EU Rules Allow For Free Movement of Companies

(CN) - Freedom of establishment laws in the EU mean Hungary cannot keep foreign companies from incorporating there, Europe's high court ruled Thursday.

The ruling comes in response to questions from Hungary's supreme court regarding a former Italian company, Vale Costruzioni, which closed up shop in Italy and tried to incorporate in Hungary.

Hungarian officials refused to enter Vale Costruzioni into its commercial register, saying that a foreign company cannot transfer headquarters to Hungary and or be registered as the predecessor in law to a Hungarian company.

The Hungarian court asked whether the law permitting Hungarian companies to leave and incorporate elsewhere but prohibiting foreign companies from incorporating in Hungary violates the freedom of establishment. The national court also sought a determination on whether a member state may refuse to register foreign predecessors in law.

The EU Court of Justice noted that in the absence of a uniform definition of "companies" in European law, member states may apply their own laws to govern corporations. However, national legislation cannot prevent the free exercise of basic EU freedoms like establishment - and Hungarian law must be examined in the light of that basic principle.

Furthermore, national and foreign companies cannot be treated differently under EU law and "differences in treatment depending on whether a domestic or cross border conversion is at issue cannot be justified by the absence of rules laid down in secondary European Union law. Even though such rules are indeed useful for facilitating cross-border conversions, their existence cannot be made a precondition for the implementation of the freedom of establishment," the Luxembourg court wrote.

"Insofar as concerns justification on the basis of overriding reasons in the public interest, such as protection of the interests of creditors, minority shareholders and employees, the preservation of the effectiveness of fiscal supervision and the fairness of commercial transactions, it is established that such reasons may justify a measure restricting the freedom of establishment on the condition that such a restrictive measure is appropriate for ensuring the attainment of the objectives pursued and does not go beyond what is necessary to attain them. However, such justification is lacking in the present case," the court continued.

The EU court also noted that while requirements of Hungary's commercial law cannot be questioned, the laws must be applied equally between all companies - national and foreign.

"However, the refusal by the authorities of a Member State, in relation to a cross border conversion, to record in the commercial register the company of the Member State of origin as the 'predecessor in law' of the converted company, is not compatible with the principle of equivalence if, in relation to the registration of domestic conversions, such a record is made of the predecessor company," the court wrote.

Hungarian officials must inspect dissolution documentation from companies leaving other countries and, if the companies have complied with the laws of the foreign country, accept them as valid in Hungary, the court concluded.The Court of Justice remanded the case back to the Hungarian supreme court for final judgment.

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