Effect of Brexit

In the absence of no Brexit or a very limited Brexit, it  appears that the general EU right to provide services based on the establishment in one state in other states and to establish branches and local establishments in a host  state based on home state regulation, will cease. Across various sectors and services, there are common schemes of regulation which underpin and make realistic this framework.

It appears clear that the EU will not extend the general right to provide services cross-border and to establish branches and subsidiaries in the absence of freedom of movement of persons. While there is a good deal of rhetoric about the indivisibility of the four freedoms there is a clear logical link between freedom of movement and freedom to provide services.

Key Services Freedoms

Article 49 of the Treaty on the Functioning of the European Union (TFEU) deals with the establishment of natural persons, companies branches and agencies in other EU states and a permanent or semi-permanent basis. In broad terms, it provides that restrictions on the freedom of establishment of nationals of a member state in the territory of another member state are prohibited. Such prohibition provisions  also apply to restrictions on setting up of agencies branches or subsidiaries by nationals of any member state established in the territory of any member state.

Freedom of establishment includes the right to take up and pursue activities as self-employed persons and to set up and manage undertakings, in particular companies or firms  under the conditions laid down for its own nationals by the law of the country where such establishment is effected subject to the provisions of the TFEU relating to capital.

Applies to Companies Established in State

Article 55 provides that companies or firms formed in accordance with the law of the member state and having their registered office, central administration or principal place of business within the European Union arel for the purposes of the TFEU provisions on freedom of establishment, to be treated in the same way as natural persons who are nationals of member states.

Companies or firms means companies or firms constituted under civil or commercial law including cooperative societies…’

Member state shall accord nationals of the other member states the same treatment as their own nationals as regards participation in the capital of companies and firms within the meaning of article 54.

The EU Treaty right to provide services and the terms of individual schemes of regulation have the consequence that businesses and undertakings established in the United Kingdom or which might otherwise have been established in United Kingdom may become established in another EU state, in order to be able to provide services in the European Union on a cross-border basis or establish further branches or establishments in other use EU states on the basis of their EU establishment.

The scope of Services Directive I

The Directive potentially invalidates any requirement which impacts adversely upon access to the provision of a service by a supplier or on access a service by a user across EU state borders. A requirement includes any obligation condition, prohibition or limit in law, regulation or administrative practice. It includes the rules of professional and trade bodies and associations.

Rules which apply to all persons, irrespective of EU residence or which apply to nationals and EU nationals are presumptively lawful. If they specifically affect a service activity, they may be required to be justified under the directive.

Any requirement, which is discriminatory directly or indirectly on the grounds of the nationality of the provider, employees, shareholders, directors or managers is not permitted. A provider must not be restricted from having an establishment in more than one EU member state. It must not be required to select a principal or secondary establishment.

Authorisation Scheme

In broad terms, a service provider need not be authorised, licensed or registered in an EU State, before providing services into that other EU state from its EU home state in which it lawfully conducts business. It is generally obliged to comply with the “doing business” / public protection rules applicable in that other host state.

An authorisation scheme which applies to the establishment in an EU State may be justified provided that it is non-discriminatory either directly or indirectly, there is an overriding reason in relation to the public interest and the objective cannot be obtained by means which are less restrictive.

Freedom to Provide Services

An establishment involves the pursuit of an economic activity for an indefinite period through a stable infrastructure from where the business or provision of services is actually carried out.

EU member states must respect the right of service providers in another EU state, to provide services in a member state other than that in which they are established. The member state in which the service is provided shall allow free access to and free exercise of the service activity within their state.

EU States shall not make access to or the exercise of a service activity in their territory subject to compliance with any requirement which does not satisfy the principles of non-discrimination and certainly limited justifications. Any requirements which qualify as legitimate must also be proportionate.


Host states shall not make access to or the exercise of a service activity in their state subject to compliance with any requirements which do not conform to the principles of non-discrimination, necessity, and proportionality. The requirements may be neither directly nor indirectly discriminatory with regard to the nationality or in case of legal persons the state in which they are established.

A number of requirements are prohibited unless saved by a derogation,  in case by case derogation, or on on narrow public interest requirements. They are requirements.

  • to having an establishment in the territory of the host state;
  • obtaining an authorisation from the host state’s competent authority,
  • entry on a register
  • prohibiting or requiring a certain type of infrastructure, offices or establishment.

The public interest requirement may be used, in principle to justify other requirements. However, they have to be cogently and objectively justified.

In effect, the host state may impose restrictions only where there is a good reason to do so, in particular having taken into account the protections offered to the user by the home state regulation.

