Minimum Capital and Cross-Border Firm Formation in Europe

This article explores the impact of minimum capital requirements on trends in incorporations of UK-based private limited companies by non-UK founders within Europe. The legal capital system, including minimum capital requirements, has faced increasing criticism over the past two decades for its alleged inefficiency, hindering business formation, and affecting founders’ incorporation choices in European countries. The article presents comprehensive panels of minimum capital and minimum pay-in requirements from 1995 to 2020 for 31 countries, including all EU and EEA member states (except the UK) and Switzerland. Many European countries have reduced or abolished minimum capital requirements during this period. Utilizing this dataset, the article examines the influence of minimum capital relative to GDP per capita on the number of cross-incorporations to the UK from each country while controlling for other factors. The regression analysis reveals that minimum capital requirements significantly impact corporate mobility, with more demanding requirements associated with more cross-incorporations. The paper highlights the effects of regulatory arbitrage in corporate law across countries. As European countries have progressively reduced minimum capital requirements to facilitate firm formation, this research provides valuable evidence on how such requirements influence entrepreneurs’ choices. With the impact of Brexit eliminating the freedom of establishment in the UK under EU treaties, we can expect budding entrepreneurs to seek other favorable jurisdictions in the coming years. The article underscores the importance of corporate law in shaping firm formation decisions and its effectiveness in retaining jurisdictional control over local businesses.