The Free Movement of Persons: Business Mobility – Establishment

and Provision of Services

1 Articles 49 and 56 TFEU: Freedom of Establishment and Provision of Service

1.1 “Establishment” and “Services”

Article 49 and 56 TFEU set out the rights of self-employed Union citizens and their
businesses to operate anywhere within the Union.

Article 49 TFEU states that “restrictions on freedom of establishment of nationals of a

Member State in the territory of another Member State shall be prohibited”.

This means a Union citizen is free to set up and run a business permanently in a host State.

Article 56 TFEU states that “restrictions on freedom to provide services within the Union
shall be prohibited”.

This means that a Union citizen is free to provide temporary services to people in a host
State, without being based there permanently.

a) Distinguishing between “Establishment” and “Services”

Gebhard

o FACTS: Mr Gebhard set up an office in Milan. It became important to ascertain

whether he was providing temporary legal services in Italy (Article 56 TFEU), or was
in fact established permanently in Italy (Article 49 TFEU). Mr Gebhard was claiming
that could take advantage of the Lawyers’ Services Directive, which covers only those
providing services temporarily in another Member State, not those who have become
established. It allows such people to provide legal services in other Member States on
a temporary basis.
 o COMMENTARY: this case clarified the distinction between the right of
establishment and the right to provide services. The court upheld that the main
criterion of distinction between services and establishment remains the temporary
nature of services. Further, it inferred that the temporary character of the provision of
services should be assessed as to its duration, regularity, periodicity and continuity. A
provider of services may still though, “equip himself with some form of infrastructure
in the host Member State (e.g. an office) in so far as the infrastructure is necessary for
the purposes of providing the services in question”.

Hiring people, setting up a factory, setting up an office, buying furniture e.g. even in
rented office = establishment (evidence of continuity)

The test to apply is: how “stable and continuous” is the activity in the host State. The more
“stable and continuous”, the more likely the activity is to be “establishment”; the less “stable
and continuous”, the more likely it is to amount to “services”.

1.2 Can Individuals Rely on Articles 49 and 56 TFEU?

Article 49 and 56 TFEU have direct effect and can be relied on by individuals in national
courts (Reyners v Belgium).

1.3 What Exactly are “Services”?

Article 57 TFEU defines services as those “normally provided for remuneration”.

Grogan case

o FACTS: The SPUC (Society for the Protection of Unborn Children) challenged the
practice of students’ union in Ireland, where abortion is illegal, to supply information,
free of charge, about abortion services provided lawfully by London clinics.
 o DECISION: The court ruled on three questions. The first asked whether lawful
abortion constitutes a “service” for the purposes of Art. 57 TFEU. The Court had no
difficulty answering this in the affirmative. It observed that a “service” is “normally
provided for remuneration and may be carried out as part of a professional activity”,
noting that existing case law confirmed that “medical activities” fall within the scope
of Art. 57 TFEU. The second and third questions asked whether, where a member
State prohibits abortion and prohibits student associations from distributing material
about lawful access to abortions in another member State, this is contrary to EU law
where those clinics are not involved with the distribution. The court found that there
was no breach of EU law in this respect. The link between the activity of the student
associations and that of the clinics was “too tenuous” to regard Ireland’s ban on
distributing the information as being a restriction on the freedom to provide services
for the purposes of Art. 56 TFEU. The student associations were not acting in
cooperation with the clinics, but were carrying out their activities independently. The
information constituted a “manifestation of freedom of expression and of the freedom
to impart and receive information”, and was entirely independent of the economic
activity carried out by clinics in the UK, which were not involved in the distribution
of material. Therefore, since the information was not distributed on behalf of the
economic operators (the clinics), the students’ information service fell outside the
scope of “services”. Accordingly the prohibition of the students activity did not
infringe EU law

1.4 The Wide Scope of Article 56 TFEU

There are five situations to which Article 56 TFEU applies:

 Where the provider of services goes to another Member State to provide services
there.

 When the provider of services moves to another Member state to provide services to
nationals of his own Member State.
  E.g. British estate agent might work temporarily in Spain, to provide advice to British
people seeking to buy property there.

 When no individuals actually move but services are provided purely by post,
telephone, fax, internet, etc. (Alpine Investments)

 When an EU citizen/ business providing services in a host State wishes to employ

workers who are not themselves EU citizens.
 The right to provide services includes a right to use one’s own workforce—the fact
the workers in question had, in VanderElst, permits to work in Belgium (the home
State of the business in question) was sufficient to allow them to be used for work on
a services contract in France.

 When nationals of one Member State travel to another Member State and receive
services there. The ECJ has said in its case law that Article 56 applies in this situation
too.
 E.g. the ECJ confirmed that individuals have rights to receive medical services and
tourism services in other Member States (Luisi and Corbone).

2 Equal Treatment for the Self-Employed: Freedom of Establishment and Freedom

to Provide Services

a) Article 49, 56 and 57 TFEU: Equal Treatment

Article 49 TFEU states (2nd paragraph) that freedom of establishment includes the right to
undertake self-employed business “under conditions laid down for its own nationals by the
law of the country where such establishment is effected”.

Article 57 TFEU states (final paragraph) that the person providing services may do so “under
the same conditions as are imposed by that State on its own nationals”.
Both provisions aim to secure that every Member State treats self-employed people from
other Member States equally to its own nationals.

Both provisions go further than simply providing for equal treatment and prohibit Member
States imposing restrictions on the freedom in question.

NOTE: the ECJ defined, in Gebhard, restrictions widely, as “national measures liable to
hinder or make less attractive the exercise of fundamental freedoms guaranteed by the
Treaty”.

2.1 Rights of Companies

Article 54 TFEU makes it clear that Article 49 covers companies/ firms.

Article 54 TFEU applies to businesses providing temporary services under Article 56.

The meaning of company/ firm is a matter for the law of the home State.

Centros

o FACTS: The court examined the conditions under which reliance on the right of
secondary established could be considered abusive. The claimants, a Danish couple,
established a company in the UK with the sole purpose of carrying on a business in
Denmark through a permanent establishment of their UK Company. The structure was
set up to avoid the strict Danish rules governing the formation of private limited
companies. The Danish authorities refused to register the Danish branch of the
company on the grounds that it was actually seeking to set up a principle
establishment in Denmark while avoiding the national rules on the paying-up of
minimum share capital. Since the company did not exercise any business operations
 in the UK, the Danish authorities were of the opinion that the primary establishment
in the UK was not genuine and the company could not rely on the EU right of
(secondary) establishment.

o DECISION: The ECJ though, ruled, the conduct of the two Danish nationals was
legitimate, even though the purpose was to avoid the Danish requirements.

2.2 Distinctly and Indistinctly Applicable Measures: Establishment

Article 49 TFEU bans both distinctly applicable discriminatory measures and indistinctly
measures that actually hinder free movement.

Reyners v Belgium

o Belgian legislation stated that only Belgian nationals could be admitted to practice as
lawyers, this, therefore, was a case which concerned a distinctly applicable measure.

Commission v Italy

o Italian law made contracts for developing data-processing systems for public
authorities available only to companies in which the State had a majority
shareholding. No reference was made to the nationality of those companies, but
clearly the State was much more likely to be a majority shareholder in Italian
companies than in foreign ones, therefore, this case concerned an indistinctly
applicable measure.

2.3 Indirectly Discriminatory and Non-discriminatory Indistinctly Applicable

Measures: Establishment

Some indistinctly applicable measures actually have the effect of indirectly discriminating
against non-national businesses.

However, other indistinctly applicable measures which inhibit free movement may not be
discriminatory at all.
 Sodemare

o This case concerned Italian rules that required certain activities (e.g. running homes
for older people) to be carried out by only non-profit making organisations. This was
argued to be a restriction on freedom of establishment: businesses would be
discouraged from carrying out such activities if they were not allowed to make a
profit from their work, including businesses form other Member States. Only
businesses from other Member States could use Article 49 TFEU to challenge the
Italian rules in question though, Italian business would not have been able to do so.
NOTE: both types of indistinctly applicable measures which inhibit freedom of
establishment are capable of being justified in the same way.

2.4 Relying on Article 49 TFEU in Home Member State

Though Article 49 TFEU does not apply to the wholly internal situation, the ECJ has often
been quick to find a “Union element”, and individuals (including businesses) have then been
able to use Article 49 TFEU in their home State.

Marks & Spencer v Halsey

o FACTS: Marks & Spencer’s French and Belgian subsidiaries had suffered substantial
losses. UK tax law allowed parent companies based in the UK to claim tax relief for
losses incurred by British subsidiaries, but not by foreign subsidiaries. Marks &
Spencer therefore challenged the refusal to grant it relief for its French and Belgian
losses under Article 49 TFEU.

o DECISION: The ECJ ruled that the exclusion of tax relief for losses incurred by
subsidiaries established in another Member State hindered the exercise by that parent
company of its freedom of establishment, as it deterred it from setting up subsidiaries
in other Member States. It constituted a restriction on freedom of establishment within
the meaning of Article 49 TFEU, and consequently had to be justified by the UK tax
authorities. NOTE: this also provides an example of a non-discriminatory restriction
on free movement that nevertheless hinder free movement.
2.5 Distinctly and Indistinctly Applicable Measures: Services

Article 56 TFEU bans both distinctly applicable measures and indistinctly applicable
measures that actually hinder free movement.

a) Freedom to Provide Services: Distinctly and Indistinctly Applicable Measures

Van Binsbergen

o FACTS: the Dutch law stated that only persons “established in Holland” could act as
legal advisers in social security cases. This is indistinctly applicable, since it makes no
reference to nationality, only to persons “established in Holland”, which could include
both Dutch nationals and foreigners. (However, remember that Dutch nationals are
more likely to be “established in Holland” than are foreign nationals, and thus more
likely to meet this requirement). This was therefore an indistinctly applicable measure
that arguably actually inhibited the freedom of lawyers from outside Holland to
provide services there. If the Dutch law had said that “only Dutch nationals can act as
legal advisers”, that would have been a distinctly applicable measure, with reference
made to nationality.
2.6 Indirectly Discriminatory and Non-discriminatory Indistinctly Applicable
Measures: Services

Some indistinctly applicable measures actually have the effect of indirectly discriminating
against non-national businesses (e.g. Van Binsbergen).

However, other indistinctly applicable measures which inhibit free movement may not be
discriminatory at all.

Sager v Dennemeyer

o FACTS: an English company provided patent renewal services in Germany, e.g. it

informed its clients when patent renewal fees were due and paid the fees on their
behalf if asked to do so. However, this breached a German law which prohibited
limited companies from carrying on this type of activity; only professionals acting in
their personal capacity were allowed to do so. The German law was non-
discriminatory as it also applied to German companies—nevertheless it infringed
Article 56 TFEU as it prevented an English company from providing the service in
Germany.

Both types of indistinctly applicable measure which inhibit freedom to provide services are
capable of being justified in the same way.
2.7 Relying on Article 56 TFEU in Home Member State

It may be possible for individuals to rely on Article 56 TFEU in their home State.

Alpine Investments

o FACTS: a Dutch investment company “cold-called” potential customers in other

Member States; this was held to be an offer of “services” within the meaning of
Article 56 TFEU. A Dutch law prohibited such cold-calling of people both inside and
outside Holland. It was argued that this Dutch law was a restriction on the Article 56
TFEU freedom to provide services in any Member State: the law restricted the
provision of services by Dutch established businesses—including provision of
services to people in other Member States. This is another example of a non-
discriminatory restriction on free movement.

2.8 Scope of Article 49 and 56 TFEU

Article 49 TFEU and 56 have a wide scope, they even cover non-discriminatory measures
that hinder free movement.

2.9 Secondary Legislation

The principle of equal treatment applies to the self-employed as much as to the employed.
However, Directive 2004/38 does not apply to companies.

3 Permissible Restriction on Freedom of Establishment and Freedom to Provide

Services
3.1 Justification of Distinctly Applicable Measures: the Treaty Exceptions

Article 51 TFEU and 52(1) set out the exceptions or “derogations” from the basic principles
of freedom of establishment.
Under Article 51 TFEU, a State could argue that its measure is not covered by Articles 49
TFEU or 56 at all, since it relate to activities connected “with the exercise of official
authority”.

Under Article 52(1) TFEU, a State could argue that its measure is justified on grounds of
“public policy, public security or public health”. NOTE: these three derogations are common
to all free movement areas.

These derogations have always been narrowly interpreted by the courts; if there is any doubt
as to whether or not a measure fits within them, it will be deemed not to do so.

3.1.2 Case Law on the Treaty Exceptions

a) Official Authority Exception

Reyner v Belgium

o Belgian legislated stated only Belgian nationals could be admitted to practise as

lawyers. Mr Reyners, who was Dutch, argued this law was distinctly applicable
measure which prevented his establishing himself as a lawyer in Belgium. Belgium
attempted to rely on Article 51 TFEU, and said that the provision in question, was
connected with the “exercise of official power”. Belgium argued that because of this,
freedom of establishment did not apply, and its law restricting the profession to
Belgians only did not breach EU law. The ECJ said though, that most of the work that
would be done would not actually be considered to be connected with the “exercise of
official authority”.

b) Public Policy, Public Security and Public Health

 Omega

o FACTS: Omega, a German company, ran a laser game facility (supplied by a British
company which triggered the application of Article 56 TFEU to the case). The police
banned the “playing at killing” game, as the simulated homicide and trivialisation of
violence were contrary to fundamental values and so constituted a danger to public
order. When the ban was challenged, the authorities sought to justify it under the
“public policy” exception.

o DECISION: as the authorities were relying on a Treaty exception, the ECJ did not
consider it necessary to decide whether the ban was distinctly or indistinctly
applicable. The ECJ stated that public policy could be relief on only if there was a
genuine and sufficiently serious threat to a fundamental interest of society, and as
circumstances varied from country to country, national authorities had a margin of
discretion, although they had to act proportionately. In this case, by banning the laser
game which involved “playing at killing” people, and not others, the authorities had
not gone further than necessary to attain their objective, i.e. the level of protection of
human dignity which the national constitution sought to guarantee. The ban was
therefore appropriate.

c) Proportionality

The issue of proportionality concerns whether the law in question goes beyond what is
necessary to meet legitimate public policy concerns.
3.2 Justification of Indistinctly Applicable Measures

Indistinctly applicable measures that actually hinder free movement can be justified in two
ways by the State.

They can be justified by Treaty exceptions (above) or by the Cassis approach, i.e. the State
may argue that the measure is “necessary” for a “mandatory requirement” of the State.

The Cassis approach must be examined in the field of establishment and services, by means
of the case of Gebhard

Gebhard

o A State could defend measures that actually hinder freedom of establishment on the
following basis:

i. Such measures must be non-discriminatory (i.e. indistinctly applicable);

ii. They must be “justified by imperative requirements in the general interest”;
iii. They must be “suitable for securing the attainment of the objective which they
pursue”;
iv. “They must not go beyond what is necessary in order to attain it”

o NOTE: When the ECJ stated in the first criterion, the measures must be non-
discriminatory, it meant they must not be directly discriminatory. Therefore, the
approach set out by the ECJ in Gebhard can justify both types of indistinctly
applicable measures, i.e. indirectly discriminatory measures and non-discriminatory
restrictions on free movement.
o The last two of these criterions reflect the need for proportionality.
Article 16 Service Directive relates to services.