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S33-Free Movement of Capital; Distinction between Different Freedoms of Movement Taxation and Free Movement of Capital CASE C-443/06 HOLLMANN a favourable tax provision which limited the amount to be taken into account to 50% of capital gains was only applicable to persons residing in Portugal Residents: taxed on 50% of the capital gains → progressive rate: max. 42% Non-residents: taxed on total amount of the capital gains realized → tax rate: 25% the transfer of capital is less attractive for non-residents by deterring them from making investments in immovable property in Portugal and from carrying out transactions related to those investments Under Article 65 TFEU MS may distinguish between residents and non-residents as long as the distinction does not amount to an arbitrary discrimination or a disguised restriction on the free movement of capital the situations must also not be objectively comparable alternatively there must be overriding reasons in the public interest which justify the different treatment
- Income received: capital gains resulting from the transfer of immovable property
- Concerns both residents and non-residents
- The MS in which the taxable income arises is Portugal in both cases => no difference in the situation capable of justifying the unequal treatment Possible justification: the need to maintain the coherence of the national tax system in order to be justified → a direct link between the tax advantage and the offsetting of that advantage by a particular levy is required not fulfilled in Hollmann → the reduction of half of the tax basis of capital gains outweighs the progressive tax rate ARTICLE 63 TFEU COVERS THREE TYPES OF RESTRICTIONS Measures which discourage investment in another MS discrimination against transnational activities Measures that restrict investment in a MS e.g. require an authorization before one can invest in a sector or activity Measures which limit control over the investment e.g. ‘golden shares’ cases DEROGATIONS FROM THE FREE MOVEMENT OF CAPITAL Derogation grounds in Article 65 TFEU e.g. public policy public security the prevention of the infringement of national law especially concerning taxation and the prudential supervision of financial institutions procedures for the declaration of capital movements for purposes of administrative and statistical information the right to different tax treatment of residents and non-residents not in the same situation → their situations must not be objectively comparable MS must not abuse the derogation possibilities → derogations only acceptable if they do not amount to an arbitrary discrimination or a disguised restriction on the free movement of capital (Article 65(3) TFEU) MS may also invoke overriding reasons in general interest a general reference to goals that are in the public interest is not sufficient (Case C-463/00 Spanish Golden Shares) the measures taken must be proportionate The EP and the Council shall define a framework for administrative measures with regard to capital movements and payments to prevent and combat terrorism and related activities (Article 75 TFEU) RESTRICTIONS ON CAPITAL MOVEMENT TO OR FROM THIRD COUNTRIES Controls on the movement of funds in or out of the Union already in place prior to December 31 1993 and related to direct investment establishment the provision of financial services or the admission of securities to capital markets may be retained (Article 64(1) TFEU) The Council may after consulting the EP unanimously adopt measures which constitute a step backwards in Union law as regards the liberalization of the movement of capital to or from third countries (Article 64(3) TFEU) MS may request the Council to adopt a decision stating that restrictive tax measures adopted by a MS concerning one or more third countries is compatible with the Treaties insofar as they are justified by one of the objectives of the Union and are compatible with the proper functioning of the internal market (Article 65(4) TFEU) Safeguard clause in Article 66 TFEU: allows the Council to take safeguard measures in relation to third countries under certain exceptional circumstances when movements of capital to or from third countries cause or threaten to cause serious difficulties for the operation of the EMU e.g. balance of payments difficulties on a proposal by the Commission the EP must be consulted the Council will adopt safeguards measures by qualified majority if such measures are strictly necessary safeguards measures may not exceed 6 months Summary of the Analysis of Free Movement of Capital Does the transaction constitute a cross-border movement of capital? The restrictions-based (or obstacles-based) approach used by the CJEU in the Golden Share cases is today increasingly applied to free movement of capital Regarding taxation: the analysis focuses today on whether the tax measure is discriminatory Derogations under Article 65 TFEU or overriding reasons of public interest to justify the restriction on the free movement of capital? may not amount to arbitrary discrimination or a disguised restriction on the free movement of capital more justifications available for movements of capital from third countries Proportionality of the measure? also in relation to other fundamental rights? If a MS argues that a measure which it has adopted and which restricts a fundamental freedom guaranteed by the TFEU is justified by a derogation in the TFEU or an overriding reason in the public interest recognized by EU law à implementing EU law (Article 51(1) of the Charter) à must comply with the fundamental rights enshrined in the Charter any limitations on the rights and freedoms laid down by the Charter must be justified in the light of the requirements set out in Article 52(1) of the Charter see e.g. Case C 78/18 Commission v Hungary Conclusion The restrictions-based (or obstacles-based) approach is today increasingly applied to free movement of capital measures which hinder access to the market breach Article 63 TFEU unless they can be justified by public interest requirements or express derogations in Article 65 TFEU (and are proportionate) Regarding taxation: the analysis focuses today on whether the tax measure is discriminatory directly discriminatory measures may only be justified under express derogations in Article 65 TFEU indirectly discriminatory measures may also be justified by a public interest requirement Derogation grounds in Article 65 TFEU e.g. public policy and public security and the prevention of the infringement of national law (Article 65(1)(b) TFEU) the right to different tax treatment of residents and non-residents who are not in the same situation (Article 65(1)(a) TFEU) MS must not abuse the derogation possibilities Non-discriminatory restrictions may also be justified by overriding reasons in general interest IMPORTANNCE OF Distinction between Different Freedoms of Movement Article 63 TFEU applies to movement of capital within the EU/EEA and between the EU/EEA and third countries Articles 49 and 56 TFEU apply on to movements of the self-employed and companies within the EU/EEA Not clear whether the rules on capital are horizontally directly effective in actions between private parties → the distinction between the freedoms is important However: the concurrent application of free movement of capital and other fundamental freedoms has also not been excluded FREE MOVEMENT OF CAPITAL AND FREE MOVEMENT OF GOODS The free movement of capital covers: tax treatment of charitable gifts tax treatment of transferred assets both sums of money and movable and immovable property FREE MOVEMENT OF CAPITAL AND FREEDOM OF ESTABLISHMENT Analysis of the object and the purpose of the rule alternatively: the facts of the case Definite influence on a company’s decisions and ability to determine its activities → freedom of establishment (see e.g. Lasertec) If the intention is merely to make financial investment without any intention to influence the management and control of the undertaking (portfolio investment) → free movement of capital LASERTEC Loan interest paid by a resident capital company to a shareholder established in a third-country who has substantial holding in the capital of that company → covert distribution of profits The non-resident company has a substantial holding in the nominal capital of the resident borrowing company (2/3) → a determinative influence on the German company’s decisions and activities → freedom of establishment If the notational measure has any restrictive effect on the free movement of capital → the unavoidable consequence of the restriction on the freedom of establishment If MS can show that the objective of the legislation restricting investments is to control establishment => third country investors cannot challenge the measure FREEDOM TO PROVIDE SERVICES AND FREE MOVEMENT OF CAPITAL Fidium Finanz Legal issue: whether granting credit on a commercial basis constitutes a provision of services or falls within the scope of the free movement of capital Regulate different situations The notion of services in Article 57 TFEU covers services which are not governed by other freedoms → no order of priority If a national measure relates to the freedom to provide services and the free movement of capital at the same time To what extent is the exercise of those fundamental freedoms affected? What is the center of gravity of the measure? The activity of granting credit on a commercial basis concerns in principle both freedoms Purpose of the German rules → to supervise the provision of services and to authorize such provision only for undertakings which guarantee to conduct such transactions properly => predominant purpose: access to the financial market the case concerned the entrepreneurial activity of financial services May also make financial services offered by companies established outside the EEA to clients established in Germany less accessible → reduction of cross-border financial traffic relating to those services → unavoidable consequence of the restriction on the freedom to provide services FREE MOVEMENT OF GOODS AND FREEDOM TO PROVIDE SERVICES Canal Satélite Digital Legal issue: the compatibility with the free movement of goods and the freedom to provide services of a prior authorization procedure for the marketing by conditional-access service operators of apparatus equipment decoders or systems for the digital transmission and reception of television signals by satellite In the field of telecommunications → difficult to determine generally whether free movement of goods or freedom to provide services should take priority the question of whether the restrictions are justified must be examined simultaneously in light of both Articles 34 and 56 TFEU if the aspects are intimately linked Informing and protecting consumers (as users of products or services) → legitimate grounds of public interest Compliance with the principle of proportionality: A prior administrative authorization scheme must be based on objective non-discriminatory criteria which are known in advance in such a way as to circumscribe the exercise of the national authorities' discretion so that it is not used arbitrarily; A measure cannot be regarded as necessary to achieve the aim pursued if it essentially duplicates controls which have already been carried out in the context of other procedures either in the same State or in another MS; principle of mutual recognition and complementary control Necessary only where subsequent control must be regarded as being too late to be genuinely effective and to enable it to achieve the aim pursued; Does not comply with the free movement of goods and the freedom to provide services if because of its duration and the disproportionate costs that it entails it deters the operators concerned from pursuing their business plan Conclusions (1) The distinction between the freedoms is important only Article 63 TFEU applies to movements of capital between the EU/EEA and third countries not all freedoms are horizontally directly effective in actions between private parties Usually the center of gravity test will apply However: the concurrent application of free movement of capital and other fundamental freedoms has not been excluded In particular in cases concerning telecommunications and broadcasting services the distinction between freedoms may be difficult and both the freedom to provide services and the free movement of goods may both be applied Areas in which only free movement of capital applies: property purchase and investment building and land subdivision currency and other financial transactions loans investments in companies à if the national rules affect those who do not have a dominant interest in the company the Golden Share cases The CJEU has also applied Article 63 TFEU to the tax treatment of certain capital movements especially in connection with property purchase investment inheritance and charitable gifts
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CASE C-78/18 COMMISSION V HUNGARY ‘The Transparency Law’ → imposes obligations of registration declaration and publication on certain categories of civil society organizations directly or indirectly receiving support from abroad exceeding a certain threshold + provides for penalties Existence of a restriction on the free movement of capital (Article 63 TFEU) Movement of capital? Cross-border dimension? Restriction on the free movement of capital? Inheritances and gifts
- = movements of capital (if there is a cross-border element) also financial loans or credits sureties or other guarantees granted by non-residents to residents State measures of discriminatory in nature establish directly or indirectly a difference in treatment between domestic and cross-border movements of capital does not correspond to an objective difference in circumstances contrary to Article 63 TFEU Justifications increasing the transparency of the financing of associations public policy or public security (Article 65(1)(b) TFEU) only possible if the EU legislature has not completely harmonized the measures which seek to ensure their protection Limitations of rights enshrined in the Charter the right to freedom of association (Article 12(1) of the Charter) the right to respect for private and family life (Article 7 of the Charter) the right to protection of personal data (Article 8(1) of the Charter) COMMISSION V HUNGARY (“HIGHER EDUCATION”) Requirement that foreign higher education institutions situated outside the EEA conclude an international agreement as a prerequisite for providing education services → breach of Article XVII of the GATS? Requirement that foreign higher education institutions offer higher education in their country of origin → breach of Article 16 of Directive 2006/123 and Articles 49 and Article XVII of the GATS? Imposition of those measures → breach of Article 13 Article 14(3) and Article 16 of the Charter