W7 Free Movement of Capital

Question 1

Article 63 TFEU

Answer 1

Free Movement of Capital

Question 2

Authority for free movement of capital?

Answer 2

Art 63 TFEU

Question 3

What does article 63 TFEU prohibit?

Answer 3

1) Restrictions on movement of capital between MS
2) Restrictions on payments between MS
3) Restrictions on payments between MS and 3rd countries

Question 4

What is the difference between capital and payment?

Answer 4

Payment relates to an underlying transaction
Capital is an investment

Question 5

Does Art 63 apply to non-EU citizens?

Answer 5

Yes (different from the other fundamental freedoms)

Question 6

Trummer and Mayer

Answer 6

Facts: Austria required mortgages to be registered in the national currency or in gold. Tried to justify on an ORPI for predictability and transparency of the mortgage system. Court accepted these justifications if the restriction was non-discriminatory and proportionate. Creditor protection was not accepted as a justification since measure was not suitable - gold is as unpredictable/fluctuating as foreign currencies.

Significance: Mortgages and gold are included in definition of capital. ORPI can be a justification if restriction is non-discrimatory and proportionate.

Question 7

C-370/05 Festersen

Answer 7

Facts: German national acquired a designated agricultural property in Denmark. Danish law required any acquirer of agricultural land to live on it. Was challenged under free movement of capital. Was found to be a non-discriminatory restriction, with an ORPI justification (preservation of agricultural communities, traditional farming methods, etc), but was not suitable to the objective/proportionate.

Significance: Land is capital (immovable property). Test for restrictions: measures which are likely to discourage non-residents from making investments in a MS or discourage MS residents from investing in other States.

Question 8

What is capital?

Answer 8

Resources used for, or capable of, investment to generate revenue.

Question 9

C-251/98 Baars

Answer 9

Facts: NL resident owning shares in an Irish company. Under NL Wealth Tax law, substantial shareholding in NL companies are exempt/subject to lower tax rate. Taxpayer argued the exemption should apply to his Irish holdings as well. Court held it fell under free movement of establishment since it was a controlling interest. It was found to infringe freedom of establishment.

Significance: Establishment vs capital

Question 10

Case C-157/05 Holbock

Answer 10

Facts: Austrian taxpayer receiving dividends from Swiss shares objected to Austrian tax rules, which tax Austrian dividends half as much. Ruled as falling under free movement of capital or establishment.

Significance: Acquiring shares engages both establishment and capital rules. However, if buying shares that give you decisive influence over company, then only establishment and not capital.

Question 11

Case C-31/11 Scheunemann

Answer 11

Facts: German taxpayer inherits Canadian shares as sole shareholder. Tried to benefit from German tax law exemption on inheritance tax if more than 25% of a company was inherited. Since the rule was designed to apply to people with controlling interest, was deemed to fall under freedom of establishment rather than capital, so Art 63 (protecting third country capital) could not be engaged.

Significance: Acquiring shares engages both establishment and capital rules. However, if buying shares that give you decisive influence over company, then only establishment and not capital.

Question 12

Fidium Finanz

Answer 12

Facts: Swiss bank provided corporate loans to German companies. Germany required third country loaners to have German regulatory authorization. Swiss bank relied on freedom of capital (since establishment doesn’t extend to third countries). Court found that provision of loan was a service, and the underlying capital was incidental to the service, so Art 63 not engaged. The German law was objecting to the service, not the capital.

Significance: Loaning money is a service. When considering a case engaging both both services and capital, consider to what extent the exercise of the freedoms is affected.

Question 13

Where are the treaty exceptions to Art 63 found?

Answer 13

Art 65 TFEU

Question 14

Art 65 TFEU

Answer 14

Exceptions to free movement of capital
Also allows the Commission or Council to declare a tax measure adopted by a MS concerning third countries to be compatible, if compliant with objectives of the EU and internal market

Question 15

What are the treaty exceptions to free movement of capital?

Answer 15

1) MS may continue to apply provisions of national tax law which differentiates on location
2) MS may take measures to enforce their tax law and financial regulatory standards
3) MS may require declaration of capital movements for purposes of administration/statistics
4) Public policy and public security

Question 16

C-503/99 Commission v Belgium (Golden Shares)

Answer 16

Facts: Belgian government held golden shares in a Belgian energy company, which gave the government some managerial power (veto, representation on the board, etc). The justification was public security - state had an interest in maintaining a certain amount of control to ensure suitable energy supplies. Golden shares are considered restricting free movement of capital as they reduce the amount of possible investment. Was found to be permissable - adequate justification, suitable, and proportionate, given the terms of the golden shares.

Significance: Golden shares case.

