Freedom of establishment

What Is Freedom of Establishment?

Freedom of establishment is a fundamental principle within the European Union's (EU) internal market, falling under the broader category of International Business Law and Economic Integration. It grants individuals and legal entities from one EU member state the right to set up and conduct a stable and continuous economic activity in another member state, under the same conditions as that host country's own nationals and companies. This means that an entrepreneur or a business can establish a permanent presence, such as a branch, agency, or subsidiary, in any other EU country without facing unjustified barriers or discrimination based on nationality. This "freedom of establishment" is distinct from the temporary provision of services and is a cornerstone of the EU's vision for a unified economic area.

History and Origin

The concept of freedom of establishment is deeply rooted in the foundational treaties of the European project. It originated with the Treaty of Rome in 1957, which established the European Economic Community (EEC). This treaty laid the groundwork for the "four freedoms" – the free movement of goods, persons, services, and capital – aiming to create a common market. The Treaty on the Functioning of the European Union (TFEU), which superseded earlier treaties, explicitly details the freedom of establishment in Articles 49 to 55. Th²³ese articles mandate the abolition of restrictions on the freedom of establishment for nationals of one member state in the territory of another member state. The evolution of this freedom has been significantly shaped by rulings from the European Court of Justice (ECJ), which has continuously interpreted and clarified its scope, ensuring that the spirit of non-discrimination is upheld across the Union. Th²¹, ²²e intent was to foster greater economic integration and allow businesses to operate seamlessly across national borders, much like they would within their own country.

Key Takeaways

• Non-Discrimination: Freedom of establishment ensures that EU citizens and companies can set up businesses in any other EU country under the same conditions as local nationals.
• ¹⁹, ²⁰ Stable and Continuous Activity: This freedom applies to permanent economic activities, differentiating it from the temporary provision of services.
• ¹⁸ Legal Basis: It is enshrined in the Treaty on the Functioning of the European Union (TFEU), specifically Articles 49 to 55.
• ¹⁷ Scope: It covers a wide range of activities, from self-employment and professional practices to the formation and management of various corporate structures like subsidiaries and branches.
• ¹⁶ Internal Market Integration: Freedom of establishment is crucial for deepening the EU's internal market by removing barriers to business mobility and fostering competition.

#¹⁵# Interpreting the Freedom of Establishment

Interpreting the freedom of establishment involves understanding its broad scope and its application in various economic contexts. The European Court of Justice (ECJ) has played a pivotal role in this interpretation, clarifying that it applies to both natural persons (self-employed individuals) and corporate governance structures such as companies or firms. Wh¹⁴en evaluating situations, the key question is whether a national measure restricts the ability of an EU national or company to establish itself in another member state or makes it less attractive than establishing in their home state. Any such restriction must be justified by imperative requirements in the general interest and be proportionate to the objective pursued. For instance, a requirement for a foreign company to register in a new member state might be permissible if it's non-discriminatory and justified, but an outright ban based on nationality would violate the principle of freedom of establishment. Th¹³is principle significantly influences rules on cross-border investment and the movement of businesses.

Hypothetical Example

Consider a scenario involving "GreenTech Solutions," a company specializing in renewable energy installations, established as a limited liability company in Germany. The management identifies a significant market opportunity in Spain due to new government incentives for solar power.

Under the principle of freedom of establishment, GreenTech Solutions has the right to set up a new branch or a Spanish subsidiary in Spain. This means they should not face additional hurdles or discriminatory practices that a Spanish company would not encounter. For example, Spanish authorities cannot require GreenTech Solutions to hold higher capital reserves than a local Spanish renewable energy company of similar size and structure. They would, however, need to adhere to Spanish national laws regarding business registration, environmental permits, and labor laws, just as any Spanish firm would. The goal is to ensure that GreenTech Solutions can compete fairly and integrate into the Spanish market without artificial barriers, promoting greater market efficiency within the EU.

