Legal capacity is the ability to be the bearer of rights and obligations. In principle, the relevant legal system – the so-called “Company Statute” – determines the legal capacity of foreign companies. However, it has been problematic for a long time which company statute is relevant for companies that are based abroad. At the core, the unity theories and the mixed theories are opposed. We explain these theories in the article and explain how the legal capacity of foreign companies is actually determined.

1. problem of the legal capacity of foreign companies

Whether a foreign company can be legally competent in Germany is influenced by different principles. On the one hand, society wants to be able to act. In contrast, the company was founded under foreign law. Foreign law may provide for more lax conditions than national law. A company effectively incorporated under foreign law could not have been incorporated in this way under national law. If society were nevertheless legally competent in Germany, then the national conditions for founding could easily be circumvented in this way. Various theories have been developed to solve this problem, which can be roughly divided into unit theories and mixed theories.

2nd Unity Theories

2.1. Foundation theory

The founding theories relate to the seat, i.e. the place of foundation, of the relevant society. If the company has been effectively incorporated in the State of its registered office, it shall also have legal capacity there. Since this right is decisive, the company is also legally competent in any other country. The background to this theory is that it should be possible for the founders of companies to establish their company once under domestic law and then, under the protection of this right, to pursue actual business activities in any other state. Thus, the transfer of the entire statutory seat is also possible without problems.

The advantage of this theory lies mainly in having a uniformly applicable criterion for determining the company status with the founding seat. The founding seat can easily be proven by the founding documents and the registration. Furthermore, the legal capacity of foreign companies creates legal certainty in every place.

2.2.Seat theory

According to the seat theory, the company statute is linked to the effective administrative seat of the company. When the company is founded, it is not only necessary that the founding regulations are met. Furthermore, the administrative headquarters of the company must also be located in the founding state. The basic idea of this theory is that the law of the state should be applied, whose economic and political protection interests are most affected.

Accordingly, a company founded abroad loses its legal capacity if it transfers its administrative seat to another country, where it is not newly founded. In order to gain legal capacity, it would have to be established effectively in the new country.

However, there is still disagreement about how the company should be treated until its new foundation. Some assume that the company should be treated as long as a GbR, OHG or a non-legally competent association. As a rule, an OHG (§§ 105 ff. HGB) should be assumed, since most corporations operate a commercial trade. Others assume that the foreign corporation is to be treated as a pre-establishment company, defective company, liquidation company or pre-establishment company.

The advantage of the seat theory is that circumvention of the legislation of the administrative seat is prevented. The State most affected by the company should be able to monitor which forms of company are permitted in its territory.

3. mixed theories

3.1. Limited Founding Theory

Mixed theories are characterized by the fact that they partially permit the application of the seat right. Therefore, the limited founding theory requires mandatory reservations in favor of the right of residence. These reservations are intended to take account of the legitimate interests of the host state, but without at the same time rendering the foreign company completely inoperative. However, the specific reservations should clarify the case law. This is, however, heavily criticised. Thus, the limited founding theory is contourless. It offers no indication of the “legitimate interests of the host state” to justify the validity of the host state.

3.2 Superposition theory

The company statute is based on the superposition theory in principle on the founding seat of the company. Thus, the legal capacity of foreign companies is decided in principle according to the registered office of the company. In order to protect private interests in the company, however, creditors, partners and employees should be able to invoke the right of domicile if this makes them better off. The application of the right of residence in this case also depends on whether the persons actually exercise their rights. If people exercise their rights, however, there is no cumulative application of the rules. Rather, the right of residence supersedes the founding statute. Therefore, the transfer of the administrative seat does not lead to the loss of legal capacity. Only the law applicable to the company can change.

The argument against this theory is that it no longer depends on objective criteria as to which law is to be applied. Rather, the legal system is in fact at the will of individuals. This restricts society's ability to act too much.

3.3. theory of differentiation

The differentiation method distinguishes between the internal ratio and the external ratio. Depending on this, a different legal system applies. The internal relationship concerns the constitution of the company, amendments to the articles of association, acquisition and loss of the position of shareholders, the company constitution and the rights and obligations of the shareholders towards the company, the co-shareholders and the company bodies. For the internal relationship, the founding statute applies. The shareholders have decided to set up the company under this right. This private autonomous decision must be protected. The law of the place of activity shall apply to the external relationship.

The differentiation method therefore means that several rights are applicable. The transfer of the administrative headquarters does not create fundamental problems. Only the legal system for external relations can change. In the internal relationship, however, the company statute of the founding seat applies.

3.4 Combination theory

According to the combination theory, a company statute applies uniformly. If the seat of the statutes and the administrative seat are different, a distinction should be made according to case groups. If the company no longer has an international connection, the norms of the right of residence shall apply. Then there is no longer any interest in society, worthy of protection, in maintaining its choice of law. If, on the other hand, there are still substantial relations abroad, the founding statute is to be used as a company statute. The delimitation should be the usual residence of the shareholder, legal relationships and branches.

