Business environment in the EU
1st Semester, Academic Year 2011/2012
Prepared by Dr. Endre Domonkos (PhD)
I. The establishment of the single market I.
 The fundamental aim of establishing the European Economic
Community was to create a common market for its Member States.
 The common market is an area where goods, services, capital and
workers move freely without any restrictions.
 Following the Treaty of Maastricht, the principle of free movement was
extended from workers to persons in general.
 Therefore the programme of the single market outlined in the Single
European Act (SEA), signed on 18 February 1986.
 The legislative process related to the single market continues even today.
I. The establishment of the single market II.
 As guaranteeing the single market and the four freedoms was the main
aim of European integration, it is not surprising that Community
legislation related to these areas provides the backbone of the acquis
communautaire.
 Both the EC Treaty and secondary legal acts focus primarily on ensuring
the efficient functioning of the single market.
 The four fundamental freedoms are guaranteed on the one hand by
negative integration, and on the other hand by positive integration as
well.
 There are several financial, technical, legal or administrative regulations
rooted in the differences in taxation systems, standards, state or
national traditions that prevent the European Community from fully
realising the dream of the single market.
II. The free movement of goods I.
 The free movement of goods (which is about free trade within the EU), is
guaranteed by the creation of a customs union and the abolition of
quantitative restrictions between Member States.
 The Member States abolished existing (and refrained from introducing
new) customs duties and charges having equivalent effect levied on
trade between each other.
 Discriminatory taxation is also prohibited in the EU.
 There are, however, three exceptions when charges having equivalent
effect may be levied.
II. The free movement of goods II.
 In addition to the abolition of customs duties and charges having
equivalent effect, the setting up of a Common Customs Tariff (or
Common External Tariff) forms another important element of the
customs union.
 The Common Customs Tariff is the main instrument for regulating trade
with third countries.
 Common customs tariffs are thus a precondition for guaranteeing the
free movement of goods within Member States.
 In addition to setting common tariffs, the Member States have also
harmonised their customs regulations and procedures, simplified
border control formalities and developed forms of cooperation in the
field of customs.
II. The free movement of goods III.
 In order to guarantee the free movement of goods, in addition to the
removal of customs duties, quantitative restrictions (trade and customs
quotas) and measures with equivalent effect also had to be prohibited.
 For a long time, to define measures with equivalent effect was
problematic.
 Originally, the Commission derived the ban on such measures from a
1970 Directive.
 Finally, in the Dassonville case of 1974, the European Court of Justice
gave a uniform definition of the concept of measures with equivalent
effect to quantitative restrictions, which was wider that the scope of the
Directive.
II. The free movement of goods IV.
 The ECJ set down a general formula defining the scope of the concept of
measures with equivalent effect to quantitative restrictions:
 This has become known as the ‘Dassonville formula’.
 However, there is an exception to the ban on imposing restrictions on
trade.
 Article 30 (ex article 36) of the EC Treaty stipulated that the prohibition
of quantitative restrictions and measures with equivalent effect shall
not preclude restrictions on grounds of: public morality, public policy or
public security; the protection of health and life of humans, animals or
plants; the protection of national treasures possessing artistic, historic
or archaeological value or the protection of industrial and commercial
property.
II. The free movement of goods V.
 Another important ruling of the ECJ was in the so-called Cassis de Dijon
case of 1979, which – together with the Dassonville-formula – was a
milestone not only in the removal of trade barriers, but also in the entire
process of the approximation of legislation.
 The Court ruled that a product which has been lawfully produced and
marketed in one Member State should be able to circulate lawfully
throughout the entire Community. (This is known as the principle of
equivalence).
 The Cassis de Dijon judgment pointed out the concept of mutual
recognition.
II. The free movement of goods VI.
 The possible restrictions listed in the Cassis de Dijon judgment are
generally referred to as mandatory requirements.
 Mandatory requirements set by the Court are not valid forever but only
until Community legislation covers the relevant field.
 Member States can refer to mandatory requirements in cases when
national measures apply without distinction to imported and
domestically produced goods alike.
 This temporary nature of mandatory requirements is indicated by the
Court’s subsequent decisions, which extended their scope.
 The Cassis de Dijon ruling put an end to the Member States’ practice of
protecting their national products with various rules and standards.
II. The free movement of goods VII.
 Mutual recognition practically became a new harmonisation
mechanism in Community law, which was finally institutionalised by
the Single European Act.
 Mutual recognition however does not mean that Member States have to
adjust to the lowest national standards and requirements.
 The aim of the continuous exercise of extensive and thorough
approximation of standards and technical specifications is to provide a
solution to this problem.
 The enforcement of these rules is monitored by the Commission.
 Member States must always inform the Commission in advance if they
wish to introduce new standards or regulations.
III. The free movement of persons
 The universal right of free movement was no enshrined in the Treaty of
Rome.
