Freedom of Establishment – Corporate Mobility
Often labelled as “passporting”, Corporate Mobility means that once a company is established in one EU member state, others will need to recognise it as validly established legal entity. As a result, an established company can sell goods or services to other EU countries, in principle without needing to establish a branch or subsidiary there. In some instances, member states’ tax rules will still require establishment of a local entity. An example here is the UK legal obligation to form a “UK establishment” (subsidiary or branch) when certain criteria are met. Several questions come to mind in relation to the future of this freedom…
Will you need to establish an entity in the UK to run operations smoothly?
If you have a UK Branch, should you form a subsidiary to strengthen your UK base?
Answers to these questions will vary depending on where your company is based, as well as what Brexit scenario the future holds – will there be a “hard Brexit” or not, how long is the transition period, will Mrs May negotiate a solution for corporate mobility?
To illustrate the background: Most continental EU jurisdictions (e.g. France, Germany) adopt the “Real Seat Theory”. This means the company will follow the company law where it has its real seat, being the location of the company’s centre of management or central administration. The second theory, called “Legal Seat Doctrine” (adopted, for example, in England), the applicable company law is determined by the jurisdiction where the company is incorporated.
This means that a UK established company, whether or not it is a foreign subsidiary or not, will retain its legal status in the UK irrespective of the Brexit model applied. Depending on business carried out in other EU member states, your UK established company may need to explore whether you should set up an entity in another EU country if you do not currently have such an entity. This will be particularly relevant for companies registered in one of the UK jurisdictions but having their central administration in a “Real Seat Country”. Those types of businesses may risk to be regarded as unincorporated associations following Brexit, thus potentially losing their status as legal entity in those other member states.
On the flip side, if you are currently operating an entity outside the UK and are carrying out regular business with the UK, you may not have the benefit of being regarded as legal entity in the UK. Depending on your exposure to the UK market and business plans, you may wish to consider setting up a UK Limited company to strengthen your base. Whilst it is not possible to advice on what precisely will happen, we have seen this used as a contingency approach during less certain times.
If you have any questions about Corporate Mobility,
get in touch with Tessa Schrempf,
Corporate Legal Controller at Goodwille.