1. Freedom of Establishment. Prohibition of Requirements Limiting Freedom of Establishment under Directive 2006/123/EC Seminar on Competitiveness of the Service Sector 24/11/2008 Ankara Elizabeth Parushkova BNB

2. 2 Freedom of Establishment. Key points What does ‘Freedom of establishment’ mean? Significance of Freedom of Establishment Freedom of Establishment under art.43-48 of European Community (EC) Treaty. Barriers to exercising of Freedom of Establishment under the EC Treaty Ways the Service Directive 2006/123/EC tackles barriers to exercising Freedom of Establishment. Administrative simplification (art. 5-8), Simplification of authorisation procedure (art. 9-13) Requirements that are prohibited or subject to evaluation (art.14- 15) What is incompatible with art. 43-48 of EC Treaty in accordance with practice of European Court of Justice

3. 3 Freedom of Establishment. EC Treaty Significance of Freedom of Establishment What does ‘Freedom of establishment’ mean? Art. 43 of the EC Treaty provides the unrestricted right of establishment for natural persons The same rights are granted for corporations under art. 48 For art. 43 to be applicable, the establishment must be permanent and the establishment must be set up to make profits

4. 4 Freedom of Establishment Legal Position. Art 43 -48 EC Treaty Article 43: “Within the framework of the provisions set out below, restrictions on the freedom of establishment of nationals of a Member State in the territory of another Member State shall be prohibited. Such prohibition shall also apply to restrictions on the setting-up of agencies, branches or subsidiaries by nationals of any Member State established in the territory of any Member State. Freedom of establishment shall include the right to take up and pursue activities as self-employed persons and to set up and manage undertakings, in particular companies or firms within the meaning of the second paragraph of Article 48, under the conditions laid down for its own nationals by the law of the country where such establishment is effected, subject to the provisions of the Chapter relating to capital.”

5. 5 Freedom of Establishment. Some Differences from Other Freedoms The difference from art. 49 which deals with provision of services is mainly that a permanent establishment leads to the application of art. 43, whereas a temporary presence leads to the application of art. 49 There is also difference between freedom of establishment and freedom of movement for workers. The difference from art. 39 is simply that employees fall under art. 39, while self-employed persons can appeal to art. 43

6. 6 Freedom of Establishment under Services Directive in the Context of the Treaty The Freedom of Establishment under Services Directive has its context in the EC Treaty and must be interpreted and implemented in this context The principles the European Court of Justice (ECJ) has developed on the basis of the application of these articles have to be respected

7. 7 Barriers to Freedom of Establishment Recognised by the Service Directive, in the Context of EC Treaty Although the EC Treaty has guaranteed (in articles 43-48) the right of service providers to establish themselves in other Member States, in practice they are still faced with numerous barriers Prohibitions ( further on clarified ) Dissuasive barriers ( further on clarified ) Natural barriers ( not addressed directly)

8. 8 Prohibitive Barriers Prohibitive barriers: legal requirements that prevent Member State (MS) service providers outright from establishing in other MS, such as:  nationality requirements in respect of service providers, shareholders, management and staff;  residential requirements governing the number of non- domestic service providers, in terms of population or geographical distance; and  single-establishment requirements to have one single establishment or the principal establishment in the MS concerned

9. 9 Dissuasive Barriers Dissuasive barriers - legal and administrative barriers which prevent service providers from establishing in another MS, even where it is technically possible for them to do so, such as:  Registration requirements : e.g. a service provider is obliged to register with an administrative authority, a professional body or trade association in order to establish in a particular Member State; and  Administrative requirements and burdens : e.g. a service provider is required to supply notifications and declarations or documentation in a particular format  Compliance costs: e.g. significant legal costs, where extensive legal advice is required to identify national requirements and procedures, as well as for other formalities to be fulfilled

10. 10 Ways of Dealing with Barriers to Freedom of Establishment under Service Directive Ways of dealing with barriers to Freedom of Establishment under Chapters II and III of the Service Directive 1) Administrative simplification (Articles 5-8); 2) Simplification of authorisation procedures (Articles 9-13), and 3) Prohibition or Assessment of certain particularly restrictive legal requirements (Articles 14-15)

