Introduction
This essay examines whether fictitious Estonian legislation, which prevents companies from establishing their legal seat in Estonia while running their business from another EU member state, violates EU law. Michael, representing Your Health Inc., seeks to relocate the European legal seat of Your Health Germany to Estonia, turning it into a branch of Your Health Estonia, while continuing to manage operations from Germany. Using the IRAC (Issue, Rule, Application, Conclusion) framework, this analysis will assess the compatibility of the Estonian restriction with EU principles, particularly the freedom of establishment under the Treaty on the Functioning of the European Union (TFEU). The essay argues that such a law likely contravenes EU law by imposing disproportionate restrictions on cross-border corporate structuring.
Issue
The primary issue is whether the Estonian legislation, which prohibits a company from registering its legal seat in Estonia if its business operations are primarily conducted from another EU member state, infringes upon EU law. Specifically, this concerns the freedom of establishment enshrined in Articles 49 and 54 of the TFEU, which guarantee the right of companies to set up and manage businesses across member states without unjustified restrictions.
Rule
Under EU law, the freedom of establishment allows companies formed in accordance with the law of a member state to operate in any other member state, either through primary or secondary establishment (such as branches or subsidiaries). Articles 49 and 54 TFEU explicitly protect this right, ensuring that member states cannot impose discriminatory or disproportionate barriers. Landmark cases, such as *Centros Ltd v Erhvervs- og Selskabsstyrelsen* (1999), have clarified that companies can choose their legal seat in one member state while conducting business elsewhere in the EU, provided there is no abuse of rights (Craig and de Búrca, 2020). However, member states may impose restrictions if justified by imperative reasons of public interest, such as preventing tax evasion or protecting creditors, provided the measures are proportionate and non-discriminatory, as established in *Gebhard v Consiglio dell’Ordine degli Avvocati e Procuratori di Milano* (1995).
Application
Applying these principles to the case, the Estonian legislation appears to directly restrict the freedom of establishment by preventing Your Health Estonia from serving as the legal seat while operations are managed from Germany. This rule arguably limits Michael’s ability to structure the company in a manner that optimises tax benefits—a legitimate business strategy under EU law, as affirmed in *Centros*. The restriction may be seen as discriminatory, as it targets cross-border arrangements specifically, potentially treating foreign-managed entities less favourably than purely domestic ones. Furthermore, it is questionable whether the rule meets the proportionality test. While Estonia might argue that the law prevents tax avoidance or ensures regulatory oversight, such objectives could likely be achieved through less restrictive means, such as mutual assistance agreements between member states or enhanced reporting requirements (Barnard, 2019).
Indeed, the European Court of Justice (ECJ) has consistently ruled against similar national measures that hinder corporate mobility unless a clear public interest justification exists. For instance, in Überseering BV v Nordic Construction Company Baumanagement GmbH (2002), the ECJ held that member states must recognise companies formed under the laws of another member state, reinforcing the principle of mutual recognition. The Estonian law, by contrast, seems to undermine this by imposing a blanket ban on certain corporate structures without apparent justification tailored to specific risks. Therefore, it is likely that the legislation violates EU law by disproportionately restricting the freedom of establishment.
Conclusion
In conclusion, the Estonian legislation prohibiting companies from maintaining a legal seat in Estonia while operating primarily from another EU member state appears to contravene EU law, specifically the freedom of establishment under Articles 49 and 54 TFEU. While member states can impose restrictions for public interest reasons, such measures must be proportionate and non-discriminatory—an unlikely standard for this blanket prohibition to meet. Michael should be advised that the law is incompatible with EU principles, and he could potentially challenge it before national courts or seek a preliminary ruling from the ECJ. The broader implication is that EU law prioritises corporate mobility, and member states must align their policies accordingly to avoid infringing on fundamental freedoms.
References
- Barnard, C. (2019) The Substantive Law of the EU: The Four Freedoms. 6th ed. Oxford University Press.
- Craig, P. and de Búrca, G. (2020) EU Law: Text, Cases, and Materials. 7th ed. Oxford University Press.
