The Services Directive's Impact on Company Law and Company Structures

The Services Directive, Directive 2006/123/EC (Directive) was implemented in 2009 and has thus been in operation for 15 years. After a slow start, the Services Directive has started to generate more and more preliminary rulings and infringement actions against member states, and it has become clear that the Directive is likely to impact company law and company structure. This is the topic of my recently published paper.

The Services Directive deals with both the establishment of service providers and the cross-border provision of services. These topics were already regulated by Articles 49 and 56 of the Treaty of the Functioning of the European Union (TFEU), and to some extent the Directive just mirrors these provisions as interpreted by the European Court of Justice (ECJ). But the Services Directive also has the potential for going beyond these provisions, and my paper attempts to point out some areas where this is likely to happen.

The provisions which are most likely to affect company law and company structure are Articles 14, 15 and 16 of the Services Directive. The first two provisions address the freedom of establishment of service providers, but contrary to Article 49 TFEU they also apply to purely internal situations. Thus, if a German businessman wants to make an establishment in Germany by setting up a German company, he or she may invokes both Articles 14 and 15. As the number of such purely internal establishments are likely to far outnumber the number of cross-border establishments, the Services Directive has the potential to generate more cases challenging national company law than has previously been generated by Article 49 TFEU.

Both Articles 14 and 15 address different requirements directly relating to the choice of corporate form.  According to Article 14, point 1, of the Services Directive, discriminatory requirements based on the nationality of the service provider, or, in the case of companies, the location of the registered office, are prohibited. This provision has been used several times to set aside national requirements for using domestic companies or companies with their seat in the member state of establishment (which is de facto the same). This is not surprising as there were already cases under Article 49 TFEU that set aside such measures, but Article 14 of the Services Directives makes it even easier, as the prohibition in this provision is unconditional. So, there is no reason to evaluate any justification forwarded by the member state. According to Article 15(2)(b) any requirement to use a specific type of corporate form must be submitted to a test that mirrors the Gebhard-test under Article 49 TFEU, e.g. must be justified by public interests requirements and be proportional. The provision has been applied by the ECJ in several cases, and it seems that the Directive is applied in the same way as Article 49 TFEU.

Additionally, Article 14, point 3, of the Services Directive prohibits restrictions on the freedom to choose between a principal or secondary establishment. This provision prohibits a requirement that a provider must have its principal establishment in the territory of a member state to be allowed to conduct a particular type of service. However, Article 14, point 3 is not limited to restrictions on the freedom to choose between a principal or secondary establishment, as it also (in the second part of the provision) prohibits restrictions on the right to choose between establishments in the form of an agency, branch or subsidiary. This part of the provision will prevent a member state from prohibiting the use of one of the forms mentioned, which in practice is either a prohibition of the use of a branch or a subsidiary. This was confirmed by the CJEU in Case C-179/14, Commission v. Hungary, where branches of a company incorporated in another member state than Hungary could not provide the service in question (the issuing of SZÈP card). The CJEU noted that this restricted the choice between the different forms of establishment, and as Article 14 of the Services Directive applies without exceptions, the Hungarian state could not give any justification, nor could they rely on Article 52 TFEU.

It is possible that Article 14, point 3, can also be used to set aside provisions that, even if they do not rule out one form of establishment, subject different types of establishments to different conditions. The wording of Article 14, point 3 is not clear, as it just prohibits restrictions on the freedom to choose between different forms of establishment. However, according to the Commission, Article 14, point 3 prohibits requirements which grant certain forms of secondary establishments more favourable treatment than others. But it is unclear how such a prohibition should be applied. Thus, setting up a branch and subsidiary is in many ways subject to different conditions, as the former ‘just’ requires a registration, whereas the latter requires the formation of a company with all that this entails. These differences seem very difficult, if not impossible, to remove in their entirety. So far, the CJEU has not addressed the question of whether Article 14, point 3 prohibits (some) types of differentiation between different forms of establishments. In my paper, I discuss the issue and suggest an interpretation that will allow the provision to have a large potential for challenging national company law, while still allowing branches and subsidiaries to have some basic different features.

According to Article 4(2) of the Services Directive, a service provider is a company which is ‘established in a member state’. In Article 4(5) of the Services Directive, an establishment is defined as ‘the actual pursuit of an economic activity … for an indefinite period and through a stable infrastructure from where the business of providing services is actually carried out’. According to Recital 37 of the preamble to the Services Directive, this definition intends to follow the definition laid down by the CJEU. Furthermore, it says that ‘according to this definition, which requires the actual pursuit of an economic activity at the place of establishment of the provider, a mere letter box does not constitute an establishment.’ The Directive may be interpretated in different ways, but the preparatory works for the Services Directive indicate that the reference to letterbox companies in Recital 37 was an attempt to avoid allowing Centros-like companies to benefit from the Services Directive. This would be a major deviation from the case law under Article 49 TFEU as the ECJ has consistently protected the use of Centros-like companies. Not surprisingly, the ECJ has interpreted the Services Directive so as to allow for such companies, thus ignoring what may have been implied in Recital 37 (see Case C-66/18, Commission v. Hungary).

There are other provisions in the Services Directive that impact company law or the choice of company structures. In several of these areas, the Services Directive has the potential to go further than Articles 49 and 56 TFEU, making the Directive interesting for both company law scholars and practitioners.

The author’s full paper is available here.

Karsten Engsig Sørensen is a Professor at the Department of Law, Aarhus University, Denmark.