The Legal Capacity of the Limited after Brexit

Article 54 TFEU, BGH (Trabrennbahn) and BFH jurisprudence

As of 12/31/2020, the United Kingdom has notably exited the EU Single Market.

What impact does this have on the Limited in Germany?

Firstly, it should be noted that this question is currently not uniformly answered. Ultimately, it will have to be clarified by the courts.

However, the general claim that the Limited in Germany is no longer legally capable, because this corresponds to the supreme court jurisprudence in Germany, seems premature. Such representations were mainly spread by authorities in mass circulars to Limiteds.

It is true that the BFH in its decision (resolution dated January 8, 2019, II B 62/18) among other things, has determined that the legal capacity is governed by the so-called incorporation theory, if a company is effectively established in a member state of the EU, the EEA or in a state equated with these due to a treaty regarding the freedom of establishment according to its regulations. This means that EU companies and companies from states with which a corresponding treaty has been concluded are legally capable in Germany and the company in Germany is also recognized as a limited liability company with respect to the company's assets.

If the company is not from such a state, it can still be legally capable (as a partnership) if it has more than one shareholder. However, it will not be recognized as a capital company. Therefore, there is personal liability for the shareholders.

Interim result: According to BFH jurisprudence, companies are legally capable if they have at least two shareholders or were effectively established in the EU or a treaty state. In this case (established in the EU or treaty state), foreign capital companies are also recognized as such. In addition to legal capacity, there is generally no personal liability for the shareholders of such foreign capital companies.

It is noteworthy that even the BFH in its decision focuses on the establishment. The decision explicitly states in guiding principle No 3 “...effectively established is...”. By no means does the BFH jurisprudence explicitly deny the legal capacity of the Limited in Germany. According to the wording in guiding principle number 3, the BFH rather focuses on effective establishment in an EU state. Essentially the same conclusion is also reached by the BGH in its Trabrennbahn decision (BGH judgment of the II. Civil Senate dated 27.10.2008 - II ZR 158/06 in paragraph 19). Admittedly, the BGH at that time (Trabrennbahn decision) had no indication that a member state would leave. This was also not the basis of its decision, so this question was not to be answered. This alone shows that it is wrong to claim that we have a clear supreme court jurisprudence on the legal status of the Limited in Germany after leaving the EU Single Market, because the question of legal capacity upon establishment in an EU state with subsequent exit from the EU was just not to be decided by the BFH or BGH. At the time of the BFH resolution of January 8, 2019, II B 62/18, the exit from the EU Single Market was indeed quite foreseeable.

The thought to focus on the act of establishment is also found in Article 54 in conjunction with Article 49 of the Treaty on the Functioning of the EU. Article 49 formulates the freedom of establishment for EU citizens. Article 54 sets out the conditions under which this freedom of establishment also applies to companies.

Article 54 states explicitly:

„For the application of this chapter (referring to, among other things, the freedom of establishment in Art. 49) the companies established under the laws of a Member State, which have their statutory seat, their principal administration or their principal establishment within the Union are equivalent to natural persons who are nationals of the Member States."

Limiteds, which were established before 12/31/2020 and have their main establishment or main administration in Germany, as is the case for most Ltds in Germany, thus fall under the clear wording of Article 54 of the freedom of establishment.

The freedom of establishment, according to our legal opinion, therefore has a long-term effect beyond the exit of Great Britain from the EU Single Market, provided a Limited was established before 12/31/2020 and has its main administration or main establishment in Germany.

Result: There are significant doubts about applying the existing jurisprudence on the legal capacity of third-country companies unconditionally to the Limiteds in Germany that were established before 12/31/2020, because this jurisprudence was not based on cases in which the long-term effect of the freedom of establishment after the exit of a founding state from the EU had to be assessed, that is cases in which a company was established in an EU member state and that state then left the EU Single Market. Even if one ignores this, it must be noted that the BFH jurisprudence in resolution dated January 8, 2019, II B 62/18 - guiding principle 3, as well as in the BGH Trabrennbahn decision paragraph 19, focuses on the time of establishment. The same applies to Article 54 of the Treaty on the Functioning of the European Union. This also explicitly protects companies that were established in the EU and have their main administration or their main establishment in the EU.

Both conditions are met for the majority of the Limiteds in Germany. According to our legal opinion, therefore, UK Limiteds, which were established before 12/31/2020 and have their main administration or main establishment in Germany, are protected by the long-term effect of the freedom of establishment under Article 54 TFEU. The existing jurisprudence does not contradict this result.