Samenvatting European Law Catherine Barnard and Steve Peers, European Union Law
14. Free movement of legal persons and the provision of services
The right of establishment, under Article 49 TFEU, implies the migrating company has a permanent
link with the host Member State, while the freedom to provide services under Articles 56 and 57
TFEU envisages a much more temporary relationship between the provider/receiver and the host
State. This distinction is reflected in the approach taken by the EU legislator and the Court of
Justice: generally the host State controls the activities of the migrant person/company in the case
of freedom of establishment, whereas the home State (country of origin) controls the activities of
the migrant person/company in the case of free movement of services.
2. The treaty requirements
2.1 The relevant Treaty provisions
2.1.1 Freedom of establishment
Article 49 TFEU concerns the establishment of EU natural persons and companies, branches and
agencies in other Member States on a permanent or semi-permanent basis.
Within the framework of the provisions set out below, restrictions on the freedom of establishment of
nationals of a Member State in the territory of another Member State shall be prohibited. Such
prohibition shall also apply to restrictions on the setting-up of agencies, branches or subsidiaries by
nationals of any Member State established in the territory of any Member State. Freedom of
establishment shall include the right to take up and pursue activities as self-employed persons and to
set up and manage undertakings, in particular companies or firms within the meaning of the second
paragraph of Article 54, under the conditions laid down for its own nationals by the law of the country
where such establishment is effected, subject to the provisions of the Chapter relating to capital.
Article 54 TFEU talks specifically about companies.
Companies or firms formed in accordance with the law of a Member State and having their registered
office, central administration or principal place of business within the Union shall, for the purposes of
this Chapter, be treated in the same way as natural persons who are nationals of Member States.
‘Companies or firms’ means companies or firms constituted under civil or commercial law, including
cooperative societies, and other legal persons governed by public or private law, save for those which
Article 55 TFEU adds
Member States shall accord nationals of the other Member States the same treatment as their own
nationals as regards participation in the capital of companies or firms within the meaning of Article
54, without prejudice to the application of the other provisions of the Treaties.
Thus Article 49 TFEU covers two situations
1. The right for natural or legal persons to set up and manage undertakings, in particular
companies and firms, in other Member States => primary establishment
o In Cadbury Schweppes the Court said that Article 49 TFEU presupposes (a) actual establishment of the
company in the host State (i.e. permanent presence), and (b) the pursuit of a genuine economic
o Both have to be satisfied (Stauffer)
2. The right for legal persons to set up agencies, branches, or subsidiaries in another Member
State => secondary establishment
o Branch, agency or other establishment implies a place of business which has to appearance of
The fact that the Treaty encourages secondary establishment raises questions as to whether those
wishing to form a company can take advantage of EU rules by incorporating a company in State A
which has lenient incorporation rules and then, relying on Articles 49 and 54 TFEU, set up a branch or
agency in State B, thereby avoiding State B's more onerous rules of incorporation. Simply taking
advantage of EU law rights is held not to constitute abuse (Centros).
Although the Treaty covers only the two situations of primary and secondary establishment, more
recent case law shows that the Court is willing to use Articles 49 and 54 TFEU to achieve freedom of
establishment more generally. (SEVIC)
Thus it requires economic activity together with a degree of permanence by the company in the host
State. The question of permanence distinguishes t Article 49 TFEU from Article 56 TFEU on services.
2.1.2 Free movement of services
The relevant Treaty provisions
Article 56(1) provides
Within the framework of the provisions set out below, restrictions on freedom to provide services
within the Union shall be prohibited in respect of nationals of Member States who are established in a
Member State other than that of the person for whom the services are intended.
Article 57 TFEU then gives a partial definitions of services:
Services shall be considered to be ‘services’ within the meaning of the Treaties where they are
normally provided for remuneration, in so far as they are not governed by the provisions relating
to freedom of movement for goods, capital and persons.
‘Services’ shall in particular include:
(a) activities of an industrial character;
(b) activities of a commercial character;
(c) activities of craftsmen;
(d) activities of the professions.
