Transfer of the company within the European Economic Area

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In 2004, with the accession to the European Union, Poland received many benefits and opportunities for economic development. One of them is undoubtedly the opening of the borders of the Member States. For Polish entrepreneurs, this means increasing the possibility of exporting their goods and services. More and more entrepreneurs decide to move their companies within the European Economic Area.

The European Union countries encourage Polish entrepreneurs with favorable tax and contribution conditions, as well as simplified administrative procedures. For a large group of entrepreneurs, the undoubted reason for relocating the company is the desire to avoid interest on the part of the tax authorities. How in practice is the transfer of a company within the European Economic Area? You will find out in this article.

The essence of the transfer of the company within the European Economic Area

The most important issue for Polish entrepreneurs is the transfer of the registered office of a commercial law company registered in Poland to another EU country, while maintaining legal personality and all rights and obligations. When the company is transferred abroad, the company is removed from the National Court Register and is registered in the register of entrepreneurs of the target country. The company retains its rights and obligations. Such a transfer of a company within the European Economic Area is called a cross-border conversion.

transfer of the company abroad - what are the premises?

According to the Act of September 15, 2000, the Code of Commercial Companies (hereinafter referred to as the Commercial Companies Code), cross-border conversion may be carried out by both partnerships and capital companies. In the case of partnerships and limited liability companies the transfer of the company requires a resolution of the shareholders, while in the case of a joint-stock company a resolution of the general meeting is required. The resolution on the transfer of the company's seat abroad should be drawn up by a notary public. As a result of the cross-border transfer, a new company is created in the destination country. It is equipped with the assets of the primary company. At the same time, the company's legal existence in Poland ends.

Cross-border transfer in European Union law

The cross-border transfer of Polish companies within the European Economic Area is possible thanks to the Treaty on the Functioning of the European Union (hereinafter referred to as the TFEU). Pursuant to Art. 49 and art. 54 TFEU, all EU Member States enjoy the freedom of establishment and the free movement of people, capital and services throughout the EU. However, under Art. 19 of the Act of February 4, 2011 - Private International Law, every EU entrepreneur has the right to transfer his activity within the entire territory of the European Economic Area. Pursuant to the above provision, upon transfer of the seat to another country, the company is subject to the laws of the new country. Moreover, if provided for by the laws of both States, the legal personality of the company acquired in the original State after the transfer is maintained.

What does cross-border transfer look like in practice?

In practice, the cross-border transfer of a Polish company to another EU country has so far been problematic, mainly due to laconic legal regulations and unfriendly jurisprudence of Polish courts.The adoption by the company of a resolution on the transfer of the seat to another country under the Code of Commercial Companies and Partnerships, led to the dissolution of the company with the necessity to conduct liquidation proceedings. For the entrepreneur, it meant the complete termination of the activity in its current form, carrying out the liquidation proceedings and starting a new business in another country. The liquidation of the company was additionally connected with the obligation to end the company's current interests, fulfill all obligations, collect receivables and liquidate the company's assets. What is more, the commercial courts did not consider the motions to remove the company from the National Court Register, based on the resolution on the transfer of the company's seat abroad, if the applicants did not prove that the liquidation proceedings had been conducted.

In addition, the provisions of the Personal Income Tax Act in the current wording impose a tax obligation on the partners in the amount of 19% of the value of income obtained from shares in the company's profit. When relocating the company's seat, it actually meant an order to realize the company's profits from its operations, despite the fact that it would be continued abroad. Therefore, it should be recognized that the provisions of the Code of Commercial Companies and Partnerships obliging the company to wind up economic activity in the event of a cross-border conversion, companies act only for the benefit of the tax authorities, which, when they lose their administrative powers, are able to determine and collect the tax in the appropriate amount. The above shows that the current process of transferring the company abroad was time-consuming, but also very expensive.

The jurisprudence of Polish courts gradually began to change with the judgment of the Court of Justice of the European Union of October 25, 2017. The Tribunal then found that the provisions ordering the liquidation of a company in the process of transferring the seat from Poland to another country within the European Economic Area are inconsistent with the EU principle of freedom of establishment. In the ruling, the CJEU emphasized that EU standards take precedence over national ones. Therefore, despite the unchanged provisions of the Polish Code of Commercial Companies, under the ruling of the CJEU of October 25, 2017, Polish entrepreneurs have the right to transfer their seats throughout the EU, while maintaining legal personality and all rights and obligations of the company.

Moreover, the Court found that, in line with the principle of freedom of establishment, companies deciding to transfer their seat should avoid imposing tax obligations on their partners, provided that the company is transferred abroad using the institution of cross-border conversion. It is determined by the fact that in such a situation the assets are not liquidated and they are not divided among the existing partners of the company. So there is no taxable profit. Thus, this means that the process of the cross-border transformation of the company should be considered tax neutral.

Position of the Court of Justice on cross-border transfers

The Court of Justice of the EU in its ruling of October 25, 2017, clearly stated that the freedom of establishment in the European Economic Area gives EU companies the right to freely transform into companies under the law of another country. The only obstacle is that these companies must fulfill all the conditions set out in the legal system of the Member State of destination.

The CJEU takes the position that the freedom of establishment applies to any cross-border transfer of a company's registered office, provided that the company was established in accordance with the economic law of an EU Member State. The above also applies in a situation where the transfer of the seat is not accompanied by an actual transfer of the company. The Tribunal emphasized that the provisions of Art. 49 and art. 54 TFEU precludes rules of a Member State which make the transfer of the registered office of a company conditional upon its liquidation.

At the same time, the CJEU found that restrictions on the freedom of establishment may only exist if they are justified by overriding reasons of public interest in a given state. At the same time, these limitations should be appropriate to the needs and objectives of the economic policy of a given state and not go beyond what is necessary to achieve them.

The CJEU also referred to the regulation in the Polish k.s.h. In the Court's view, the circumstances in which a company moves its seat from one Member State to another cannot justify a general presumption of abuse and justify an obstacle to the exercise of one of the fundamental freedoms guaranteed by the EU Treaty, namely the freedom of establishment. The CJEU noted that the provisions ordering liquidation proceedings to be carried out during a cross-border transfer of a company should be considered too restrictive and detrimental to the interests of Polish entrepreneurs.

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The significance of the judgment of the Court of Justice for a Polish entrepreneur

The indicated judgment of the Court of Justice of the EU is of great importance for Polish entrepreneurs. The Tribunal unequivocally stated that the rules established by the European Union have superior power over Polish legal acts.

The principle of freedom of establishment essentially precludes the imposition on companies relocating their registered office to another EU country with the obligation to conduct liquidation proceedings. Pursuant to the said judgment of the CJEU, in the case of cross-border transfers, Polish registry courts are currently obliged to remove the company from the National Court Register without requiring liquidation. Thanks to this, the company retains its legal existence and has the possibility to continue its current activities.

Is the transfer of the company's seat abroad no longer associated with the obligation to liquidate the enterprise?

In accordance with the regulations in force throughout the European Economic Area, every EU entrepreneur has the right to transfer his business to another EU country. Cross-border transfers mean that a new company is formed in the destination country, which is endowed with the assets, rights and obligations of the original company. Despite unfavorable national regulations, in accordance with the latest judgments of the Court of Justice of the EU, it should be recognized that currently Polish entrepreneurs have a real possibility to change their company's seat cross-border to the territory of another EU country without the need to liquidate and dissolve the company.