Free Movement of Capital and Payments: Investment, Financial Transactions, and Restrictions

Free Movement of Capital and Payments: Investment, Financial Transactions, and Restrictions

1. Introduction

The free movement of capital is one of the four fundamental freedoms of the European Union’s internal market. It enables individuals, businesses, and investors to transfer financial resources across national borders, acquire assets in other Member States, invest in foreign companies, purchase real estate, grant loans, and participate in cross-border financial transactions.

Its economic importance is substantial. An integrated market cannot function effectively if capital is prevented from moving towards productive investments, if businesses cannot obtain financing across borders, or if individuals are discouraged from holding assets in another Member State. The freedom therefore supports investment, business development, financial integration, and the efficient allocation of economic resources.

The principal legal foundation is Article 63 of the Treaty on the Functioning of the European Union (TFEU). It prohibits restrictions on the movement of capital and payments not only between Member States but also between Member States and third countries. This third-country dimension distinguishes the freedom from the other principal internal market freedoms, whose Treaty protections are generally more closely connected to movement within the Union.

The freedom is nevertheless subject to qualifications. Articles 64–66 TFEU establish specific rules concerning certain third-country transactions, while Article 65 permits defined national measures relating to taxation, financial supervision, public policy, and public security. Article 75 TFEU provides an additional legal basis for certain restrictive measures directed against terrorism and related activities.

The Court of Justice of the European Union (CJEU) has developed an extensive body of case law defining capital movements, identifying prohibited restrictions, and determining when national measures may be justified. Its decisions have addressed foreign investment, shareholdings, real estate, taxation, financial transfers, and the treatment of investments originating outside the Union.

This article examines the legal foundations of the freedom, the distinction between capital movements and payments, its application to individuals and companies, the special position of third countries, permissible restrictions, and the enforcement mechanisms that protect cross-border financial activity.

2. Treaty Foundations: Articles 63–66 TFEU

The free movement of capital is governed principally by Articles 63–66 TFEU, located in Title IV, Chapter 4 of the Treaty.

Article 63 establishes the general prohibition. It provides that all restrictions on the movement of capital between Member States and between Member States and third countries are prohibited. Its second paragraph extends the same principle to payments.

The provision is significant for two reasons.

First, it prohibits restrictions rather than merely discriminatory treatment. A national measure may infringe Article 63 even if it applies equally to domestic and foreign investors, provided that it makes cross-border investment or financial transfers more difficult or less attractive.

Second, the provision expressly includes transactions involving third countries. Capital may therefore move between an EU Member State and a non-EU country within the scope of Article 63, although the Treaty provides additional qualifications for certain external transactions.

Article 64 contains a specific exception concerning certain restrictions on capital movements involving third countries. It preserves, under defined conditions, certain restrictions that existed on 31 December 1993, particularly those involving direct investment, establishment, financial services, and the admission of securities to capital markets. For restrictions existing under national law in Bulgaria, Estonia, and Hungary, the relevant reference date is 31 December 1999.

Article 65 recognises certain national powers to regulate capital movements. These include measures distinguishing taxpayers according to residence or the place where their capital is invested, measures necessary to prevent infringements of national law, and measures justified on grounds of public policy or public security.

However, these powers are not unlimited. Article 65 expressly prevents Member States from using such measures as arbitrary discrimination or disguised restrictions on the free movement of capital.

Article 66 provides for temporary safeguard measures concerning third countries where capital movements cause, or threaten to cause, serious difficulties for the operation of economic and monetary union. Such measures require the prescribed EU-level procedure and are limited to a period not exceeding six months.

These provisions establish a balance between the liberalisation of capital movements and the continuing regulatory responsibilities of Member States and EU institutions.

3. What Constitutes a Movement of Capital?

Unlike some other Treaty freedoms, the TFEU does not provide an exhaustive definition of the term “movement of capital”.

The CJEU has therefore relied on the nomenclature annexed to Directive 88/361/EEC, originally adopted to implement the former Treaty provisions on capital movements. Although the Directive’s liberalisation framework has been superseded, its nomenclature remains an important interpretative reference for identifying transactions that constitute capital movements.

The categories are broad and include:

• Direct investment in businesses and companies.
• Investment in real estate.
• Transactions involving shares, bonds, and other securities.
• Participation in collective investment schemes.
• Loans and credits.
• Financial transfers connected with commercial transactions.
• Transfers of personal capital, including inheritances and gifts.
• Certain transactions involving bank accounts and other financial institutions.
• Transfers connected with insurance and pension arrangements.

The classification is not limited to transactions undertaken by professional investors or financial institutions. Individuals may also rely on the freedom when acquiring property abroad, opening bank accounts in another country, investing in securities, or transferring personal assets across borders.

The European Commission identifies foreign direct investment, real estate, securities, loans, and personal capital transfers among the principal categories protected by the freedom. <Cite refs={[“turn770272search0″,”turn770272search3”]}/>

3.1. Direct Investment

Direct investment generally involves the establishment or maintenance of lasting economic links between an investor and an undertaking.

It may include acquiring or establishing a company, obtaining a controlling or significant shareholding, participating in management, or making investments intended to create a durable economic relationship.

The distinction between direct investment and portfolio investment is important in EU law because certain Treaty exceptions, particularly Article 64, refer specifically to direct investment.

