The free movement of capital and payments is one of the four fundamental freedoms guaranteed by the European Union treaties. Often overlooked by businesses and individuals, this freedom nevertheless plays a decisive role in the proper functioning of the European internal market. Our firm regularly observes situations in which this freedom is hindered by national regulations that may conflict with EU law. This article presents the essential principles of this freedom of movement, its scope of application and the exceptions permitted.

What is the free movement of capital and payments?

Definition and historical development of the principle

The free movement of capital refers to the right of any person to carry out transfers of capital and payments without unjustified restrictions, both between Member States and with third countries. This freedom covers a wide range of financial operations, from real estate investments to bank transfers, including the acquisition of shareholdings in companies.

Initially, the 1957 Treaty of Rome provided for a gradual and partial liberalisation of capital movements, conditional on the adoption of implementing acts. At the time, the free movement of capital was regarded as the « poor relation » among the fundamental freedoms. A major turning point came with the adoption of Directive 88/361/EEC, followed by the Maastricht Treaty in 1992, which enshrined this freedom as a fully-fledged principle, applicable not only between Member States but also in relations with third countries. Article 63 of the Treaty on the Functioning of the European Union (TFEU) now clearly states that « all restrictions on the movement of capital between Member States and between Member States and third countries shall be prohibited ».

The objectives of this fundamental EU freedom

The free movement of capital pursues several complementary objectives:

  • Ensuring the proper functioning of the internal market by allowing an optimal allocation of financial resources
  • Facilitating cross-border investment and stimulating economic growth
  • Supporting the achievement of Economic and Monetary Union
  • Guaranteeing the mobility of factors of production
  • Promoting the development of financial services at the European level

The Court of Justice of the European Union has repeatedly described this freedom as a « fundamental principle », underlining its crucial importance for European economic integration. It is an essential pillar for economic actors seeking to diversify their investments or expand their activities beyond national borders.

Scope of application: who and what is concerned?

Operations covered by the freedom (concrete examples)

The material scope of the free movement of capital is particularly broad. It notably covers:

  • Direct investments, such as the acquisition of shares allowing effective participation in the management of a company
  • Portfolio investments, corresponding to financial placements without the intention of influencing management
  • Real estate investments in another Member State
  • Cross-border loan and financial credit operations
  • Operations involving securities and other financial instruments
  • Successions and gifts involving cross-border elements
  • Fund transfers linked to the supply of services
  • Cross-border guarantees and sureties (cautionnements, personal guarantees under French law)

The Court of Justice frequently refers to the nomenclature of capital movements set out in Annex I to Directive 88/361/EEC, which retains an indicative value in defining these operations, although this list is not exhaustive.

Application between Member States and with third countries

A remarkable feature of the free movement of capital lies in the fact that it applies not only to exchanges between EU Member States but also to relations with third countries. This extension of the territorial scope represents a major difference compared to the other fundamental freedoms.

However, specific mechanisms apply to exchanges with third countries, allowing in particular for the maintenance of certain restrictions in existence on 31 December 1993 (Article 64 TFEU), the adoption of safeguard measures in case of serious difficulties for the functioning of Economic and Monetary Union (Article 66 TFEU), or the imposition of restrictive measures to prevent and combat terrorism (Article 75 TFEU).

Beneficiaries and those bound by the obligation of free movement

Unlike other freedoms, the Treaty does not explicitly specify who may rely on the free movement of capital. Case law has clarified that both natural and legal persons may benefit from it, whether they are EU residents or non-residents, individuals or companies.

The primary addressees of this obligation are the Member States and their public authorities, which must refrain from adopting unjustified restrictive measures. EU institutions are also required to comply with this freedom when drafting secondary legislation. The question of direct applicability to private persons remains more uncertain, although certain obstacles originating from private actors may be caught, notably where they stem from banking or financial institutions.

Interaction with the other freedoms of movement

The specific link with the freedom of establishment (investments)

The free movement of capital has close ties with the freedom of establishment, particularly with regard to investments in companies. The Court of Justice has developed nuanced case law to determine which of these freedoms prevails in a given situation.

When a national regulation concerns a shareholding allowing definite influence over a company’s decisions and the determination of its activities, freedom of establishment applies primarily. Conversely, if the shareholding at issue does not confer such influence, the restriction will be examined in light of the free movement of capital.

Thus, according to settled case law, a shareholding of less than 10% of a company’s capital generally falls under the free movement of capital, whereas larger shareholdings may fall under the freedom of establishment. This distinction is particularly important in relations with third countries, where only the free movement of capital applies.

Distinction and complementarity with the freedom to provide services

The free movement of capital is distinct from, yet complementary to, the freedom to provide services. As the Court of Justice clarified in the Luisi and Carbone judgment, payments are transfers of currency constituting consideration in the context of an underlying transaction, whereas capital movements are financial operations essentially aimed at placement or investment.

In some cases, a single national regulation may simultaneously affect both freedoms. The Court then generally identifies a principal infringement of one of the freedoms, with infringements of the other being considered secondary. For example, restrictions on banking services fall primarily under the freedom to provide services, whereas the taxation of income from placements and investments made in another Member State relates primarily to the free movement of capital.

Permissible restrictions on free movement

The principle of prohibition of restrictions

Article 63 TFEU lays down a general principle of prohibition of restrictions on capital movements and payments. This prohibition targets not only discriminatory measures, which treat domestic and cross-border operations differently, but also measures applicable without distinction that have a restrictive effect on trade.

National regulations are therefore prohibited when they:

  • Establish discrimination based on the nationality or residence of persons
  • Draw a distinction based on the place where a company is established
  • Differentiate treatment depending on the location of an asset
  • Impose unjustified prior authorisations on capital transfers
  • Limit shareholdings in certain undertakings
  • Provide for unfavourable tax treatment of cross-border investments

Derogations provided by the treaties (public policy, public security)

The Treaty nevertheless provides for several derogations from this principle of prohibition. Article 65(1) TFEU in particular allows Member States to:

  • Apply the provisions of their tax law which distinguish between taxpayers who are not in the same situation with regard to their place of residence or the place where their capital is invested
  • Take measures justified on grounds of public policy (ordre public) or public security

These derogations are to be interpreted strictly and may constitute neither a means of arbitrary discrimination nor a disguised restriction on the free movement of capital and payments. Public policy and public security may only be invoked in the event of a « genuine and sufficiently serious threat affecting a fundamental interest of society », as the Court emphasised in the Église de Scientologie judgment.

Overriding reasons in the public interest admitted by case law

Beyond the derogations expressly provided for by the Treaty, the Court of Justice has recognised that certain overriding reasons in the public interest may justify restrictions on the free movement of capital. These justifications include in particular:

  • The coherence of the national tax system
  • The effectiveness of tax supervision and the fight against tax evasion
  • The protection of minority shareholders
  • The preservation of a balanced allocation of taxing powers between States
  • Environmental protection and spatial planning
  • Safeguarding the security of energy supply
  • Promoting research and development
  • Consumer protection

By contrast, purely economic objectives, such as reducing tax revenue losses or strengthening the competitive structure of the market, do not constitute admissible overriding reasons in the public interest.

Conditions justifying restrictive measures (proportionality)

To be justified, a restriction on the free movement of capital must satisfy several cumulative conditions:

  1. Be suitable for achieving the objective pursued (suitability test)
  2. Not go beyond what is necessary to attain that objective (necessity test)
  3. Be applied in a non-discriminatory manner, subject to specific justification
  4. Be based on objective, precise criteria known in advance
  5. Respect fundamental rights, in particular the right to an effective remedy

The Court of Justice exercises particularly rigorous review of compliance with the principle of proportionality. It examines whether less restrictive measures would allow the same objective to be achieved, for example the substitution of a prior declaration system for an authorisation regime, or the possibility of relying on the mutual assistance mechanisms between tax administrations provided for by EU law.

Practical cases: when to call on a lawyer?

Blocking of fund transfers

The unjustified blocking of fund transfers between Member States is a characteristic violation of the free movement of capital. Such situations can arise in various forms:

  • A bank’s refusal to carry out an international transfer without valid justification
  • Excessive delays in the execution of cross-border transfers
  • Disproportionate documentary requirements for transfers to certain countries
  • Discriminatory fees applied to cross-border operations

In such situations, the involvement of a lawyer experienced in European business law is often necessary to assess the legality of the restrictions applied and to initiate the appropriate steps before the competent national or European authorities.

National regulations restricting foreign investment

Member States sometimes put in place mechanisms to control foreign investment, particularly in sectors considered strategic. These arrangements, such as « golden shares » (special shares conferring particular rights on the State) or prior authorisation regimes, may conflict with EU law if they do not meet the strict conditions laid down by case law.

A lawyer can assist you in:

  • Assessing the compliance of an authorisation regime with EU law
  • Challenging a decision refusing authorisation for an investment
  • Structuring an investment operation to limit legal risks
  • Representing your interests in litigation before national or European courts

Discriminatory taxation linked to capital movements

Tax issues form a particularly sensitive area in relation to the free movement of capital. Numerous national tax rules may create unjustified obstacles:

  • Heavier taxation of dividends of foreign origin
  • Unfavourable tax treatment of cross-border successions or gifts
  • Non-deductibility of certain expenses linked to investments made in other Member States
  • Application of discriminatory withholding taxes

The complexity of these situations calls for the input of a lawyer to identify the discrimination, assess the scope for challenge and, where appropriate, bring the relevant proceedings to obtain a refund of unduly levied taxes.

If you are faced with a potential restriction on the free movement of capital, please do not hesitate to contact our firm to discuss your options and determine the best legal strategy to adopt. Our team of lawyers is able to guide you effectively through this complex but fundamental area for your cross-border operations.

BOOK AN APPOINTMENT