 The Treaty of Maastricht introduced the freedom of movement as a
fundamental right that all EU citizens have, irrespective of whether they
have economic activity.
 There are still different rules for various groups, depending on the
economic nature of their activities , if any.
 Three different freedoms apply to people taking up residence in another
Member State for the purposes of work.
 The free movement of these three groups is based on the same
underlying principle: non-discrimination.
III. The free movement of workers I.
 The freedom of movement for workers is fundamental pillar of
European integration.
 Even today, a mere 2% of the EU’s active population works in another
Member State.
 The free movement of workers can be hampered by three conditions:
1) discrimination between workers based on nationality;
2) legislation or administrative action that set different conditions for
workers from different Member States;
3) the lack of coordination between social security systems.
III. The free movement of workers II.
 According to Article 39, the key rights of workers of the Member States
are the followings:
 The anti-discriminatory provisions of Article 39 also prohibit
discrimination between workers from different Member States in terms
of remuneration (including social and tax benefits), or any other
conditions of work and employment.
 Under the secondary legislation of the Union, workers are entitled to
bring with them their spouses and dependants (or children under the
age of 21), even if they are not national of any Member State.
 However, the principle of the free movement of workers would not be
very useful if workers lost their rights to social security benefits when
moving from one Member State to another.
 For this reason, Article 42 of the EC Treaty stipulates that migrant
workers can „carry over” the rights acquired.
III. The free movement of workers III.
 The aim of the Treaty is clearly not to harmonise the social security
systems of the Member States, but to create the necessary coordination
between those systems.
 Council regulations are aimed at regulating the following areas:
 However, there are exemptions from the free movement of workers,
whereby the Treaty allows for certain restrictions against foreign
workers (from another Member State).
 According to Article 39 of the EC Treaty, such restrictions must be
justified on grounds of public policy, public security or public health.
 Such limitations can only be an exception to the rule and have to be
properly justified.
IV. The freedom of establishment I.
 Self-employed persons form a separate category based on Community
law.
 This category includes those working in the so-called liberal professions
as well as different activities many of whom provide services.
 These people are entitled to freedom of establishment.
 Qualifications may vary greatly from one Member State to another in
terms of their content and length, which makes it more difficult for
citizens of other Member States to obtain a licence for the pursuit of
professional activities.
 In the beginning, Member States tried to harmonise certain professions.
IV. The freedom of establishment II.
 The mutual recognition of diplomas, degrees and certificates thus
became a fundamental principle (both for people in a self-employed or
employed capacity).
 In the case of the majority of professions, Member States mutually
recognise diplomas issued by the others.
 Nonetheless, in certain professional fields (for example, law), the
recognition of a person’s qualifications has to be requested from the
local authorities.
 The significance of the freedom of establishment is that it covers both
natural persons and legal entities.
 For the latter, it means the right of so-called „secondary establishment”.
IV. The freedom of establishment III.
 The European Company Statute is a legal instrument that gives
companies the option of forming a European Company – known
formally by its Latin name Societas Europeae” (SE) – in one of four ways:
 In practice, this means that European Companies are able to operate
throughout the EU on the basis of a single set of rules and a unified
management and reporting system.
 There are exemptions from the freedom of establishment principle.
 Member States may impose certain restrictions on the grounds of public
policy, public security or public health, as long as they are justified and
proportionate to the objectives they are supposed to serve.
V. The free movement of non-economically active persons I.
 With the Treaty of Maastricht, the freedom of movement became a
fundamental right of every citizen of every Member State of the
European Union.
 This is due to the fact that the Maastricht Treaty created the institution
of Union citizenship and made the right to free movement a
fundamental element of such citizenship.
 Citizenship of the Union means four specific rights.
 There are no restrictions whatsoever on EU citizens on short-term visits
(travelling).
 All citizens of the Union are free to travel to and stay in another Member
State for a period of three months.
V. The free movement of non-economically active persons II.
 All limitations on goods purchased by travellers were also removed
under the principle of free movement of goods and persons.
 Taxes on the products (VAT, excise duties) have to be paid at the point of
purchase.
 Free movement involves not only the right to travel freely, but also the
right to stay in any Member State for a sustained period, which includes
the freedom to work, study, reside and stay in all Member States.
 This also means that citizens of the EU are free to choose their domicile
in the area of the Union.
 However, if they intend to stay in a Member State for a period longer
than three months, they need a residence permit.
V. The free movement of non-economically active persons III.
 While for wage-earners, the conditions of free movement were already
guaranteed by the Treaty of Rome and subsequent secondary legislation,
for residence for other purposes the Council adopted three Directives on
28 June 1990, which regulate the general framework rules on the right of
residence for non-economically active persons, the conditions governing
the right of residence of people who have ceased their occupational
activity (pensioners) and the conditions applicable to persons staying in
another Member State for educational purposes (students).