In Baars (Case C-251/98), the Court examined the relationship between the freedom of establishment and the movement of capital. It explained that where a shareholding enables its holder to exercise definite influence over a company’s decisions and determine its activities, the relevant situation may fall primarily within the freedom of establishment.

By contrast, an investment made without the intention or ability to influence the management of the undertaking may fall within the rules on capital movements.

The distinction is not always straightforward. A transaction may involve both investment and corporate participation, and the applicable Treaty freedom must be identified by examining the purpose and effects of the national measure.

3.2. Portfolio Investment

Portfolio investment generally involves acquiring financial instruments for investment or financial return without seeking to exercise significant influence over the undertaking concerned.

Examples include purchasing publicly traded shares, acquiring government or corporate bonds, and investing in collective investment funds.

Portfolio investment is protected by Article 63. National measures that discourage foreign investors from purchasing domestic securities, or domestic investors from acquiring foreign securities, may therefore constitute restrictions.

3.3. Real Estate Investment

Purchasing real estate in another Member State is also a movement of capital.

The freedom covers transactions involving residential property, commercial premises, agricultural land, and other forms of real estate, subject to applicable Treaty qualifications and transitional arrangements.

National restrictions on property acquisition may infringe Article 63 where they discourage or prevent cross-border investment.

In Konle (Case C-302/97), the Court examined Austrian rules concerning the acquisition of property and their compatibility with EU law. It recognised that Member States may pursue legitimate objectives, including spatial planning, but national authorisation systems must satisfy proportionality.

The freedom does not mean that every investor has an unconditional right to acquire any property. Planning, environmental protection, and other legitimate regulatory objectives may justify restrictions, provided that the measures comply with EU law.

4. The Difference Between Capital Movements and Payments

Although Article 63 addresses both capital movements and payments, the concepts are legally distinct.

A movement of capital generally involves a financial or investment transaction that transfers assets or resources across borders. A payment is the transfer of money that constitutes consideration for an underlying transaction or discharges a financial obligation.

For example, purchasing shares in a company established in another Member State involves a movement of capital. Transferring the purchase price to the seller constitutes a payment.

Similarly, granting a cross-border loan involves a capital movement, while transferring the loan proceeds and making subsequent repayments involve payments.

The distinction matters because not every cross-border payment necessarily constitutes an independent movement of capital. A payment may instead be the financial consequence of another transaction, such as the provision of services or the movement of goods.

The CJEU has recognised that payments connected with transactions falling under other Treaty freedoms must be considered in their relevant economic and legal context.

In Luisi and Carbone (Joined Cases 286/82 and 26/83), the Court examined transfers of money connected with the movement of persons and the provision and receipt of services. Its reasoning helped clarify the relationship between financial transfers and the underlying economic activities.

Article 63 nevertheless protects payments as an independent category. A restriction on the method or availability of payment may discourage cross-border investment or make international transactions more difficult.

This was particularly clear in ECOTEX BULGARIA (Case C-544/19), discussed later in this article. The case concerned Bulgarian legislation restricting large cash payments, including certain dividend distributions. The Court considered whether the restriction could discourage investors and therefore fall within Article 63.

The broader principle is that financial transfers must not be treated as legally irrelevant merely because they are ancillary to an underlying investment or commercial transaction.

5. The Direct Effect of Article 63 TFEU

Article 63 TFEU is directly effective. Individuals and companies may rely on it before national courts where national measures unlawfully restrict capital movements or payments.

The principle was confirmed in Sanz de Lera and Others (Joined Cases C-163/94, C-165/94 and C-250/94).

The cases concerned Spanish legislation requiring prior administrative authorisation for certain transfers of money to other countries. The Court held that the general prohibition in Article 63 could be relied upon before national courts.

The judgment is particularly important because it confirmed the direct effect of the Treaty prohibition in relation to capital movements involving third countries.

Direct effect means that an individual or company does not need to wait for the adoption of a specific implementing directive before invoking Article 63, provided that the circumstances fall within its scope.

National courts must examine the compatibility of domestic measures with the Treaty and provide effective judicial protection.

The principle also applies to measures adopted by public authorities, including administrative decisions and national legislation governing investments, financial transfers, and the acquisition of assets.

However, the existence of direct effect does not mean that every restriction is automatically unlawful. The court must still examine the relevant Treaty exceptions and the justifications recognised under EU law.

6. Restrictions on the Free Movement of Capital

Article 63 prohibits all restrictions on capital movements and payments. Its scope therefore extends beyond measures that expressly discriminate against foreign investors.

A restriction may exist where a national rule:

• Prevents or limits the acquisition of foreign assets.
• Requires prior authorisation for a cross-border investment without sufficient justification.
• Imposes additional taxes on foreign investments.
• Discourages non-residents from acquiring shares in domestic companies.
• Makes it more difficult for domestic residents to invest abroad.
• Restricts the transfer of dividends, interest, or other investment income.
• Imposes disproportionate conditions on cross-border loans or financial transactions.
• Creates unnecessary administrative obstacles to the transfer of capital.

The CJEU has repeatedly confirmed that Article 63 covers measures capable of discouraging investors from making cross-border investments.

In Commission v Portugal (Case C-367/98), the Court examined special rights held by the Portuguese state in certain companies. These rights allowed the state to exercise influence over corporate decisions beyond what would ordinarily follow from its shareholding.

The Court found that the arrangements could discourage investors from acquiring shares and therefore constituted restrictions on the free movement of capital.

The judgment is part of the broader line of cases concerning so-called golden shares: special rights retained by states in privatised companies.

6.1. Golden Shares and State Control

Golden-share arrangements are particularly significant because they demonstrate that restrictions on capital movements may arise from corporate governance mechanisms rather than conventional prohibitions on investment.

A state may retain special voting rights, veto powers, or authorisation requirements in a privatised company. Even where foreign investors are formally permitted to acquire shares, the special rights may discourage investment by limiting their ability to influence the company’s decisions.

The CJEU has examined such arrangements in several cases.

In Commission v Portugal (C-367/98), the Court found that special rights retained by the state in privatised companies restricted capital movements.

In Commission v France (C-483/99), special rights concerning a strategic company were also examined under the Treaty rules.

In Commission v United Kingdom (C-98/01), the Court considered special rights retained in British Airports Authority-related corporate arrangements.

The judgments demonstrate that national ownership policy and public-interest concerns do not automatically justify special state powers over companies. Restrictions must be clearly defined, justified, and proportionate.

7. The Relationship Between Capital Movements and Other Internal Market Freedoms

Capital movements frequently overlap with the other fundamental freedoms.

An investor acquiring a controlling shareholding in a company may be exercising freedom of establishment. A passive investment in shares may fall primarily within Article 63.

Similarly, a financial transfer may form part of a transaction involving the provision of services, the sale of goods, or the movement of persons.

The CJEU therefore examines the purpose and effects of the national measure rather than classifying every transaction according to its financial component.

7.1. Capital and Establishment

The distinction between investment and establishment is particularly important in corporate law.

In Baars, the Court held that a national measure concerning a shareholding capable of giving the investor definite influence over the company’s decisions could fall within the freedom of establishment.

Where the investor does not exercise such influence and merely seeks a financial return, the movement of capital may be the more relevant freedom.

The distinction also affects the treatment of third-country investors because Article 63 extends to third countries, whereas the establishment provisions do not provide an equivalent general right to establish a business in the EU for all third-country persons and companies.

7.2. Capital and Taxation

Taxation is another area in which the freedoms overlap.

A national tax measure may affect both the freedom of establishment and the movement of capital. The applicable provision depends on the nature of the investment and the influence exercised by the investor.

Where a measure concerns a controlling shareholding and the investor’s ability to participate in management, establishment may be the principal freedom.

Where the measure concerns portfolio investment or other financial assets, Article 63 may apply.

The Court’s classification matters because the scope of the third-country protection differs between these freedoms.

8. Capital Movements Involving Third Countries

One of the distinctive features of Article 63 is that it protects capital movements not only within the EU but also between Member States and non-EU countries.

This means that an investor in a third country may, in principle, rely on the Treaty prohibition where an EU national measure restricts a capital movement falling within Article 63.

Similarly, an EU resident investing outside the Union may benefit from the provision, subject to the Treaty qualifications.

The protection is not confined to EU citizens. Article 63 does not specify that only nationals of Member States may invoke the freedom. Its scope depends on the cross-border capital movement and the relevant legal circumstances.

The Commission describes the third-country dimension as one of the defining characteristics of the freedom, distinguishing it from the other principal internal market freedoms. <Cite refs={[“turn770272search0″,”turn770272search2”]}/>

8.1. Why the Third-Country Dimension Matters

The third-country dimension has important consequences for international investment.

A national tax rule may affect an investor established outside the EU. A restriction on dividends may discourage a non-EU shareholder from acquiring an interest in a European company. A limitation on the transfer of financial assets may affect transactions between EU residents and persons in third countries.

Article 63 may therefore apply to transactions involving countries that are not members of the Union.

However, the protection is not absolute. Articles 64–66 establish qualifications, and the CJEU has recognised that the specific context of third-country relations may justify distinctions that would not be permissible within the Union.

8.2. Article 64: Existing Restrictions and the Standstill Clause

Article 64(1) preserves certain restrictions involving third countries that existed on the relevant reference date.

The provision concerns capital movements involving:

• Direct investment, including investment in real estate.
• Establishment.
• The provision of financial services.
• The admission of securities to capital markets.

The general reference date is 31 December 1993. For restrictions existing under national law in Bulgaria, Estonia, and Hungary, the relevant date is 31 December 1999.

The provision is commonly described as a standstill or grandfathering clause.

It does not authorise Member States to introduce new restrictions simply because they concern third-country investment. The national measure must fall within the precise scope of Article 64 and satisfy its historical conditions.

The provision is also subject to interpretation by the CJEU. A Member State cannot rely on it merely by asserting that a restriction has existed for a long time. It must demonstrate that the relevant legal and factual conditions are satisfied.

Article 64(2) also allows the European Parliament and Council to adopt measures concerning certain third-country capital movements involving direct investment, establishment, financial services, and the admission of securities to capital markets.

Article 64(3) provides a special legislative procedure under which the Council may unanimously adopt measures constituting a step backwards in the liberalisation of capital movements with third countries in the circumstances specified by the Treaty.

8.3. Third-Country Restrictions and Taxation

The application of Article 63 to third countries becomes particularly complex in tax disputes.

Member States may have legitimate reasons to impose certain controls where tax authorities cannot obtain information or verify transactions involving jurisdictions outside the Union.

However, the mere fact that an investment originates in a third country does not automatically justify a restriction.

In A (Case C-101/05), the Court examined the relationship between the free movement of capital and restrictions concerning investments in third countries. It recognised that the particular legal and administrative circumstances of third-country relations may be relevant when assessing whether a restriction is justified.

The judgment illustrates that the effectiveness of tax supervision and the possibility of obtaining reliable information may be relevant to proportionality, but cannot be used as a general justification for every restriction.

The legal analysis must consider the nature of the investment, the availability of administrative cooperation, and the specific national measure.

9. Permissible Restrictions Under Article 65 TFEU

Article 65 recognises certain national powers to regulate capital movements.

These exceptions must be interpreted carefully because they qualify a fundamental Treaty freedom.

9.1. Taxation and Residence-Based Distinctions

Article 65(1)(a) allows Member States to apply relevant provisions of their tax law that distinguish between taxpayers who are not in the same situation with regard to their place of residence or the place where their capital is invested.

The provision recognises that taxation necessarily involves distinctions between different categories of taxpayers and investment situations.

For example, a Member State may apply different tax rules to residents and non-residents where the distinction reflects a genuine difference in their circumstances.

However, the provision does not authorise arbitrary discrimination.

A tax rule may still infringe Article 63 if it treats comparable cross-border situations less favourably without adequate justification.

In Verkooijen (Case C-35/98), the Court examined a Dutch tax advantage granted in connection with dividends from companies established in the Netherlands but not equivalent dividends from companies established elsewhere.

The Court held that the measure restricted the free movement of capital. The desire to encourage investment in domestic companies was not sufficient to justify the difference in treatment.

The judgment illustrates that Member States cannot use tax incentives simply to favour domestic investment at the expense of comparable cross-border investment.

9.2. Prevention of Infringements of National Law

Article 65(1)(b) allows Member States to take measures necessary to prevent infringements of national law and regulations, particularly in the fields of taxation and prudential supervision of financial institutions.

This includes legitimate measures aimed at preventing tax evasion, money laundering, fraud, and violations of financial regulations.

However, the measures must be directed towards genuine risks and must satisfy proportionality.

A state cannot rely on the general objective of preventing tax evasion to justify restrictions that are excessive or indiscriminate.

9.3. Administrative and Statistical Declarations

Article 65 also recognises procedures for declaring capital movements for administrative or statistical purposes.

A declaration requirement is not automatically incompatible with Article 63.

The legal issue is whether the procedure is genuinely administrative or statistical, or whether it functions as an unnecessary authorisation system that obstructs cross-border transactions.

The distinction is particularly important where a reporting requirement is accompanied by substantial delays, disproportionate documentation, or a discretionary power to prevent the transaction.

9.4. Public Policy and Public Security

Article 65(1)(b) also permits measures justified on grounds of public policy or public security.

These grounds may be relevant where capital movements present risks to national security, public safety, or other fundamental public interests.

However, they cannot be interpreted as a general power to restrict foreign investment whenever the government considers it economically or politically undesirable.

The restriction must address a genuine public-interest concern and satisfy proportionality.

9.5. The Prohibition of Arbitrary Discrimination

Article 65(3) expressly provides that national measures adopted under Article 65 must not constitute arbitrary discrimination or a disguised restriction on the free movement of capital.

This limitation is essential.

A Member State cannot label a measure as a tax, security, or supervisory measure and thereby remove it from judicial scrutiny.

The CJEU examines the substance, purpose, and practical effects of the national measure.

10. Taxation and Cross-Border Investment

Taxation is one of the most extensively litigated areas of the free movement of capital.

National tax systems may influence investment decisions by determining how dividends, interest, capital gains, inheritance, and other investment income are taxed.

The Treaty does not establish a completely harmonised system of direct taxation. Member States retain substantial authority over their tax systems, but they must exercise that authority consistently with EU law.

10.1. Dividends and Withholding Taxes

A Member State may impose withholding taxes on dividends paid to investors, but the rules must comply with the Treaty freedoms.

Where comparable domestic and foreign investment situations are treated differently, the national measure may restrict capital movements.

The CJEU has examined several disputes involving withholding taxes and cross-border dividend distributions.

In Amurta (Case C-379/05), the Court considered different tax treatment of dividends distributed to resident and non-resident companies.

The judgment demonstrates that Member States must examine whether the economic double taxation suffered by foreign shareholders is comparable to the treatment of domestic shareholders and whether any available tax relief adequately removes the disadvantage.

10.2. Taxation of Foreign Investment Funds

Cross-border investment funds have also generated significant case law.

In Emerging Markets Series of DFA Investment Trust Company (Case C-190/12), the Court examined national tax rules affecting dividends paid to an investment fund established in a third country.

The case concerned the treatment of investment funds and the extent to which Article 63 applied to third-country capital movements.

The Court confirmed that the movement of capital provisions may apply to investments involving third countries, subject to the relevant Treaty exceptions and the particular nature of the tax measure.

The case is important because it illustrates that the third-country dimension of Article 63 can affect institutional investment structures as well as transactions by individuals.

10.3. Cross-Border Losses and Tax Advantages

Tax measures concerning investment losses may also restrict capital movements.

In Köln-Aktienfonds Deka (Case C-156/17), the Court considered the tax treatment of investment funds established in another Member State.

It held that a Member State cannot automatically exclude foreign investment funds from tax treatment available to comparable domestic funds merely because their legal form or regulatory framework differs.

The assessment must examine whether the funds are objectively comparable in light of the purpose and conditions of the national tax rules.

The judgment illustrates that differences in legal form do not automatically justify different tax treatment where the relevant economic and legal characteristics are comparable.

10.4. Tax Avoidance and the Exchange of Information

The prevention of tax avoidance and evasion may justify certain restrictions, particularly where authorities face genuine difficulties in obtaining information necessary to verify transactions.

However, the restriction must be proportionate.

The availability of mechanisms for administrative cooperation and exchange of information is relevant. Where the necessary information can be obtained through less restrictive means, a blanket refusal of tax relief or a general investment restriction may be unjustified.

The Court’s case law therefore requires national authorities to distinguish between genuine supervisory difficulties and general assumptions about foreign investment.

11. Financial Supervision and the Regulation of Investment

The free movement of capital operates alongside a substantial body of EU financial regulation.

Banks, investment firms, insurance undertakings, collective investment funds, and other financial institutions are subject to rules intended to protect investors, depositors, markets, and the stability of the financial system.

The existence of such regulation does not conflict automatically with Article 63. Prudential supervision and market regulation are legitimate elements of the internal market.

The legal question is whether the national measure imposes an unjustified restriction on capital movements.

11.1. Prudential Supervision

Article 65 expressly recognises the importance of prudential supervision.

Member States may adopt measures to ensure that financial institutions comply with appropriate standards of capital adequacy, governance, risk management, and financial reporting, subject to applicable EU harmonisation.

However, national requirements must not be used to create unnecessary barriers for cross-border investors or financial institutions.

Where EU legislation has harmonised the relevant regulatory field, Member States must comply with the harmonised framework and cannot introduce inconsistent additional restrictions.

11.2. Financial Stability

Financial stability may justify certain regulatory interventions where capital movements threaten the proper functioning of financial institutions or the wider financial system.

However, ordinary economic concerns or a desire to retain capital within national borders are not sufficient.

The relevant measure must address a genuine risk and remain proportionate.

The Treaty also provides specific mechanisms for exceptional circumstances, including Article 66, which concerns temporary safeguard measures involving third countries.

12. Anti-Money Laundering, Financial Transparency and Capital Transfers

The free movement of capital does not prevent Member States from adopting measures against money laundering, terrorist financing, tax evasion, and other financial crimes.

These objectives are supported by an extensive EU legal framework, including the legislation governing anti-money-laundering obligations, customer due diligence, beneficial ownership, and the reporting of suspicious transactions.

The relevant measures may require financial institutions and other regulated entities to identify customers, verify beneficial ownership, retain information, and report certain transactions to competent authorities.

Such obligations can affect the practical execution of cross-border financial transactions, but they do not automatically constitute unlawful restrictions.

The legal assessment must distinguish between legitimate compliance requirements and disproportionate obstacles to capital movements.

12.1. Large Cash Payments: The ECOTEX BULGARIA Judgment

An important illustration comes from ECOTEX BULGARIA (Case C-544/19).

The case arose from Bulgarian legislation restricting cash payments equal to or exceeding a specified threshold. The rules required qualifying payments to be made through a payment account rather than in cash.

The dispute concerned a payment associated with the distribution of dividends by a Bulgarian company to a shareholder residing in another Member State.

The CJEU considered whether the restriction could affect the free movement of capital.

It held that a restriction on the lawful means of paying dividends could discourage certain investors, including non-residents, from acquiring shareholdings in a company established in the Member State concerned. The measure therefore fell within the scope of Article 63.

However, the Court did not conclude that the national restriction was automatically unlawful. It examined whether the measure could be justified by the objective of combating tax evasion and tax avoidance.

The Court held that Article 63, read together with Article 49(3) of the Charter of Fundamental Rights, did not preclude the relevant legislation and penalty system provided that the measure was appropriate for achieving those objectives and did not go beyond what was necessary.

The case is especially significant because it demonstrates two principles.

First, a restriction may affect the free movement of capital even where it regulates the method of payment rather than prohibiting the underlying investment.

Second, a legitimate anti-evasion objective may justify a restriction, but the national measure and the penalties attached to it must satisfy proportionality.

The judgment is available through EUR-Lex, Case C-544/19. <Cite refs={[“turn770272search7″,”turn770272search9”]}/>

13. Public Security and the Screening of Foreign Investments

Foreign investment may raise concerns relating to national security, critical infrastructure, strategic industries, and public order.

Member States may therefore adopt mechanisms for examining certain investments by foreign investors.

However, such mechanisms must comply with EU law.

Regulation (EU) 2019/452 establishes a framework for the screening of foreign direct investments into the Union.

The Regulation does not create a single central EU authorisation system. Instead, it establishes cooperation mechanisms between Member States and the European Commission.

It allows Member States and the Commission to exchange information and raise concerns where foreign direct investment may affect security or public order.

Relevant considerations may include:

• Critical infrastructure, including energy, transport, communications, and data infrastructure.
• Critical technologies and dual-use items.
• Supply of critical inputs.
• Access to sensitive information.
• Freedom and pluralism of the media.
• The potential control of strategic assets by a foreign government or other state-related entity.

The Regulation also provides for cooperation where an investment in one Member State may affect projects or programmes of Union interest.

The framework must be understood in the context of Article 63 and the Treaty exceptions. Investment screening does not create an unlimited power to exclude foreign investors.

A national screening measure must be transparent, non-discriminatory in its application where required, and proportionate to the relevant security or public-order concern.

The distinction between legitimate security screening and economic protectionism is essential.

A Member State may protect genuinely sensitive assets, but it cannot use national security as a general justification for preventing foreign competition or retaining domestic ownership of ordinary commercial enterprises.

The full legislation is available through EUR-Lex: Regulation (EU) 2019/452.

14. Emergency Restrictions and Capital Controls

The Treaty recognises that exceptional circumstances may require temporary intervention in capital movements.

Article 66 TFEU provides a specific safeguard mechanism where capital movements to or from third countries cause, or threaten to cause, serious difficulties for the operation of economic and monetary union.

The Council may adopt temporary safeguard measures under the procedure established by the Treaty. Such measures must be necessary and may not exceed six months.

Article 66 is therefore not a general authorisation for Member States to impose permanent capital controls.

It is a limited EU-level emergency mechanism addressing serious difficulties involving third-country capital movements.

14.1. Public Policy and Public Security Measures

Article 65 may also justify restrictions in exceptional circumstances where public policy or public security is genuinely threatened.

However, any restriction must be justified by the relevant public interest and satisfy proportionality.

The mere existence of financial instability or concern about capital leaving a country does not automatically justify a national prohibition on transfers.

14.2. Historical Examples

During the European sovereign debt crisis, Cyprus and Greece introduced capital controls in response to severe financial pressures.

These measures included restrictions on withdrawals, transfers, and certain cross-border payments.

The restrictions were exceptional responses to specific financial circumstances rather than an ordinary feature of the internal market.

They also illustrate the tension between financial stability and the principle of free capital movement.

The experience demonstrates that restrictions on capital transfers may have significant effects on individuals, companies, and financial institutions. Such measures must be assessed within the applicable Treaty framework and the relevant emergency legal arrangements.

15. The Protection of Property and Investment Rights

The free movement of capital is closely connected with the protection of property and economic rights.

Article 17 of the Charter of Fundamental Rights of the European Union protects the right to property. It provides that everyone has the right to own, use, dispose of, and bequeath lawfully acquired possessions.

However, the Charter does not create an unrestricted right to invest in any asset or to receive a guaranteed financial return.

Property rights may be regulated in accordance with the law and may be subject to limitations justified by the general interest, provided that the requirements of Article 52 of the Charter are satisfied.

The relationship between property protection and capital movements becomes particularly relevant where a Member State restricts foreign ownership, imposes compulsory acquisition, or introduces measures affecting the use and disposal of investments.

The CJEU must assess the relevant Treaty freedom and the applicable fundamental rights framework.

The two forms of protection are related but distinct. Article 63 concerns restrictions on cross-border capital movements, while Article 17 of the Charter concerns the protection of property within the scope of EU law.

A national measure may raise issues under both provisions, but the legal tests and conditions are not identical.

16. Payments, Banking Transfers and Cross-Border Financial Infrastructure

The free movement of capital depends on effective systems for transferring money across borders.

Financial integration therefore requires more than the formal abolition of restrictions on investment. Individuals and businesses must also be able to execute payments efficiently and access financial services in other Member States.

Several EU instruments support this objective.

Regulation (EU) No 260/2012 establishes technical and business requirements for credit transfers and direct debits in euro. It forms part of the Single Euro Payments Area (SEPA) framework.

The SEPA system is designed to make euro payments between participating countries operate under harmonised standards.

Regulation (EU) 2021/1230 addresses cross-border payments in the Union and aims to ensure that charges for cross-border payments in euro are aligned with charges for corresponding domestic payments.

These instruments do not replace Article 63. They complement the Treaty freedom by addressing practical obstacles in the execution of cross-border payments.

The distinction is important: Article 63 establishes the general prohibition on restrictions, while secondary legislation provides more detailed rules governing payment systems, transaction costs, and financial infrastructure.

17. Enforcement of the Free Movement of Capital

The freedom of capital movements is enforceable through national courts and the EU institutional framework.

17.1. National Courts

Individuals, companies, and investors may invoke Article 63 before national courts where national legislation or administrative measures restrict cross-border capital movements.

National courts must examine whether the measure falls within the scope of the Treaty and whether it can be justified under Articles 64 or 65 or the other applicable rules.

Where the national measure is incompatible with EU law, the court must provide effective judicial protection.

17.2. Preliminary References

Article 267 TFEU allows national courts to refer questions concerning the interpretation or validity of EU law to the CJEU.

Questions may concern the classification of an investment, the scope of Article 63, the compatibility of a national tax rule, or the proportionality of a restriction.

The CJEU provides the authoritative interpretation of EU law, while the national court resolves the underlying dispute.

17.3. Infringement Proceedings

The European Commission monitors the application of the Treaty provisions and may initiate infringement proceedings under Articles 258–260 TFEU where a Member State maintains unlawful restrictions.

The Commission examines national laws and administrative practices and may seek their amendment or removal.

Where a Member State fails to comply with a judgment of the CJEU, financial penalties may be imposed under Article 260.

The Commission also publishes information and monitoring material concerning capital movements and investment flows. <Cite refs={[“turn770272search5”]}/>

17.4. Administrative Cooperation

Cross-border financial regulation depends on cooperation between national authorities.

Tax administrations, financial supervisors, anti-money-laundering authorities, and law-enforcement bodies exchange information under the applicable EU frameworks.

Such cooperation is important because financial transactions frequently involve several jurisdictions and may be subject to different regulatory responsibilities.

The objective is to facilitate legitimate investment while ensuring that the freedom is not used to evade financial, tax, or criminal-law obligations.

18. Practical Application: Cross-Border Investment and Financial Transactions

A person or business intending to make an investment or financial transfer involving another Member State should first identify the nature of the transaction.

The distinction between direct investment, portfolio investment, real estate acquisition, loans, and ordinary payments may affect which Treaty provisions and secondary legislation apply.

The investor should then determine whether the transaction involves another Member State or a third country. Article 63 covers both, but third-country transactions may be subject to additional qualifications under Articles 64 and 66.

The applicable national requirements must also be examined. These may include tax obligations, registration, anti-money-laundering checks, prudential requirements, investment screening, and reporting obligations.

The existence of a national requirement does not automatically mean that the freedom has been violated. The question is whether the measure restricts capital movements and, if so, whether it is justified under EU law.

Consider the following examples.

Example 1: An individual purchasing property in another Member State.

A resident of one Member State wishes to purchase an apartment in another. The transaction falls within the movement of capital. The host state may apply legitimate planning, registration, and tax requirements, but cannot impose unjustified restrictions simply because the buyer is a non-resident.

Example 2: A company acquiring shares abroad.

A company established in one Member State purchases a minority shareholding in a company established elsewhere in the Union. If the investment is primarily financial and does not confer definite influence over the company’s decisions, Article 63 is likely to be the principal Treaty provision.

Example 3: A foreign investor acquiring a controlling interest.

An investor from outside the Union seeks to acquire a controlling interest in an EU company operating critical infrastructure. Article 63 may be relevant, but the transaction may also be subject to the rules on investment screening, including Regulation (EU) 2019/452 and the applicable national legislation.

Example 4: A cross-border dividend payment.

A company distributes dividends to a shareholder residing in another Member State. Restrictions on the transfer or payment of the dividend may affect the free movement of capital. The national measure must be examined under Article 63 and any applicable justification under Article 65.

Example 5: A large cash transaction.

A national law requires payments above a specified threshold to be made through a bank account. Such a rule may affect capital movements if it discourages investment or cross-border financial transactions. As ECOTEX BULGARIA demonstrates, the restriction may nevertheless be justified where it genuinely combats tax evasion and satisfies proportionality.

Example 6: A domestic tax advantage for local investments.

A Member State grants a tax advantage only to residents who invest in domestic companies. If comparable foreign investments are excluded without sufficient justification, the measure may restrict the free movement of capital.

These examples demonstrate that Article 63 protects cross-border investment without removing the legitimate regulatory responsibilities of national authorities.

19. Key Takeaways

1. The free movement of capital is governed principally by Articles 63–66 TFEU.
2. Article 63 prohibits restrictions on capital movements and payments between Member States and between Member States and third countries.
3. Capital movements include direct investment, portfolio investment, real estate acquisitions, loans, securities transactions, and certain personal transfers.
4. Payments are legally distinct from capital movements, although a payment may form part of an underlying investment or commercial transaction.
5. Article 63 has direct effect and may be invoked before national courts.
6. Restrictions need not be discriminatory to fall within the prohibition. Measures that discourage or make cross-border investment more difficult may also be restricted.
7. Article 64 preserves certain historical restrictions involving third countries, subject to strict conditions and reference dates.
8. Article 65 permits defined measures relating to taxation, financial supervision, administrative declarations, public policy, and public security.
9. Article 65(3) prohibits arbitrary discrimination and disguised restrictions on capital movements.
10. National tax measures affecting cross-border investment must comply with the Treaty, even though direct taxation remains largely within Member State competence.
11. Regulation (EU) 2019/452 establishes a cooperation framework for screening certain foreign direct investments on security and public-order grounds.
12. Article 66 provides a limited mechanism for temporary safeguard measures concerning third-country capital movements.
13. ECOTEX BULGARIA demonstrates that even restrictions on the method of payment may affect capital movements, while potentially being justified by proportionate anti-evasion measures.
14. National courts, the CJEU, and the European Commission contribute to the enforcement of the freedom.

20. Frequently Asked Questions

1. What is the free movement of capital under EU law?

It is the right to transfer financial resources and make investments across national borders without unjustified restrictions. It is principally governed by Article 63 TFEU.

2. Does Article 63 apply to countries outside the European Union?

Yes. Article 63 expressly covers capital movements and payments between Member States and third countries. However, Articles 64–66 provide important qualifications for certain external transactions.

3. What transactions count as movements of capital?

They include direct investment, purchases of shares and bonds, real estate acquisitions, loans, credits, and certain personal transfers such as inheritances and gifts.

4. What is the difference between capital movements and payments?

Capital movements generally concern the transfer or investment of financial resources. Payments are transfers of money that discharge obligations or provide consideration for transactions. A payment may be connected with a capital movement without being identical to it.

5. Can an individual rely on Article 63?

Yes. Individuals may invoke Article 63 before national courts where a national measure unjustifiably restricts a cross-border capital movement or payment.

6. Can a Member State restrict foreign investment for reasons of national security?

Yes, where a genuine public-security or public-order concern exists and the restriction is justified and proportionate. Regulation (EU) 2019/452 provides an EU cooperation framework for screening certain foreign direct investments.

7. Can Member States impose different tax rules on domestic and foreign investments?

Sometimes. Article 65 recognises certain tax distinctions, including distinctions based on residence or the place where capital is invested. However, the distinction must not amount to arbitrary discrimination or an unjustified restriction on capital movements.

8. What are golden shares?

Golden shares are special rights retained by a state or another shareholder in a company, often following privatisation. They may include veto powers or special voting rights. The CJEU has found that certain arrangements can restrict capital movements by discouraging investment.

9. Can a Member State require large payments to be made through bank transfers?

It may do so where the measure pursues a legitimate objective, such as combating tax evasion, and satisfies proportionality. In ECOTEX BULGARIA, the CJEU considered such a restriction and held that it could be compatible with Article 63 under the conditions specified in its judgment.

10. What is the purpose of Article 66 TFEU?

Article 66 allows temporary safeguard measures concerning capital movements to or from third countries where serious difficulties threaten the operation of economic and monetary union. Such measures are subject to a special EU procedure and cannot exceed six months.

21. Conclusion

The free movement of capital is an essential foundation of the European internal market and a central mechanism for integrating national financial systems. It enables individuals to invest abroad, businesses to obtain financing across borders, companies to attract foreign shareholders, and financial resources to move towards productive economic opportunities.

Its legal significance is particularly pronounced because Article 63 extends beyond the internal boundaries of the Union. Unlike the other fundamental freedoms, it expressly protects capital movements and payments involving third countries, although the Treaty provides important qualifications for certain external transactions.

The CJEU has interpreted the prohibition broadly. Restrictions may arise not only from explicit investment prohibitions or nationality-based discrimination but also from tax measures, corporate governance arrangements, payment rules, and administrative requirements that discourage cross-border investment.

At the same time, the freedom does not remove the regulatory authority of Member States. Taxation, prudential supervision, anti-money-laundering obligations, national security, and the protection of public order remain legitimate areas of public intervention. The Treaty therefore establishes a framework in which restrictions must be assessed according to their legal basis, objective, and proportionality.

The judgments concerning golden shares, cross-border taxation, third-country investments, and the Bulgarian ECOTEX BULGARIA dispute demonstrate the practical reach of Article 63. They also show that the freedom protects not only the acquisition of assets but the financial mechanisms through which investment is made, maintained, and transferred.

Ultimately, the free movement of capital is not simply a rule against financial barriers. It is a constitutional principle supporting an integrated investment environment while preserving the capacity of public authorities to regulate genuine risks. Its effectiveness depends on maintaining that balance between economic openness, financial stability, investor protection, and the legitimate interests of Member States.

22. Primary Legal Sources and Further Reading

Treaty Provisions

• Article 63 TFEU – Free Movement of Capital and Payments
• Article 64 TFEU – Restrictions Involving Third Countries
• Article 65 TFEU – Permitted National Measures
• Article 66 TFEU – Temporary Safeguard Measures
• Article 75 TFEU – Administrative Measures to Combat Terrorism
• Article 17 of the EU Charter – Right to Property

EU Legislation

• Directive 88/361/EEC – Liberalisation of Capital Movements
• Regulation (EU) 2019/452 – Screening of Foreign Direct Investments
• Regulation (EU) No 260/2012 – Technical Requirements for Credit Transfers and Direct Debits
• Regulation (EU) 2021/1230 – Cross-Border Payments in the Union
• Directive (EU) 2015/849 – Prevention of the Use of the Financial System for Money Laundering or Terrorist Financing

Important CJEU Judgments

• Luisi and Carbone, Joined Cases 286/82 and 26/83 – financial transfers and the relationship between payments and economic freedoms.
• Sanz de Lera and Others, Joined Cases C-163/94, C-165/94 and C-250/94 – direct effect of the free movement of capital, including third-country transactions.
• Konle, Case C-302/97 – real estate acquisition and national restrictions.
• Commission v Portugal, Case C-367/98 – golden shares and restrictions on investment.
• Baars, Case C-251/98 – distinction between establishment and capital movements.
• Verkooijen, Case C-35/98 – discriminatory tax advantages and cross-border investment.
• A, Case C-101/05 – capital movements involving third countries and national restrictions.
• Amurta, Case C-379/05 – dividend taxation and cross-border investment.
• Emerging Markets Series of DFA Investment Trust Company, Case C-190/12 – third-country investment funds and taxation.
• Köln-Aktienfonds Deka, Case C-156/17 – tax treatment of foreign investment funds.
• ECOTEX BULGARIA, Case C-544/19 – cash-payment restrictions, dividend distributions, tax evasion, and proportionality.

Institutional Resources

• European Commission – Free Movement of Capital
• European Commission – Monitoring of Free Movement of Capital
• European Parliament – Free Movement of Capital
• EUR-Lex – Free Movement of Capital: Legal Summary