The free movement of capital and payments is one of the four fundamental freedoms guaranteed by the European Union Treaties. This freedom is often overlooked by businesses and individuals, yet it plays a decisive role in the smooth running of the European internal market. Our firm regularly observes situations where this freedom is hampered by national regulations that sometimes conflict with European law. This article sets out the essential principles of this freedom of movement, its scope and the permitted exceptions.
What is the free movement of capital and payments?
Definition and historical development of the principle
The free movement of capital is the right of any person to make capital transfers and payments without unjustified restrictions, both between Member States and with third countries. This freedom covers a wide range of financial transactions, from property investments to bank transfers and company shareholdings.
Initially, the 1957 Treaty of Rome provided for the gradual and partial liberalisation of capital movements, subject to the adoption of implementing acts. At the time, the free movement of capital was considered to be the "poor relation" of 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 principle in its own right, 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 freedom of the EU
The free movement of capital has several complementary objectives:
- Ensuring the smooth operation of the internal market by allowing optimum allocation of financial resources
- Facilitating cross-border investment and stimulating economic growth
- Supporting Economic and Monetary Union
- Guaranteeing the mobility of production factors
- Encouraging the development of financial services on a European scale
The Court of Justice of the European Union has on several occasions described this freedom as a "fundamental principle", underlining its crucial importance for European economic integration. It is an essential pillar for economic players wishing to diversify their investments or develop their activities beyond national borders.
Scope: who and what is covered?
Operations covered by the freedom (concrete examples)
The material scope of the free movement of capital is particularly broad. It covers in particular :
- Direct investments, such as the acquisition of shares enabling effective participation in the management of a company
- Portfolio investments, i.e. financial investments with no intention of influencing management.
- Property investments in another Member State
- Cross-border financial loans and credits
- Transactions in securities and other financial instruments
- Inheritances and gifts involving cross-border elements
- Transfers of funds linked to the provision of services
- Bonds and other cross-border guarantees
The Court of Justice frequently refers to the nomenclature of capital movements set out in Annex I to Directive 88/361/EEC, which remains indicative in defining these transactions, although this list is not exhaustive.
Application between Member States and with third countries
A remarkable feature of the free movement of capital is that it applies not only to trade between EU Member States, but also to relations with third countries. This extension of the territorial scope of application is a major difference compared with other fundamental freedoms.
However, specific mechanisms apply to trade with third countries, allowing certain restrictions existing on 31 December 1993 to be maintained (Article 64 TFEU), safeguard measures to be adopted in the event of serious difficulties for the functioning of Economic and Monetary Union (Article 66 TFEU), and restrictive measures to be taken to prevent and combat terrorism (Article 75 TFEU).
Beneficiaries and debtors of the obligation of freedom of movement
Unlike other freedoms, the Treaty does not explicitly specify who may benefit from the free movement of capital. Case law has clarified that both natural and legal persons can benefit, whether they are EU residents or non-residents, individuals or companies.
The main debtors of this obligation are the Member States and their public authorities, which must refrain from adopting unjustified restrictive measures. The institutions of the European Union are also required to respect this freedom when drafting secondary legislation. The question of direct applicability to private persons remains more uncertain, although certain barriers of private origin may be concerned, particularly when they emanate from banking or financial institutions.
Relationship with other freedoms of movement
The specific link with freedom of establishment (investments)
The free movement of capital is closely linked to the freedom of establishment, particularly where investments in companies are concerned. The Court of Justice has developed nuanced case law to determine which of these freedoms takes precedence in a given situation.
Where a national regulation concerns a shareholding that makes it possible to exercise a definite influence on a company's decisions and to determine its activities, it is the freedom of establishment that primarily applies. On the other hand, if the shareholding in question does not confer such influence, the restriction will be examined in the light of the free movement of capital.
According to established case law, a holding of less than 10% of a company's capital generally falls within the scope of the free movement of capital, whereas larger holdings may fall within the scope of the freedom of establishment. This distinction is particularly important in relations with third countries, where only the free movement of capital is applicable.
Distinction and complementarity with the freedom to provide services
The free movement of capital is distinct from, but complementary to, the freedom to provide services. As the Court of Justice pointed out in the Luisi and Carbone judgment, payments are transfers of currency which represent a consideration in the context of an underlying transaction, whereas movements of capital are financial operations aimed essentially at investment or placement.
In some cases, the same national legislation may affect both freedoms simultaneously. In such cases, the Court generally identifies a primary infringement of one of the freedoms, with infringements of the other being regarded as secondary. For example, restrictions on banking services relate primarily to the freedom to provide services, while taxation of income from investments made in another Member State relates primarily to the free movement of capital.
Possible restrictions on freedom of movement
The principle of prohibiting restrictions
Article 63 TFEU lays down a general principle prohibiting restrictions on capital movements and payments. This prohibition covers not only discriminatory measures, which treat national and cross-border transactions differently, but also measures that are applied indiscriminately and have a restrictive effect on trade.
National regulations which :
- Discriminate on the basis of nationality or residence
- Make a distinction according to the place of establishment of a company
- Differentiate treatment according to the situation of a property
- Impose unjustified prior authorisations for capital transfers
- Limit holdings in certain companies
- Provide unfavourable tax treatment for cross-border investments
Derogations provided for in the Treaties (public policy, public security)
However, the Treaty provides for a number of derogations from this prohibition. In particular, Article 65(1) TFEU allows Member States :
- to apply the provisions of their tax legislation which make a distinction between taxpayers who are not in the same situation with regard to their residence or the place where their capital is invested
- Take measures justified on grounds of public order or public safety
These derogations must be interpreted strictly and may not constitute a means of arbitrary discrimination or a disguised restriction on the free movement of capital and payments. Public policy and public security can only be invoked where there is a "genuine and sufficiently serious threat affecting a fundamental interest of society", as the Court emphasised in the Church of Scientology judgment.
Overriding reasons of general interest accepted by case law
In addition to the derogations expressly provided for in the Treaty, the Court of Justice has recognised that certain overriding reasons in the general interest may justify restrictions on the free movement of capital. These include, in particular
- A coherent national tax system
- The effectiveness of tax audits and the fight against tax evasion
- Protecting minority shareholders
- Safeguarding a balanced distribution of taxing powers between States
- Environmental protection and regional planning
- Guaranteeing the security of energy supplies
- Promoting research and development
- Consumer protection
On the other hand, purely economic objectives, such as reducing tax revenue or strengthening the competitive structure of the market, do not constitute admissible overriding reasons in the general interest.
Conditions for justifying restrictive measures (proportionality)
To be justified, a restriction on the free movement of capital must meet several cumulative conditions:
- Be suitable for achieving the objective pursued (suitability criterion)
- Do not go beyond what is necessary to achieve this objective (necessity criterion)
- Be applied in a non-discriminatory manner, unless there is special justification for doing so
- Be based on objective, precise criteria that are known in advance
- Respect fundamental rights, in particular the right to an effective remedy
The Court of Justice exercises particularly rigorous control over compliance with the principle of proportionality. It examines whether less restrictive measures would make it possible to achieve the same objective, such as replacing an authorisation system with a system of prior declaration, or the possibility of using the mechanisms for mutual assistance between tax administrations provided for in EU law.
Case studies: when should you call a lawyer?
Blocking fund transfers
Unjustified blocking of fund transfers between Member States is a typical violation of the free movement of capital. These situations can take various forms:
- Refusal by a bank to process an international transfer without valid justification
- Excessive delays in executing cross-border transfers
- Disproportionate documentary requirements for transfers to certain countries
- Discriminatory charges for cross-border transactions
In such situations, the assistance of a European business lawyer is often required to assess the legality of the restrictions applied and to take the appropriate steps with the relevant national or European authorities.
Restrictive national regulations on foreign investment
Member States sometimes introduce mechanisms to control foreign investment, particularly in sectors considered strategic. These mechanisms, such as "golden shares" (specific shares conferring special rights on the State) or prior authorisation schemes, may be contrary to EU law if they do not comply with the strict conditions laid down by case law.
A lawyer can help you with :
- Assessing whether an authorisation scheme complies with European law
- Challenging a decision to refuse investment authorisation
- Structuring an investment transaction to limit legal risks
- Represent your interests in litigation before national or European courts
Discriminatory taxation of capital movements
Tax issues are a particularly sensitive area when it comes to the free movement of capital. Many national tax regulations can create unjustified barriers:
- Higher taxation of foreign dividends
- Unfavourable tax treatment of cross-border inheritances or gifts
- Non-deductibility of certain charges relating to investments made in other Member States
- Application of discriminatory withholding taxes
The complexity of these situations requires the expertise of a lawyer to identify the discrimination, assess the possibilities for challenging it and, if necessary, take appropriate action to obtain repayment of the tax unduly levied.
If you are faced with a potential restriction on the free movement of capital, do not hesitate to contact our firm to discuss your options and determine the best legal strategy to adopt. Our team of lawyers will be able to guide you effectively in this complex but fundamental area for your cross-border operations.
Sources
- Treaty on the Functioning of the European Union (TFEU), Articles 63 to 66
- Council Directive 88/361/EEC of 24 June 1988 implementing Article 67 of the Treaty on European Union.
- Directive 2011/16/EU on administrative cooperation in the field of taxation
- CJEU, 14 March 2000, Église de Scientologie, Case C-54/99
- CJEU, 12 December 2006, Test Claimants in the FII Group Litigation, Case C-446/04
- CJEU, 17 October 2013, Welte, Case C-181/12
- CJEU, 6 March 2018, SEGRO and Horvath, aff. jtes C-52/16 and C-113/16
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