Global Tax Update
Germany
Deloitte Tohmatsu Tax Co.
August 2016
Brexit: "German" Limited – unlimited ? Liability risks for shareholders in a "German"
Limited
The Brexit may lead to significant liability
there still exists a substantial number of these
risks for shareholders of a UK Limited in
companies.
Germany.
The Limited having its headquarters in Germany
Shareholders of a UK Limited headquartered in
(in short: German Limited) is now threatened
Germany face liability risks because of the
with severe legal uncertainty. Under the freedom
Brexit. Those concerned should be vigilant as to
of establishment which is provided in articles 49,
further developments.
54 TFEU and on the basis of the so-called
foundation theory which is applied by the ECJ in
Shareholders of a UK Limited which is
headquartered in Germany face liability risks
because of the Brexit. Those concerned should
be vigilant as to further developments and take
timely steps to safeguard themselves.
landmark decisions such as “Centros” (ECJ, 5
November 2002 - C- 212/97) or “Uberseering”
(ECJ, September 30, 2003 - C-208/00),
provisions of the national law concerning EUforeign companies are recognized by German
Based on landmark decisions established by the
courts (Cf. German Federal Court of Justice,
European Court of Justice (“ECJ”) around 15
March 13, 2002 - VII ZR 370/98). This means
years ago, the “private company limited by
that even if an EU foreign company operates
shares” according to UK law (in short: Limited)
exclusively in Germany, the company can “take
has become a standard item in the German
along” its domestic corporate law. This results in
corporate landscape. Due to the fact that its
particular in the unconditional recognition of
foundation is quicker and requires less capital
than the German GmbH, the Limited was – in
German Limited companies as legal persons by
particular until the introduction of the German
shareholders’ liability limitations as provided for
entrepreneurial company
by British statutory law.
(Unternehmergesellschaft (UG)) in 2008 - a
popular legal vehicle for small and medium-sized
companies in Germany. Meanwhile, the trend
towards the Limited in Germany is negative
(2007: 14.000, 2013: 12.000). Nevertheless,
German courts and in the application of
But the foundation theory, which means the
reference to the legal convictions of the country
of foundation, is not the only possible way to
treat foreign companies. In the absence of EU
influence, German courts predominantly apply
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the so-called corporate domicile theory.
disputes between creditors of a German Limited
According to this theory, the applicable law is not
and its shareholders, a German court could, on
determined by the jurisdiction of a company’s
the basis of the corporate domicile theory, affirm
foundation but based on where its headquarter
the personal and unlimited liability of the
is located - generally, this will be the place where
shareholders for the company’s obligations. It
the board meetings and the supervisory board
appears unlikely that this will be applied to
meetings take place. Under the corporate
liabilities incurred before the Brexit since such a
domicile theory, the legal nature of a foreign
retroactive effect will not be permitted in the vast
company is exclusively determined in
majority of cases. Meanwhile, it is certainly
accordance with German corporate law if the
conceivable that liability limitations will be
company’s head office is located in Germany.
waived for liabilities which have been assumed
Since a foreign company is not established
after the Brexit.
according to the incorporation provisions
applicable to the GmbH or another German
limited liability legal form and was therefore not
registered as such with the German Commercial
Register, it is typically classified as a German
general partnership (offene Handelsgesellschaft
(OHG)) or as a German civil law company
(Gesellschaft bürgerlichen Rechts (GbR)). In
both legal forms, the shareholders are
personally and without limitation liable for the
company’s obligations.
Therefore, shareholders of a German Limited
should be advised to keep a close watch on the
developments of the following months and, if
necessary to safeguard themselves by
converting the German Limited in a GmbH or
into another limited liability company type. Those
who want to do so by way of merger should not
wait for the Brexit to happen: The admissibility of
a cross-border merger from the United Kingdom
to Germany will likely be affected by the Brexit
as well.
By its commitment to the foundation theory, the
ECJ has barred the application of the corporate
domicile theory to EU foreign companies having
their head office in Germany. However, German
courts still apply the corporate domicile theory to
foreign companies from non-member states: In
the case “Trabrennbahn” (October 27, 2008 - II
ZR 158/06), the German Federal Court of
Justice has treated a stock company founded in
Switzerland and having its head office in
Germany as a partnership. To justify its decision,
the court pointed out that the fact that
Switzerland is neither a member of the EU, nor
that it has ratified the European Economic Area
(“EEA”) agreement, would represent a
“conscious decision against the European
freedom of establishment opened to EEA
member states which cannot be ignored by
German courts”.
If the United Kingdom becomes a non-member
state after the Brexit, the German Limited is
threatened with a similar fate: In the event of
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Contacts
Deloitte GmbH (Düsseldorf)
Mitsutoshi Sato, Senior Manager
[email protected]
Issued by
Deloitte Tohmatsu Tax Co.
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