Minimum Capital and Cross-Border Firm Formation in Europe

Martin Gelter is Professor of Law at Fordham University School of Law. This post is based on his article forthcoming in the Journal of Law, Finance, and Accounting. Related research from the Program on Corporate Governance includes The Elusive Quest for Global Governance Standards (discussed on the Forum here) by Lucian A. Bebchuk and Assaf Hamdani.

Company laws in many European countries have traditionally adhered to a legal capital system, and most countries have required founders to contribute a minimum amount of capital to form a private limited company. During the past 20 years, scholars, policymakers, and international organizations such as the World Bank have increasingly criticized these requirements as inefficient. Many countries have begun to modify or abolish minimum capital requirements in private limited companies or have created capital-less forms of limited liability business entities for new firm formations. A contributing factor to this development has been that, at least in theory, since the early 2000s, business founders in EU and European Economic Area (EEA) countries have been able to choose in which EU or EEA Member State to incorporate. Many prospective founders in Continental European countries initially selected the UK, which has no minimum capital requirement. During the mid-2000s, scholars in some countries observed an increasing number of UK companies controlled by non-UK citizens or residents.

This paper empirically looks at the impact of minimum capital on cross-border firm formation, specifically the pre-Brexit phenomenon of setting up UK-based private limited companies for the purpose of business elsewhere in Europe. The analysis is based on a panel of minimum capital and minimum pay-in requirements from 1995 to 2020 for 31 countries, including all EU and EEA member states, and Switzerland.

The debate about minimum capital as a hindrance to firm formation

The legal capital system has two primary intrinsic features. First, shareholders must contribute at least a measurable amount to the company’s capital, either in cash or kind. Second, the company may not return the nominal amount to shareholders outside of liquidation. Dividends and other distributions are thus limited to, at most, the company’s surplus and reserves, i.e., the company’s total equity minus the company’s legal capital. In addition, many countries require or have traditionally required a minimum capital set in the law.

Critics have argued that a firm can quickly lose its capital to ordinary business activity and does not create a buffer against losses. In addition, at least contractual creditors would likely bargain for capital maintenance and minimum capital requirements if these were efficient. Therefore, legal capital and minimum capital requirements are increasingly considered unnecessary impediments to business formation. By forcing some founders to start a business without the benefit of limited liability, minimum capital may inhibit business formation and deter some entrepreneurial activity. The World Bank made minimum capital requirements part of their (now abandoned) “Doing Business” index, in the context of which it is a negative factor reducing a country’s ranking. Reportedly, the Doing Business ranking motivated some countries to reduce or eliminate minimum capital requirements.

From the Court of Justice of the European Union’s three seminal cases of Centros (1999), Überseering (2002), and Inspire Art (2003) up to the UK’s final departure from the European Union in 2020, founders in Member States were essentially free to select English law in the decision to incorporate. This led to notable numbers of cross-incorporation of private limited companies that were intended for doing business in other Member States being set up in the UK. One of the advantages was arguably that the UK did not require a minimum capital, unlike most Continental European jurisdictions. The following years saw the emergence of a debate about the possibility and desirability of regulatory arbitrage in corporate law concerning privately held firms. However, the practical availability of English legal forms on the Continent varied considerably between countries. Practical hurdles remained in many jurisdictions.

The empirical study

The study investigates the impact of minimum capital requirements for trends in UK incorporations by non-UK founders of private limited companies. The paper constructs panels of minimum capital and minimum pay-in requirements from 1995 to 2020 for 31 countries, namely all Member States of the European Union (EU) and the European Economic Area (EEA) (besides the pre-Brexit UK), as well as Switzerland. Uniquely, the paper attempts to trace all reforms of minimum capital and minimum pay-in requirements during this period. The dependent variable, namely the number of UK incorporations, is estimated using methods developed in prior literature. I test the impact of the ratio of minimum capital to GDP per capita on the number of cross-incorporations to the UK from each country and control for other possible factors. While other papers have explored the impact of the freedom to choose the country of incorporation, a few of which have looked into the effects of specific reforms in individual countries, none so far has looked at minimum capital figures across Europe over such a long period. Many reforms have been enacted over the past two decades, allowing us to use a wealth of information.

The regressions provide evidence that capital requirements affect corporate mobility. The results are tested with several robustness checks, including models using lagged and leading variables, to address whether large numbers of cross-border firm formation have driven reforms of minimum capital or whether reforms influence the numbers of firm formation. Models with lagged and leading minimum capital variables show no evidence for a leading effect of reforms but rather for lagged ones.

The regressions support that capital requirements drive founders’ incorporation choices in European countries. As expected, more demanding requirements are associated with more firm formations in the UK. The regressions are consistent with an evasive effect of capital regulation in jurisdictions that do not have such a requirement. This highlights how barriers to entry may affect firm formations and how founders will often look to avoid burdensome regulation by exploiting regulatory arbitrage opportunities. The results suggest that founders often perceive it as a hurdle in firm formation even though the contribution is not lost but available to run the business. As to specific reforms, it appears that reforms that eliminate minimum capital requirements seen as excessively high were particularly effective at reducing cross-incorporations to the UK. Reforms that eliminated smaller but likely reasonable minimum capital requirements probably had no discernable effect. 


Since the early 2000s, many European countries have reduced minimum capital requirements for privately held firms or introduced new, capital-less business forms to facilitate firm formation. By creating a novel dataset of minimum capital requirements in 31 countries from 1995 to 2016, this paper provides evidence that burdensome corporate law requirements contribute to corporate mobility by encouraging founders to seek incorporation outside their home jurisdiction. Minimum capital requirements incentivize entrepreneurs to seek to evade the national corporate law. Once regulatory arbitrage opportunities became available after Centros, they began to play a considerable role. Thus, it appears that removing such requirements can help jurisdictions to retain control over the corporate law applying to local businesses. With Brexit becoming fully effective at the end of 2020 and eliminating the right to cross-incorporate in the UK under EU treaty provisions, a more diverse picture in future years where budding entrepreneurs seek out other jurisdictions. Budding entrepreneurs from EU countries might choose to incorporate in remaining EU countries with no minimum capital requirements (now a large set of countries including Ireland, Cyprus, and Belgium). Still, with the reforms in recent years, the incentives may have dissipated.

The full paper is available for download here.

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