Without prejudice to the provisions of the Chapter relating to the right of establishment, the person
providing a service may, in order to do so, temporarily pursue his activity in the Member State where
the service is provided, under the same conditions as are imposed by that State on its own nationals.
The principle of non-discrimination emphasized in Article 57(3) TFEU is repeated in Article 61 TFEU
As long as restrictions on freedom to provide services have not been abolished, each Member State
shall apply such restrictions without distinction on grounds of nationality or residence to all persons
providing services within the meaning of the first paragraph of Article 56.
Finally, Article 58 TFEU adds:
1. Freedom to provide services in the field of transport shall be governed by the provisions of the Title
relating to transport.
2. The liberalisation of banking and insurance services connected with movements of capital shall be
effected in step with the liberalisation of movement of capital.
So for Articles 56 and 57 TFEU to be engages three conditions must be satisfied
1. There must be a service
o Article 57 TFEU provides some examples and case law has gone considerably beyond this
2. The service must normally be provided for remuneration (it constitutes consideration for the
service in question)
o Excludes voluntary services
o Remuneration does not need to be paid directly by the recipient of the service (Skandia)
3. The services must be temporary, with the temporariness being assessed, according to Schnitzer,
'in the light not only of the duration of the provisions of the service but also of its regularity,
periodical nature of continuity'. The Court added that service providers can equip themselves
'with some form of infrastructure in the host Member State in so far as such infrastructure is
necessary for the purposes of performing all services in question'.
The material scope of Articles 56 and 57 TFEU
They apply in three situations:
1. The freedom to (travel to) provide services
2. The freedom to travel to receive services
3. When neither provider nor recipient travels
Finally, for the Treaty to apply the entity must be connected to a Member State and there must be
some interstate element, albeit, as the case law has shown, this threshold is set fairly low: a potential
interstate element will suffice.
2.2 The relationship between Articles 49, 56 and 63 TFEU
Articles 49 and 56 TFEU apply only to movements of the self-employed and companies within the
EU/EEA. Article 63 TFEU applies to movement of capital within the EU and between the
EU/EEA and third countries.
A link is recognized in Article 58(2), but when there is a third country element, the free movement
rules would apply only if capital movements were involved, but would not if establishment or
services were at stake.
2.2.2 Services and capital
In Fidium Finanz the Court recognized that the rules on granting credit on a commercial basis could
equally involve service provisions and capital movement. However, having looked at the context of
the German rules the Court found that 'the predominant consideration is freedom to provide
services rather than the free movement of capital'. Therefore, a company in a non-Member State
could not rely on Article 56 to challenge the detail of those rules.
2.2.3 Establishment and capital
The borderline between freedom of establishment and free movement of capital has also proved
difficult. Generally, the Court looks at the object and purpose of the rule; where that does not
work, it will consider the facts of the case.
National legislation intended to apply only to those shareholdings which enable the holder to
exert a definite influence on a company's decisions and to determine its activities falls within
the scope of Article 49 TFEU on freedom of establishment
National provisions which apply to shareholdings acquired solely with the intention of making
a financial investment without any intention to influence the management and control of the
undertaking must be examined exclusively in light of the free movement of capital.
In FII the Court held that, where there is EU-third country movement, the division between freedom
of establishment and free movement of capital was only relevant to intra-EU situations. Thus the
provisions relating to free movement of capital would be applicable in third country relations not
only for portfolio investment, but also for situations where there was decisive influence over the
dividend-paying subsidiary in a third country. However, obiter it was held that its ruling on Article
63(1) TFEU should not 'enable economic operators who do not fall within the limits of the territorial
scope of freedom of establishment to profit from Article. 63(1) TFEU'. Thus, its ruling should not
allow third country operators to circumvent the territorial restrictions on Article 49 TFEU. This might
suggest that the Court was trying to draw a distinction between a Fidium-style situation, to which
Article 49 and 56 TFEU would continue to apply, and tax cases where a broader approach to Article
63 TFEU is applied.
2.3 Who/what are the subjects of Articles 49 and 56 TFEU?
They have vertical direct effect: they apply to the Member States and also to regulatory bodies.
