1. Historical overview

At the origin of the European Union, the stability of economic and monetary policy of the Member States were subject to the capital and payments movements controlled by Member States.

The movement of capital and payments was not liberalized together with the other three fundamental freedoms.

The original EEC provisions on capital and payments movements appeared to be more prudent and less imperative than the other three freedoms, since they were drafted in a more cautious way that the other freedoms, providing that restrictions on free capital flows would only be removed through positive integration and to the extent necessary for the common market.

The original provisions of the freedom of capital movements lacked direct effect, but with the entry into force of the Maastricht Treaty the original EEC rules have been amended and replaced and the movement of capital and payments became a directly applicable freedom.

The free movement of capital and payments has been considered crucial for the building of the Internal Market, empowering the growth of an integrated and competitive financial market and services in the European Union.

Although the free movement of capital and payments has been developed later than the other fundamental freedoms, currently it appears to be a relevant and powerful freedom, broadly explored by the ECJ case law.

The free movement of capital and payments covers today both discriminatory and non-discriminatory restrictions and it is the sole freedom which can apply to intra-Union as well extra-Union restrictions.

Actually the free movement of capital and payments has the broadest scope of all TFEU freedoms, also covering the relationships between Member States and third countries.

The level of liberalization of the freedom of capital and payments movements, especially with reference to intra-Union transactions, is clearly intended to grow forward, so that the scope of this freedom is deemed to be further strengthened, also by means of the relevant case law to be developed by the ECJ.

1.1 Evolution of the Free Movement of Capital

The original provision concerning the freedom of capital movement was contained in Article 67 EEC which provided that member States, in the course of the transitional period and to the extent necessary for the proper functioning of the Common Market, had to progressively abolish as between themselves restrictions on the movement of capital belonging to persons resident in Member States and any discrimination based on the nationality or place of residence of the parties or on the place where such capital is invested, while current payments connected with movements of capital between Member States shad to be freed from all restrictions not later than at the end of the first stage.

According to Art. 68 EEC, Member States were required to be as liberal as possible in granting exchange authorizations.

Furthermore, the original Art. 71 EEC pointed out that Member States had to endeavour to avoid introducing within the Community any new exchange restrictions which could affect the movement of capital and current payments connected with such movement, and making existing rules more restrictive.

In this background, a specific role was played by the Council and the Commission.

The Council, as provided by Art. 69 EEC, had the power to issue Directives for the implementation of Art. 67, acting by a qualified majority from the beginning of the third stage (i.e. January 1, 1996).

With reference to capital movements between Member States and third countries, as set in Art. 70 EEC, the Commission had to propose to the Council measures for the progressive coordination of the exchange rate policies of the Member State, while, according to Art. 72 EEC, the Member States had to keep the Commission informed of any known movement of capital to and from third countries.

Finally, Art. 73 EEC enabled the Commission to authorise a Member State to take protective measures in the event of movement of capital leading to disturbances in the functioning of the capital market.

The ECC provided also protection clauses under the second paragraph of Art. 71 EEC, and under Art. 108 EEC and Art. 109 EEC, in order to promote a certain moderate degree of liberalization of the movement of capital and payments.

Notwithstanding that, the provisions of the EEC concerning movement of capital and payment soon turned out to be too vague and less ‘mandatory’ compared to the other three fundamental freedoms.

The conditional commitments meant that the original provisions of the EEC about movement of capital and payments did not have direct effect, not being able to give rise to rights enforceable by individuals before their national courts.

In the lack of direct effects, the positive integration of the free movement of capital and payments relied on legislative implementation.

To this aim, the Council adopted Directives on the basis of Art. 69 EEC, provided that the first paragraph of Art. 67 EEC did not abolish restriction on the movement of capital by the end of the transitional period.

The first Council Directive was enacted on May 11, 1960, soon amended by Directive 63/21/CEE.

According to the recitals of these Directives, the relevant legislative bedrock was not found entirely under Art. 67 EEC and Art. 69 EEC but also under the second paragraph of former Art. 106 EEC, on current payments.

The above-mentioned Directives divided all movement of capital into four lists A, B, C and D), annexed to the Directives, each of them with a different degree of liberalization.

With reference to transactions or transfers mentioned in list A (including, inter alia, direct investments in an undertaking in another Member State, investment in real estate, some personal capital movements, short and medium-term credits related to commercial transactions or provisions of services, death duties and damages concerning the capital), Member State had to grant ‘all foreign exchange authorizations’, while in respect of the movements covered by list B (such as transactions in securities, acquisition and liquidation by non-residents of domestic listed securities or by resident of foreign listed securities) Member State had to grant ‘general permission’. In the case of movement covered by list C (including the issue and placing of a foreign undertaking on the domestic capital market, cross-border acquisitions and liquidations of units in unit trusts) Member States were required to maintain or reimpose exchange restrictions in the event that free movement of capital would have formed an obstacle to the achievement of its economic policy objectives. Finally, movements set out in List D (such as physical importation and exportation of financial assets, including bank notes, opening and placing of funds on current or deposit accounts) did not have to be liberalized.

The mentioned legal context was modified by Directive 86/566, which merged the list A and B of Directive 63/21/CEE into a new list A together with certain movements from the old list C (such as the issue and placing of securities of a domestic undertaking on a foreign capital market, granting and repayment of long-term credits and cross-border acquisitions and liquidation of units in unit trusts), while list C was renamed list B and still subject to the possibility for Member State to maintain or reintroduce exchange restrictions effective as of the date of the entry into force of the Directive itself, in the event that free movement of capital could be an obstacle for the relevant Member State to achieve its economic policy objectives. Lastly, the old list D became list C, but not yet liberalized.

In this legal framework, the absence of direct effect of the provision concerning the movement of capital was confirmed by the case law of the ECJ.

