Legal Framework of EU Capital Movement

Legal Framework & Origins

• The Free Movement of Capital is the most recent and broadest EU freedom.
• Restrictions on capital movements and payments have been prohibited since the Maastricht Treaty.
• The legal basis is Articles 63-66 of the Treaty on the Functioning of the European Union (TFEU).
• The objective is to remove all restrictions on capital movements between EU Member States, as well as between Member States and third countries, with exceptions in certain circumstances.
• Liberalization of capital flows progressed gradually.
• Treaty of Rome (1957) restrictions only removed to the extent necessary for the functioning of the common market. (Art. 67(1) EEC)
• The "First Capital Directive" (1960) and the second (1963) led to some degree of liberalization.
• Further progress occurred with Council Directive 88/361/EEC in 1988, which scrapped all remaining restrictions on capital movements between Member State residents as of 1 July 1990. This directive aims to liberalize capital movements involving third countries similarly.
• Art. 1(1) of Directive 88/361/EEC states that Member States must abolish restrictions on capital movements between persons residing in Member States.
• The directive lists an exhaustive nomenclature of capital movements in an annex and facilitates its application.
• The directive came into force on 1 July 1990, marking the first stage of monetary union.
• Directive 88/361/EEC now replaced by the new Treaty rules on the Free Movement of Capital, yet still defines the notion of capital movements.
• The Maastricht Treaty established the free movement of capital as a Treaty freedom and stipulated the second stage of monetary union would begin in 1994.
• The Treaty of Rome required Member States to remove restrictions only to the extent necessary for the functioning of the common market. (Art. 67(1) EEC)
• In the Casati case (Case 230/80), the CJEU ruled that Article 67(1) EEC was different from other freedoms in that it did not have direct effect.
• The dynamic of capital liberalization differed from other freedoms: Member States had a significant role in driving the process.

Scope of the Capital Rules

• Restrictions on capital movements and payments prohibited since the Maastricht Treaty (1993).

Restrictions, Express Derogations, and Justifications

• Restricting Free Movement of Capital based on nationality, on the acquisition and disposal of property (e.g. needing prior administrative authorization), prohibition on creating a mortgage in a foreign currency, or limitations imposed by the ‘golden share’ holder (usually the state acting as a regulator in the guise of a market participant) is prohibited.
• The Treaty provisions include the "grandfather clause" (Art. 64 TFEU) and express derogations (Art. 65(1) TFEU).
• Direct taxation remains in the remit of Member States as long as there is no discrimination based on nationality (Art. 65(1)(a) TFEU).
• Art. 65(1)(b) TFEU allows public policy or public security justifications, but these measures must be proportionate.
• Art. 65(1)(b) TFEU also allows fiscal supervision and combatting illegal activities, such as tax evasion, as justifications.
• Restrictions cannot be arbitrarily discriminatory (Art. 65(3) TFEU). 
• Derogations must be interpreted strictly (Case 36/75 Rutili).
• Derogations cannot be misapplied to serve purely economic purposes (Case 36/75 Rutili).
• Anyone affected must have access to legal redress (Case 222/86 Unectef v Heylens).
• Derogations are subject to the principle of proportionality.
• Derogations are subject to the principle of legal certainty (Case C-54/99 Eglise de Scientologie).
• The CJEU introduced the concept of "objective justifications" (Case C-288/94 Reisch) for restrictions to the Free Movement of Capital in the realm of public interest.
• Proportionality is a key consideration when applying justifications based on public interest.

Economic & Monetary Union

• The Maastricht Treaty introduced the free movement of capital as a Treaty freedom and stipulated the second stage of monetary union would begin in 1994.