There are hints (Viking) that the rules do have horizontal application (i.e. to private bodies), but it is
better to say that the Court's decision - that Article 49 TFEU could be relied on by a private
undertaking against a trade union or an association of trade unions - more firmly in the frame of an
extended form of vertical direct effect.
2.4 Establishing a breach
Once a claimant company has established that the national rule it wishes to challenge falls in the
scope of Article 49 or 56 TFEU, it must then show that the rule breaches that Treaty provision. The
burden then shifts to the Member State to justify the rule and show that steps taken to achieve
that objective were proportionate, and where appropriate compatible with fundamental human
2.4.2 Discrimination approach
Direct discrimination concerns less favourable treatment on the grounds of origin. According to the
orthodox view, direct discrimination can be saved by the express derogations only.
Indirect discrimination concerns a rule, such as a residence requirement of the corporate
headquarters, which, on its face, applies to all companies but in fact disadvantages those with only a
branch in the host state. Such rules can, however, be objectively justified/justified on public interest
grounds as well as saved by the express derogations.
In the context of the free movement of services, direct discrimination covers not only less favourable
treatment on te grounds of nationality but also on the basis of establishment in another Member
2.4.3 Restrictions/market access approach
To move to market access
The corollary of the discrimination approach is that rules which do not discriminate do not reach the
Treaty. At issue in Alpine Investments was what about rules which are non-discriminatory but
nevertheless hinder market access.
The case concerned a Dutch rule prohibiting cold-calling by the Dutch financial services industry both
within and outside the Netherlands. It was argued that since this rule was non-discriminatory, EU law
would not apply, following the principles laid down in Keck. The Court disagreed; it said the Dutch
rule breached Article 56 TFEU since although non-discriminatory, it 'directly affects access to the
markets in services in the other Member States and is thus capable of hindering intra-Union trade in
This presaged a broader shift towards the so-called market access/restrictions approach.
It was de decision in Gebhard, a case on freedom of establishment, which made clear that the change
was significant and applied across all the freedoms.
The Court said: national measures liable to hinder or make less attractive the exercise of
fundamental freedoms guaranteed by the Treaty must fulfil four conditions: they must be applied in
a non-discriminatory manner; they must be justified by imperative requirements in the general
interest; they must be suitable for securing the attainment of the objective which they pursue; and
they must not go beyond what is necessary in order to attain it.
Thus national rules which are 'liable to hinder or make less attractive the exercise of fundamental
freedoms' or 'are liable to hinder or make less attractive the exercise of fundamental freedoms' -
terms which the Court uses interchangeably and are often referred to as the 'market access'
approach for short - breach the Treaty unless they can be justified by the Member States and shown
to be proportionate.
While the discrimination approach compares the treatment of the in-state and out-of-state company
and finds illegality where there is a difference in treatment, with the market access approach the
Court looks at a particular rule only from the perspective of the migrant service provider/company: is
there a rule in the home or host State which is liable to interfere with its access to the market?
In subsequent cases the Court simplified the language of the market access approach to reflect the
terminology of the Treaty: it says the Treaty prohibits 'obstacles' or 'restrictions' to free movement.
Cases demonstrate that while the restrictions approach is effective at challenging any national
rules which interfere with free movement, it also reaches deeply into the national systems and
challenges legitimate regulatory choices and policy decisions taken by democratically elected
national governments. The Court is alert to this problem and has some tools to limit the reach of
the restrictions approach:
that the effect of the national rule on free movement is too uncertain and indirect (remoteness
some sort of de minimis test (i.e. an economic threshold)
Although the Court of Justice and the national courts now have the tools to limit the effect of the
market access case law, the Court has not applied them consistently and generally the Court finds
that most national rules do, in principle, interfere with free movement and so need to be justified by
the State and shown to be proportionate.