In its fundament case Casati (case 203/80), in 1981, the ECJ rejected the direct effect of the original provisions of the free movement of capital, ruling that complete freedom of movement of capital might undermine the economic policy of one of the Member State or create an imbalance in its balance of payment, thereby impairing the proper functioning of the common market. For these reasons, the ECJ pointed out that Art. 67(1) EEC was different from the provisions on the other three fundamental freedoms since there was an obligation to liberalize capital movements only ‘to the extent necessary to ensure the proper functioning of the common market’.

According to the ECJ in the Casati case, Art. 67 EEC did not require to simply abolish restrictions on the movement of capital, since the scope and the restriction might vary in time and depend on ‘an assessment of the requirements of the common market’ and ‘on an appraisal of both the advantages and risks which liberalization could entail for the latter’, also taking into account the level of integration attained in matters in respect of which capital movements are ‘particularly significant’.

The ECJ also pointed out that such an assessment was a matter for the Council and that the obligation to abolish restrictions on movement of capital could not be separated from the Council’s assessment of the necessity to liberalize such transactions.

The ECJ therefore concluded that Art. 67 EEC was not a provision which a national court and even the ECJ could apply directly, but a question of policy of the Council, which the ECJ was just required to examine in order to verify whether the Council had overstepped the limits provided by the same rule.

It is from the second half of the eighties that the liberalization of the capital movements became a priority for the creation of the Internal Market, as mentioned in the White Paper from the Commission to the European Council dated 28-29 June 1985 (COM 310/1985) and in the Programme for the liberalization of capital movements in the Community dated 23 May 1986 (COM 86/292), which enshrined the principal actions to put in place in this matter.

The most important legislative measure of this early period was Directive 88/361 enacted for the implementation of Art. 67 EEC, which established the full liberalization of capital movements within the European Union with effect, for most Member States, from July 1, 1990.

Art. 1(1) of Directive 88/361 expressly provided that Member States were required to abolish restrictions on movements of capital taking place between person resident in Member State. In order to facilitate the application of such provision, the Directive provided with a nomenclature in the Annex.

Directive 88/361 stated that Member State had to abolish restrictions on movements of capital taking place between persons resident in Member States. To facilitate the application of such Directive, capital movements had to be classified in accordance with the annexed nomenclature. Furthermore, according to the same Directive, in order to achieve the liberalization of capital movements, it was required the abolition of foreign exchange restrictions and the removal of all obstacles to the execution of the capital transactions. As a consequence, the Directive gave access to the financial system of any Member State to individuals and financial service firms.

The erga omnes effects of the provision under Art. 1 of Directive 88/361 were confirmed by Art. 7 of the same Directive, which, also if not in imperative terms, provided that in the treatment of transfers in respect of movements of capital to or from third countries, the Member States shall endeavour to attain the same degree of liberalization as that which applies to operations with residents of other Member State.

The Directive 88/361 was the basis of the process of liberalization of financial services.

In 1992 the Maastricht Treaty replaced the old provisions on free movement of capital and payment by adopting a new set of rules.

In a single chapter, the Maastricht Treaty brought together the provisions on capital, amended to reproduce the content of Directive 88/361, and the provisions on payments.

This legislative action turned the provisions on free movement of capital and payments from being a weak freedom to be a strong freedom both within and outside the European Union.

The provisions governing the freedom of movement of capital are currently contained in Art. 63, 64, 65 and 66 within Chapter 4 of Title IV (‘Free Movement of Persons, Services and Capital’) of the TFEU.

In detail, current Art. 63(1) TFUE - (which was Article 73b(1) EEC, the Maastricht Treaty number, renumbered at Amsterdam as Art. 56(1) EEC and at Lisbon as Art. 63(1) TFUE) - provides that:

Art. 63 TFUE

1. Within the framework of the provisions set out in this Chapter, all restrictions on the movement of capital between Member States and between Member States and third countries shall be prohibited. […]

1.2 Evolution of the Free Movement of Payments

As per the provisions concerning the free movement of capital, also the provisions concerning the free movement of payments were original drafted in prudent terms.

The wording of Art. 106 EEC, contained in Title II (Economic Policy), Chapter 2 (Balance of Payment) provided that each Member State had to undertake to authorise, in the currency of the Member State in which the creditor or the beneficiary resides, any payments connected with the exchange of goods, services or capital, and also any transfers of capital and wages, to the extent that the movement of goods, services, capital and persons was freed as between Member State.

Such a provision required Member States to authorize means of payment as consideration for trade in goods, persons, services or capital.

The interpretation of the provisions on free movement of payments was also developed by means of the case law of the ECJ.

In case Thompson (case 7/78), the ECJ pointed out that Art. 106(1) EEC was one of the most important provision in the original version of the EEC for the purpose of achieving a common market.

In the leading case Luisi and Carbone (case 286/82 and 26/83), the ECJ ruled that Art. 106(1) EEC was directly effective, giving rise to rights enforceable by individuals before their national courts, at a time when the EEC provisions on free movement of capital were not directly effective.

In the Luisi and Carbone case it appeared that there was a clear distinction between movement of capital and current payments, even though the mentioned Directives on free movement of capital enacted under the original Art. 67 EEC seemed to have considered both types of transactions.

In the case ED Srl (case 412/97), the ECJ pointed out that the provision on payments was intended ‘to enable a person liable to pay a sum of money in the context of a supply of goods or services to discharge that contractual obligation voluntarily without undue restriction and to enable the creditor freely to receive such a payment’.

With the decision in the Lambert case (case 308/86), the ECJ clarified the distinction between Art. 106(1)EEC and Art. 67 EEC.

The ECJ pointed that Art. 106 covered current payments (i.e.: transfers of foreign exchange being the consideration within the context of an underlying transaction of goods, persons, services or capital), while Art. 67 ECC covered movements of capital (i.e.: financial operations essentially concerned with the investments of funds, rather than with consideration for a service).

