Centros@20 Series: Could Centros have gone the other way?

Twenty years ago, the Court of Justice surprised observers when it handed down its Centros judgement. Until then, it was believed that the internal market was about opening borders and ensuring a level-playing field for companies. In Centros, however, the Court expressed a different vision of the internal market. As Saydé explains in his excellent book, the narrative shifted from fair competition among firms to free competition among states. The Court’s blunt endorsement of regulatory competition is exactly what caused surprise. Twenty years on, whether the internal market project is about fair competition among firms or free competition among states is still controversial (see AG Kokott’s Opinion in Polbud at para 38 and the contrasting Grand Chamber’s judgment).

So, why did the Centros court go that way and could it have decided this landmark case any other way? To start with the latter question, let us engage in an exercise in juridical fiction and imagine how an alternative Centros court might have reasoned the opposite conclusion, allowing the Danish authorities to refuse to register Centros’ Danish branch. It could have gone like this:

It is settled case-law that the concept of establishment within the meaning of the Treaty is a very broad one, allowing a Community national to participate, on a stable and continuous basis, in the economic life of a Member State other than his State of origin and to profit therefrom, so contributing to economic and social interpenetration within the Community in the sphere of activities as self-employed persons (Case C-55/94 Gebhard, EU:C:1995:411, para. 25; Case 2/74, Reyners, EU:C:1974:68, para. 21). In the words of Advocate General La Pergola, establishment within the meaning of the Treaty involves two factors: physical location and the exercise of an economic activity, both, if not on a permanent basis, at least on a durable one (Opinion in Case 81/87 Daily Mail, EU:C:1988:286, para. 3). In the case before the referring court, only one of these two elements is present. Indeed, it is common ground that Centros Ltd has no economic activity in the United Kingdom and was not set up in view of developing such activity in the future. For this reason, Centros cannot be considered to be established in the UK within the meaning of Article [49] TFEU. Consequently, it does not enjoy the right to create a secondary establishment under that provision.

While this is the exact opposite of what the real Court held in the real Centros case, it is possible to find internal market cases which follow this logic. In tax cases in particular, the Court has allowed Member States to adopt anti-abuse measures (eg Halifax). Outside of tax law, TV10 is a case in point. In that case, the Court allowed the Dutch media regulator to treat a substantially Dutch TV channel established in Luxembourg (but operating in Dutch, with mostly Dutch staff and targeting the Dutch public) as if it were established in the Netherlands, thus neutralising the regulatory benefit of its strategic mobility. Note that this anti-circumvention strategy was very similar to the one the Danish company registrar had sought to deploy in Centros: looking at the reality underneath the convenient out-of-state establishment, stripping the Luxembourg corporation of its artificial legal cloak, and giving the situation one that better fitted economic and social reality.

In the case law on free movement of natural persons, an unusual case in point is Wolffersdorff von Bogendorff. A German national named Nabiel Bagdadi at birth had his name changed (in several instalments) to Peter Mark Emanuel Graf von Wolffersdorff Freiherr von Bogendorff while he resided in the UK. He then sought to have his new name recognised in Germany, thus circumventing the abolition of tokens of nobility in the German Constitution. Like in Centros, the mobile person created a ‘U-shaped’ situation by moving from a home state with stringent rules (on minimum capital or tokens of nobility) to a friendlier host state and by then returning home to seek recognition of the situation lawfully constituted in the host state (which had artificially been made a home state for the purposes of the second leg of the journey). In that case, the Court left it open to the German authorities to deny recognition of Mr Bagdadi’s new name.

These examples illustrate that the alternative Centros would not have been entirely out of place in internal market law. However, it would be at odds with what seems to be a strong trend in the case law regarding genuine link requirements. Such requirements are widely accepted, especially in citizenship cases (and even codified in the Citizens directive). For example, the UK may require students from other Member States to have established genuine links with its society before they can claim the benefit of a student loan (Bidar). However, where the Court validates a genuine link requirement (provided it is proportionate), it is always a requirement of a genuine link with the host state’s own territory. A requirement of a genuine link with another Member State does not seem to be acceptable. Micheletti illustrates this point in relation to the law of nationality. Mr Micheletti was a dual Argentinian and Italian citizen who, relying on his Italian citizenship, claimed a right to establish himself in Spain. The Spanish authorities had denied this on the grounds that his Italian nationality was not effective. The Court squarely rejected this approach: Spain could not meddle with the conditions set out by Italy for granting Italian nationality. The Court’s analysis here mirrors that in Centros regarding companies: Danish law could not meddle with the conditions for incorporation set out by UK law.

Saying that Centros was ultimately decided the way it was because it is for every Member State to determine the connecting factor relevant for the purpose of its own company law is both familiar and accurate, but does not go to the heart of the matter. In this regard, Saydé’s analysis is the most thorough to date (see here for a summary). Yet one more dimension may be worth exploring to explain the ebb and flow on the case law defining the regulatory leeway Member States enjoy to combat strategic use of free movement rules. It is the costs dimension. In some cases, the costs of strategic private mobility for the host state is salient, as in the case of social benefits claimed by migrants. In other cases, costs may be hidden. Costs may also be high or low depending on the extent of (corporate or human) migration triggered by regulatory competition. Could the Court be sensitive to state’s loss aversion? If so, it seems plausible that this dimension may play a larger role when costs are high and salient. This hypothesis is yet to be tested (intrepid researchers are welcome to contact the author).

A fuller version of this analysis can be found here.

Anne-Lise Sibony is a Professor of European Law at UCLouvain.