There are two exceptions to this general observations: 1) rules concerning the exit of companies, and
2) rules on taxation.
The special case of taxation
The restrictions approach appeared to add a new tool to company's lawyers in establishing complex
corporate arrangement to reduce their tax liability. It had the potential to enable them to bring
challenges to all sorts of tax rules, including differential rates of taxations. This made it almost
impossible for finance ministries to draft any tax laws which could not be challenged under EU law.
Had a non-discrimination model been applied then State B's rules would not have breached Article
49 TFEU because they would have applied equally to all companies/subsidiaries established in one
The Court's application of the restrictions model overlooked two key points.
1. By definition companies established in one State would never challenge tax rates in the other
State which were lower than those in the one state. It disregarded the fact that tax policy is a
2. In the absence of any meaningful harmonization of tax rules at EU level, taxation policy is
national but reflects internationally agreed norms on which it was reasonable for Member States
to base their practice. The application of the restrictions approach thus risked undermining
international standards without the Eu having the realistic possibility of replacing those rules
with standards of its own.
Overview of international rules on taxation
Tax unit: resident companies are taxed on their worldwide profits, while non-resident companies are
taxed only on profits arising from sources located in that taxing State = the principle of territoriality.
The corollary of the principle of territoriality is that generally the State of residence grants taxpayers
tax advantages, because their financial interests are centred there and so the State of residence can
best assess the taxpayers' ability to pay tax. But then a company resident in one state receiving
profits in another state risks being taxed twice: once by the source state and then again in the home
state, where it is taxed on worldwide profits. DTCs to avoid this.
Return to a discrimination-based approach
The Court showed signs that it was rejecting a pure restrictions approach in favour of a
discrimination model (FII and ACT Group Litigation).
2.5 Derogations and justifications
Once a rule has been classified as a restriction or an obstacle to free movement, the question is
whether Member States can justify those rules. Treaty law lays down an exhaustive list of
derogations which apply across all four freedoms.
2.5.1 Express derogations
Articles 52(1) and 62 TFEU allow Member States to derogate from the rules on freedom of
establishment and the free movement of services on grounds of public policy, public security and
public health (Église de Scientologie).
Exercise of official authority
There is a special exception from the free movement rules for the 'exercise of official authority'
(Article 51(1) TFEU on establishment, Article 62 TFEU extends this to services). It seems that the
derogations under there articles must be restricted to activities which, in themselves, are directly and
specifically connected with the exercise of official authority.
2.5.2 Public interest justifications
'Public interest' or 'objective justifications' exist for indirectly discriminatory and non-discriminatory
national measures which impede the activities of a provider of services and any other measure which
hinders market access. Also known in the case law as 'imperative reasons in the public interest',
objective justifications have covered a wide range of public concerns, such as the need to safeguard
the reputation of the Dutch financial markets and to protect the investing public (Alpine
Once a Member State has made out a justification it must then show that the steps taken to achieve
that objective are proportionate (i.e. suitable and no more restrictive than necessary) and, where
appropriate, are compatible with human rights.
In the context of free movement of services, one extra factor needs to be taken into account: the
extent to which the interest at stake in the host State is already protected in the home State.
Case study 14.1 (Centros)
Registrar's refusal to grant registration request constituted an obstacle to the freedom of establishment,
saying that it was 'immaterial' that the company was formed in the UK only for the purpose of establishing
itself in Denmark where its main or entire business was to be conducted.
Danish government sought to justify the refusal on the ground of the need to maintain its rules on
minimum capital requirements, so as to 1) reinforce the financial soundness of companies in order to
protect public creditors against the risk of seeing the debts owed to them become irrecoverable and 2) the
law aimed at protecting all creditors from the risk of fraudulent bankruptcy due to insolvency of companies
whose initial capitalization was inadequate.
o 1) was held inadequate because creditors would have been no better off had the company previously
traded in the UK and been able to register its branch in Denmark
o 2) was valid, but combating fraud did not justify a practice of refusing to register a breach of a
company which had its registered office in another Member State.
2.5.2 The special case of gambling
This is widely regarded as an area of great sensitivity for Member State and the Court has therefore
applied a fairly relaxed level of scrutiny to national rules.
Courts tend to find that the rules imposing limitations on gambling are restrictions on free
movement. Having brought the ruels within the purview of Article 49 or 56 TFEU, the Court considers
whether they can be justified on the grounds of various public interests outlined previously. The
focus then shifts to proportionality (Centros, Läärä). However, the Court has increasingly insisted that
Member States at least be consistent in the application of their policies towards gambling (Carmen,
Lindman). Generally, however, the Court will intervene only if the value judgements of the Member
State appear manifestly unfounded.
3 Secondary legislation in the field of freedom of establishment
We turn now to consider some examples of how the EU has (re)regulated at EU level, laying down EU
rules to facilitate freedom of establishment and free movement of services.
3.2 The Services Directive 2006/123
The Services Directive was intended to open up the market in services, which accounts for over 2/3
of Europe's gross domestic product.
The striking feature about the list in Article 57 TFEU is that the services identified are relatively
uncontroversial and are often provided by small operators. Assuming the activity is a service. The
word requirement is broadly construed by Article 4(7). Thus, the Directive is underpinned by notions
of market access rather than discrimination.
Although the potential scope of the Directive is broad, in fact the effectiveness of the Directive is
limited by the significant derogations. Principal exclusions can be found in Article 2(2) and 2(3).
Member States also had to screen existing legislation to remove legal and administrative barriers to
the provisions of services.
The establishment chapter (Chapter III) deals with two groups of rules: (a) authorization schemes,
and (b) 'other' requirements which are either prohibited or subject to evaluation.
Authorization schemes are permitted provided that
they do not discriminate (directly or indirectly) against the provider in question
the scheme is justified by an overriding reason relating to the public interest
the objective pursued cannot be attained by means of a less restrictive measure
Criteria for granting authorization must also satisfy these requirements, together with the obligations
to be clear and unambiguous, objective, made public in advance, transparent and accessible.
The Directive concerns not only authorization scheme but also 'other requirements', in respect of
which the Directive distinguishes between (a) those which are prohibited, and (b) those which are
'suspect' and need to be evaluated. Article 14 lists 8 requirements which are prohibited. Article
15(2) identifies a further 8 requirements which have already been considered 'restrictions' on
freedom of establishment in the Court's case law, which are 'suspect'. Unlike the prohibited
requirements, the Directive requires Member States to evaluate whether these suspect
requirements re compatible with the conditions laid down in Article 15(3).
The provisions on services proved to be the most controversial aspect of the Directive. Article 16,
including a lift of seven particularly suspect requirements largely based on the Court's case law.
These requirements can be saved by the express derogations in Article 17, the case-by-case
derogations in Article 18, and by the narrow list of public interest requirements provided for by the
Under the country of origin principle, the principal regulator would have been the home State;
reinforced by the presumption that the host State could not impose any additional requirements
unless there were very good reasons for this. The current approach appears to reverse this: it accepts
that the host State can impose its own restrictions on the service provider, where there are good
reasons for so doing, account being taken of the protection already provided in the home State. The
current approach therefore broadly reflects the case law of the Court where the country of origin
principle is not as firmly embedded in respect of services as it is in goods.
3.3 Financial services
Financial services have for a long time been seen as a key factor for European economic integration,
because 1) financial services are a large and important sector where services can actually be traded
across frontiers (contrary to other services such as hairdressing), and 2) through the free movement
of financial services, a deep and liquid European capital market can be attained.
Unfortunately, the financial services sector is as dangerous as it is beneficial due to (1) information
asymmetries (financial products are complex) and 2) externalities (financial stability and various
systemic externalities relating to it).
3.3.2 The EU legislative framework
The unique desirability of financial service integration and the risks that it involves have resulted in
a complex and evolving framework.
Samenvatting European Law
Catherine Barnard and Steve Peers, European Union Law