The provisions governing the freedom of movement of payments, such as those concerning the freedom of movement of capital, are currently contained in Art. 63, 64, 65 and 66 within Chapter 4 of Title IV (‘Free Movement of Persons, Services and Capital’) of the TFEU.

In detail, current Article 63(2) TFUE, replacing Art. 106 EEC, provides that:

Art. 63 TFUE

[…]

2. Within the framework of the provisions set out in this Chapter, all restrictions on payments between Member States and third countries shall be prohibited.

2. Definitions and scope

2.1 Definition of ‘Capital’ and ‘Payments’

The TFEU does not contain a definition of ‘capital’ or ‘payment’.

Legislative definitions were specified in the above-mentioned annex to Directive 88/361, which contained a nomenclature of capital movements which the ECJ has accepted as of an ‘indicative value’ for the purposes of defining the notion of capital movements, as it did before the entry into force of Art. 63 TFUE.

In the case Trummer and Meyer (Case 222/97) the ECJ stated that, since Art. 63 TFEU substantially reproduces contents of Art. 1 of Directive 88/361, and even though that Directive was adopted on the basis of Art. 69 and Art. 80(1) EEC, which have been then replaced by Art. 63 TFEU, the nomenclature in respect of movement of capital annexed to Directive 88/361 still has the same indicative value, subject to the qualification contained in the introduction to the nomenclature, since the list set out therein is not exhaustive.

In the Trummer and Meyer case the ECJ pointed out that mortgages was a transaction covered by the nomenclature and so was ‘inextricably linked to a capital movement’.

The ECJ also stated that investments in real property, its administration and its sale constituted a movement of capital.

A capital movement is also considered to be a ‘direct investment’ in a company by means of a shareholding with the view of effectively participating in the management and control of a company as ruled by the ECJ in one of the Golden shares cases (case 367/98, Commission v. Portugal).

It is possible to consider as movements of capital also inheritances, banknotes and coins, gifts in money or in kind, guarantees granted by non-residents to residents or by residents to non-residents, and granting of credit on a commercial basis.

In the case Verkooijen (case 35/98) the ECJ ruled that the receipt of dividends from a foreign company, although not listed in the mentioned annex, fell within the scope of the Treaty since it was linked to some of the measures in the annex.

Therefore, even if not listed in the annex, a transaction could still constitute a capital movement within the meaning of Art. 63(1) TFEU.

The notion of capital within the European Union is therefore able to go beyond the broad categories listed in the Directive 88/362, being even able to extensively expand its scope.

2.2 Territorial scope

In spite of the original Art. 67 EEC and Art. 1 of Directive 88/361, the current provision of Art. 63 TFUE takes into consideration the territorial presence of the capitals instead of the nationality of the persons or their residence within the European Union, being a condition to have a link between the movement of capital and (at list) a Member State.

This entails that also a person resident in another Member State could take advantage of such a freedom, as long as the relevant capitals are located in the territory of a Member State.

More in detail, with respect to inter-state movement, in order to apply Art. 63(1) TFEU, there must be a movement of capital between Member State, but the rule is not always self-evident.

In the Block case (case 67/08) the ECJ considered to be an inter-state movement and therefore applied Art. 63(1) TFEU to the situation of an inheritance being located both in Germany and Spain.

Furthermore, Art. 63 TFEU applies also to movement of capital between member State and third countries.

This extension of the rights of free movement of capital and payment to third countries goes beyond all the other fundamental freedoms.

The extension of the territorial scope of the free movement of capital contributes to the principle of an open market economy pursuant to Art. 119 TFEU.

2.3 Direct effect of Art. 63 TFEU

In the above-mentioned Casati case (case 203/80) the ECJ ruled that Art. 67 EEC was not directly effective, considering that the provisions on free movement of capital were not yet liberalized at that time.

With the case Sanz de Lera (joined cases 163/94 and 250/94) the ECJ ruled that Art. 73 (b1) EEC, now Art. 63(1) TFEU, was directly effective.

Accordingly, the ECJ, in the A case (case 101/05) ruled that Art. 63(1) TFEU ‘lays down a clear and unconditional prohibition for which no implementing measure is needed and which confers rights on individuals which they can rely on before the courts’.

As confirmed by the case law of the ECJ, Art. 63 TFEU is therefore vertically directly effective.

In spite of that, the question whether Art. 63 TFEU might have horizontal direct effect seems to be not yet solved, even though the position of the ECJ in the case Volkswagen (case 112/05) appears to be contrary to the attribution of horizontal direct effect to Art. 63 TFEU.

The ECJ also clarified that Art. 63 TFEU is directly effective with regard to capital movements between Member State and third countries.

In the Sanz de Lera case the ECJ pointed out that the expression ‘within the framework of the provisions set out in this Chapter’ contained in Art. 63 TFEU relates to the whole chapter in which it appears. The provisions should therefore be interpreted in that context. The ECJ also stated that the exception in Art. 64(1) TFEU concerning the application to non-member countries of the restrictions existing on 31 December 1993 under national law of Union law regarding the capital movements listed in it to or from non-member countries is ‘precisely worded’, with the result that no latitude is granted to the Member States or to the Union legislature regarding either the date of applicability of the restrictions or the categories of capital movements which may be subject to restrictions. Furthermore, according to the ECJ, the power to adopt measures granted to the Council by Art. 64(2) TFEU of the Treaty relates only to the categories of capital movements to or from non-member countries listed in that provision. The ECJ also ruled that the adoption of such measures is not a prerequisite for implementing the prohibition laid down in Art. 63(1) TFEU, ‘since that provision relates to restrictions that do not come within the scope’ of Art. 64(1) TFEU.

The ECJ therefore ruled that Art. 63 TFEU conferred directly enforceable right on individuals with reference to capital movements both between Member States that between Member States and third countries.

3. Prohibition of Discriminatory and Non-discriminatory national Rules

The original provision of Art. 67 EEC provided for the abolition ‘of all restrictions on the movement of capital’ and ‘any discrimination based on the nationality or on the place of residence of the parties or on the place where such capital is invested’.

The current wording of Art. 63(1) TFEU does not contain any reference to ‘discrimination’, since the Maastricht Treaty amended Art. 67 EEC removing the reference to ‘discrimination’ and referring solely to ‘restrictions’.

Notwithstanding that, according to the legislative field of application of the other three freedoms, it seems that Art. 63(1) TFEU prohibits national measures being both directly and indirectly discriminatory as well as non-discriminatory measures which are capable to be an obstacle to the free access to the market.

This interpretation seems to be in line with the provision on free movement of services which prohibits discriminations on all the same grounds (i.e.: on the grounds of nationality, place of residence of the parties and place where capital are invested).

Accordingly, in its decisions the ECJ took into consideration both the discrimination approach and the restrictions approach, in order to remove measures interfering with the free movement of capital, even though deciding on the basis of the current wording of Art. 63(1) TFEU.

The ECJ confirmed that Art. 63 TFEU could cover non-discriminatory capital restrictions.

Moreover, according to the ECJ case law, Art. 63 TFEU may apply both to direct and indirect discriminations.

With reference to direct discriminations, in the Sandoz case (case 439/97) the ECJ ruled that the imposition of a stamp duty on loans by the national Austrian legislation was likely to deter national residents from obtaining loans from persons established in other Member State, being considered a restriction to capital movements under Art. 63 TFEU.

In Golden Share cases (see, inter alia, cases 367/98, 483/99, 503/99) the ECJ confirmed that Art. 63 TFEU deals also with non-discriminatory measures.

In brief, such cases concerned the possibility for Member State to influence, in various manner, shareholder structures and corporate decisions by means of national legislation.

These cases arose in context where many European States had decided to re-privatise formerly nationalised companies providing public services. In order not to lose influence on those companies, national governments tried to maintain a certain degree of control over them by limiting the transfers of shares to certain investors or by issuing ‘golden shares’.

More in detail, in the case Commission v. France (case 483/99), the ECJ had to decide upon a national decree allowing the French government to secure influence over a national company by means of the issuing of a golden share. National provisions required the prior approval from the domestic government when a person, acting alone or in conjunction with others, exceeded a fixed part of the capital or of voting rights in a company.

In the case Commission v. Belgium (case 503-99) the ECJ had to solve a dispute concerning the possibility for the Belgian government, according to its domestic legislation, to preclude investors from carrying out transactions in certain domestic companies active in the energy sectors, in case the relevant Minister would have considered that such operations could adversely affect domestic interests in the energy sector.

In the case Commission v. Portugal (case 367/98), national rules precluded investors from buying more than a given number of shares in certain privatized Portuguese companies operating in specific sensitive sectors.

Moreover, in the case Commission v. Portugal, Portugal claimed that national legislation on the matter was a non-discriminatory measure that fell outside current Art. 63 TFEU, but even so the ECJ ruled that it had to be considered a restriction of the free movement of capital. In detail, the ECJ specified that even though ‘the rules in issue may not give rise to unequal treatment, they are liable to impede the acquisition of shares in the undertakings concerned and to dissuade investors in other Member States from investing in the capital of those undertakings. They are therefore liable, as a result, to render the free movement of capital illusory. In those circumstances the rules in issue must be regarded as a restriction on the movement of capital within the meaning of Article 73b of the Treaty. It is therefore necessary to consider whether, and on what basis, that restriction may be justified’.

Therefore in these three cases the ECJ ruled that, also taking into consideration Directive 88/361 and the nomenclature annexed to it, the disputed regulations fell under the scope of the movement of capital and payments according to Art. 53(1) of the EEC. In accordance with the above-mentioned annex, capital movements included direct investments involving the control and administration of a company.

The ECJ then ruled that the disputed domestic provisions involved unequal treatment of nationals of other Member States and restricted the freedom of movement of capital.

With reference to possible impairments of the freedom of establishment under Art. 43 EEC by the mentioned domestic legislation, in the mentioned Golden Share cases the ECJ considered that, in the cases of Portugal and France, restrictions on the freedom of establishment are direct consequence of the obstacles to the movement of capital and that, in the case of Belgium, as for restrictions on the movement of capital, it is possible to justify possible restrictions to the freedom of establishment.

In the Golden Share cases of 2003, Commission v. United Kingdom (case 98/01) and Commission v. Spain (case 463/00), the ECJ, following the case Alpine Investments (case 384/93), ruled that non-discriminatory measures which hinder access to the market breached Art. 63(1) TFEU unless they could be justified.

The mentioned case Commission v. United Kingdom concerned the 1986 ‘Airport Act’ that privatised the British Airport Authority and permitted the Secretary of State for Transport to retain a special share allowing its owner to block certain business decisions within such company.

In such a case, the ECJ stated that Art. 63 TFEU would go ‘beyond the mere elimination of unequal treatment, on grounds of nationality, as between operators on the financial markets’ and pointed out that although national rules limiting the acquisition of shareholdings over a certain level applied without distinction to both residents and non-residents, ‘it must nonetheless be held that they affect the position of a person acquiring a shareholding as such and are this liable to deter investors from other Member States from making such investments and, consequently, affect access to the market’.

The ECJ had therefore ruled that the government’s golden share was to be considered a restriction on the free movement of capital.

The ECJ has also ruled cases on possible indirect discriminatory national rules, even though such decisions are rarer than those on possible direct discriminatory national provisions.

In the case Hollman (case 443/06), the ECJ found to be an unjustified breach of Art. 63(1) TFEU the Portuguese national law which imposed to non-residents a higher rate of capital gains tax than residents, that being considered an indirect discriminatory national legislation.

