On April 25, 2024, the European Court of Justice (ECJ) handed down a judgment that provides more legal certainty for EU companies with business activities in another EU member state.1 The ECJ held that restrictions under Italian law for delegating powers of the board of directors do not apply to a company that is registered in Luxembourg, even if its only business activities are in Italy.
Facts of the Case
The case concerns the castle Castello di Tor Crescenza in Italy near Rome. The castle was the sole asset of an Italian company that transferred its registered office to Luxembourg and was converted into a Luxembourg company. Its sole activity continued to be the operation of the castle.
The sole director of the Luxembourg company appointed a company outsider as general agent with the power to perform all necessary acts and operations within the scope of the company’s object. The general agent then transferred the ownership of the castle to an Italian company.
The Luxembourg company initiated legal proceedings against the Italian buyer of the castle, seeking to have the transfer of the castle annulled on the grounds that the conferral of powers to the general agent was unlawful under Italian law. The court of first instance dismissed the case, but the appellate court reversed the decision and the case was appealed to Italy’s highest civil court. Italy’s highest civil court requested a preliminary ruling from the ECJ on the question whether European law, in particular the freedom of establishment, precludes the application of Italian law that limits the delegation of powers of a company to a company registered in Luxembourg.
Decision of the Court
The ECJ first confirmed that the delegation of powers, as an act of the Luxembourg company’s management, is covered by the European freedom of establishment.
The ECJ determined that national legislation of a EU member state that applies to the management of a company established in another EU member state restricts the freedom of establishment when it renders the exercise of the freedom of establishment less attractive. In particular, being subject to two sets of rules could significantly increase the complexity of managing a company.
The ECJ then inquired whether the application of restrictions imposed by Italian law on the conferral of powers of a company to companies established in another EU member state are justified. Referring to its previous rulings, the court determined that such restrictions under Italian law are disproportionate in relation to legitimate purposes for restricting the freedom of establishment such as the fight against tax avoidance and fraud.
The court thus decided that the freedom of establishment precludes restrictions under the law of the country where business activities take place to acts of the management of a company established in another EU member state. As a consequence, the restrictions on the delegation of company powers under Italian law do not apply to the Luxembourg company, despite its sole business activities being in Italy.
Conclusion
The decision increases the legal certainty for companies with business activities in other EU member states. The ECJ has ruled that companies with business activities in multiple EU member states can rely on the jurisdiction where they are registered for legal actions taken by their management. The jurisdictions where their business activities take place cannot impose their own legal rules on such actions.
The case at hand determined that Italian legal restrictions regarding the conferral of corporate powers do not apply to companies registered in Luxembourg with activities solely in Italy. In essence, the decision means that private international law rules of the country where the business activities take place that call for the application of its national law do not apply to acts of management of a company registered in another EU member state.
With this decision the ECJ has strengthened the position of jurisdictions that are a preferred venue for registering holding companies such as Luxembourg. Business activities in other EU member states must not interfere with the corporate law rules applicable to companies in their home jurisdiction.