Accordingly, the transfer of the effective administrative seat alone has no impact on the company statute. The company statute only changes to the country of residence when the company loses its connection to the state of incorporation. However, the effective administrative seat is changeable and would create considerable legal uncertainty.

4. Opinion of the ECJ on the legal capacity of foreign companies

4.1.

The Federal Court of Justice (BGH) suspended the decision on the applicant’s appeal. It submitted questions to the ECJ on the interpretation of the freedom of establishment (Article 43 of the EC Treaty – now Article 52 TFEU). The BGH wanted to know whether it is compatible with the freedom of establishment for companies to assess their legal capacity and party capacity under the law of the country of residence even if it loses the opportunity to assert contractual claims there or, whether the freedom of establishment requires that legal capacity and party capacity be assessed in principle under the right of incorporation.

The BGH also clarifies in the draft that it wants to maintain the seat theory in the current state of Community law and company law within the European Union. The reason for this is that only the connection to the administrative headquarters can prevent circumvention of company law provisions of the country of residence. These would be necessary to protect the interests of creditors, dependent companies, minority shareholders and employees.

The BGH explicitly rejects the superposition theory. This theory leads to legal uncertainty due to the different connection points and different legal systems.

4.2 Decision of the ECJ on the legal capacity of foreign companies

4.2.1. Freedom of establishment as a test yard

In its decision of 05.11.2002, the ECJ first examines whether the freedom of establishment can be an examination standard at all. Union law does not contain any reservation for the benefit of the Member States.

In a previous judgment, the ECJ stated that a Member State is allowed to restrict the transfer of the effective administrative seat of a company from its territory. But now we have the opposite case. It is questionable whether a Member State, in the event of a transfer of its seat to its territory, may refuse to recognise the legal personality existing under the legal system of the founding State. However, the European Court of Justice did not want to enable the Member States to make the actual exercise of the freedom of establishment of companies which move their registered office to their territory conditional on compliance with national rules. Instead, companies can invoke the right of establishment.

4.2.2. Restrictions on freedom of establishment

Furthermore, it is decisive whether the deprivation of the legal capacity of foreign companies and their party capacity of a company effectively established abroad constitutes a restriction of the freedom of establishment.

Überseering BV had acquired legal personality in the Netherlands through its effective establishment. It did not lose this legal personality under Dutch law when the entire capital of the company was acquired by German nationals. The existence of the company is rather inextricably linked to its status as a company under Dutch law. According to the ECJ, the requirement of a new company is therefore equivalent to the withdrawal of the foreign company’s freedom of establishment. There is therefore a restriction on the freedom of establishment.

4.2.3 Justification of restriction of freedom of establishment

But a restriction on the freedom of establishment is only a violation of European law if it cannot be justified. Such justification could lie in the reasons put forward by the BGH and the German government. Mandatory reasons of general interest may, in certain circumstances and subject to certain conditions, justify restrictions on the freedom of establishment. However, according to the BGH, the freedom of establishment is negated. Nor can this negation be justified by reasons of the general good.

That is why the ECJ answers the first preliminary question to the effect that it is contrary to the freedom of establishment for companies if a company is deprived of its legal capacity and thus of its party capacity when the head office is transferred from a Member State to the Member State of arrival.

From this the ECJ, without any further justification, derived its answer for the second question referred. The incoming state is obliged to respect the legal capacity of foreign companies and thus the party capacity that this company possesses under the law of its founding state.

The consequence of this judgment is that foreign corporations which move their administrative headquarters to Germany are to be regarded as legally and party-capable. This removes the floor from the strict sitting theory. The exercise of the freedom of establishment requires the recognition of the company by all Member States.

5. Legal capacity of foreign companies from third countries

However, if the company is based outside the EU, European law restrictions do not apply in principle. It is therefore possible to adhere to the sitting theory. Restrictions could only be found in international agreements.

Such an international law restriction could be Article 24(5) OECD-MA. This article can be found in almost all double taxation agreements concluded by the Federal Republic of Germany. However, by decision of 13 November 1991, the Bundesfinanzhof (BFH) has already established that the difficulties caused by the validity of the seat theory do not violate the anti-discrimination clause with regard to a capital company doubly resident in the USA and Germany. However, BFH expressly gave up this view after the ECJ’s decision in the overseas ring case. The fact that the seat theory has a discriminatory effect under European law forces it to be considered discriminatory under agreement law. Accordingly, the siting theory cannot be applied in third-country cases either.

However, the tax administration does not wish to derive from the judgment any consequences for the application of the DTA non-discrimination prohibitions going beyond the decided facts and restricts the scope to the decision for the period before 2001. It has therefore adopted a non-application decree.

6th Conclusion: Recognizing the Legal Capacity of Foreign Companies

All in all, it can be stated that a foreign corporation that moves its administrative headquarters to Germany must also subsequently be treated as a corporation under foreign law. This applies regardless of whether it has its founding headquarters in Europe or other countries. Otherwise, there would be a fragmentation of the requirements for the legal capacity of foreign companies in Germany. The result would be a further increase in the complexity of matter.