4. Restrictions on the Free Movement of Capitals and Payments

4.1 Third-country Restrictions (grandfathered provisions)

The free movement of capital and payments between Member State and third countries is subject to potential restrictions both provided by the TFEU or established by the case law of the ECJ and based on exceptions contained in the TFEU.

The most important restriction to the free movement of capital and payments is the ‘grandfathered restrictions’, provided by Art. 64(1) TFEU.

It allows Member State to continue to apply restrictions which existed with regard to third countries involving direct investment, including in real estate establishment, the provisions of financial services or the admission of securities to capital markets (but not payments) in force on 31 December 1993 (or, in case of Bulgaria, Estonia and Hungary, on 31 December 1999).

4.2 Other Third-country Restrictions

Specific restrictions are provided by TFEU with reference to movements of capital and payments to and from third countries.

Another restriction is provided by Art. 64(2) TFEU, stating that:

Art. 64 TFUE

[…]

1. Whilst endeavouring to achieve the objective of free movement of capital between Member State and third countries to the greatest extent possible and without prejudice to the other Chapter of the Treaties, the European Parliament and the Council, acting in accordance with the ordinary legislative procedure, shall adopt the measures on the movement of capital to or from third countries involving direct investment – including investment in real estate – establishment, the provision of financial services or the admission of securities to capital market.

Furthermore, Art. 64(3) TFEU allows the Council, acting unanimously in accordance with the special legislative procedure, and after consulting the Parliament, to adopt measures which ‘constitute a step backwards in Union law as regards the liberalization of the movement of capital from or to third countries.

The Lisbon Treaty added a relevant important provision under Art. 65(4) TFEU providing that:

Art. 65 TFUE

[…]

3. In the absence of measures pursuant to Article 64(3), the Commission or, in the absence of a Commission decision within three months from the request of the Member State concerned, the Council, may adopt a decision stating that restrictive tax measures adopted by a Member State concerning one or more third countries are to be considered compatible with the Treaties in so far as they are justified by one of the objectives of the Union and compatible with the proper functioning of the internal market. The Council shall act unanimously on application by a Member State.

[…]

The above-mentioned provision could be considered unusual, since it allows the Council, and not the ECJ, to rule on the legality of national measures.

Other restrictions concerning transaction to and from third-countries are provided by Art. 66 TFEU and concerns balance of payment.

It allows the Council to take safeguard measures for up to six months, where ‘in exceptional circumstances, movements of capital to or from third countries cause, or threaten to cause, serious difficulties for the operation of economic and monetary union’.

4.3 Tax Restrictions

Many cases under Art. 63 TFEU concern national measures on direct taxation.

The cases focused on the question whether the taxation rule constituted a restriction on free movement; more recently the cases are discussed on a discrimination-base analysis and the ECJ describes any such discriminatory treatment as a restriction on the free movement of capital which is, in principle, forbidden by Art. 63(1) TFEU.

In the Sandoz case (439/97) the ECJ applied a restriction-based approach with respect to tax rules.

The case concerned the Austrian national rules providing that, where a natural or legal person resident in Austria entered into an agreement outside Austria for a loan not set down in a written instrument and the existence of the loan was recorded by an entry in the borrowers’ book of and record account, he was liable to pay a stamp duty.

The ECJ found that provision to be discriminatory according to the place where the loan was contracted and stated that discrimination of that nature was likely to deter residents from contracting loans with persons established in other Member States.

According to the ECJ such national provisions constituted a restriction to the principle of the free movement of capital within the meaning of Art. 73b(1) TFEU.

The ECJ decisions also concerned the question whether a dual fiscal burden through double taxation violated or not the Internal Market and in particular Art. 63 TFEU, considering that double taxation exists where two countries claim tax sovereignty over a cross-border situation.

In the case Verkooijen (case 35/98), a Dutch employee of a Belgian company claimed that the company shares he received as part of an employee’s saving plan were both subject to dividend tax in Belgium and to income tax in the Netherland, despite the fact that the Dutch rules excepted dividends received from Dutch companies from income tax. He therefore pointed out that the limitation of the income tax exemption to national companies violated the free movement of capital.

The ECJ ruled that such legislative provision had the effect of dissuading nationals of a Member State from investing their capital in companies having their seat in another Member State. According to the ECJ such a provision had a restrictive effect as regards companies established in other Member States.

Also in the case Test Claimants (II) (case 35/11) the ECJ ruled that since European Union law ‘as it currently stands does not lay down any general criteria for the attribution of areas of competence between the Member State in relation to the elimination of double taxation within the European Union’, each Member State remains free to organise its system for taxing distributed profits, provided, however, that the system in question does not entail discrimination prohibited by the TFEU.

In its decisions, the ECJ adopted an international model based on the fiscal sovereignty of the Member State.

In this context, Member States are only prevented from adopting domestic discriminatory measures, since a direct tax may violate Art. 63 TFEU in case it offers a less favourable treatment in foreign capital.

Therefore, any Member State can apply its tax system to capital being within its jurisdiction, but it has to maintain a neutral and coherent domestic tax system.

4.4 Prudential Restrictions

Moreover, certain prudential measures are provided by Art. 65(1b), stating that:

Art. 65 TFUE

1. The provisions of Article 63 shall be without prejudice to the rights of Member States:

[…]

(b) to take all requisite measures to prevent infringements of national law and regulations, in particular in the field of taxation and the prudential supervision of financial institutions, or to lay down procedures for the declaration of capital movements for purposes of administrative or statistical information, or to take measures which are justified on the grounds of public policy or public security.

[…]

These measures must not represent a means of arbitrary discrimination or a distinguished restriction in the meaning of Art. 65(3) TFEU.

In this context, the ECJ ruled that the difficulty in blocking capital once it has entered a member State may justify various treatment of transactions involving foreign direct investment.

In the case Église de Scientologie (case 54/99), the ECJ had to decide whether Article 73d(1)(b) of the Treaty, which provides that Article 73b thereof is without prejudice to the right of Member States to take any measures which are justified on the grounds of public policy or public security, permits national legislation to require prior authorisation for direct foreign investments which are such as to represent a threat to public policy or public security.

The ECJ clarified that the provision of national law which submits a direct foreign investment to prior authorisation constitutes a restriction on the movement of capital within the meaning of Article 73b(1) TFEU, but that the question arsing was whether Article 73d(1)(b) of the Treaty (which provides that Article 73(b) thereof is without prejudice to the right of Member States to take any measures which are justified on grounds of public policy or public security) permits national legislation to require prior authorisation for direct foreign investments which are such as to represent a threat to public policy or public security.

To this aim the ECJ firstly stated that while Member States are still, in principle, free to determine the requirements of public policy and public security in the light of their national needs, those grounds must, in the Community context and, in particular, as derogations from the fundamental principle of free movement of capital, be interpreted strictly, so that their scope cannot be determined unilaterally by each Member State without any control by the Community institutions. Thus, according to the ECJ, public policy and public security may be relied on only if there is a genuine and sufficiently serious threat to a fundamental interest of society (see, to this effect, the Rutili case. Secondly, the ECJ pointed out that measures which restrict the free movement of capital may be justified on public-policy and public-security grounds only if they are necessary for the protection of the interests which they are intended to guarantee and only in so far as those objectives cannot be attained by less restrictive measures.

The ECJ also expressed that, in case of direct foreign investments, the difficulty in identifying and blocking capital once it has entered a Member State may make it necessary to prevent, at the outset, transactions which would adversely affect public policy or public security. It follows that, in the case of direct foreign investments which constitute a genuine and sufficiently serious threat to public policy and public security, a system of prior declaration may prove to be inadequate to counter such a threat.

In this case, however, the essence of the system in question is that prior authorisation is required for every direct foreign investment which is 'such as to represent a threat to public policy [and] public security, without any more detailed definition’. Thus, the investors concerned are given no indication whatever as to these specific circumstances in which prior authorisation is required.

The ECJ clarified that such lack of precision does not enable individuals to be apprised of the extent of their rights and obligations deriving from Art. 73(b) TFEU. The ECJ therefore ruled that ‘The answer to the question submitted must therefore be that Article 73d(1)(b) of the Treaty must be interpreted as precluding a system of prior authorisation for direct foreign investments which confines itself to defining in general terms the affected investments as being investments that are such as to represent a threat to public policy and public security, with the result that the persons concerned are unable to ascertain the specific circumstances in which prior authorisation is required.’

That being so, the system established is contrary to the principle of legal certainty.

4.5 Public Security Restrictions

Restrictive measures may be taken by Member States also pursuant to Art. 52(1) TFEU, which allows Member States to take restrictive measures if justified by public policy or public security reasons.

The ECJ clarified that exceptions to the fundamental principles of the TFEU must be allowed narrowly and in a suitable, proportionate and transparent way, subject to judicial review, as decided in the case Église de Scientologie (case 54/99).

In the case Albore (case 423/98) the ECJ ruled that ‘the requirements of public security cannot justify derogation from the TFEU rules such as the freedom of capital movements unless the principle of proportionality is observed, which means that any derogation must remain within the limits of what is appropriate and necessary to achieve the aim in view and must not go beyond what is necessary to secure the objective.

The ECJ also expressed that under Article 73d(3) of the EEC Treaty the requirement of public security may not be relied on to justify measures constituting a means of arbitrary discrimination or a disguised restriction on the free movement of capital.

In that regard, according to the ECJ, a mere reference to the requirements of defence of the national territory of the Member State concerned does not fall within the scope of Article 224 of the EEC. It cannot be therefore be sufficient to justify discrimination on grounds of nationality against nationals of other Member States regarding access to immovable property on all or part of the national territory of the first State. The Court ruled that the position would be different only if it were demonstrated, for each area to which the restriction applies, that non-discriminatory treatment of the nationals of all the Member States would substantially expose the military interests of the Member State concerned to real, specific and serious risks which could not be countered by less restrictive procedures.

Moreover, with reference to third countries, in case A (case 101/05), the ECJ declared that the extent to which the Member States are authorised to apply certain restrictive measures on the movement of capital cannot be determined without taking account of the fact that movements of capital to or from third countries take place in different legal contexts from that which occurs within the Community, but the third country has to demonstrate that a restriction on the movement of capital to or from third countries is justified for a particular reason in circumstances where the reason would not constitute a valid justification for a restriction on capital movements between Member State.

By means of the same decision, the ECJ acknowledged that the liberalisation of the movement of capital with third countries may pursue objectives other than that of establishing the internal market. However, it stated that the Member States enshrined the principle of free movement of capital in the same article of the EEC and in the same terms for movements of capital taking place within the Community and those relating to relations with third countries, whilst at the same time providing safeguard clauses and derogations which apply specifically to the movement of capital to or from third countries

In addition, Art. 75 TFUE, as redrafted after Lisbon Treaty, allows the European Parliament and Council to define a framework for administrative measures, aimed at preventing and combating terrorism and related activities, concerning capital or payments, such as freezing of funds, financial assets or economic gains belonging to, or owned or held by, natural or legal persons, groups or non-State entities.

4.6 Other Restrictions established by the ECJ Case Law

The ECJ has pointed out that the free movement of capital and payment may be substantially restricted only by national rules justified by reasons related to Art. 65(1) TFEU or by ‘overriding requirements of the general interest’ and which are applicable to all persons and undertakings pursuing an activity in the territory of the host member State. Furthermore, ‘in order to be so justified, the national legislation must be suitable for securing the objective which it pursues and must not go beyond what is necessary in order to attain it, so as to accord with the principle of proportionality’ (case 367/98, Commission v. Portugal).

The ECJ case law has considered to be important and prevalent interests those concerning services and supplies of general interests, such as the postal service in the case Commission v. the Netherlands (joined cases 282/04 and 283/04), or the public telecommunications network service in the case Radiosistemi (case 429/00), or services in the energy sector, as in the case Commission v. Spain (case 463/00).

Other justifications have been found in the measures aimed to protect national values, as broadly considered. In the case Commission v. Austria (case 10/10), the ECJ recognised that the promotion of research and development could constitute a public interest requirement.

The ECJ also ruled that public interest requirements may be found in the protection of interest of third parties. In the case VBV (case 39/11) the ECJ recognised ‘the need to guarantee the stability and security of the assets administrated by an undertaking for collective investment created by a severance fund, in particular by the adoption of prudential rules’ as a public interest requirements.

Since there is not a fixed definition of general interest requirements in the TFEU, the list is intended to be widely expanded by the ECJ case law.

5. Free movement of Capital and Payments and the other fundamental Freedoms

The TFEU considers the possibility of overlap between the freedom of capital movement and the other fundamental freedoms.

With reference with the freedom of establishment, art. 49 TFEU provides that the freedom of establishment is ‘subject to the provisions of the Chapter relating to capital’, while the provisions on capital ‘shall be without prejudice to the applicability of restrictions on the right of establishment which are compatible with the Treaties’.

The ECJ seems to prefer not to apply both the freedom simultaneously.

As a matter of example, when the ECJ manages a case in which the investors has gained ‘definitive influence’ in the foreign company, the freedom of establishment applies and the exam of the freedom of capital movement is no more necessary (case 196/04, Cadbury Schweppes).

Furthermore, where a national restriction concerns ‘ordinary shareholder’, the ECJ ruled that free movement of capital will apply and that there is no need for a separate examination of the measures at issue in the light of the Treaty rules concerning freedom of establishment’, where the establishment restriction was ‘a direct consequence of the obstacles to the free movement of capital’ to which it is ‘inextricably linked’ (case 367/98, Commission v. Portugal).

In the event of cases concerning intra-Union capital movements, the ECJ has recognised the possibility to have a parallel application of both the freedoms. When, instead, a third-country restriction is concerned, only the free movement of capital should be apply (as in case 35/11, Test Claimants (II)).

The ECJ explained this external limitation of Art. 63 TFEU in the mentioned case Test Claimants (II)), where it stated that ‘since the Treaty does not extend freedom of establishment to third countries, it is important to ensure that the interpretation of Article 63(1) TFEU as regards relations with third countries does not enable economic operators who do not fall within the limits of the territorial scope of freedom of establishment to profit from that freedom’.

The relation between free movement of capital and payments and free movement of service is instead contained in Art. 58(2) TFEU, which provides that

Art. 58 TFUE

[…]

2. The liberalization of banking and insurance services connected with movement of capital is to be effected in step with the liberalization of movement of capital.

[…]

The ECJ used to apply the Treaty provisions on services together with those on capital.

Most recently, the ECJ seems to prefer to examine the ‘centre of gravity’ of the national rules and then applies either the provisions on services or those on capital, as the case may be (case 452/04, Fidium Finanz).

In the mentioned Fidium Finanz case, the ECJ ruled that ‘contrary to the chapter of the Treaty concerning the free movement of capital, the chapter regulating the freedom to provide services does not contain any provision which enables service providers in no-member countries and established outside the European Union to rely on those provisions’. Thus, according to the ECJ, the question concerned ‘the delimitation of and the relationship between, first, the Treaty provisions concerning the freedom to provide services and, second, those governing the free movement of capital’. Where a national measure relates to the freedom to provide services and the free movement of capital at the same time, it is necessary to consider to what extent the exercise of those fundamental liberties is affected and whether, in the circumstances of the main proceedings, one of those prevails over the other’.

The ECJ also pointed out that it will examine ‘the measure in dispute in relation to only one of those two freedoms if it appears, in the circumstances of the case, that one of them is entirely secondary in relation to the other and may be considered together with it’.

In the Fidium Finanz case, using the centre-of-gravity approach, the ECJ found that the freedom of services was predominant and the restrictions on capital were a consequence of the restrictions imposed on the provisions of services.

The free movement of capital and payment, by means of the relevant case law to be developed by the ECJ, is therefore still adjusting its scope, especially with respect to its relationships with other Freedoms.

Table of Cases

§ case C-7/78, Regina v Thomson

§ case C-203/80, Casati [1981]

§ cases (joined) C-286/82 and C-26/83, Luisi and Carbone [1984]

§ case C-308/86, Ministère public v Lambert [1988]

§ case C-204/90, Backmann v Belgium [1992]

§ case C-300/90, Commission v Belgium [1992]

§ case C-279/93, Finanzamt Köln-Altstaadt v Schumacker [1995]

§ cases (joined) C-358/93 and C-416/93, Aldo Bordessa and others [1995]

§ case C-384/93, Alpine Investments [1995]

§ case C-484/93, Svensson and Gustavsson v Ministre du Logement et de l’Urbanisme [1995]

§ cases (joined) C-163/94, C-165/94 and C-250/94, Sanz de Lera and others [1995]

§ case C-222/95, Société civile immobiliare Parodi v Banque H. Albert de Bary et Cie [1997]

§ case C-410/96, André Ambry [1998]

§ case C-222/97, Manfred Trummer and Peter Mayer [1999]

§ case C-302/97, Klaus Konle v. Republik Österreich [1999]

§ case C-412/97, ED Srl v Italo Fenocchio [1999]

§ case C-439/97, Sandoz GMbH v Finanzlandesdirektion für Wien [1999]