11. 11 Administrative Simplification. Chapter II, Section 1, Articles 5 – 8 of Service Directive Article 5 – a host Member State must accept an equivalent document from another Member State or from one which shows the requirement has been met Article 5 (3) - a host Member State cannot insist on having an original, a certified copy or a certified translation of such a document, unless some circumstances under art.5 (3) are in place

12. 12 Administrative Simplification (continued) Article 6 - requires MS to set up ‘single points of contact’ to enable business to complete all formalities and applications for authorisation at one point Article 7 - makes clear that single points of contact are not themselves regulatory bodies - their role is facilitative Also under Article 7 - MS are required to provide all relevant information on legal and administrative requirements linked to service activities, and to introduce electronic means for the fulfilment of procedures and formalities by the end of 2009 (Article 8)

13. 13 Authorisations (Authorisation Schemes). Chapter III, Section 1, Articles 9 – 13, Service Directive Article 9 - MS are obliged to ensure that authorisations for access to, and exercise of, service activities are not required, unless some circumstances under art. 9 are in place MS are also required to:  base authorisation schemes on objective and transparent criteria (Article 10 para 1 and para 2);  ensure that authorisation is granted as soon as it has been determined that the conditions for authorisation are met Article 10(5); and  provide a fully reasoned explanation of refusals or withdrawals of authorisations, which should be open to challenge before the courts (Article 10 para 6)

14. 14 Authorization Schemes ( continued) Article 11 sets out the rules concerning authorisations which are limited in duration Article 12 sets out the rules concerning situations where limited numbers of authorisations are available because of scarcity of natural resources or technical capacity Article 13 sets out the detail of how authorisation schemes should work procedurally Article 13(4) provides for tacit consent where the authorising body does not reply to the applicant within the published deadline

15. 15 Prohibited Requirements. Chapter III, Section Two, Article 14 Requirements included in so-called Blacklist prevent or discourage service providers from one MS from setting up in another. For this reason: MS will have to examine their legislation, and remove requirements of the type listed in Article 14 in a systematic way and for all service activities covered by the Directive Member States are also prevented from newly introducing such requirements in the future. In view of the very restrictive nature of the requirements listed in Article 14, and because of the fact that in many cases the ECJ has already found them to be incompatible with Article 43 of the EC, Member States should consider removing them also in sectors not covered by the Services Directive

16. 16 Blacklist under Service Directive Article 14 Discriminatory requirements (including nationality, place of registered office); Ban on having an establishment in more than one MS Ban on restriction of choice as to where principal establishment is to be located; Conditions of reciprocity between home MS of service provider and host MS where he intends to establish; Requirement to carry out an economic test; Involvement of competing operators in authorisation or supervision procedure; Obligation to provide a financial guarantee or to take out insurance with a provider from the host MS Obligation to be entered in the registers of the host MS, or to have exercised activity, for a given period

17. 17 Prohibition of Requirements Based Directly or Indirectly on Nationality Article 14(1) prohibits all discrimination based directly or indirectly on grounds of nationality or, as regards companies, the location of the registered office  Direct discrimination - requirements based on nationality/ location of the registered office;  Indirect discrimination - requirements based on residence/ location of the registered office Article 14(1) explicitly mentions requirements which make access to or exercise of a service activity conditional upon the nationality or residence of the provider; Article 14(1) also prohibits:  rules which make the access to or the exercise of the service activity for foreign service providers more burdensome than for domestic players  requirements which restrict the legal capacity or the rights of companies to bring legal proceedings

18. 18 Prohibition of Requirements Limiting the Establishment of Service Providers to One Member State Article 14(2) requires MS to remove all requirements prohibiting service providers from having an establishment in more than one MS, as well as requirements prohibiting service providers from being entered in registers or enrolled with professional bodies or associations in more than one MS  MS has to identify and abolish any rule which prohibits a provider from registering with a professional association if already a member of a similar association in another MS  MS has to abolish any requirement obliging service providers to give up their previous establishment in another Member State upon their establishment in such Member States’ territory

19. 19 Prohibition of Requirements Limiting the Choice of the Service Provider Between Principal and Secondary Establishment Under Article 14(3), MS will have to remove requirements which restrict the choice of a provider, already established in a Member State, as to the type of establishment he wants to have in another Member State (principal or secondary establishment or a specific type of secondary establishment, such as a branch or a subsidiary)  MS will have to abolish obligations imposed on providers to have the principal establishment in their territory  MS will have to abolish requirements which limit the freedom to choose between different types of secondary establishment ( obligations to establish a subsidiary, but not a branch, etc.)