Practical Applications

The freedom of establishment has profound practical applications across the EU, influencing various aspects of business and economic policy. It enables companies to expand their operations seamlessly across national borders, fostering direct investment and enhancing competition.

For businesses, this means:

• Cross-border Expansion: A German automobile manufacturer can establish a production plant in Slovakia, benefitting from local conditions, without facing discriminatory national restrictions.
• Professional Mobility: A self-employed architect based in France can open an office in Italy to serve clients there, operating under the same professional rules as Italian architects, subject to mutual recognition of qualifications.
• Facilitating Trade in Services: As the European economy increasingly relies on the services sector, the freedom of establishment, alongside the freedom to provide services, is critical. The Services Directive (Directive 2006/123/EC) further aims to dismantle remaining barriers to an open single market in services, leading to benefits for consumers and small and medium-sized enterprises (SMEs). Th¹¹, ¹²is directive promotes the "country of origin principle," which generally allows a service provider to follow the rules of their home country when offering services in another EU country, although the exact interpretation of this principle has often been clarified by the Court of Justice.

#¹⁰# Limitations and Criticisms

While designed to promote economic integration, the freedom of establishment is not absolute and faces certain limitations and criticisms. Member states retain the right to impose restrictions that are justified by imperative requirements in the general interest, such as public policy, public security, or public health. Th⁸, ⁹ese derogations must be narrowly defined and proportionate to the objective. For example, a member state could restrict activities involving the exercise of official authority or those related to public security.

A key area of contention has been the interaction between freedom of establishment and national taxation laws. The European Court of Justice has often had to rule on cases where national tax rules might indirectly hinder a company's ability to establish itself in another member state. Early cases, such as R (Daily Mail and General Trust plc) v HM Treasury, affirmed that member states could restrict a company from moving its "seat" without settling its tax liabilities, indicating that rules on company seats were not yet harmonized across the EU. More broadly, international bodies like the Organisation for Economic Co-operation and Development (OECD) have developed frameworks, such as the Base Erosion and Profit Shifting (BEPS) Action Plan, which address how multinational enterprises might artificially avoid tax liabilities by exploiting discrepancies in national tax systems, implicitly impacting interpretations of "establishment" for tax purposes.

F⁷urthermore, the complexity of diverse national regulatory compliance frameworks can still pose practical challenges, even with the principle of freedom of establishment in place. Despite efforts towards harmonization and mutual recognition, businesses may still encounter administrative burdens and legal complexities when expanding across different EU jurisdictions.

Freedom of Establishment vs. Freedom to Provide Services

The freedom of establishment is often discussed alongside, but is distinct from, the freedom to provide services. The primary difference lies in the nature of the economic activity:

The European Court of Justice's Gebhard ruling clarified this distinction, stating that "establishment" means participating in economic life "on a stable and continuous basis," while "services" implies activity more "on a temporary basis". Confusion can arise because some activities might have elements of both, but the duration and permanence of the presence are key differentiating factors.

FAQs

Q1: Who benefits from the freedom of establishment?

Individuals who are self-employed, professionals, and all forms of legal entities, such as companies, firms, and cooperative societies, that are legally operating in one EU member state can benefit from the freedom of establishment.

#⁶## Q2: Can a country restrict freedom of establishment?
Yes, a country can restrict the freedom of establishment, but only under strict conditions. Any restriction must be justified by imperative requirements in the general interest (e.g., public policy, public security, public health) and must be proportionate, meaning it must be necessary and not go beyond what is required to achieve the legitimate objective.

#⁴, ⁵## Q3: Does freedom of establishment apply to all types of businesses?
It applies to a broad spectrum of economic pursuits, including self-employment, professional practices, and the formation and operation of corporate entities like a sole proprietorship or a large corporation. However, it does not typically cover non-profit making entities or activities that involve the exercise of official authority.

#², ³## Q4: How does freedom of establishment impact individuals?
For individuals, it means they can move to another EU country to work as a self-employed person or set up their own business under the same conditions as that country's own citizens. This includes the right to take up and pursue activities on a stable and continuous basis.¹