NATIONS UNIVERSITYDEPARTMENT OF LAW

UNIVERSITY OF LONDON - International ProgrammesYEAR THREE

Bachelor of Laws (LL. B.)

EUROPEAN UNION LAW COURSE WORKSHEET

ONLECTURE NOTES 9

ON FREE MOVEMENT OF CAPITAL

UNIVERSITY OF LONDON SCHOOL OF THE NATIONS– International Programmes - NATIONS UNIVERSITY

Prepared by Facilitator Ms. K.T.H. Stephenson- Attorney-at-LawLL. B. (Credit)(UG), L.E.C. (H.W.L.S), Pg Cld (ComSec/UG),UNODC Cert. IL & Terrorism, Diplofoundation (Malta) Adv. Cert. in Internet Governance and ICT POLICY.

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2015- 2016ACADEMIC YEAR

Worksheet on Study Guide 8 Prepared by Ms. Kayreen

StephensonLL. B. (Credit), L.E.C. (H.W.L.S.), Pg

CLD.Adv. Cert in Internet GovernanceAttorney-at-Law

Introduction

The Treaty of Rome recognised the need to remove restrictions on the free movement of capital between Member States however only ‘to the extent necessary to ensure the proper functioning of the common market’. This was later confirmed in the seminal Case C-203/80 Casati [1981] ECR 2595, in which the court found that, unlike the provisions on the free movement of goods, persons and services, the complete free movement of capital could undermine the economic policy of the Member States. In deciding so, the Court found that what is now Article 67 TFEU was not directly effective. In view of this approach to the free movement of capital, many Member States chose to introduce and maintain safeguarding measures such as ‘exchange controls’ (i.e. controls to ban or restrict the amount of foreign currency or local currency that is allowed to be traded or purchased). However, it was not long before the damage such restrictions caused the Single Market was recognised and, in 1988, the European Council confirmed the progressive realisation of the Economic and Monetary Union (EMU). Stage one of EMU introduced complete freedom for capital movements, scrapping all remaining restrictions and allowing for full liberalisation, first through Council Directive 88/361 (Article 1(1) of which prohibited all restrictions on the free movement of capital) and later on in the Maastricht Treaty.

The Treaty provisions on the free movement of capital were complemented by those on payments. Ex Article 106(1) EEC provided that Member States must authorise means of payment

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as consideration for trade in goods, persons, services or capital. Now, Article 63(2) TFEU, the successor to Article 106 EEC, prohibits all restrictions on payments.

Evolution of the Free Movement of Capital

http://ir.lawnet.fordham.edu/cgi/viewcontent.cgi?article=2122&context=ilj

Free movement of capital in the EU

Freedom of capital movement is another essential element for the proper functioning of the large European internal market. The liberalisation of payment transactions is a vital complement to the free movement of goods, persons and services. Borrowers - individuals and companies notably SMEs - must be able to obtain capital where it is cheapest and best tailored to their needs, while investors and suppliers of capital must be able to offer their resources on the market where there is the greatest interest. That is why it is important that the member states of a common market free capital movements and allow payments to be made in the currency of the member state in which the creditor or beneficiary is established. Obviously, all these conditions must pre-exist before the passage to the stage of an economic and monetary union, involving the circulation of a single currency.

To this end, a 1988 Directive ensures the full liberalisation of capital movements [Directive 88/361 and EEA Agreement]. Under this Directive, all restrictions on capital movements between persons (natural or legal) resident in Member States were removed in the beginning of the nineties. Monetary and quasi-monetary operations (financial loans and credits, operations in current and deposit accounts and operations in securities and other instruments normally dealt in on the money market) in particular were liberalised.

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However, the provisions of the new European treaties go even further than the 1988 Directive in the liberalisation of capital movements. The principle of the free movement of capital and payments is now expressly laid down in the Treaty on the functioning of the EU. Article 63 of the TFEU (ex  Article 56 TEC) declares, in fact, that all restrictions on the movement of capital between Member States and on payments between Member States and third countries are prohibited. It thus extends the liberalisation of capital movements to and from third countries. Article 66 of the TFEU (ex Article 59 TEC), however, authorises temporary safeguard measures to be taken 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. In addition, Article 65 of the TFEU (ex Article 58 TEC) authorises Member States to take all requisite measures to prevent infringements of national law and regulations, in particular in the field of taxation and the prudential supervision of financial institutions.

