fundamental premise of the entire abuse doctrine has not been proven yet. Why is it the case that companies should pursue a real economic activity through their establishment? Why should they become part of the economic life of the Member State in which they incorporate? For no apparent reason, the ECJ appears to ascribe to the old view that a company forms part of the country in which its seat is located, because it is linked with its economy.¹²⁴

4.101  However, this reasoning contradicts the very premise of the ruling in the Centros case according to which there nothing abusive in incorporating a letter-box company in England in order to avoid the application of Danish company law. The fact that the Centros type of company may be regarding abusive from a tax-law viewpoint does not mean that this should be also the case from a company-law viewpoint.

4.102  The conclusion to be drawn is that letter-box companies have one main challenge to face; namely the application of a law other than the law of the place of incorporation. In the Centros-type of case, if the host Member State adheres to the real seat theory it will be open to it to apply the law of the real seat. It will be for the company to establish that the application of the substantive provisions of the applicable law to corporate matters—and not the real seat theory—as applied by the domestic court constitutes a restriction of freedom of establishment and for the host Member State to (p. 124) justify it under the Gebhard test. In the latter case, it is conceivable that the Member State might seek to argue abuse, separate from any other mandatory requirement it might wish to invoke. By contrast, if the host Member State adheres to the incorporation theory, it will have to resort to the doctrine of abuse of law, not in order to justify a restriction, but in order to restrict the right of access of the letter-box company to the benefits of freedom of establishment.

4.103  In both instances the abuse analysis will come down to the kind of interest that the State will seek to protect. The closer this interest comes to its sovereign powers or its imperium—eg taxation—the easier it will be to succeed on this ground. By contrast, if the provisions in question whose application the letter-box company has allegedly evaded regulate private interests, it will be much harder for the State to establish abuse. Therefore, letter-box companies have much less to fear in the field of corporate law rather than in the field of taxation.

4.104  As for the rights of third parties vis-à-vis the Centros-type of company European insolvency law guarantees a certain level of protection. The Court has expanded its anti-letter-box statements into the field of the Insolvency Regulation¹²⁵ through its ruling in the Eurofood case.¹²⁶ In the latter case, the ECJ held that the case for rebutting the presumption of the centre of main interests for companies being located at the registered office is even stronger when the use of criteria which are objective and ascertainable by third parties lead to the conclusion that the debtor is actually a letter-box company. The outcome thus is that in appropriate circumstances, a letter-box company may not be able to rely on the law of the place of incorporation as the law applicable to corporate matters and/or the law of the forum of insolvency, thwarting thus entirely the choice to incorporate in a particular jurisdiction.