20. 20 Prohibition of Conditions of Reciprocity Article 14(4) prohibits any requirement on the basis of which a MS would make access to or exercise of a service activity by service providers from another Member State subject to a condition of reciprocity Reciprocity is generally not compatible with the idea of an Internal Market based on the principle of equal treatment of all Community operators MS will have to abolish requirements, according to which a service provider already established in another MS can only enrol in professional registers in its territory if his MS of first establishment also allows the registration of nationals from the MS where the registration is being requested.

21. 21 Prohibition of Economic Tests Article 14(5) requires MS to abolish requirements that may exist in their legislation laying down a case-by-case application of economic tests Economic tests exist in some Member States, in particular in the commerce sector and often require service providers to carry out costly and time-consuming economic studies whose outcome is generally uncertain. They delay the establishment of service providers considerably, if they do not indeed fully hinder the establishment of newcomers Article 14(5) clarifies that the prohibition set out in this provision does not concern territorial planning requirements which do not pursue economic aims but serve overriding reasons relating to the public interest (such as the protection of the environment, urban environment, safety of road traffic, etc.)

22. 22 Prohibition of the Involvement of Competing Operators in the Decisions of Competent Authorities Under Article 14(6), MS will have to abolish any rule which envisages the involvement of competing operators in decisions about individual applications for an authorisation. The opposite will go against the basic goal of ensuring objective and transparent procedures MS are not prevented from maintaining in place systems whereby the participation/ consultation of potential competitors would be envisaged in matters other than individual cases Article 14(6) does not prevent professional bodies or other organisations from deciding about individual applications if these professional bodies are themselves acting as competent authorities

23. 23 Prohibition of Obligations to Obtain Financial Guarantees or Insurances from Operators Established in the Same Member State According to Article 14(7), MS will have to abolish requirements for providers to take out insurance with, or to provide a financial guarantee issued by, an operator established in their own territory  Article 14(7) does not prevent MS from imposing insurance requirements as such (see art.23 of Directive)  Article 14(7) does not prevent MS from maintaining in force requirements relating to participation in a collective compensation fund (lawyers’ contributions in a Bar Association in order to compensate any damage and losses caused to clients by the malpractice of its members would not be affected by this provision)

24. 24 Prohibition of Obligations to Have Been Previously Registered or to Have Previously Exercised the Activity for a Given Period in the Same Member State Article 14(8) requires Member States to abolish requirements making establishment in their territory conditional on a previous registration or a previous exercise of activities of the provider in their territory  Requirements that allow only operators which have already carried out activities in a Member State for a certain number of years to provide certain categories of services will normally exclude access to the market for new service providers

25. 25 Requirements to be Evaluated Article 15 requires MS to examine (again during the transposition stage) a number of requirements (Grey List) that restrict the freedom of establishment, but which may be justified in certain cases This differs from Article 14 in that, whilst MS will have to examine whether requirements of this kind exist in their legal systems, they will not automatically have to eliminate them (as required in Article 14) Instead, MS will first have to verify whether any such requirements meet the criteria of non-discrimination, necessity and proportionality under Article 15 (3) The concept of overriding reason relating to the public interest refers to legitimate non-economic grounds (public policy, public health, public security, the protection of the environment, the protection of consumers and social policy objectives)

26. 26 Requirements to be Evaluated ( continued) MS can maintain requirements which comply with the criteria in Article 15(3) By virtue of Article 15(6), from the coming into force of the Directive, MS must not introduce requirements falling within those listed in Article 15(2), unless they are in accordance with the conditions in Article 15(3) and arise from new circumstances

27. 27 Grey List under Service Directive Article 15 Quantitative or territorial restrictions; Requirements of businesses’ legal form; Requirements relating to shareholding; Reserving right to service activity to particular providers, other than due to qualification or EC Law; Ban on more than one establishment on territory; Requirements which stipulate a minimum number of employees; Fixed minimum or maximum tariffs; Prohibitions or obligation on underselling and sales; Requirements that providers must allow access to other providers’ services; and Requirements that providers must supply other services jointly with theirs service