Question 17

C-367/98 Commission v Portuguese Republic

Answer 17

Facts: Portugal had a tax evasion problem. Tried to address it by creating an amnesty with 5% tax on assets (lower than usual). If the assets are re-patriated to Portugal, then tax rate is 2.5%. Court’s issue was between the 5% and 2.5% - intent was purely the financial interest of the MS to repatriate assets. Ruled an inadequate justification on economic grounds.

Significance: General financial interests of a MS is not adequate justification/ORPI. Any prior authorisation scheme must be proportionate, based on objective, non-discriminatory criteria which are known in advance, with a legal remedy available to those affected.

Question 18

Scientology v France

Answer 18

Facts: French court made a preliminary ruling request regarding a refusal to authorise investment in France by the Church of Scientology. Asked for clarification on the scope of public policy exceptions. Was confirmed to follow the case law of other fundamental freedoms, in that “public policy” is narrowly interpreted, excludes economic interests, and is subject to control by EU institutions.

Significance: Prior authorization can be proportionate if based on objective criteria clearly laid out, and there must be recourse to an independent tribunal with potential remedies. Public policy is an available justification but must be proportionate, etc.

Question 19

Case C-101/05 A

Answer 19

Facts: Concerning Swedish taxation laws on dividends from Switzerland distributed in the form of subsidiary shares. Sweden exempted income tax on dividends like this if the distributing company was in the EEA. Was argued that concept of “restrictions” should be different for MS and non-MS countries. Court held the definition of restriction was the same, but the justification test may vary, e.g. in third countries where tax authorities wouldn’t be able to verify that a taxpayer met certain conditions.

Significance: While free movement of capital extends to third countries, there are situations where they will be treated differently than MS.

Question 20

Art 64 TFEU

Answer 20

EU retains some power to restrict movement of capital from MS to third countries. Still needs to abide by requirements for justifications, proportionality, objective criteria, and available recourse.

Question 21

Art 66 TFEU

Answer 21

Grants the Council the power to take safeguard measures for up to six months if strictly necessary where movement of capital to or from third countries causes or threatens to cause serious difficulty for the operation of the economic and monetary union.
Council may only act on a proposal from the Commission and after consulting the European Central Bank

Question 22

Persche

Answer 22

Facts: German national donated gifts to a Portuguese retirement/children’s home and claimed as tax-deductable on German tax form. Germany rejected the request since the recipient was not in Germany. CJEU deemed that inheritances, legacies, and gifts of money, moveable property, and immoveable property fall under Art 63, and that Germany failing to allow deductions for non-German recipients likely discourages Germans to make those gifts, thereby it is a restriction. Was held that MS can define charitable purposes which can be tax-exempted, but they must apply regardless of nationality among MS. MS can impose restrictions against third country charitable causes, since there is no reporting harmonization requirement.

Significance: Capital can include gifts. Another example where MS and non-MS states are treated differently under free movement of capital.

Question 23

UK Golden Shares

Answer 23

Facts: UK government had golden shares in British Airports Authority limiting other parties from acquiring voting shares in BAA. Argued that it did not restrict free movement of capital as it was not discriminatory. Court found that it had the effect of deterring investors, so was a restriction. UK government did not attempt to justify the restriction.

Significance: To contrast with Belgian Golden Shares case - always submit justifications!

Question 24

Facts: Austria required mortgages to be registered in the national currency or in gold. Tried to justify on an ORPI for predictability and transparency of the mortgage system. Court accepted these justifications if the restriction was non-discriminatory and proportionate. Creditor protection was not accepted as a justification since measure was not suitable - gold is as unpredictable/fluctuating as foreign currencies.

Significance: Mortgages and gold are included in definition of capital. ORPI can be a justification if restriction is non-discrimatory and proportionate.

Answer 24

Trummer and Mayer

Question 25

Facts: German national acquired a designated agricultural property in Denmark. Danish law required any acquirer of agricultural land to live on it. Was challenged under free movement of capital. Was found to be a non-discriminatory restriction, with an ORPI justification (preservation of agricultural communities, traditional farming methods, etc), but was not suitable to the objective/proportionate.

Significance: Land is capital (immovable property). Test for restrictions: measures which are likely to discourage non-residents from making investments in a MS or discourage MS residents from investing in other States.

Answer 25

C-370/05 Festersen

Question 26

Facts: NL resident owning shares in an Irish company. Under NL Wealth Tax law, substantial shareholding in NL companies are exempt/subject to lower tax rate. Taxpayer argued the exemption should apply to his Irish holdings as well. Court held it fell under free movement of establishment since it was a controlling interest. It was found to infringe freedom of establishment.

Significance: Establishment vs capital

Answer 26

C-251/98 Baars

Question 27

Facts: Austrian taxpayer receiving dividends from Swiss shares objected to Austrian tax rules, which tax Austrian dividends half as much. Ruled as falling under free movement of capital or establishment.

Significance: Acquiring shares engages both establishment and capital rules. However, if buying shares that give you decisive influence over company, then only establishment and not capital.

Answer 27

Case C-157/05 Holbock

Question 28

Facts: German taxpayer inherits Canadian shares as sole shareholder. Tried to benefit from German tax law exemption on inheritance tax if more than 25% of a company was inherited. Since the rule was designed to apply to people with controlling interest, was deemed to fall under freedom of establishment rather than capital, so Art 63 (protecting third country capital) could not be engaged.

Significance: Acquiring shares engages both establishment and capital rules. However, if buying shares that give you decisive influence over company, then only establishment and not capital.

Answer 28

Case C-31/11 Scheunemann

Question 29

Facts: Swiss bank provided corporate loans to German companies. Germany required third country loaners to have German regulatory authorization. Swiss bank relied on freedom of capital (since establishment doesn’t extend to third countries). Court found that provision of loan was a service, and the underlying capital was incidental to the service, so Art 63 not engaged. The German law was objecting to the service, not the capital.

Significance: Loaning money is a service. When considering a case engaging both both services and capital, consider to what extent the exercise of the freedoms is affected.

Answer 29

Fidium Finanz

Question 30

Facts: Belgian government held golden shares in a Belgian energy company, which gave the government some managerial power (veto, representation on the board, etc). The justification was public security - state had an interest in maintaining a certain amount of control to ensure suitable energy supplies. Golden shares are considered restricting free movement of capital as they reduce the amount of possible investment. Was found to be permissable - adequate justification, suitable, and proportionate, given the terms of the golden shares.

Significance: Golden shares case.

Answer 30

C-503/99 Commission v Belgium (Golden Shares)

Question 31

Facts: Portugal had a tax evasion problem. Tried to address it by creating an amnesty with 5% tax on assets (lower than usual). If the assets are re-patriated to Portugal, then tax rate is 2.5%. Court’s issue was between the 5% and 2.5% - intent was purely the financial interest of the MS to repatriate assets. Ruled an inadequate justification on economic grounds.

Significance: General financial interests of a MS is not adequate justification/ORPI. Any prior authorisation scheme must be proportionate, based on objective, non-discriminatory criteria which are known in advance, with a legal remedy available to those affected.

Answer 31

C-367/98 Commission v Portuguese Republic

Question 32

Facts: French court made a preliminary ruling request regarding a refusal to authorise investment in France by the Church of Scientology. Asked for clarification on the scope of public policy exceptions. Was confirmed to follow the case law of other fundamental freedoms, in that “public policy” is narrowly interpreted, excludes economic interests, and is subject to control by EU institutions.

Significance: Prior authorization can be proportionate if based on objective criteria clearly laid out, and there must be recourse to an independent tribunal with potential remedies. Public policy is an available justification but must be proportionate, etc.

Answer 32

Scientology v France

Question 33

Facts: Concerning Swedish taxation laws on dividends from Switzerland distributed in the form of subsidiary shares. Sweden exempted income tax on dividends like this if the distributing company was in the EEA. Was argued that concept of “restrictions” should be different for MS and non-MS countries. Court held the definition of restriction was the same, but the justification test may vary, e.g. in third countries where tax authorities wouldn’t be able to verify that a taxpayer met certain conditions.

Significance: While free movement of capital extends to third countries, there are situations where they will be treated differently than MS.

Answer 33

Case C-101/05 A

Question 34

Facts: German national donated gifts to a Portuguese retirement/children’s home and claimed as tax-deductable on German tax form. Germany rejected the request since the recipient was not in Germany. CJEU deemed that inheritances, legacies, and gifts of money, moveable property, and immoveable property fall under Art 63, and that Germany failing to allow deductions for non-German recipients likely discourages Germans to make those gifts, thereby it is a restriction. Was held that MS can define charitable purposes which can be tax-exempted, but they must apply regardless of nationality among MS. MS can impose restrictions against third country charitable causes, since there is no reporting harmonization requirement.

Significance: Capital can include gifts. Another example where MS and non-MS states are treated differently under free movement of capital.

Answer 34

Persche

Question 35

Facts: UK government had golden shares in British Airports Authority limiting other parties from acquiring voting shares in BAA. Argued that it did not restrict free movement of capital as it was not discriminatory. Court found that it had the effect of deterring investors, so was a restriction. UK government did not attempt to justify the restriction.

Significance: To contrast with Belgian Golden Shares case - always submit justifications!

Answer 35

UK Golden Shares