§ case C-35/98, Staatssecretaris van Financiën v B.G.M. Verkooijen [2000]

§ case C-251/98, Baars v Inspecteur der Belastingen [2000]

§ case C- 367/98, Commission v. Portugal (Golden shares I) [2002]

§ Case C-423/98, Alfredo Albore [2000]

§ case C- 478/98, Commission v. Belgium (Eurobond) [2000]

§ case C-54/99, Association Eglise de scientology de Paris and Scientology International Reserves Trust v The Prime Minister [2000]

§ case C- 483/99, Commission v. France (Golden shares II-Elf-Aquitaine) [2002]

§ case C- 503/99, Commission v. Belgium (Golden shares II) [2002]

§ cases (joined) C-515/99, C-519-24/99 and C-526-40/99, Reisch and others v Bürgeirmeister der landeshauptstadt Salzburg and others [2002]

§ case C-279/00, Commission v Italy [2002]

§ case C-436/00, X and Y [2002]

§ case C-463/00, Commission v Spain [2003]

§ case C- 98/01, Commission v. United Kingdom (BAA) [2003]

§ case C-364/01, The Heirs of H. Barbier v Inspecteur van de Belastingdienst Particulieren [2003]

§ case C-319/02, Manninen [2004]

§ case C-376/03, D. v Inspecteur van de Belastingdienst/Particulieren/Ondernemiingen buitenland te Heerlen [2005]

§ case C-512/03, Blanckaert v Inspecteur van de Belastingdienst [2005]

§ case C-196/04, Cadbury Schweppes v Commissioners of Inland Revenue [2006]

§ cases (joined) C-282/04 and C-283/04, Commission v Netherlands (KPN/TPG) [2006]

§ case C-265/04, Bouanich v Skatteverket [2006]

§ case C-386/04, Centro di Musicologia Walter Stauffer [2006]

§ case C-446/04, Test Claimants [2006]

§ case C-452/04, Fidium Finanz AG v Bundesanstalt für Finanzdienstleistungsaufsicht [2006]

§ cases (joined) C-463/04 and C-464/04, Federconsumatori and others v Comune di Milano [2007]

§ case C-513/04, Kerckhaert and Morres v Belgische Staat [2006]

§ case C-101/05, Skatteverket v A. [2007]

§ case C-112/05, Commission v Germany (Volkswagen) [2007]

§ case C-157/05, Holböck v Finanzamt Salzburg-Land [2007]

§ case E-2/06 [2006]

§ case C-284/06, Finanzamt Hamburg-Am Tiepark v Burda [2008]

§ case C-443/06, Hollmann v Fazenda Pública [2007]

§ case C-318/07, Hein Persche v Finanzamt Lüdenscheid [2009]

§ case C-326/07, Commission v Italy [2009]

§ case C-377/07, Finanzamt Speyer-Germersheim v Steko Industriemontage [2009]

§ case C-67/08, Block v Finanzamt Kaufbeuren [2009]

§ case C-171/08, Commission v Portugal (Commission v Portugal I) [2010]

§ case C-543/08, Commission v Portugal (Commission v Portugal II) [2010]

§ case C-310/09, Ministre du Budget, de Comptes publics et de la Fonction publique v Accor [2011]

§ case C-10/10 [2011]

§ case C-35/11, Test Claimants in the FII Group Litigation v Commissioners of Inland Revenue and the Commissioners for Her Majesty’ revenue & Customs [2012]

§ case C-39/11, VBV-Vorsorgekasse v FMA [2012]

§ case C-95/12, Commission v Germany (Volkswagen II) [2013]

Table of EU Legislation

§ Art. 56 EEC

§ Art. 67 EEC

§ Art. 68 EEC

§ Art. 69 EEC

§ Art. 70 EEC

§ Art. 71 EEC

§ Art. 72 EEC

§ Art. 73 EEC

§ Art. 80 EEC

§ Art. 106 EEC

§ Art. 108 EEC

§ Art. 109 EEC

§ Art. 224 EEC

§ Art. 49 TFUE

§ Art. 52 TFUE

§ Art. 56 TFUE

§ Art. 58 TFUE

§ Art. 63 TFUE

§ Art. 64 TFUE

§ Art. 65 TFUE

§ Art. 67 TFUE

§ Art. 71 TFUE

§ Art. 72 TFUE

§ Art. 73 TFUE

§ Art. 119 TFUE

§ First Directive of 11 May 1960 for the implementation of Article 67 of the Treaty

§ Second Council 63/21/EEC Directive of 18 December 1962 adding to and amending the First Directive for the implementation of Article 67 of the Treaty

§ Council Directive 86/566/EEC of 17 November 1986 amending the First Directive of 11 May 1960 for the implementation of Article 67 of the Treaty

§ Council Directive 88/361/EEC of 24 June 1988 for the implementation of Article 67 of the Treaty

Table of other EU Documents

§ COM (85) 310 final, “Completing the Internal Market”, White Paper from the Commission to the European Council (Milan, 28-29 June 1985)

§ COM (86) 292 final, “Programme for the liberalization of capital movements in the Community”. Communication from the Commission to the Council, 23 May 1986

§ “A New Strategy for the Single Market”, Report to the President of European Commission José Manuel Barroso by Mario Monti, 9 May 2010

§ COM (2010) 2020 “EUROPE 2020. A strategy for smart, sustainable and inclusive growth”, Communication from the Commission

§ COM (2011) 206 final, "Single Market Act. Twelve levers to boost growth and strengthen confidence. Working together to create new growth", Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions

§ COM (2012) 259 final, “Better Governance for the Single Market”, Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions

§ COM (2012) 573 final, “Single Market Act II - Together for new growth”, Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions

§ COM (2015) 550 final, “Upgrading the Single Market: more opportunities for people and business”, Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions