Free Movement of Capital and Payments
1. Foundations in EU law
Historically, the free movement of capital and of payments took an exceptional position among the fundamental freedoms because it was not recognized until relatively late that the respective guarantees were also imperative and necessitated liberalization in a way comparable to EU primary law. Originally, even after the transitional period Art 67(1) EC Treaty merely established the obligation to progressively deregulate the movement of capital ‘to the extent necessary to ensure the proper functioning of the common market’ (see ECJ Case 203/80 – Casati  ECR 2595, para 10). Therefore, only measures of secondary legislation could compel Member States to go beyond these limited obligations in primary law and to further remove impediments for the free cross-border movement of capital. However, even under this regulatory framework, the European Court of Justice (ECJ) propelled the development of the free movement of capital towards a fully fledged and comprehensive guarantee. The court ruled that the unfettered duty to abolish any restrictions on the free movement of capital within the Union as stipulated by Art 1 Capital Movements Directive (Dir 88/361 of 24 June 1988 for the implementation of Article 67 of the Treaty) was directly effective (ECJ Case C-358/93 – Bordessa  ECR I-361, paras 33 ff) and hence de facto established a fundamental freedom based on secondary law. The decision concurred with the intention of the Member States to promote the free movement of capital, as shown by it becoming the fourth fundamental freedom in primary law under the Treaty of Maastricht (Art 73b(1) EC 1992). In the course of these amendments to EU primary legislation, the free movement of payments, previously regulated by Art 106 EEC Treaty, was annexed to the free movement of capital where it systematically belongs (Art 73(b)(2) EC 1992). Hence, its character as another fundamental freedom was underlined. Neither the Treaty of Amsterdam nor the Treaty of Lisbon included any substantive amendments to this status quo.
2. Free movement of capital
a) Regulatory purposes
The guarantee of the free movement of capital in Art 63(1) TFEU/56(1) EC is based on fundamental considerations of regulatory policy. It reflects the conviction that only decentralized decisions of market participants lead to the optimal allocation of capital as a scarce resource. Hence, any limitations on the cross-border movement of capital generally result in socially undesirable welfare losses. The far-reaching regulatory goal in competition policy drawn up by the fundamental freedom at hand is further emphasized by the fact that free movement of capital is guaranteed not only in order to integrate the European internal market but also to facilitate transactions with countries outside the EU.
It can be inferred from Art 64 TFEU/57 EC that the free movement of capital comprises direct investments including investments in real estate as well as cross-border capital transfers relating to the establishment, the rendering of financial services or the admission of securities to capital markets. Furthermore, the transactions listed in Annex I to the Capital Movements Directive (Dir 88/361) give further guidance on construing the scope of the freedom of capital movements. However, the directive does not ultimately determine the content of the fundamental freedom. In fact, the latter includes all transfers of cash or real capital across the borders of a Member State if they are executed for investment purposes.
The clear wording of Art 63(1) TFEU/56(1) EC and the special rules of Art 64 TFEU/57 EC clarify that the fundamental freedom aims beyond the territory of the Member States and also guarantees the free movement of capital to and from non-EU countries. According to widespread opinion amongst commentators, even citizens of these non-EU countries can plead a violation of the freedom of capital movements in both the courts of the Member States and the European Union.
c) Relation to other fundamental freedoms
The relationship between the guarantee of free movement of capital and payments and other fundamental freedoms plays an important role not solely with a view to the specific limits in tax law, see Art 63(1)(a) TFEU/58(1)(a) EC. It is also of particular relevance with regard to private law even after the previously existing gap between the respective mandates to liberalize the regulations that govern the pertinent cross-border activities has been closed. The latter is a consequence of the observation that any justification for imposing limits on a specific fundamental freedom through private law regulations is predetermined by the respective guarantee regarded as being subject to that limitation. This holds true even if the prerequisites for a legitimate limitation are in fact conceptually the same across all the fundamental freedoms. In particular, the proportionality of any limitation can only be judged in the context of the respective Union policies as determined by the affected fundamental freedom.
First, it has to be determined whether the cross-border transfers of capital are executed for investment purposes or whether they serve to achieve other goals. Payments that form the monetary consideration in transactions that can be attributed to the free movement of goods and services do not fall within the guarantee of the free movement of capital (ECJ Joined Cases 286/82 and 26/83 – Luisi and Carbone  ECR 377, para 21 ff; Joined Cases C-163/94, C-165/94 and C-250/94 – Sanz de Lera  ECR I-4821, para 17). However, overlaps with other fundamental freedoms remain possible because investments are frequently undertaken in order to make use of other fundamental freedoms. Investments in securities might, for example, also pursue the end to set up a foreign subsidiary, an activity protected by the freedom of establishment. Or, it may serve to provide cross-border services as a securities dealer, a trade protected by the free movement of services.
If the free movement of capital and the freedom of establishment are simultaneously affected (eg in the case where the acquisition of factory premises or that of significant equity stakes for entrepreneurial rather than mere financial purposes (portfolio-investments) are enjoined or restricted) the European Court of Justice in its more recent judgments applies both Arts 49, 54 TFEU/43, 48 EC and Art 63(1) TFEU/ 56(1) EC cumulatively (ECJ Case C-302/97 – Konle  ECR I-3099, para 22; ECJ Case C-326/07 – Commission v Italy  ECR I-2291, para 36; ECJ Case 543/08 – Commission v Portugal Celex No 608J0543 para 39 ff). Even if the direct investment is carried out in another Member State in order to pursue activities as a self-employed person, the freedom of establishment does not assume priority. It is only where a violation of one fundamental freedom is established that the ECJ considers itself discharged of the duty to investigate an additional violation of other guarantees (ECJ Case C-483/99 –Commission v France  ECR I-4781, para 56; ECJ Case C-98/01 – Commission v United Kingdom  ECR I-4641, para 52; ECJ Case C-463/00 – Commission v Spain  ECR I-4581, para 86; ECJ Case C-171/08 – Commission v Portugal Celex No. 608J0171 para 80). However, a permissible limitation on the freedom of establishment cannot be overturned because of an alleged violation of the free movement of capital (Art 65(2) TFEU/58(2) EC).
Both the definition of Art 57(1) TFEU/50(1) EC and the precept of coordination in Art 58(2) TFEU/51(2) EC may be interpreted in a way that the guarantee of the free movement of capital establishes a special regime for financial services that supersedes the one arranged under the guarantee of the free movement of services. The ECJ has indeed assigned priority to the guarantee of the free movement of capital in some judgments, both before and after the full liberalization of capital movements (ECJ Case 267/86 – ASPA  ECR 4769, paras 22–25; ECJ Case C-222/99 – Parodi  ECR I-3899, para 9; ECJ Case C-222/97 – Trummer and Mayer  ECR I-1661). However, the decisions do not always follow this line of reasoning. The court sometimes invokes both fundamental freedoms simultaneously (ECJ Case C-484/93 – Svensson and Gustavsson  ECR I-3955, paras 10 ff; ECJ Case C-118/96 – Safir  ECR I-1897, para 35; ECJ Case C-410/96 – Ambry  ECR I-7875, para 40). It has to be stressed, though, that the practical importance of these doctrinal differences is limited. In those cases where the ECJ relied on both fundamental freedoms, it either implicitly or expressly presumed a simultaneous violation of Art 56(1) TFEU/49(1) EC and Art 63(1) TFEU/56(1) EC by the sovereign acts under scrutiny. Hence, the substantive outcomes of the cases would have been the same even if subsidiarity had been assumed.
