Freedom of Establishment and Freedom to Provide Services in the European Union

The Freedom to Provide Services or sometimes referred to as free movement of services along with the Freedom of Establishment form the core of the European Union's functioning. With the free movement of workers, citizens, goods and capital, they constitute fundamental rights that give companies and citizens the right to provide services without restrictions in any member country of the EU regardless of nationality and jurisdiction.
After WWII the creation of the European project led to the opening of borders, especially for citizens since these control were almost absent before 1914. The Treaties of Rome laid down the foundations of the so-called "four freedoms in the EU. Initially they were basic for workers, for the free provision of services and the free movement of goods, later on capital movement was included.
The right to provide services has proven to be increasingly important as the European economy shifts towards a more service-based economy. Today, it is estimated that the services sector represents about two-thirds of the European economy and it is responsible for 90% of the overall creation of jobs in the EU. Adding to that, the shift to a digital economy means that many things that used to be goods now become services. The Commission is well aware of that and in 2015 launched a proposal for a so-called "Digital Single Market" with the aim of bringing down barriers to unlock digital opportunities.
Legal Basis.
The freedom to provide services involves the elimination of discrimination on the grounds of nationality and the adoption of measures to make it easier its exercise including the harmonisation of national access rules or mutual recognition. The exercise of both freedoms applies, according to Article 54 of the TFEU, to Self-employed persons and professionals or legal who are legally operating in one Member State. It consists in the right:
Services, nonetheless, according to settled case law, need to have an economic base, that it, a reward for what is being offered by the recipient. This concept is introduced in Grogan (C-159/90) where the court rules on the "economic nature" of the provision of services. The case concerns a company that provides free information for women in Ireland wanting to have an abortion in the UK. The court finds out that the company has no right to claim its freedom to provide services as in this case, as the case would concern "freedom to provide information". This is intrinsically linked to the lack of payment and therefore of an economic link.
Services provided by governments or public entities are called "Services of General Interest". In practice, this means services that are considered to be "essential" and therefore subject to specific public services obligations. This type of services can be divided into three categories:
In the treaties, more specifically the Treaty on the Functioning of the European Union (TFEU), the freedom to provide services is based on Articles 49–66. The main articles related to both, the right of legal and natural persons to establish themselves in another EU country and there provide services (freedom of establishment), and the right to provide cross-border services without having the need of establishing an office (freedom to provide services) can be found at:
Case-Law.
Services.
The "freedom to provide services" under TFEU article 56 applies to people who give services "for remuneration", especially commercial or professional activity. For example, in "Van Binsbergen v Bestuur van de Bedrijfvereniging voor de Metaalnijverheid" a Dutch lawyer moved to Belgium while advising a client in a social security case, and was told he could not continue because Dutch law said only people established in the Netherlands could give legal advice. The Court of Justice held that the freedom to provide services applied, it was directly effective, and the rule was probably unjustified: having an address in the member state would be enough to pursue the legitimate aim of good administration of justice. The Court of Justice has held that secondary education falls outside the scope of article 56 because usually the state funds it, but higher education does not. Health care generally counts as a service. In "Geraets-Smits v Stichting Ziekenfonds" Mrs Geraets-Smits claimed she should be reimbursed by Dutch social insurance for costs of receiving treatment in Germany. The Dutch health authorities regarded the treatment unnecessary, so she argued this restricted the freedom (of the German health clinic) to provide services. Several governments submitted that hospital services should not be regarded as economic, and should not fall within article 56. But the Court of Justice held health was a "service" even though the government (rather than the service recipient) paid for the service. National authorities could be justified in refusing to reimburse patients for medical services abroad if the health care received at home was without undue delay, and it followed "international medical science" on which treatments counted as normal and necessary. The Court requires that the individual circumstances of a patient justify waiting lists, and this is also true in the context of the UK's National Health Service. Aside from public services, another sensitive field of services are those classified as illegal. "Josemans v Burgemeester van Maastricht" held that the Netherlands' regulation of cannabis consumption, including the prohibitions by some municipalities on tourists (but not Dutch nationals) going to coffee shops, fell outside article 56 altogether. The Court of Justice reasoned that narcotic drugs were controlled in all member states, and so this differed from other cases where prostitution or other quasi-legal activity was subject to restriction.