There are general derogations in relation to services of general economic interest in the utility sector and in relation to matters covered by another directive such as the Posted Workers Directive, the Professional Qualifications Directive, the Lawyers Directive, and the Citizens Rights Directive.

Companies and Services Freedom

The effect of article 55 is that a company established in another EU state can enjoy the same treatment as nationals of a member. EU nationals may not be subject to discrimination as regards participation in the capital of and EU company.

A branch, agency or other establishment is a place business that has sufficient permanency,  management and is materially equipped to undertake business with customers. The degree of presence is in somewhat nebulous, but it  must be a sufficient presence such that third parties can undertake business without recourse to the principal establishment.

These provisions have had consequences in terms of UK and Irish taxes. The UK and Irish tax system have long since allowed reorganisations and restructuring which include the transfer of assets and shares which might be subject to capital gain or income tax as distribution, relief from taxation which would otherwise apply so that the reorganisation and restructuring  takes place in a tax neutral basis.

The effect of the above  anti-discriminatory and other TFEU provisions has been to require the Irish Revenue and the UK HMRC to remove taxation discrimination between restructures which involved an intra-EU element and restructuring involving an internal Irish or  internal UK element.


In the notorious Factortame  litigation, Spanish trawlers owners reregistered their vessels in the United Kingdom and sought to quota hop. The European Commission took action against United Kingdom’s legislation requiring the vessel to be British owned managed and operated from within the UK and with managers operators who are British persons or company (with company being owned as to 75% by British residents).

The EU Court of Justice held that the conditions of registration of vessel should not form an obstacle to freedom of establishment under article 49 (predecessor) the nationality conditions on shareholders and infringed article 49 and also article 55 (predecessor) in respect of freedom of movement of capital. The requirements that the owner’s charterers managers and operators of the vessels and in the case of a company the shareholders and directors be resident and domiciled in the UK, was held to  be unjustifiably indirectly discriminatory. Such persons would have to move the residents and domiciled the UK to comply.

The court found that the requirement that the vessel is management’s operations be directed and controlled in the UK was compatible with EU law since it essentially coincided with the actual concept of the establishment.

Fishermen affected where entitled to compensation against the UK government an account of the breach of EU law in the circumstances. Substantial compensation was payable by the  UK government.


In the Centros case in 1999  Danish citizens were sole shareholders who incorporated a company in the United Kingdom and then sought to have a branch registered in Denmark. Its registrar of companies refused to register on the basis that it sought to evade a minimum capital requirement under Danish law and that the freedom should not be available or abusive or fraudulent purposes.

The court held that the registrar’s refusal constituted an unlawful obstacle to freedom of establishment. It was immaterial that the company was formed in the UK only for the purpose of further establishing itself in Denmark where its main or entire business was to be conducted. This was said not to be an abuse because the national rules they were trying to avoid were those relating to the formation of companies and not those concerning the conduct of a trade, profession or businesses. They were doing what the EU Treaties permitted namely incorporating in another member state and setting up a secondary establishment in another.

Justification of minimum capitalisation in Denmark was insufficient because the key factor in the refusal of registration was the failure to trade in the UK. This was immaterial to the protection of Danish creditors. EU  legislation on disclosures and branch disclosures disclose this position.

Continental Concept of Establishment

It is argued that the Centros decision gave the green light to “Delaware”  style race to the bottom in company law. Delaware is a commonly used place of incorporate for many US corporations.

France, Germany and Italy adopt a “real seat” approach and look at the reality of incorporation, establishment and presence. EU cases have indicated that real seat principle may contravene freedom of establishment.

In the Uberseering case, the German courts were obliged to recognise companies validly formed under Dutch law even though they would not be recognised under German law because it deemed from a substantial perspective, that its actual place of the establishment was Germany, and was not incorporate there. However, the EU courts reaffirmed that a company whose registered office central administration or principal place of business is within the EU cannot be denied access to any other member state.

A company may not be discriminated against on account of its seat or place of establishment. Equally indirect discrimination which involves the use of criteria which by their application has the same result is discriminatory.

Tax Considerations

The terms of the case law on exercising the right of establishment have led to the removal of much of the discrimination that existed under tax law until the last decade . It  typically required that the new entity be resident in the home jurisdiction and  had the effect of impeding  the right of establishment by creating a tax barrier by way of an exit charge or structurally in terms of the a new holding arrangement.

The terms of protections which facilitate restructure in themselves are protected by EU law for so long as the United Kingdom remains a member of the European Union.  After Brexit, if as appears likely there will be no right of establishment etc,  under the new trading arrangement, then barriers to re-establishing a presence in another EU jurisdiction may be put in place without the presence of overarching EU framework to invalidate them.The consequence may be that in some cases, there are taxation consequences which militate against  re-establishment in another EU state.


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