d) Scope of the prohibition on the restriction of the free movement of capital
To date, the ECJ has avoided using general and abstract language on what constitutes a restriction in the context of Art 63(1) TFEU/56(1) EC. The court has preferred to resolve the question on a case-by-case basis. Apart from regulations in tax law and in foreign exchange operation law, restrictions with relevance to private law have in particular been assumed in cases of information, approval and declaration duties prior to the purchase of real estate by citizens of other Member States (eg ECJ Case C-423/98 – Albore  ECR I-5965, para 16) or where such obligations occurred in connection with the acquisition of significant holdings in firms (ECJ Case C-54/99 – Scientology  ECR I-1335, paras 14 ff). Apart from these direct interferences with the free movement of capital, indirect acts which make cross-border capital transfers less attractive have been classified as relevant restrictions, eg government interest rate subsidies which were bound to the lending bank’s domestic registered office (ECJ Case 484/93 – Svensson and Gustavsson  ECR I-3955, para 10). Similarly, where corporate law provided for special government privileges in certain areas of business and hence was apt to deter cross-border investments since it caused a distorted distribution of shareholder rights, it was also regarded as a restriction of the free movement of capital (for more detail, see f) below). It seems of relevance in this context that the ECJ has further ruled that a restriction on the free movement of capital may be justified even where none of the explicit exceptions provided for in primary law applies if there are overriding reasons in the general interest for the restriction (ECJ Case C-35/98 – Verkooijen  ECR I-4071, paras 46 ff; implicitly already ECJ Case C-148/91 – Veronica  ECR 487, paras 9, 13, 15). This decision reflects the Cassis-de-Dijon-formula (ECJ Case 120/78 – Cassis de Dijon  ECR 649). However, the latter is itself merely the complement to the wide construction of relevant restrictions on the free movement of goods by the Dassonville-formula (ECJ Case 8/74 – Dassonville  ECR 837). It can be inferred from this interrelation that the free movement of capital has incrementally become part of the evolving general doctrinal framework of the fundamental freedoms. Hence, a restriction on the free movement of capital will be found if discriminating or non-discriminating regulations of Member States indirectly or directly, actually or potentially hinder, restrict or aggravate cross-border capital transactions. In line with this reasoning, the notorious decision in Keck (ECJ Joined Cases C-267 and C-268/91 – Keck  ECR I-6097) also applies mutatis mutandis to the free movement of capital. Therefore, non-discriminatory rules that regulate only the ‘arrangements’ relating to the investments (eg duties to have certain acquisitions notarized or made public) do not constitute a restriction of the free movement of capital, and hence do not need to be justified.
e) Justification of restrictions
With respect to certain aspects of the movement of capital to or from third countries, Art 64 TFEU/57 EC permits more severe restrictions than would be legitimate for cross-border transactions within the EU. The provision’s first paragraph allows such restrictions in relation to non-EU countries that existed on 31 December 1993 under either national or Union law and constitutes therefore—by argumentum e contrario—a prohibition on changing the status quo. The main purpose of the rule is to enable the Union and Member States to keep regulations compelling reciprocity in liberalization (eg Dir 2001/34 of 28 May 2001 on the admission of securities to official stock exchange listing and on information to be published on those securities, Art 41) and to finally achieve a total deregulation of capital movements in negotiations. Article 64(2) TFEU/ 57(2) EC extends options in relation to countries outside the EU and hence facilitates flexible and robust negotiations. The provision empowers the Union, but not the Member States, to further restrict capital transfers involving non-EU members by promulgating new regulations. Hence, the current state of deregulation can even be reduced.
In general, restrictions of capital movements between Member States and also between Member States and third countries are permissible if they result from tax laws that distinguish between taxpayers according to their place of residence or the place where their capital is invested (Art 65(1)(a) TFEU/58(1)(a) EC). However, in order to be permitted on this basis, the respective regulations must have been in force at the end of 1993 (see the binding Declaration (No 7) on Article 73d of the Treaty establishing the European Community of 7 February 1992) and have to apply to situations which are in fact not objectively comparable (ECJ Case C-35/98 – Verkooijen  ECR I-4071, para 43). Moreover, Member States are entitled to enact procedures for the declaration of capital movements for purposes of administrative or statistical information and to take other measures to prevent infringements of national law or to provide for regulations justified on grounds of public policy or public security (Art 65 Abs (1)(b) TFEU/58(1)(b) EC). The latter permission mirrors common good considerations within the scope of the ‘overriding reasons’ which may justify non-discriminatory restrictions of other fundamental freedoms according to the Cassis-adjudication. Hence, the ECJ states broadly that non-discriminatory regulations may be justified by ‘overriding public-interest grounds’ (eg ECJ Case C-174/04 – Commission v Italy  ECR I-4933, para 35; ECJ Case C-326/07 – Commission v Italy  ECR I-2291, para 41 f.). On such grounds, the Court has recognized, for example, the coherence of tax legislation (ECJ Case C-319/02 – Manninen  ECR I-7498, para 28) or the protection of a pluralistic, non-commercial broadcasting system (ECJ Case C-148/91 – Veronica  ECR 487, para 10). In contrast, the mere pursuit of general economic policy goals has been refused as an overriding reason of public interest apt to justify a restriction of the free movement of capital (ECJ Case C-35/98 – Verkooijen  ECR I-4071, para 48).
In any case, measures that constitute a means of arbitrary discrimination or a disguised restriction are prohibited outright. The explicit ban of such measures in Art 65(3) TFEU/58(3) EC adds little given that substantive reasons must be given for asserting a justification of a restriction, and it must also be proportional.
The guarantee of the free movement of capital in EU primary law has recently had a massive impact on corporate law provisions of Member States that provided privileges for government-shareholders in previously privatized firms (‘golden shares’). Such measures can affect the free movement of capital in various ways. The case is obvious if direct restrictions apply, eg if the purchase of shares carrying voting power requires government approval, is subject to a government veto or is prohibited outright once a certain threshold is crossed (ECJ Case C-367 – Commission v Portugal  ECR I-4731, paras 13 ff; ECJ Case C-483/99 – Commission v France  ECR I-4781, paras 39 ff, 46 ff). Moreover, indirect restrictions of share purchases have to be justified in light of the guarantee of the free movement of capital because government privileges potentially hinder cross-border investments by rendering the acquisition of such shares de facto less attractive even though they may not restrict the transaction legally-speaking. This is the case for instance, if the exclusive competence to execute certain strategically-pivotal corporate transactions is vested in government actors or if these actors can veto such decisions (ECJ Case C-503/99 – Commission v Belgium  ECR I-4809, para 40 ff; ECJ Case C-463/00 – Commission v Spain  ECR I-4581, paras 9, 11; ECJ Case C-543/08 – Commission v Portugal Celex No 608J0543, para 57) or if these actors dispose of disproportionate voting power in relevant corporate decisions or are represented disproportionately on supervisory boards (ECJ Case C-174/04 – Commission v Italy  ECR I-4933, paras 34 ff, 40; ECJ Case C-112/05 – Commission v Germany  ECR I-8995, paras 59 ff; ECJ Case C-543/08 – Commission v Portugal Celex No 608J0543, para 63).
However, it cannot be inferred from the ECJ’s condemnation of the German VW-law (Volkswagengesetz) that the court would always regard specific corporate law rules (in this case, an increased quorum for shareholder resolutions changing VW’s charter combined with a voting-cap at 20 per cent of the share capital) as restrictions to the free movement of capital if they apply in a non-discriminatory fashion to each and every shareholder and hence do not solely favour government entities. According to the ECJ, the historical circumstances surrounding VW’s privatization justified the allegation of preferential treatment of the German authorities (ECJ Case C-112/05 – Commission v Germany  ECR I-8995, para 48 ff). Hence, it is in line with the ECJ’s reasoning that the European Commission has criticised the supermajority requirement for amendments to VW’s charter remaining in the reformed VW-law as a continuous violation of the free movement of capital because it de facto favours the state of Lower Saxony. Yet, beyond these particular facts, it is still unclear whether and to what extent Member States’ organizational law can come under scrutiny where it enables private actors to limit or to deter cross-border share purchases, eg by permitting voting caps in the corporate charter or by being lenient towards defence measures in takeover law etc.
As to justifying restrictions of the free movement of capital that result from granting privileges to government shareholders, it should be noted that neither considerations of structural nor those of general economic policy satisfy the ‘overriding reasons’ test. Moreover, even where Member States try to invoke such reasons (eg the need to secure domestic energy supply), the legislation in question has to be proportionate. This requires in particular that the government privileges are tied to precise and verifiable objective criteria (see ECJ Case C-503/99 – Commission v Belgium  ECR I-4809, paras 48 ff; but see also ECJ Case C-483/99 – Commission v France  ECR I-4781, paras 50 ff).
3. Free movement of payments
The guarantee of the free movement of payments, Art 63(2) TFEU/56(2) EC primarily serves to protect the other fundamental freedoms (‘annex-freedom’). Market participants should not be deterred from making use of these other fundamental freedoms by potential impediments during the settlement-process of cross-border transfers of goods, services, etc in the broadest sense. Relevant hindrances can occur, for example, in the context of discharging contractual obligations, the payment of damages or the disbursement of insurance benefits (see ECJ Case C-412/97 – ED Srl  ECR I-3846, para 17). However, the freedom safeguards only cross-border transfers of means of payments. The permitted justifications for restrictions to the free movement of capital also apply to the free movement of payments. However, it should be noted that the ECJ has held that national procedural rules that govern an action by a creditor seeking payment of a sum of money from a recalcitrant debtor do not fall within the scope of the free movement of payments (ECJ Case C-412/97 – ED Srl  ECR I-3846, para 17).
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