If an activity does fall within article 56, a restriction can be justified under article 52, or by overriding requirements developed by the Court of Justice. In "Alpine Investments BV v Minister van Financiën" a business that sold commodities futures (with Merrill Lynch and another banking firms) attempted to challenge a Dutch law that prohibiting cold calling customers. The Court of Justice held the Dutch prohibition pursued a legitimate aim to prevent "undesirable developments in securities trading" including protecting the consumer from aggressive sales tactics, thus maintaining confidence in the Dutch markets. In "Omega Spielhallen GmbH v Bonn" a "laserdrome" business was banned by the Bonn council. It bought fake laser gun services from a UK firm called Pulsar Ltd, but residents had protested against "playing at killing" entertainment. The Court of Justice held that the German constitutional value of human dignity, which underpinned the ban, did count as a justified restriction on freedom to provide services. In "Liga Portuguesa de Futebol v Santa Casa da Misericórdia de Lisboa" the Court of Justice also held that the state monopoly on gambling, and a penalty for a Gibraltar firm that had sold internet gambling services, was justified to prevent fraud and gambling where people's views were highly divergent. The ban was proportionate as this was an appropriate and necessary way to tackle the serious problems of fraud that arise over the internet. In the Services Directive a group of justifications were codified in article 16, which the case law has developed.
Other important cases related to specific issues are:
Establishment.
As well as creating rights for "workers" who generally lack bargaining power in the market, the Treaty on the Functioning of the European Union also protects the "freedom of establishment" in article 49, and "freedom to provide services" in article 56. In "Gebhard v Consiglio dell’Ordine degli Avvocati e Procuratori di Milano" the Court of Justice held that to be "established" means to participate in economic life "on a stable and continuous basis", while providing "services" meant pursuing activity more "on a temporary basis". This meant that a lawyer from Stuttgart, who had set up chambers in Milan and was censured by the Milan Bar Council for not having registered, should claim for breach of establishment freedom, rather than service freedom. However, the requirements to be registered in Milan before being able to practice would be allowed if they were non-discriminatory, "justified by imperative requirements in the general interest" and proportionately applied. All people or entities that engage in economic activity, particularly the self-employed, or "undertakings" such as companies or firms, have a right to set up an enterprise without unjustified restrictions. The Court of Justice has held that both a member state government and a private party can hinder freedom of establishment, so article 49 has both "vertical" and "horizontal" direct effect. In "Reyners v Belgium" the Court of Justice held that a refusal to admit a lawyer to the Belgian bar because he lacked Belgian nationality was unjustified. TFEU article 49 says states are exempt from infringing others' freedom of establishment when they exercise "official authority". But regulation of an advocate's work (as opposed to a court's) was not official. By contrast in "Commission v Italy" the Court of Justice held that a requirement for lawyers in Italy to comply with maximum tariffs unless there was an agreement with a client was not a restriction. The Grand Chamber of the Court of Justice held the commission had not proven that this had any object or effect of limiting practitioners from entering the market. Therefore, there was no "prima facie" infringement freedom of establishment that needed to be justified.
In regard to companies, the Court of Justice held in "R (Daily Mail and General Trust plc) v HM Treasury" that member states could restrict a company moving its seat of business, without infringing TFEU article 49. This meant the "Daily Mail" newspaper's parent company could not evade tax by shifting its residence to the Netherlands without first settling its tax bills in the UK. The UK did not need to justify its action, as rules on company seats were not yet harmonised. By contrast, in "Centros Ltd v Erhversus-og Selkabssyrelsen" the Court of Justice found that a UK limited company operating in Denmark could not be required to comply with Denmark's minimum share capital rules. UK law only required £1 of capital to start a company, while Denmark's legislature took the view companies should only be started up if they had 200,000 Danish krone (around €27,000) to protect creditors if the company failed and went insolvent. The Court of Justice held that Denmark's minimum capital law infringed Centros Ltd's freedom of establishment and could not be justified, because a company in the UK could admittedly provide services in Denmark without being established there, and there were less restrictive means of achieving the aim of creditor protection. This approach was criticised as potentially opening the EU to unjustified regulatory competition, and a race to the bottom in legal standards, like the US state of Delaware, which is argued to attract companies with the worst standards of accountability, and unreasonably low corporate tax. Appearing to meet the concern, in "Überseering BV v Nordic Construction GmbH" the Court of Justice held that a German court could not deny a Dutch building company the right to enforce a contract in Germany, simply because it was not validly incorporated in Germany. Restrictions on freedom of establishment could be justified by creditor protection, labour rights to participate in work, or the public interest in collecting taxes. But in this case denial of capacity went too far: it was an "outright negation" of the right of establishment. Setting a further limit, in "Cartesio Oktató és Szolgáltató bt" the Court of Justice held that because corporations are created by law, they must be subject to any rules for formation that a state of incorporation wishes to impose. This meant the Hungarian authorities could prevent a company from shifting its central administration to Italy, while it still operated and was incorporated in Hungary. Thus, the court draws a distinction between the right of establishment for foreign companies (where restrictions must be justified), and the right of the state to determine conditions for companies incorporated in its territory, although it is not entirely clear why.