 The main aim of the Directives is to regulate the conditions upon which
citizens of another Member State may be entitled to a residence permit.
V. The free movement of non-economically active persons IV.
 Free movement and travel to other Member States is facilitated by the
fact that there are practically no border controls inside the EU.
 By integrating the Schengen Agreement and subsequent Schengen
legislation (the so-called Schengen acquis) into the European Union and
the acquis communautaire, the Amsterdam Treaty largely removed
controls on passenger traffic on borders within the Union, except for the
United Kingdom and Ireland.
 Persons crossing from one Member State to another can do so freely,
while those who have entered from a third country can move on freely
without any controls to other Member States.
 Moreover, citizens of the Union can cross the border with their identity
cards (rather than passports).
VI. The freedom to provide services I.
 The acquis (Article 50 of the EC Treaty) defines services as activities
provided for remuneration, insofar as they are not governed by the
provisions relating to the freedom on movement of goods, capital and
persons.
 For the sake of clarity, the freedom to provide services applies to those
services which have cross-border element, i.e. when the provider and the
recipient of the service reside in different Member States.
 This does not mean that the service provider cannot temporarily pursue
his activity in the state where the service is provided, and in fact he may
even open a permanent representation there, but his activity must be
fundamentally related to another Member State.
VI. The freedom to provide services II.
 For the freedom to provide services the emphasis falls on the temporary
(non-permanent) and cross-border nature of such activities.
 It is also important to note that the service is provided for
remuneration, since – to a certain extent – the essence of the freedom to
provide services is to embrace all those activities which are exercised for
remuneration but which do not fall within the scope of the other three
freedoms.
 The acquis stipulates that the remuneration must come from a private
source, thus educational services paid by the state do not fall within
scope of the free movement of services.
 In order to clarify the nature of services, Article 50 of the EC Treaty lists
activities that – upon the fulfillment of the above conditions – are
typically considered as services:
VII. The prohibition of discrimination, the question of
educational qualifications and the exceptions to the freedom
to provide services I.
 The prohibition on discrimination also applies to the free movement of
services.
 This means that Member States may not impose different conditions on
service providers who exercise their activities from another Member
State or on recipients of services in another Member State.
 It is important to note here that recipients of services cannot be
restricted or discriminated against, which means that they have the
right to travel to another Member State to buy services.
 This is a standard practice for a number of services.
VII. The prohibition of discrimination, the question of
educational qualifications and the exceptions to the freedom
to provide services II.
 With its rulings, the Court has also extended the Dassonville formula,
first applied to goods only, to services as well.
 The Directives on the mutual recognition of qualifications and the
harmonisation of educational and training conditions also apply to the
freedom to provide services.
 Certain activities are exempt from the provisions on the freedom to
provide services, as in the case of the freedom of establishment and the
free movement of goods.
VIII. The liberalisation of the free movement of services I.
 Community law guarantees the freedom to provide services and the
abolition of provisions restricting the movement of various services
through means of directives.
 Finally, parallel to the programme of the single market, the
liberalisation of intra-Community services gained new momentum in
the late ‘80s and early ‘90s.
 Consequently, most services (e.g. banking, financial, air transport and
telecommunications services) had been liberalised by the turn of the
millennium, but in few areas, particularly where state-owned service
providers were involved (e.g. electricity and gas), only the initial steps
had been taken.
VIII. The liberalisation of the free movement of services II.
 In the light of these developments, the Lisbon summit in March 2000
placed the so-called Internal Market Strategy for Services at the Centre
of the Community’s new long-term economic policy.
 This new approach was needed because the traditional method of
harmonisation and liberalisation, aimed at individual sectors, was no
longer sufficiently effective.
 The reasons for introducing a new approach in the field of services were
the followings:
 The new Internal Market Strategy for Services thus strives to create a
comprehensive horizontal regulatory framework applicable in all
sectors and flexible enough to ensure that services based on new
technologies can develop for the benefit of the single market.
VIII. The liberalisation of the free movement of services III.
 The new strategy consists of three elements:
 With the latter, the strategy aims at establishing horizontal rules
covering services in all sectors, focusing particularly on the following six
areas:
 The Draft Directive on services in the internal market (in short, the draft
Services Directive and also known as the draft Bolkenstein Directive, so
called the former European Commissioner who introduced it), which
the Commission presented in January 2004, is aimed at establishing a
truly single internal market in services by dismantling any remaining
unjustified and discriminatory administrative obstacles to cross-border
service provision.
III. The liberalisation of the free movement of services IV.
 In essence, the Draft Directive introduced the principle of „country of
origin” to cross-border services.
 The Draft Directive was severely criticised by the Member States with
higher labour costs in the services sector, who were afraid of job losses
caused by competition from (mainly new) Member States with cheaper
labour.
 The other common fear was that the Draft Directive could have
jeopardised the quality of services, by giving Member States with the
lowest regulatory standards a competitive advantage.
 The Commission’s main aim is to make better use of the growth and jobcreation opportunities offered by the single market.
IX. The free movement of capital I.
 Article 56 of the EC Treaty prohibits all restrictions on the movement of
capital, both between Member States and between Member States and
third countries.
 The EC Treaty includes provisions not only on the free movement of
capital, but on the free movement of capital and payments as well.
 This distinction between capital and payments no longer made sense
following the general liberalisation necessitated by the economic and
monetary union; thus, nowadays, we only talk about free movement of
capital.
 According to ex Article 67 of the Treaty of Rome, the free movement of
capital and payments only had to be guaranteed to the extent required
by the „proper functioning of the common market”.
IX. The free movement of capital II.
 For a long time, the acquis mainly dealt with the free movement of
capital connected with such cross-border activities.
 The decisive moment came with the adoption of a Directive in 1988,
which liberalised capital transfers by abolishing all restrictions on
movements of capital.
 The realisation of an unrestricted, free movement of all elements of
capital was reinforced by the Maastricht Treaty, which set the free
movement of capital as a precondition for joining the economic and
monetary union.
 Thus, by the beginning of the second phase of the EMU on 1 January
1994, all payments and capital movements had been fully liberalised.
X. Exceptions to the free movement of capital
 There are general exceptions to the free movement of capital.
 In addition, just as in the case of the free movement of goods, persons
and services, the free movement of capital may be restricted on grounds
of public policy or public security.
 The principle of a restriction being in proportion to the objective to be
achieved applies here as well, which means that such restrictions are not
permissible if the objective could be achieved by less restrictive means.
 This principle is strictly enforced by the European Court of Justice.
XI. The single market and taxation I.
 In order to ensure the four fundamental freedoms, certain rules on
taxation are necessary, pursuant to Articles 90 to 93 of the EC Treaty.
 It must, however, be made clear that the aim is not to harmonise taxes or
create a single system of taxation.
 It should also be emphasized that the Treaty makes a clear distinction
between rules on indirect and direct taxation.
 Article 93 of the EC Treaty empowers the Council to adopt provisions for
the harmonisation of legislation concerning turnover taxes, excise
duties and other forms of indirect taxation, to the extent necessary to
ensure the establishment and the functioning of the internal market.
 Article 93 has helped to create very detailed common rules on valueadded tax and excise duties.
XI. The single market and taxation II.
 Value-added tax (VAT) was first introduced in the Community in 1970.
 The creation of the single market in 1992 brought about the elimination
of ‘tax borders’, which necessitated even closer harmonisation of VAT
rates.
 The significant differences in VAT rates hindered the free movement of
goods and services.
 According to a Directive adopted in 1992 on harmonising tax rates, the
Member States have to apply a standard rate of VAT of a minimum 15%,
with one or two reduced rates of no less than 5% applied for certain
goods and services, serving primarily cultural and social purposes.
 The EU’s long term objective is to establish an origin-based Community
VAT system.
XI. The single market and taxation III.
 Since the introduction of the single market on 1 January 1993, excise
duties have been payable at the place of consumption.
 Excise duties on alcoholic beverages, tobacco products and mineral oils
are payable in the Member State of final consumption.
 Minimum rates of excise duties are also set at Community level.
 The only condition concerning direct taxes is that national tax systems
must respect the four fundamental freedoms.
 As a practical consequence, Community legislation adopted in this area
is aimed at avoiding double taxation and facilitating cross-border
business activities.
XI. The single market and taxation IV.
 Tax harmonisation is clearly one of the most sensitive issues of closer
integration.
 Several Member States are understandably reluctant to pool their
national sovereignty, as tax policy is the key fiscal instrument and a
major component of each government’s political programme.
 As a result, unanimity has been maintained in the area of tax
harmonisation.
 Replacing unanimity is so unrealistic that even the Treaty of Lisbon did
not attempt to extend qualified majority voting to taxation; thus the
Member States preserved their right of veto.
XII. Provisions of the Treaty of Lisbon in relation with the
single market I.
 According to the provisions of the Treaty of Lisbon the following changes
should be highlighted:
 For the free movement of goods:
 For the free movement or persons:
 In the field of social security of migrant workers:
 For the freedom to provide services:
XII. Provisions of the Treaty of Lisbon in relation with the
single market II.
 Provisions for free movement of capital:
 Provisions for taxation:
 For taxation, the Treaty of Lisbon took on board all the provisions of the
EC Treaty with one amendment, which enabled the Union to establish
measures for the harmonisation of legislation, concerning taxation,
provided that such harmonisation is necessary to ensure the
establishment and functioning of the internal market and to avoid a
distortion of competition.