28. 28 Some of the Most Commonly Quoted Cases of European Court of Justice Dealing with art.43-48, the EC Treaty In these cases, ECJ interprets the Freedom of Establishment under art.43-48, EC Treaty not only as a prohibition of discrimination, but also as a prohibition of restriction The difference between a discrimination and a restriction is that in case of discrimination a person with a link to the EC (for example a foreigner) is discriminated against (treated differently) as compared to a person without a link to the EC (home national in this example), whereas in case of restriction both persons are treated the same way but that treatment inhibits the person with the link to the EC to execute the freedom of establishment

29. 29 Case 107/83 Klopp Court of Justice [1984] ECR 2971 Klopp case: a German lawyer had been refused admission to the Paris Bar on the sole ground that he already maintained an office as a lawyer in another MS The ECJ ruled that, although it was for the states to regulate the exercise of professions in their own territory, they could not require a lawyer who wished to practice there, to have only one establishment throughout the Community, since Article 43 specifically guarantees the freedom to set up more than one place of work in the Community

30. 30 Case C-55/94 Gebhard Court of Justice ECR [1995] I-04165 Gebhard case concerned a German national against whom disciplinary proceedings were brought by the Milan Bar Council for pursuing a professional activity as a lawyer in Italy on a permanent basis, in chambers set up by himself and using the title avvocato, although he had not been admitted as a member of the Milan Bar and his training, qualifications, and experience had not formally been recognized in Italy Having established that in the absence of Community rules, MS may justifiably subject the pursuit of self-employed activities to bona fide rules relating to organization, ethics, qualifications, titles, etc., the ECJ continued: National measures liable to hinder or make less attractive the exercise of fundamental freedoms guaranteed by the Treaty must fulfil four conditions: 1) they must be applied in a non-discriminatory manner; 2) they must be justified by imperative requirements in the general interest; 3) they must be suitable for securing the attainment of the objective which they pursue; 4) and they must not go beyond what is necessary in order to attain it

31. 31 Case C-212/97 Centros Court of Justice [1999] ECR I-1459 Centros Ltd, a private limited company formed under English law (“Centros”), applied for the registration of a branch in Denmark. Centros’ share capital was held by Danish nationals residing in Denmark. Centros had never traded since its formation in the UK and was in fact seeking to establish in Denmark not a branch, but a principal place of business, by circumventing the national rules concerning the paying-up of minimum share capital The r egistration authorities refused the registration of the branch ba sed on the grounds that the establishment of a branch in Denmark would be a way of avoiding the national rules on paying-up of minimum share capital According to the ECJ, it was contrary to Articles 43 and 48 of the Treaty for a Member State to refuse to register a branch of a company formed in accordance with the law of another Member State in which it has its registered office

32. 32 Case 2/74 Reyners Court of Justice [1974] ECR 631 M. Reyners, a Dutch national, was prohibited from practicing as an advocate in the Belgian courts on the grounds that he did not have Belgian nationality. Such discrimination would be forbidden by (what is now) Art. 43 of the ECTreaty, but it was unclear whether Art. 43 had Direct Effect. Under the principle of VanGendEnLoos1963, a Treaty provision would be directly effective if, inter alia, it were unconditional and did not leave any further implementation to the MS. However, in this case Art. 44 provided that the Commission would issue various directives creating the necessary legal obligations to give effect to Art. 43. These directives had not been created at the time the case was heardECTreaty Direct Effect The ECJ held that the principle of Art. 43 - non-discrimination on the grounds of nationality - was clear. Despite the lack of specific directives, Art. 43 did prohibit member states from acting in particular ways, and it was therefore directly effective

33. 33 Summary Major objective of the Directive is to eliminate obstacles to the freedom of establishment for service providers by setting rules for: 1) administrative simplification including the establishment of “single points of contact”; and by 2) requiring removal of specified prohibited requirements Under the provisions of Service Directive, MS must also assess requirements imposed on access to, and exercise of, service activities and report to the Commission on the results, specifying which requirements Member States plan to retain and their justifications for doing so

34. 34 Elizabeth Parushkova Parushkova.E@BNBank.org +359 02 9145 2116BNB Bank Supervision Department Supervisory and Legal Directorate