Other important cases to be considered are:
Overview.
Since the launching of the Single Market, replacing the then called "Common Market", the commission has been particularly active in the launching of initiatives that affected. The following table show some of the progress made from 1985 to 2016.
Services Directive.
Launched in 2004 by the European Commission, It was seen as an important kick-start to the Lisbon Agenda which, launched in 2000, was an agreed strategy to make the EU "the world's most dynamic and competitive economy" by 2010. The main aim of the Directive is to create a genuine internal market in Services. As the directive intends to harmonise rules, the main idea is to eliminate regulation that hampers trade and directive investment in services. The Services Directive introduces the principle of "country of origin" for the provision of services in the EU, meaning that a legal/natural person following the rules in its home country is entitled to provide services in other EU countries without following additional regulation in the host country where the service is provided.
In addition to that, the directive is responsible for establishing:
The implementation of the directive has been significantly delayed in a number of Member States in relation to the original deadline (28 December 2009). In June 2010 the Commission started infringement procedure against some member states – "namely Austria, Belgium, Cyprus, France, Germany, Greece, Ireland, Luxembourg, Portugal, Romania, Slovenia and the United Kingdom" – that had not communicate the measures they had adopted in order to transpose the directive.
Financial Services.
The rights to provide cross-border services in the field of finance is also guaranteed within the Union's legislative framework and it constitutes one of the pillars of the European single market. Since the implementation of free movement of capitals after the Single European Act (SEA), the subsequent Financial Services Action Plan (1999) and the recent launch of the Capital Markets Union under the Junker administration, several directives and regulations were proposed and adopted by the institutions in order to facilitate the process of cross-border provision of financial services. The most relevant of them are:
Other regulations/directives to be considered are:
Banking Union.
The Banking Union is responsible for the supervision of the banking system in Europe through the establishment of harmonised rules. Its aim is to ensure stability in the euro zone and spare taxpayers and the real economy of the eventual risk of a bank's bankruptcy. It encompasses all euro zone countries plus those who want to take part.
The Banking Union work through:
Capital Markets Union.
The CMU was considered as the "New frontier of Europe's single market" by the Commission aiming at tackling the different problems surrounding capital markets in Europe such as: the reduction of market fragmentation, diversification of financial sources, cross-border capital flows with a special attention for Small and Medium-sized enterprises (SMEs). The project was also seen as the final step for the completion of the Economic and Monetary Union as it was complementary to the Banking Union that had been the stage for intense legislative activity since its launching in 2012. The CMU project meant centralisation and delegation of powers at the supranational level with the field of macroeconomic governance and banking supervision being the most affected.
The first Action Plan for the Capital Markets Unions presented by the commission in 2015 involves:
Digital Single Market.
The transport of goods is the most integrated sector to date following a historical evolution due to a certain "priority" given to this sector within the institutional framework in the early phases of the European project. Now that services account for more than two-thirds of the European economy, and yet the Single Market lags behind in the integration of digital services. According to European Commission, an integrated digital single market could increase EU gross GDP by more than 400 billion euro a year. Based on this, the Digital Single Market project was launched by the European Commission in May 2015 with the three main pillars:
The project has become particularly important for the free provision of services as many initiatives aiming at removing barriers for consumers and companies was implemented. Among them we can cite, notably:
More recently the European Commission under Ursula Von der Leyen proposed the introduction of a Digital Services Act as a way to revise the "eCommerce Directive". Based on the guidelines we can say that the new Directive will be based in two pillars: