Study Notes on Free Movement of Capital

FREE MOVEMENT OF CAPITAL

Introduction

  • Lecture presented by Elisabeth Schoyen at The Hague University of Applied Sciences

  • Focus of the lecture: Internal Market, specifically the free movement of capital.

Learning Objectives

  • Understand the legal framework and its origins

  • Explore the scope of the capital rules

  • Identify restrictions, express derogations, and justifications related to capital movements

  • Examine the relationship between the free movement of capital and the Economic and Monetary Union (EMU)

LEGAL FRAMEWORK AND ORIGINS

Overview

  • The Free Movement of Capital (FMC) is recognized as the most recent and broadest freedom in the EU legal context.

  • The liberalization of capital flows has progressed gradually.

  • Restrictions on capital movements and payments have been prohibited since the Maastricht Treaty.

Legal Basis

  • Articles 63-66 of the Treaty on the Functioning of the European Union (TFEU) govern the FMC.

Objectives

  • The goal is the complete removal of restrictions on capital movements between Member States and between Member States and third countries, with exceptions under specific circumstances.

Historical Background

  • Pre-Maastricht rules on capital were limited due to the close linkage of capital movements to the stability of economic and monetary policies of Member States (MSs).

  • Liberalization was slow; the Treaty of Rome (1957) mandated that restrictions should only be removed to the extent necessary for the functioning of the common market (referenced in Article 67(1) EEC).

  • Article 67(1) EEC did not abolish FMC restrictions by the end of the transitional period; instead, it tasked the Council with adopting directives based on Article 69 EEC.

  • The 'First Capital Directive' was enacted in 1960, followed by a second directive in 1962, facilitating some degree of liberalization.

Legal Cases

  • Casati (Case 230/80): It established that Article 67(1) EEC differed from other freedoms due to its lack of direct effect.

  • Member States held significant control over the pace of capital liberalization.

Liberalization Progress

  • Capital movements were fully liberalized by Council Directive 88/361/EEC in 1988, which abolished all remaining restrictions on capital movements among Member State residents from 1 July 1990.

  • The directive aimed to liberalize capital movements involving third countries similarly.

  • Article 1(1) of Directive 88/361/EEC states that Member States must abolish restrictions on movements of capital between residents of Member States.

  • The annex of this directive provided a non-exhaustive nomenclature of capital movements to aid application.

  • The coming into force of Directive 88/361 marked the first stage of monetary union. Although superseded by newer treaty rules on FMC, it continues to define the notion of capital movements.

  • The Maastricht Treaty introduced FMC as a formal treaty freedom and initiated the second stage of monetary union in 1994.

  • By July 1994, all MSs were required to comply with provisions related to the FMC and develop multiannual programs to achieve the necessary convergence for the EMU.

Stages of Monetary Integration

  • Third Stage (1 January 1999): Introduction of the euro as a single currency for Eurozone states, with euro coins and notes starting circulation on 1 January 2002.

SCOPE AND PROVISIONS ON CAPITAL

Definition of Capital

  • Free movement of capital is defined in Articles 63-66 TFEU.

  • Article 63 states: "All restrictions on the movement of capital and all restrictions on payments between Member States and between Member States and third countries shall be prohibited."

  • The TFEU does not explicitly define 'movements of capital' or 'payments' under Article 63(2) TFEU.

Guidance from CJEU

  • The CJEU often refers to the annex of Directive 88/361 for insights on what constitutes capital.

  • The annex provides a lengthy list with explanatory notes on capital movements.

  • Case C-222/97 Trummer and Mayer further clarified types of transactions, emphasizing that if a transaction is not listed in Annex 1, it may still be covered by Article 63(1) TFEU.

  • Notable transactions considered as capital movements by the CJEU include:

    • Mortgages (C-222/97 Trummer and Mayer)

    • Investments in real property (C-98/01 Commission v UK)

    • Administration and sale of properties (C-386/04 Centro di Musicologia Walter Stauffer, C-443/06 Hollmann v Fazenda Publica)

    • Direct investments, portfolio investments, inheritances, banknotes, and gifts in various forms.

Territorial Scope

  • Intra-State Movement: Covers movements within the EU, between Member States, and between EU MSs and third countries. This broad approach is advantageous for enhancing the principle of an open market economy as outlined in Article 119 TFEU.

  • Limitations exist and are defined in Article 65 TFEU, with four further potential exceptions.

Limitations on Broad Approach

  1. Historic Limitations: MSs may retain restrictions on direct investment based on existing measures before 31 December 1993 (Art. 64(1) TFEU - 'grandfather clause').

  2. Potential Limitations:

    • The Council of the EU (COU) can adopt measures reversing capital movement liberalization post-1993 after consulting the European Parliament (Art. 64(2) TFEU).

    • Legislative measures regarding direct investment or securities can be adopted (Art. 64(3) TFEU).

    • The Commission or COU may allow a Member State to implement restrictive measures considered compatible with Treaties if they align with EU objectives and the internal market's proper functionality (Art. 65(4) TFEU).

  3. Balance of Payments: Article 66 TFEU permits emergency measures against third countries, limited to six months.

  4. Political Measures: Article 75 TFEU allows the COU and EP to enact administrative measures to combat terrorism.

Direct Effect of Article 63 TFEU

  • Sanz de Lera (Joined cases C-163, 165 and 250/94): The Court found Article 73b(1) EC (now Article 63(1) TFEU) to be directly effective, allowing vertical direct effect.

PROHIBITED MEASURES UNDER ARTICLE 63(1) TFEU

Approaches to Prohibition

  • Understanding what measures are prohibited involves two main approaches:

    • Discrimination approach

    • Restrictions/obstacles-based approach

Discrimination Approach

  • Originally encompassed in Article 67 EEC, which stipulated abolishment of all restrictions on FMC and discrimination based on nationality, residence, or investment location.

  • Although Maastricht amendments omitted the explicit reference to discrimination, the CJEU applies both models to invalidate measures that interfere with FMC.

  • Grounds for discrimination include:

    • Nationality

    • Residence of parties

    • Location of capital investment

Types of Discrimination

  • Direct vs. Indirect Discrimination:

    • Many case laws emphasize direct discrimination (e.g., Case C-367/98 Commission v. Portugal).

    • Indirect discrimination is less evident (e.g., Case E-2/06 EFTA Surveillance Authority v. Norway).

  • Non-Discriminatory National Rules: Cases such as the Golden Share cases (2003) confirm that non-discriminatory measures hindering market access violate Article 63(1) TFEU unless justified.

Restrictions/Obstacles-based Approach

  • More prevalent than the discrimination model, used for capital movement regulation to promote convergence among freedoms.

  • Golden Share cases (2002) mark a directional shift in interpretation.

Examples of Restrictions by CJEU

  • A Member State measure banning its residents from acquiring specific securities.

  • Restrictions on obtaining loans abroad.

  • National regulations requiring prior administrative approval for property transactions.

  • Prohibitions on foreign currency mortgages.

  • Excessive fines imposed on undeclared cash.

EXPRESS DEROGATIONS AND JUSTIFICATIONS

Derogations Explained

  • Treaty provisions provide specific derogations:

    • Article 64 TFEU: Grandfather clause for previously existing restrictions.

    • Article 65(1)(a) TFEU allows Member States to maintain direct taxation measures as long as they are non-discriminatory based on nationality.

    • Article 65(1)(b) TFEU permits measures for fiscal supervision and combating illegal activities, provided they are justified under public policy or security and are proportional.

Interpretation of Derogations

  • Derogations to be strictly interpreted (referenced in Case 36/75 Rutili).

  • Derogations must not serve purely economic purposes (Case 36/75 Rutili).

  • Those affected must have access to legal recourse (Case 222/86 Unectef v Heylens).

  • Derogations must comply with the principles of proportionality and legal certainty (Case C-54/99 Eglise de Scientologie).

Objective Justifications

  • The CJEU has articulated non-exhaustive lists of objective justifications for restrictions:

    • Environmental protection (Case Reisch)

    • Public order (e.g., minimum energy supply protection - Case C-326/07 Commission v Italy)

    • State value protection (e.g., research and development promotion - Case C-10/10 Commission v Austria)

    • Interests of third parties protection (e.g., asset safety for collective investments - Case C-39/11 VBV).

  • It is crucial that justifications are not purely economic (Case 20/09 Commission v Portugal).

THE ECONOMIC AND MONETARY UNION (EMU)

Goals of EMU

  • The EMU serves as an umbrella term for policies of MSs aimed at closer economic integration.

  • The free movement of capital is a critical component for achieving the EMU.