On the basis of these provisions and of those liberalising banking, stock-exchange and insurance services [see sections 6.6.1, 6.6.2 and 6.6.3], the EC/EU financial market has been completely liberalised since January 1, 1993. European businesses and individuals have access to the full range of options available in the Member States as regards banking services, mortgage loans, securities and insurance. They are able to choose what is best suited to their specific needs or requirements for their daily lives and for their professional activities in the large market.

Directive 2007/64 harmonises the legal frame of payment services in the EU, including the conditions of information as well as the rights and obligations of the parts. By removing existing legal obstacles, it enables the payments sector to develop the infrastructures, procedures, common rules and standards needed for a pan-European payment system, where improved economies of scale and competition will help to reduce the cost of payments and enhance safety and efficiency, as compared with the different national systems. The Directive provides for a

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registration system based on a licence granted by the competent authority of the Member State of origin. This registration should enable payment service providers to operate in other Member States, either by free provision of services or by setting up a branch. The Directive applies, under certain conditions, to six categories of payment service providers: credit institutions, electronic money institutions, post office giro institutions, payment institutions within the meaning of the Directive, the European Central Bank and national central banks and Member States or their regional or local authorities.

The European financial area must not, however, be exploited for the purposes of laundering money generated by criminal activities. This is the aim of a Directive on prevention of the use of the financial system for the purpose of money laundering and terrorist financing [Directive 2005/60]. Taking stock of the events of 11 September 2001 [see section 8.1.3], this directive establishes a new international standard on combating serious crime, organised crime and the financing of terrorism. It requires Member States to combat the laundering of the proceeds of serious crime, as defined in Framework Decision 2001/500 on money laundering, the identification, tracing, freezing, seizing and confiscation of instrumentalities and the proceeds of crime [see section 8.1.4]. Consequently, the requirements in terms of identifying clients, retaining documents and declaring suspect transactions also apply to external auditors, real estate agents, notaries, lawyers, dealers in high-value goods such as precious stones or metals or works of art, auctioneers, money transporters and casinos. The Member States must take measures such as identification of customers and economic beneficiaries, the conservation of supporting documents and registrations of the transactions, the informing of the relevant authorities of suspected laundering operations and the determination of applicable sanctions [Directive 2015/849, see also section 8.1.2]. A Regulation lays down rules on information on the payer to accompany transfers of funds for the purposes of the prevention, investigation and detection of money laundering and terrorist financing [Regulation 2015/847].

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In a 1997 communication the Commission expressed the view that the special powers reserved to Member States in the management of privatised undertakings, such as prior authorisations and rights of veto, could constitute an obstacle to the exercise of the fundamental freedoms enshrined in the Treaty, in particular the free movement of capital, although it accepted that they could be justified under exceptional circumstances and on strict conditions. In three rulings on actions brought by the Commission against Member States for failure to fulfil their obligations, the Court of Justice fully upheld the communication of the Commission [Cases C-367/98, C-483/99 and C-503/99].

According to the Court of Justice, the free movement of capital is a fundamental principle of the Treaty, which may be restricted only by national rules which are justified by overriding public-interest grounds and that national rules guarantee the attainment of the objective pursued and satisfy the criterion of proportionality [Case C-174/04]. Therefore, the free movement of capital and loans should not be restrained by national provisions that are likely to deter the parties concerned from approaching banks established in another Member State [Case C-484/93]. However, the export of important amounts of money may be subjected to a prior declaration, so that the national authorities may exercise effective supervision in order to prevent infringements of their laws and regulations [Cases C-358/93 and C-163/94].

Free movement of capital explained…

The free movement of capital is not only the youngest of all Treaty freedoms, but — because of its unique third-country dimension — also the broadest. Initially, the Treaties did not prescribe full liberalisation of capital movements; Member States only had to remove restrictions to the extent necessary for the functioning of the common market. However, economic and

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political circumstances globally and in Europe changed, and thus the European Council confirmed the progressive realisation of the Economic and Monetary Union (EMU) in 1988. This included more coordination of national economic and monetary policies. Consequently, stage one of EMU introduced complete freedom for capital transactions, introduced first through a Council directive and later on enshrined in the Maastricht Treaty. Since then, the Treaty prohibits any restriction on capital movements and payments, both between Member States and between Member States and third countries. The principle was directly effective, i.e. it required no further legislation at either EU or Member States’ level.

Legal basis

Articles 63 to 66 of the Treaty on the Functioning of the European Union (TFEU), supplemented by Articles 75 and 215 TFEU for sanctions.Objectives

All restrictions on capital movements between Member States as well as between Member States and third countries should be removed. However, for capital movements between Member States and third countries, Member States also have: (1) the option of safeguard measures in exceptional circumstances; (2) the possibility to apply restrictions that existed before a certain date to third countries and certain categories of capital movements; and (3) a basis for the introduction of such restrictions — but only under very specific circumstances. This liberalisation should help to establish the single market by supplementing other freedoms (in particular the movement of persons, goods and services). It should also encourage economic progress by enabling capital to be invested efficiently and promoting the use of the euro as an international currency, thus

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contributing to the EU’s role as a global player. It was also indispensable for the development of Economic and Monetary Union (EMU) and the introduction of the euro.Achievements

A.First endeavours (before the single market)The first Community measures were limited in scope. A ‘First Directive’ dating from 11 May 1960 and amended in 1962 unconditionally liberalised direct investment, short- or medium-term lending for commercial transactions, and purchases of securities traded on the stock exchange. Some Member States decided not to wait for Community decisions and introduced unilateral national measures, thereby abolishing virtually all restrictions on capital movements (Germany in 1961; United Kingdom in 1979; and the Benelux countries (between themselves) in 1980). Another Directive (72/156/EEC) on international capital flows followed.B. Further progress and general liberalisation in view of the single marketIt was not until the single market was launched, almost 20 years later, that the progress which had started in 1960-1962 was resumed. Two directives, dating from 1985 and 1986, extended unconditional liberalisation to long-term lending for commercial transactions and purchases of securities not dealt in on the stock exchange. In view of the aim of completing the single market (by 1993), moving from the European Monetary System to EMU and the envisaged introduction of the euro, capital movements were fully liberalised in a first step by Council Directive 88/361/EEC of 24 June 1988, which scrapped all remaining restrictions on capital movements between residents of the Member States as of 1 July 1990. As a result, liberalisation was extended to monetary or quasi-monetary transactions, which were likely to have the greatest impact on national monetary policies, such as loans,

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foreign currency deposits or security transactions. The directive did include a so-called safeguard clause enabling Member States to take protective measures when short-term capital movements of exceptional size seriously disrupted the conduct of monetary policy. Such measures could, however, only apply in a limited number of duly substantiated cases and could not last for more than six months (no Member State made use of this possibility). It also allowed for some countries to maintain temporary restrictions, mainly on short-term movements, but only for a specific period: this applied to Ireland, Portugal and Spain until 31 December 1992, and Greece until 30 June 1994. However, Protocol 32 to the Treaty on European Union (TEU), for instance, allows Denmark to maintain existing legislation which restricts the acquisition of second homes by non-residents.C. The definitive system1. PrincipleIn a second step, the Maastricht Treaty of European Union (TEU) introduced free movement of capital as a Treaty freedom. Today, Article 63 TFEU prohibits all restrictions on the movement of capital and payments between Member States, as well as between Member States and third countries. This constitutes a unique third-country dimension of this particular Treaty freedom. It prohibits all obstacles, not just discriminatory ones. It lays down a general prohibition which goes beyond the mere elimination of unequal treatment on grounds of nationality (see Case C-367/98, Commission v Portugal, paragraph 44). Article 65(1) TFEU allows for different tax treatment of non-residents and foreign investment, but this shall not constitute a means of arbitrary discrimination or a disguised restriction, Article 65(3) TFEU. Even in relation to third countries, the principle of free movement of capital prevails over reciprocity and maintaining Member States’ negotiating leverage vis-à-vis third countries (see Case C-101/05, Skatteverket v A).

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The right of free movement of capital is not affected by notification obligations, i.e. the reporting of cross-border transactions (e.g. for electronic payments, cash and securities movements above certain thresholds) for the purpose of external sector statistics, which are used for compiling the balance of payments for Member States and the European Monetary Union.2. Exceptions and justified restrictionsNevertheless, exceptions are largely confined to capital movements related to third countries (Article 64 TFEU). In addition to the option of maintaining national or Community measures concerning direct investment and certain other transactions that were in force as of 31 December 1993 (31 December 1999 for Bulgaria, Estonia and Hungary), the Council may also, after consulting the European Parliament, unanimously adopt measures which constitute a step backwards in the liberalisation of capital movements with third countries. The Council and the European Parliament may adopt legislative measures with regard to third-country capital movement involving direct investment establishment, provision of financial services or the admission of securities to capital markets (an example of this being the proposal for a regulation establishing transitional arrangements for bilateral investment agreements between Member States and third countries (COM(2010) 344; European Parliament legislative Resolution of 10 May 2011 (TA(2011)0206)). Article 66 TFEU covers emergency measures vis-à-vis third countries; however, these are limited to a period of six months.The only justified restrictions on capital movements in general, including movements within the Union, which Member States may decide to apply, are laid down in Article 65 TFEU and include: (i) measures to prevent infringements of national law (namely in view of taxation and prudential supervision of financial services); (ii) procedures for the declaration of capital movements for

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administrative or statistical purposes; and (iii) measures justified on the grounds of public policy or public security. This is supplemented by Article 75 TFEU providing for the possibility of financial sanctions against individuals, groups or non-state entities to prevent and combat terrorism. Pursuant to Article 215 TFEU, financial sanctions may be taken against third countries, or individuals, groups or non-state entities, based on decisions adopted within the framework of the common foreign and security policy.3.Consequences of Economic and Monetary Union (EMU): Abolition of the safeguard clauseToday’s safeguard clause is Article 144 TFEU (together with Article 143 TFEU). It allows for taking protective balance of payments measures where difficulties jeopardise the functioning of the internal market or where a sudden crisis occurs. Since 1 January 1999, the beginning of the third phase of EMU, the safeguard clause to remedy crises in the balance of payments is only applicable to those Member States which have not (yet) introduced the euro.D. Treatment of violations and Court decisionsIn cases where Member States restrict the freedom of capital movement in an unjustified way, the usual infringement procedure according to Article 258-260 TFEU applies.Important infringement cases concerned, inter alia, special rights of public authorities in private companies/sectors (e.g. Commission v Germany (Case C-112/05 Volkswagen); in a case brought against Portugal (Case C-171/08) in 2010, the Court confirmed earlier jurisprudence on special rights and highlighted that the free movement of capital includes both ‘direct’ investments and ‘portfolio’ investments; and a third-country case (Case C-452/04 Fidium Finanz).E. Payments

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On payments, Article 63(2) TFEU stipulates that ‘Within the framework of the provisions set out in this Chapter, all restrictions on payments between Member States and between Member States and third countries shall be prohibited.’1.Harmonisation of the cost of domestic and cross-border payments within the euro areaRegulation (EC) No 2560/2001 of 19 December 2001 harmonised the costs of domestic and cross-border payments within the euro area. In the meantime, it has been repealed and replaced by Regulation (EC) No 924/2009 of the European Parliament and of the Council of 16 September 2009 on cross-border payments in the Community. Regulation (EU) No 260/2012 of the European Parliament and of the Council of 14 March 2012 establishing technical and business requirements for credit transfers and direct debits in euro improved the framework.2.New legal framework for paymentsThe Directive on Payment Services (PSD) 2007/64/EC provides the legal foundation for the creation of an EU-wide single market for payments by 2010. It aims to establish a comprehensive set of rules applicable to all payment services in the EU to make cross-border payments as easy, efficient and secure as ‘national’ payments within a Member State and to foster efficiency and cost-reduction through more competition by opening up payment markets to new entrants. The PSD provides the necessary legal framework for an initiative of the European banking industry, called the ‘Single Euro Payments Area’ (SEPA). SEPA instruments were available, but not much in use by the end of 2010. Consequently, in December 2010, the European Commission proposed a regulation (COM(2010) 775) setting EU-wide end-dates for the migration of the old national credit transfers and direct debits to SEPA instruments; thus phasing out national credit transfers and direct debits, respectively 12 and 24 months after the entry into force of the regulation. This proposal was adopted

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in 2012 (Regulation (EU) No 260/2012 of the European Parliament and of the Council of 14 March 2012 establishing technical and business requirements for credit transfers and direct debits in euro and amending Regulation (EC) No 924/2009).Role of the European Parliament

The EP has strongly supported the Commission’s efforts to encourage the liberalisation of capital movements. However, it has always taken the view that such liberalisation should be more advanced within the EU than between the EU and the rest of the world, to ensure that European savings feed European investment as a priority. It has also pointed out that capital liberalisation should be backed up by full liberalisation of financial services and the harmonisation of tax law in order to create a unified European financial market. It was thanks to the EP’s political pressure that the Commission was able to launch legislation on harmonisation of domestic and cross-border payments (resolution of 17 June 1988).In a closely related area, the EP supported the goal of an efficient, integrated and safe market for clearing and settlement of securities in the EU in its non-legislative resolution ‘Clearing and settlement in the EU’ of 7 July 2005 (2004/2185(INI)) and held a workshop on securities law issues (see document PE 464.428 for the workshop and the related note PE 464.416). The EP is currently expecting further legislative proposals in the area of clearing and settlement to be discussed in the ordinary legislative procedure.Overview

What are capital movements? When were capital movements liberalised? Why were capital movements liberalised?

What are capital movements?

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Capital movements mean any one of the following when carried out on a cross-border basis (i.e. between an investor in one Member State and a financial institution in another):

Foreign direct investment (FDI), including investments which establish or maintain lasting links between a provider of capital (investor) and an enterprise (in effect setting up, taking-over, or acquiring an important stake in a company or institution);

Real estate investments or purchases; Securities investments (e.g. in shares, bonds, bills, unit trusts); Granting of loans and credits; and Other operations with financial institutions, including

personal capital operations such as dowries, legacies, endowments, etc.In the absence of a definition in the Treaty of 'movement of capital' the CJEU has recognised the nomenclature    annexed to the Council Directive 88/361/EEC as having indicative value   

.When were capital movements liberalised?The Treaty of Rome provided for the free movement of capital, but the abolition of capital restrictions between Member States was to be "to the extent necessary to ensure the proper functioning of the common market".Despite initial progress in the 1960's, there was a lot of later backtracking as many Member States introduced safeguard measures. Many financial operations with other Member States were subject to prior authorisation requirements known as 'exchange controls'.  This situation persisted until the early 1990s.Recognising the damage that this was doing to the delivery of a Single Market, the Council adopted a capital liberalisation directive, in 1988, providing for the removal of all remaining exchange controls by mid-1990 for most of those countries maintaining this mechanism.  (There were though transition periods provided for Spain, Ireland, Portugal and Greece.)As part of the drive towards Economic and Monetary Union, the freedom of capital movements gained the same status as the other Internal Market freedoms with the entry into force of the Maastricht Treaty. From 1 January 1994 not only were all restrictions on capital movements and payments between EU

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Member States prohibited, but so were restrictions between EU Member States and third countries.In subsequent EU accession rounds, exchange controls have been progressively eliminated in the period before EU membership. In general all capital movements have now been fully liberalised across the EU, although some transitional periods have been granted to some newer Member States for capital operations involving the purchase of real estate (second homes or agricultural land). Read moreWhy were capital movements liberalised?This liberalisation process has taken place for a very simple reason: it is in the direct interest of the EU's citizens, companies and governments.Economic theory suggests that the free movement of capital will lead to an optimal allocation of resources and the integration of open, competitive and efficient European financial markets and services. It will also help maintain "responsible" macro-economic policy and can foster growth through finance and knowledge transfers (direct investment).

For Europe's citizens, the freedom means the ability to conduct many operations abroad, from opening bank accounts to buying shares in non-domestic companies, investing where the best return is, and buying real estate;

For Europe's big, small and medium-sized companies, it means being able to invest in, and own, other European companies and take an active part in their management as well as raising money where it is cheapest, and, with it, to create jobs that in turn benefit Europe's citizens.

And for Europe's governments, it means lower borrowing rates than previously, making it easier to finance spending on schools, hospitals and other forms of public spending.

Free movement of capital . . . . . . . . . . . . . . . . . . . . . . .139

European Union Law: Free Movement of Capital

EU solidarity

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The broad concept of EU solidarity is said to be the underlying aspiration of the integration of the people of Europe and is guaranteed by the following freedoms:

Free movement of persons / workers  

Free movement of goods Free movement of services Free movements of capital

Central to the European Union is the concept of unification of nations with the emphasis representing recognition of the autonomy of individual states.

Free Movement of Capital and the Internal Market

Articles 56 – 60 EC Treaty

Articles 56 to 60 of the EC Treaty guarantee the fundamental freedom of the European Union in relation to free movement of capital. In particular Article 56 states the following:

“all restrictions on the movement of capital between Member States shall be prohibited”.

In order for the European Union Internal Market to be guaranteed it is essential that capital is able to be moved freely from European Union Member State to European Union Member State.  Free movement of capital is one of the key ingredients of the Single Market or the Internal Market as it enables integrated, open, competitive and efficient European financial markets and services.

Benefits of Free Movement of Capital

The free movement of capital has benefits for all of us both in an individual capacity but also for business which will then have a knock on effect for consumers.

European Citizens

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Citizens are thus provided with the ability to do many operations abroad for example opening bank accounts, buying shares in non-domestic companies, investing where the best return is and even going as far as purchasing property.

European Companies

European companies are thus able to invest in and own other European companies and take an active part in their management.The free movement of capital is therefore essential to guarantee the other fundamental freedoms of the European Union. Citizens are able to act in the same manner as the citizens of another Member State when moving there freely to undertake work due to the fact that they are able to open bank accounts and get themselves on the property ladder.The free movement of goods and services and the internal market is also guaranteed by enabling companies from other Member States to receive investment from companies and individuals from a Member State in which they may try wish to break into the market in but previously did not have the financial capabilities or the awareness of that market.

Are there any exceptions to the free movement of capital?

There are certain exceptions to the free movement of capital within the European Union Member States and also within those countries having trade agreements with the European Union. These are mostly in relation to taxation, prudential supervision, public policy considerations and financial sanctions agreed under the Common Foreign and Security Policy.Specifically sanctions and strict controls have been put in place in order to monitor suspicious transactions which may involve the movement of criminal funds through money laundering. If such transactions are found by financial institutions they are required to notify the requisite authorities of any such transactions.More recently with the increasing fears concerned with terrorist activity additional controls have been put in place in order to try

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and track funds being used to prepare or to support terrorist attacks.Provisions of the Treaty on the Functioning of the European Union (TFEU)

General principle of the free movement of capital Exceptions to the free movement of capital

Art. 26 (2) TFEU states that "the internal market shall comprise an area without internal frontiers in which the free movement of goods, persons, services and capital is ensured…"

General principle of the free movement of capital Exceptions to the free movement of capital

General principle of the free movement of capitalThe general principle about free movement of capital is defined in Art. 63 TFEU. This Article stipulates that "…all restrictions on the movement of capital between Member States and between Member States and third countries shall be prohibited." The wording of the Treaty provision defines the fundamental features of this principle:

"…all restrictions…" "…between Member States…"/ "between Member States and third

countries": capital movement concerned must contain a cross-border element

"third countries": this freedom also concerns third countries (read more)

"movement of capital": the wording of Article 63 TFEU contains no limitation as to who has the right to invoke this freedom

"…prohibited": Art. 63 TFEU has direct effect; it does not need any implementing legislation at Member States’ level and it directly confers rights on individuals which they can rely on before national courts (see e.g. case C-101/05, Skatteverket v A, §21).

"…all restrictions... shall be prohibited": Art. 63 TFEU prohibits all obstacles, not just discriminatory ones. It lays down a general prohibition, which goes beyond the mere elimination of unequal treatment on grounds of nationality (see case C-367/98, Commission / Portugal, §44).

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On payments, Art. 63(2) TFEU stipulates that "Within the framework of the provisions set out in this Chapter, all restrictions on payments between Member States and between Member States and third countries shall be prohibited." (read more)Exceptions to the free movement of capital

Exceptions stipulated in the Treaty Exceptions established by the case law of the Court of Justice

Exceptions stipulated in the Treaty

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Source : 'Capital movements in the legal framework of the Community' - Annex to Chapter 5 on Determinants of international capital flows (European Economy  Nr. 6, 2003, p. 322    ) 

Third-country restrictions (grandfathered provisions) Tax differentiation Prudential measures Public security Third country restrictions (economic and monetary union) Financial sanctions Balance of payment Restrictions on property ownership National security and Defence Secondary residences

Third-country restrictions (grandfathered provisions)Art. 64 TFEU allows Member States to apply restrictions that existed before a certain date tothird countries and certain categories of capital movements and it provides a basis for the introduction of such restrictions – but under very specific circumstances. Tax differentiation

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Art. 65(1) TFEU allows for different tax treatment of non-residents and foreign investment, but with the reservation that this must not represent a means of arbitrary discrimination or a distinguished restriction in the sense of Art. 65(3) TFEU.

Read morePrudential measuresArt. 65 (1b) TFEU allows Member States "to take all requisite measures to prevent infringements of national law and regulations", in particular in the field of taxation and theprudential supervision of financial institutions , or to lay down declaration procedures for purposes of administrative or statistical information (e.g. cash controls at the border), or to take measures which are justified on grounds of public policy or public security. However, these measures must not represent a means of arbitrary discrimination or a distinguished restriction in the sense of Art. 65(3) TFEU.Public securityArt. 65(1b) TFEU stipulates that "The provisions of Article 63 shall be without prejudice to the right of Member States…to take measures which are justified on grounds of public policy or public security." The CJEU has decided that the difficulty in identifying and blocking capital once it has entered a Member State may in principle justify differential treatment of transactions involving foreign direct investment (see case C-54/99, Église de Scientologie, §20).With respect to a system of prior administrative approval, the CJEU has explicitly ruled (see cases C-463/00, Commission v Spain, §69 and C-367/98, Commission v Portugal, §50) that "such a system must be based on objective, non-discriminatory criteria which are known in advance to the undertakings concerned…" Art. 65(3) TFEU additionally stipulates that "measures and procedures" under Article 65(1b) and (2) TFEU shall not constitute a means of arbitrary discrimination (e.g. measures targeting specific individual investors) or a disguised restriction. In addition, assuming such difficulty in identifying and blocking capital once it has entered a Member State for every case of indirect control by third country entities (e.g. blanket reference to the requirement of prior authorisation for third country entities) would seem to contradict Art. 54(1) TFEU.

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The CJEU has established (see e.g. case C-423/98, Albore, §19) that the requirements of public security cannot justify derogations from the Treaty rules such as the freedom of capital movements unless the principle of proportionality is observed, which means that any derogation must remain within the limits of what is suitable for securing the objective which it pursues and must not go beyond what is necessary in order to attain the pursued objective.Regarding specifically third countries, the Court has furthermore established (see case C-101/05, Skatteverket v A, §37) that it may be "…that a Member State will be able to demonstrate that a restriction on the movement of capital to or from third countries is justified for a particular reason in circumstances where that reason would not constitute a valid justification for a restriction on capital movements between Member States…".For more information on Sovereign Wealth Funds (SWFs), you can consult the dedicated section.Third country restrictions (economic and monetary union)Art. 66 TFEU a allows for restrictions regarding third countries to safeguard against serious difficulties for the operation of economic and monetary union. Financial sanctions Art. 75 TFEU provides for the possibility of financial sanctions against individuals, groups or non-state entities to prevent and combat terrorism.more

ReadPursuant to Art. 215 TFEU financial sanctions may be taken against third countries, or individuals, groups or non-state entities, based on decisions adopted within the framework of the common foreign and security policy.

Read moreBalance of paymentArt. 143 TFEU and Art. 144 TFEU allow for the taking of protective balance of payments measures, where difficulties jeopardise the functioning of the Internal Market or where a sudden crisis occurs.

Read moreRestrictions on property ownershipPrivatisation

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According to Art. 345 TFEU, "The Treaties shall in no way prejudice the rules in Member States governing the system of property ownership", a principle that is of particular importance in the context of privatisation measures. CJEU case law on Art. 345 TFEU is limited and mostly relates to expropriation. Communication of the Commission on intra-EU investment (1997), fn. 1). On privatisation see IP/01/872  .

The privatisation of a firm (from the public to the private sector) is an economic policy choice which, in itself, falls within the exclusive competence of Member States (see e.g.

However, the CJEU stated in its landmark decisions on special rights of public authorities that "Member States are not entitled to plead" Article 345 TFEU "by way of justification for obstacles, resulting from privileges attaching to their position as shareholder in a privatised undertaking, to the exercise of the freedoms provided for by the Treaty” (emphasis added). Member States thus need to operate within the limits of the Treaty freedoms in the post-privatisation phase of an enterprise.

In case C-174/04, , Commission/Italy, §32, the CJEU ruled that "The Treaty provisions on the free movement of capital do not draw a distinction between private undertakings and public undertakings…"ExpropriationArt. 345 TFEU stipulates that "The Treaties shall in no way prejudice the rules in Member States governing the system of property ownership". In case C-309/96, Annibaldi, §23, the Court noted "…the absence of specific Community rules on expropriation…" and concluded from the wording of what is now Art. 345 TFEU that the national measure at issue "…concerns an area which falls within the purview of the Member States."

The CJEU has ruled (case 182/83, Fearon v Irish Land Commission, §7) that such a system of property ownership does, however, remain subject to the fundamental rule of non-discrimination.

The EFTA-Court in case E-2/06 (Norwegian waterfalls) found that a State "...may legitimately pursue the objective of establishing a system of public ownership over these properties, provided that the objective is pursued in a non-discriminatory and proportionate manner" (§72). The EFTA Court further held that it needed to

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examine "whether the rules satisfy the requirements of suitability and necessity under the principle of proportionality" (§81).

Exceptions established by the case law of the Court of Justice of the European Union based on exceptions stipulated in the TreatyThe CJEU has established that the free movement of capital, as a fundamental principle of the Treaty, may be restricted only by national rules which are justified by reasons referred to in Art. 65(1) TFEU or by overriding requirements of the general interest (see e.g. cases C-463/00, Commission v Spain, §68 and C-174/04, Commission v Italy, §35, where the Court further notes that "…in order to be so justified, the national legislation must be suitable for securing the objective which it pursues and must not go beyond what is necessary in order to attain it, so as to accord with the principle of proportionality").Whilst these general interest considerations are not explicitly stated in the TFEU, some have been established by CJEU case law. Some examples:

On services of general interest the Court acknowledged with regard to safeguarding the solvency and continuity of the provider of the universal postal service, "that the guarantee of a service of general interest, such as universal postal service, may constitute an overriding reason in the general interest capable of justifying an obstacle to the free movement of capital" (see joined cases C-282/04 and C-283/04, Commission v the Netherlands, §38, §39).

Regarding the petroleum, telecommunications and electricity sectors, the CJEU has ruled, that "…it is undeniable that the objective of safeguarding supplies of such products or the provision of such services within the Member State concerned in the event of a crisis may constitute a public-security reason…and therefore may justify an obstacle to the free movement of capital." (case C-463/00, Commission v Spain, §71). In joined Cases C-388/00 and C-429/00, Radiosistemi, §44 (for the free movement of goods), the Court found that "It is true that the national type-approval for radio equipment is of such a nature as to be justified by considerations of public security and imperative

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requirements relating to the proper functioning of the public telecommunications network…"

Furthermore, Art. 21(4) of the Merger Regulation (Council Regulation (EC) No 139/2004) specifically qualifies the plurality of the media as a "legitimate interest" next to considerations qualifying as notions covered by Art. 65(1b) TFEU (public security, prudential rules).

8.1 The scope and ratione materiae of the free movement of capital . . . . . .141See page 13 of Lecture Notes

8.2 Derogations from the free movement of capital . . . . . . . . . . . . . .143See page 15 of Lecture Notes

8.3 The Economic and Monetary Union (EMU) . . . . . . . . . . . . . . . . .148

See page 23 of Lecture Notes.

Further reading on the ‘Freedoms’:http://ials.sas.ac.uk/postgrad/courses/docs/MA_Tax_Working_papers/Bernhard%20PUBLICATION%20Final.pdfhttp://jog.unideb.hu/eng/documents/llm_courses_spring_semester/case_law_ecj.pdf

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