The CJEU rule in Edil Work 2. Case C-276/22 settled a long-standing conflict. A host Member State cannot impose its corporate governance rules on a company legitimately incorporated elsewhere. Here’s what that means for cross-border structures.

For anyone running a cross-border business in Europe, the “freedom of establishment” is often viewed through the lens of tax optimization or market entry. However, a recent landmark ruling from the Court of Justice of the European Union (CJEU) in Case C-276/22 (a landmark decision on EU company law handed down on 25 April 2024) has exposed a critical vulnerability: who actually governs your company when your registered office and your assets sit in different Member States? If you operate a cross-border structure, you may be operating under the dangerous illusion that your original jurisdiction’s laws follow your assets. They do not. Failing to understand the boundary between the law of the “registered office” and the law of the “place of activity” can lead to the sudden invalidation of your most critical business transactions.

The Conflict of Dual Compliance

The central issue is the conflict between where a company is born and where it works. Many companies incorporate in a specific Member State to benefit from a predictable legal framework or a sophisticated digital infrastructure (common in IT and AI licensing sectors). However, if the state where the activity is physically conducted (the “host state”) can unilaterally impose its own corporate governance rules, the “Freedom of Establishment” becomes an empty promise. This creates a “double-decker” compliance burden: you are forced to satisfy the laws of the country where you are registered and the potentially conflicting laws of the country where you operate (the ”host state”).

The risk arises when the host State attempts to claw back jurisdiction by forcing its own local corporate governance rules onto the foreign entity. This means that you are suddenly forced to accomplish two potentially conflicting legal systems, where an act perfectly legal in your country of incorporation becomes “unlawful” in the eyes of the local authorities where you actually generate revenue.

The “Castello di Tor Crescenza” Dispute

To understand the stakes, one must look at the “Castello di Tor Crescenza”. The story began in Italy with a company called Agricola Torcrescenza Srl, whose sole business was managing a real estate complex (the “Castle”) near Rome.

In 2004, the company exercised its right to cross-border mobility: its registered office migrated to Luxembourg, and converted into a société à responsabilité limitée, under the new name STE Sàrl, while its operational center of gravity remained anchored in the Italian estate.

In 2010, the company’s sole director, appointed under Luxembourgish law, granted a general power of attorney to an agent (F.F.) who was neither a shareholder nor a board member. In 2012, this agent sold the Castle to S.T., which subsequently transferred it to Edil Work 2.

A year later, the company itself (STE) sued to annul the sale within an action against S.T. and Edil Work 2 before the Tribunale di Roma (District Court, Rome, Italy). Their argument? While the power of attorney might have been valid in Luxembourg, it was allegedly void under Italian law.

Italian private international law contained two rules that pointed to different answers. The default rule was straightforward: the law of the country where a company is incorporated governs how it is managed. But there was an exception — where a company’s principal object is located in Italy, Italian law applies regardless. Since the castle was STE’s only asset, the Italian courts had grounds to argue that Italian law controlled. And under Italian law, that mattered: Article 2381 of the Civil Code limits the delegation of management powers strictly to board members, which would make the power of attorney granted to an outside agent invalid from the start.

At the same time, the referring court acknowledged the other side of the argument. The freedom of establishment under Article 49 TFEU covers not just the right to incorporate in another Member State, but also the right to manage a company under that state’s laws — in this case, Luxembourg’s. Transferring only the registered office, without moving the central administration or the business itself, does not automatically strip a company of that protection.

Faced with this issue, the Italian Supreme Court referred the following question to the CJEU:

Do Articles 49 and 54 TFEU prevent a Member State from applying its own corporate governance rules to a company that was originally incorporated there, when that company has since transferred its registered office to another Member State and reincorporated under its laws — but continues to operate in the original Member State, and the management act in question has a decisive effect on its activities?

Otherwise, the question for the Court was existential for the Single Market: Can a Member State force its internal management laws on a company validly incorporated elsewhere just because that company’s assets are local?

What the Court decided?

The CJEU’s ruling is a definitive victory for corporate mobility. The Court clarified that Articles 49 and 54 TFEU (Freedom of Establishment) preclude a Member State from generally applying its national law to the management of a company established in another Member State, even if that company carries on the main part of its activities in the first State.

The Court’s reasoning was grounded in practical reality rather than abstract principle. Forcing a company to simultaneously comply with two potentially contradictory sets of corporate rules doesn’t just create paperwork — it makes the management of cross-border structures genuinely more difficult and less predictable. An act that’s perfectly legal under the law of incorporation could suddenly be challenged as void under local rules the company never intended to be bound by.

The Court also rejected the argument that this kind of jurisdictional reach is justified by the need to fight fraud or artificial arrangements. Choosing to incorporate in one Member State while operating in another is not, by itself, evidence of abuse. It is the exercise of a right that the EU’s founding treaties explicitly protect.

The Cost of Jurisdictional Uncertainty

What makes this ruling important isn’t just the legal principle — it’s what can happen when companies don’t understand this dynamic early enough.

In the Tor Crescenza case, a transaction involving a significant asset was challenged years after the fact, based on a governance rule the parties may not even have known applied. The same pattern appeared in the Edil Work 2 case, where a real estate transfer was nearly undone by a dispute over which country’s law governed a power of attorney. National governments often hide behind the “fight against fraud” or “artificial arrangements” to justify restricting your freedom of establishment. The CJEU has now ruled that merely having your registered office in one State and your business in another is not a general presumption of fraud.

These aren’t edge cases. Any company that holds property, licenses intellectual property, or manages contracts across borders is potentially exposed to the same challenge. A local authority or a dissatisfied counterparty can always argue that the law of the place of activity — not the place of incorporation — should govern. The CJEU has now made clear that a blanket application of host-state law is impermissible. But “impermissible” and “not attempted” are two different things, and litigation is costly regardless of how it ends.

What this means in practice?

What should an European company do to insulate their structure from such national overreach?

The Court was clear that specific, proportionate local regulations — ones aimed at protecting creditors or minority shareholders — can still apply. The ruling blocks general overreach; it doesn’t eliminate every form of host-state intervention.

That distinction matters. Companies that want to rely on the protections this ruling offers need to be able to demonstrate that their structure is genuine, not a shell. Maintaining real economic substance in the state of incorporation — actual management, real decision-making, not just a registered address — remains the most effective defense against claims of abuse, whether from tax authorities or from parties seeking to challenge a transaction.

This means reviewing how internal delegations of authority are documented. Also, ensuring that significant management decisions are properly recorded under the law of incorporation, and thinking carefully about how powers of attorney are drafted when they’re likely to be exercised in another Member State.

The line between a management act that is protected by the law of incorporation and one that is subject to legitimate local intervention is not always obvious. It shifts depending on the Member State, the type of act involved, and the interests at stake. That is not a reason to avoid cross-border structures — it’s a reason to build them carefully.

The Limit of Generalization

The CJEU has ruled that a general application of local law to foreign companies is prohibited. However, this does not mean you are immune to specific, justified local regulations aimed at protecting creditors or minority shareholders—provided those measures are proportionate. The line between a “protected management act” and a “justified local intervention” is incredibly thin and varies by Member State.

Managing this boundary is not about knowing the law —it is about engineering a governance structure that survives the jurisdictional divergence between national legal systems.

Analyze the Court’s full reasoning in Case C-276/22. Access the official judgment here.

If your company operates across more than one Member State and you’re not sure whose law governs your management decisions, we’re available for a consultation at office@avbalta.com.