Overview

Article 63 of the Treaty on the Functioning of the European Union requires that all restrictions on the movement of capital between EU countries and between EU countries and non-EU countries be prohibited unless they are necessary to pursue legitimate public interests.

The purpose of free movement of capital is to enable an efficient cross-border deployment of physical and financial capital for investment and financing purposes.

For individuals, this means being able to carry out many transactions, including

• opening bank accounts abroad
• buying shares in non-domestic companies
• investing where the best return is
• purchasing real estate in another country

For businesses, it means being able to

• invest in, and own, other European businesses
• raise finance where it is cheapest

Definition

The treaty on the functioning of the EU does not define the term ‘movements of capital’. In the absence of a definition, the Court of Justice of the European Union has held that the definitions in the nomenclature annexed to Directive 88/361/EEC can be used to define that term. According to these definitions, cross-border capital movements include

• foreign direct investments (FDI)
• real estate investments or purchases
• securities investments (e.g. in shares, bonds, bills, unit trusts)
• granting of loans and credit
• other operations with financial institutions, including personal capital operations such as dowries, legacies, endowments, etc.

Legal framework

Amongst the fundamental freedoms that underpin the EU single market (free movement of people, goods, services and capital), the free movement of capital is the most recent. It became a directly applicable treaty freedom only with the Maastricht treaty.

The legal framework for the free movement of capital includes

• treaty provisions
• protocols and declarations
• transitional measures granted by the acts of accession to new member countries

Article 63of the treaty on the functioning of the EU prohibits all restrictions on capital movements and payments not only within the EU, but also between EU countries and countries outside the EU. However, further provisions in the treaty stipulate a number of exceptions to the principle of free movement of capital, in particular to prevent problems related to taxation, prudential supervision of financial institutions, public policy and security.

The Court of Justice of the European Union (CJEU) has the final say in interpreting treaty provisions, and there is extensive case law in this area.

Read more:

• legal framework of the free movement of capital
• guide to the case law of the CJEU
• interpretative communication on the acquisition of farmland and European Union law

Monitoring and enforcement

The European Commission enforces the free movement of capital by monitoring capital flows and ensuring EU countries properly apply the rules of the Treaty.

In July 2018, the Commission published a communication in which it recalled the fundamental rules under EU law for the protection of investments within the Single Market. This communication followed a ruling by the European Court of Justice that investor-to-State arbitration clauses in existing international investment agreements between EU Member States are incompatible with the Treaty.

Barriers to the free movement of capital

The capital markets union (CMU) is a plan of the European Commission to build a true single market for capital in the EU by 2019. Under the CMU action plan, the European Commission has started working with EU countries to examine the remaining national barriers to the free movement of capital.

An expert group on barriers to the free movement of capital composed of representatives from EU countries was set up to exchange views in this area.

In March 2017 the Commission adopted a report looking at how to tackle national barriers with a view to fostering the flow of cross-border investments in the EU.

• Report from the Commission - Accelerating the capital markets union: addressing national barriers to capital flows

In May 2017 the Commission and the Member States agreed on a Joint Roadmap of actions to address national barriers to capital flows

• Joint Roadmap of actions to address national barriers to capital flows

International relations

The free movement of capital has the broadest scope of all treaty freedoms. It is the only freedom that goes beyond the boundaries of the EU internal market, as it also includes capital flows between EU countries and the rest of the world.

Nevertheless, this freedom cannot exist without sensible safeguards and protections. EU countries are legally allowed to take precautions to ensure that foreign investment does not expose them to public security threats and the EU itself can act either in emergencies or in normal economic circumstances to restrict this freedom.

The EU has also led the way in promoting the free flow of capital internationally, advocating for lower trade barriers and a level playing field for investments.

The EU promotes these principles through

• international fora and multilateral agreements
• bilateral investment dialogues and trade agreements
• negotiations with EU candidate countries

Related links

International cooperation on financial regulation and capital movements