Free movement of capital and payments. Although the 1957 Treaty of Rome included free movement of capital among the foundational provisions of the European Common Market, this freedom was expressed in more ambiguous terms than the other freedoms.

6.2 The ECJ has not always distinguished clearly between restrictions and discriminations when handing down its judgements. Thus in the Portuguese Goldman Shares case, it was accepted that the Portuguese national rules precluding investors from other states from acquiring more than a specified number of shares in certain newly ‘privatised companies constituted ‘unequal treatment of nationals of other member states and restricts free movement of capital’. The court thus applied a test known as the ‘non-hindrance’ test. The court concluded in this case that a national measure is subject of Article 56(1) EC- ‘even though the rules in issue may not give rise to unequal treatment’-if it is capable of impeding capital movements and dissuading investors and, capable of rendering the free movement of capital illusory.

6.3 Similarly in Konle, an Austrian rule, which in the interests of planning control exempted Austrian nationals only from having to obtain authorisation before acquiring a plot of land was seen as creating a discriminatory restriction against nationals of other member states. Even, in this case the ECJ linked the existence of discrimination to the creation of a restriction. In other cases the ECJ has used terms such as ‘obstacles’ or ‘liable to dissuade’. In the British Goldman shares case, the ECJ noted that even rules which apply without distinction to non-nationals alike can deter investors from other member states from making such investments and consequently, affect access to the market. It seems the ECJ here has moved away from a discrimination-based approach and is now looking at the impact on the market. Certainly, in the Portuguese Goldman shares case, the ECJ commented that Article 56 ‘goes beyond the mere elimination of unequal treatment, on grounds of nationality, as between operators on the financial markets’.  

7 Exceptions to the free movement of capital:

7.1 Member States may distinguish between taxpayers who are not in the same situation with regard to their place of residence or with regard to the place where their capital is invested. This provision has been restrictively interpreted and Member States, despite taxation being directly their competence, must ensure it is compatible with EU law. In Petri Manninen, the ECJ commented that Article 58(1)(a) cannot be interpreted as meaning any tax legislation and thus making a distinction between taxpayers by reference to the place where they invest their capital is automatically compatible with the treaty. And in particular noted that Article 58(1)(a) is limited by Article 58(3) [now Article 65].

7.2 In Verkooijen, the ECJ commented that this provision effectively codified the approach that it had taken in Schumacker and Bachmann, which permits Member States to protect the coherence of their internal taxation system. However, an argument based on the need to safeguard the cohesion of a tax system must be examined in the light of the objective pursued by the tax legislation in question to see if such rules are actually necessary, the ECJ has consistently held that reduction in tax revenue cannot be regarded as an overriding reason in the public interest which may be relied upon to justify a measure which is in principle contrary to a fundamental freedom. Laws may also be justified where the difference in treatment concerns situations which are not objectively comparable or in the interests of the fight against tax avoidance and the effectiveness of fiscal supervision.

7.3 Member States may take action to prevent the avoidance of national regulation; to lay down procedure for the declaration of capital movements for the purposes of administrative or statistical information; or in the interests of public policy or public security. This is a three-pronged exception, which is a mixture of concern for fiscal supervision and a standard public policy exception. In the Eurobonds case, the prohibition on the acquisition by Belgian residents of securities of a loan issued abroad was not justified. The ECJ commented that ‘a general assumption of tax evasion or tax fraud cannot justify a fiscal measure’, especially where the national where the national measure constituted ‘an outright prohibition on of a fundamental freedom’. In Bordessa, the ECJ held that other types of measure would be permitted where they were aimed at preventing ‘illegal activities of comparable seriousness, such as money laundering, drug trafficking or terrorism’

7.4 The administrative or statistical element is potentially a broad category, although the ECJ does continue to construe all exceptions to the Treaties narrowly. There is no equivalent provision to this provision in the articles derogating from the other treaty freedoms. In this instance, therefore, jurisprudence developed in other treaty provisions can probably not be used to derive guidance on the likely scope of this derogation. It seems that some prior notification requirements for statistical purposes or to prevent money laundering, for example, maybe acceptable, but not prior authorisation.

7.5 The test with regards the last element of the section is that ‘whether there is a serious threat to fundamental interest to public policy or security exists’ and is similar to the test used in the other freedoms. This is due to the similar wording used in the exceptions for free movement of workers, establishment and services. Examples of cases were the ECJ has citied jurisprudence derived from cased dealing with the other fundamental freedoms are Association Eglise de Scientology de Paris and Scientology International Reserves v Prime Ministerand the Sanz de Laracases

7.6 In the Church of Scientology case   derogations from the fundamental principle of the free movement of capital must be interpreted strictly. Their scope cannot be determined unilaterally by individual Member States without any supervision by EU institutions. In any event, any rule falling within any of the above exceptions cannot constitute a means of arbitrary discrimination or disguised restriction on the free movement of capital or payments.

7.7 The ECJ has reaffirmed that derogations cannot be applied so as to serve purely economic ends. As with the other exceptions to Treaty freedoms, it would seem that the crucial question will be that of ‘was it proportionate’, whether the Member State is seeking to justify its measure under the express treaty derogations or using a rule of reason style argument.

8 Rule of reason?

8.1 Article 56 does not just catch those rules which discriminate directly against capital movements; it also catches rules which indirectly restrict capital movements. With a restriction based test it seems that member states may be able to rely on grounds of overriding public interest to justify a national measure. In Reisch the Court, referring to previous case law in Konle, summarised its position as follows: ‘it is not in dispute that those measures, by laying down a procedure of prior notification/authorisation for the acquisition of immoveable property, restrict the free movement of capital, by their very purpose, the free movement of capital. Such restrictions may nevertheless be permitted if the national rules pursue, in a non-discriminatory way, an objective in the public interest and if they observe the principle of proportionality that is if the same result could not be achieved by other less restrictive measures.’ Thus in Konle, town and county planning have been accepted as an appropriate overriding requirement in the general interest and similarly environmental protection and land management concerns have been recognised. Other grounds have been objectives connected with public housing policy, agricultural and forestry holdings, preservation of jobs in such holdings in cases of inheritance or the objective of maintaining or promoting the use of an official language.. Economic grounds cannot afford a valid justification

8.2 There is some lack of clarity around whether a national rule is discriminatory or not. In the Portuguese Shares case, the ECJ reiterated the position that over-riding requirements of the general interest may be used in relation to rules ‘which are applicable to all persons and undertakings pursuing an activity in the territory of the host Member State’. Nonetheless, in some cases the ECJ has accepted the principle on an overriding the general interest although the rule has been characterised as discriminatory. In Svensson and Gustavvon which, at paragraphs 16-19, contains a discussion of overriding reasons in the general interest despite the fact that the ECJ held, in paragraph 15, that there had been discrimination because the rule was based on the place of establishment and that the rule could therefore only be justified by reference to the grounds of derogation set out expressly in the Treaty.

8.3 In the Perschecase, France could not deny foreign companies the benefit of a tax exemption enjoyed by companies established in France on the sole ground that the information needed by the French authorities effectively to combat tax evasion could not be obtained from competent authorities of other member states involved since it would have been possible top request the necessary documentation from the taxpayer himself. Similarly, on the grounds of public policy (i.e. preventing illegal activates such as money laundering, tax evasion, terrorism), a member State may make the export of foreign currency conditional on a prior declaration, but not on prior authorisation which would make capital movements conditional upon the consent of the administrative authorities.Prior authorisation for foreign investment cannot be regarded as proportionate measure where the same objective can be achieved by prior notification and the associated possibilities for supervision and imposing sanctions. In any event, any authorisation system must be based on objective, non-discriminatory criteria which are known in advance to the undertakings concerned, and all persons affected by a restrictive measure of that type must have a legal remedy available to them.

9 Relationships with other Freedoms:

9.1 It has been suggested that that the free movement of capital is ancillary to the other freedoms, for example goods or establishment. Certainly, those provisions may be seen as dependent on the freedom of payments as there would be little incentive to export goods, were it not possible to repatriate the value of the costs. Equally, there is a potential for overlap between the two provisions for overlap between the two provisions, as the provisions relating to tax harmonisation and the harmonisation of the market for financial services illustrated by the provisions contained in the directives for insurance and banking.

9.2 One issue that has not been definitively resolved arises where a given national law is capable of infringing more than one fundamental freedom. There are many situations in which a measure impacts both capital and services, or capital and establishment, and even, such as the case of taxation of pension contributions and benefits, all four: workers, establishment, services and capital. 

9.3 This issue was recently addressed in the context of the overlap of services and capital in Fidium Finanz. This case concerned German legislation that required financial services providers to obtain official authorisation to offer financial services to German residents unless they were established in an EU or EEA Member State. Fidium was a Swiss enterprise offering short term consumer loans via the internet to German residents. It was not required by Switzerland to obtain any authorization to operate because it did not offer financial services in Switzerland. It challenged the German law on the basis that it was a restriction on free movement of capital with a third country.

9.4 The Court found that while the German measure concerned both services and capital, the substance of the restriction was the freedom to provide services without being established in Germany, a Treaty freedom which does not extend to third countries. The measure was primarily and directly a restriction on access to the financial services market, and the obstacle to free movement of capital was merely an inevitable and indirect consequence of the restriction on services. Thus it was “not necessary” to consider the application of Art. 56. The Court cited its decision in Cadbury-Schweppes, a direct tax case where the allegedly restrictive tax measures only applied as between UK resident companies and controlled subsidiaries, that is, in respect of establishment though both establishment and capital were relied on.

9.5 Investment amounting to establishment is expressly included in the list of capital movements in Directive 88/361, and to simply hold that it is “not necessary” to consider FMC in a third country case where the capital movement takes the form of direct investment amounting to establishment would be a very sharp curtailing of the third country dimension. Furthermore, the specific permission provided to Member States in Art. 57.1 to maintain in force measures which restrict direct investment which amounts to establishment in respect of third countries would be meaningless if Art. 56 was never to apply where the investment in connection with which the movement of capital occurred amounted to establishment. One could argue that it is only where the restrictive measure has to do directly and primarily with the exercise of the right of establishment, and a movement of capital is only indirectly and unavoidably connected with that exercise, that recourse to Art. 56 should be excluded in third country cases. This would be consistent with the services-capital ruling in Fidium Finanz. Such an approach would arguably not preclude application of Art. 56 in dividend taxation cases, even where the recipient company controlled the distributing company, if it can be asserted that the taxation of dividends is not a question of market access, but discriminatory treatment of capital movements, and the level of share ownership or control is not directly at issue. This would mean that the freedom that is most directly and primarily affected is capital, not establishment. The Court has now taken a similar stance to its ruling in Fidium Finance in a direct tax case, though not with respect to dividends. In its judgment in Test Claimants in the Thin Cap Group Litigation81 the Court excluded examination of compatibility of a measure with Art. 56 where the scope of the impugned tax measure is restricted to groups of companies, in third country cases as well as where the taxpayer also relies on freedom of establishment. This case concerned the UK tax treatment of interest paid by a UK company to its parent company or a lender within the related company group, whether in an EU Member State or a third country, and clearly excluded the application of Art. 56 where the parent company was resident in a third country, on the basis that freedom of establishment was primarily and directly concerned. The likelihood that the Court will treat dividends differently seems small, unless the Court can be persuaded that dividends pertain most directly to capital movements, regardless of the level of ownership of shares in the distributing company.

10 Movement to and from third countries:

10.1 The free movement of capital to or from third countries takes place in a different legal context than between member states. It follows that a member state may be able to justify a restriction on the movement of capital to or from third countries for a particular reason in circumstances where that reason would not constitute a valid restriction on capital movements between member states. An example would be where the legislation of a Member State makes the grant of tax advantage dependent on satisfying requirements compliance with which can be verified only by obtaining information from the competent authorities of a third country. It is, in principle legitimate for a Member state to refuse to grant that advantage, if, in particular, because that third country is not under any contractual obligation to provide information and it proves impossible to obtain information from that country.

10.2 As far as capital movements go to and from third countries are concerned, restrictions existing on December 31, 1993 under national of union law in respect of direct investment (including investment in property) establishment, the provision of financial services or the admission of securities to capital markets may continue to be applied. In order to secure compliance with such restrictions, member states are entitled to verify the nature and reality of the transactions and transfers in question prior declaration. The European Parliament and the Council, acting in accordance with the ordinary legislative procedure, may adopt measures on such capital movements (Art 64(2). Moreover, the Council may unanimously, and after consulting the European parliament, adopt measures, which constitute new restrictions on such capital movements Art 64(3) In addition the Council may take such safeguard measures as are strictly necessary where; “in exceptional circumstances, movements of capital to or from third countries cause, or threaten to cause’ serious difficulties, for the operation of economic and monetary union”

10.3 The ECB must be consulted and the measures may not go on for more than 6 months. Article 75(1) TFEU defines the European Union’s power to take economic sanctions in the sphere of capital movements and payments for the purpose of preventing and combating terrorism and related activities. The EP and Council, acting in accordance with the ordinary legislative procedure are to define a framework for such measures, which is to be implemented by the Council

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