EU Law Blog

Energy Market Report

The Commission has published a report on the implementation of the gas and electricity markets.

You can download the report - COM (2008) 192 final - here.

Of course, creating an efficient European-wide market for gas and electricity in such traditionally balkanized industries is clearly important if Europe wants to remain something of an industrial power in the coming decades.

But the conclusions of the report are not wholly encouraging:

"Despite some encouraging improvements, notably on cross-border coordination at regional level, the overall analysis of progress on the internal market in electricity and natural gas shows that major barriers to the efficient functioning of the market still exist.
Insufficient implementation of European legislation remains a crucial factor."

The fact that the language of the report sometimes descends into impenetrable Commission-babble does not help.

Cosmetics, Free Movement and Harmonization Directive: Case C-257/06

The Court of Justice handed down a neat judgment in Case C-257/06 Roby Profumi SrL v. Comune di Parma dealing with the relationship between a directive that harmonizes the law completely and the free movement provisions of the EC Treaty.

That's sometimes an issue that is obscured in certain student text books but which is of great practical importance.

The judgment in Case C-257/06 concerned the obligation imposed by Italian law on the importer of cosmetic products to provide the requisite national authorities with certain information on the products and their manufacturers.

The referring national court asked whether such obligations were compatible with Article 28 EC as well as with Directive 76/768.

The Court recalled that Directive 76/768 provided exhaustively for the harmonization of national rules on the packaging and labeling of cosmetic products (see, inter alia, Case C-77/97 Unilever, paragraph 24; Case C-220/98 Estée Lauder, paragraph 23, and Case C-99/01 Linhart and Biffl, paragraph 17). Consequently, when the question referred concerns harmonization at the EC level, the national measures relating thereto must be assessed in the light of the provisions of that harmonizing measure and not those of the EC Treaty (see, Case C-150/88 Eau de Cologne & Parfümerie-Fabrik 4711, paragraph 28; Case C-37/92 Vanacker and Lesage, paragraph 9, and Case C-324/99 DaimlerChrysler, paragraph 32).

Oh, and by the way, the Court held that the Italian obligations were compatible with Directive 76/768.

Boycotts, Strikes and the Freedom of Establishment: Case C-438/05

The Court of Justice has handed down its eagerly awaited judgment in Case C-438/05 International Transport Workers' Federation & The Finnish Seamen's Union v. Viking Line.

The Court held that the threat of strike action by a trade union to force an employer to conclude a collective agreement the terms of which are liable to deter it from exercising freedom of establishment constitutes a restriction on that freedom prohibited by Article 43 EC.

The facts of the case are fairly remarkable. In October 2003, Viking Line, a Finnish ferry company, gave the Finnish Seamen's Union (FSU) notice of its intention to reflag its vessel Rosella, which operated on the Baltic between Finland and Estonia on the "booze cruise". The Rosella operated at a loss and so Viking Line wished to register it in Estonia, where it had a subsidiary, in order to be able to employ an Estonian crew, at a lower level of pay than that applicable in Finland. That way, Viking Line hoped to compete with other booze cruise ferries on the same route. In November 2003, following a request from FSU, the International Transport Workers' Federation (ITF) in London sent a circular to all its affiliates requiring them to refrain from entering into negotiations with Viking Line, with the threat of a boycott of all Viking Line vessels if they failed to comply. FSU imposed conditions on the renewal of the manning agreement with Viking Line and announced its intention to strike. It required, on the one hand, an increase in the number of the crew on the Rosella, and, on the other, the conclusion of a collective agreement, requiring Viking Line, if the vessel was reflagged in Estonia, to continue to comply with Finnish labor law and would not lay off crew. Then, Estonia joined the EU in 2004. Viking Line, which was determined to register the loss-making vessel under the Estonian flag, brought proceedings before the courts in England where ITF had its seat to oblige it to withdraw its circular threatening a boycott and seeking an order against the FSU that it must not infringe Viking's right of establishment with regard to the reflagging of the Rosella.

The English Court of Appeal referred a series of questions to the Court of Justice on whether the rules on the freedom of establishment in Article 43 EC applied in such a case as this one.

The Court of Justice's judgment is a rich one that rewards careful reading.

The Court held that Article 43 EC on freedom of establishment applies to collective action initiated by a trade union or a group of trade unions against an undertaking to force it to enter into a collective agreement, the terms of which are liable to deter it from exercising that freedom. It makes clear that Article 43 EC confers rights on a private undertaking which can be relied on against a trade union or an association of trade unions exercising their autonomous power, pursuant to trade union rights, to negotiate with employers or professional organisations the conditions of employment and pay of workers (Case C-309/99 Wouters and others, paragraph 120, Case 43/75 Defrenne, paragraphs 31 and 39 and Case C-112/00 Schmidberger, paragraphs 57 and 62).

It held that the conditions laid down for the registration of vessels must not form an obstacle to freedom of establishment (Case C-221/89 Factortame and Others, paragraphs 20 to 23). According to the Court, the strike action envisaged by the FSU has the effect of making less attractive, or pointless, Viking Line’s exercise of its right to freedom of establishment, because its aim is to prevent both Viking Line and its Estonian subsidiary from enjoying the same treatment in the host member State (Estonia) as other economic operators established in that State. Secondly, collective action taken in order to implement ITF’s policy of combating the use of flags of convenience, which seeks, primarily, to prevent ship-owners from registering their vessels in a State other than that of which the beneficial owners of those vessels are nationals, must be considered to be at least liable to restrict Viking Line’s exercise of its right of freedom of establishment.

The Court held that Article 43 EC applies in such a case notwithstanding the fact that the right to strike is not a right regulated by EC law according to Article 137 EC and is recognized as a fundamental right.

Finally, the Court examined whether the restriction on the freedom of establishment was justified. It stated that it is for the referring national court to determine whether the objectives of the labor unions were in fact those of protecting workers. The Court did give some guidance on the matter. It held that although the protection of workers' rights was a matter of overriding public interest (see Joined Cases C-49/98, C-50/98, C-52/98 to C-54/98 and C-68/98 to C-71/98 Finalarte and Others, paragraph 33), the restriction on the freedom of establishment could not be justified if it were established that the jobs or conditions of employment at issue were not jeopardized or under serious threat. If, on the other hand there was a threat to jobs or conditions of employment, the threat of strike action must be proportionate to the aim of protecting them.

Citizenship, Student Grants and Country of Origin Impediments: Joined Cases C-11/06 and C-12/06

The Court of Justice has handed down a judgment in Joined Cases C-11/06 and C-12/06 Morgan an Bucher that is so exciting that we can barely contain ourselves. It really does reward reading and so we should just suggest you go and read it for yourselves.

Here's a bit of an introduction to whet your appetite for it. The Court held that a national law that makes the award of education and training grants for studies in another member State subject to the condition that those studies should be a continuation of studies pursued for at least one year in the member State awarding the grant is liable to deter citizens of the Union from making use of their freedom of movement and is thus contrary to Articles 17 EC and 18 EC.

Ms Morgan, a German national, moved to Great Britain where she worked for a year as an au pair before starting her university studies in England, for which she applied to the German authorities for a grant. Her application was rejected because, under German legislation, the grant was subject to the condition that the course of study should constitute a continuation of education or training pursued for at least one year in a German establishment.

Ms Bucher, also German, lived in Bonn until she decided to move to Düren, a German town close to the Dutch border, and pursue a course of study in Heerlen, in the Netherlands. She applied to the authorities in Düren for a grant. She was refused because she was not ‘permanently’ resident near a border as required by the German legislation.

The Court of Justice held that while member States remain competent to establish a system of grants for the pursuit of education, they must ensure that if students pursue their education in another member State, they must ensure that the detailed rules for the award of those grants do not create an unjustified restriction on freedom of movement. In the present case, German legislation imposed a two fold obligation on the receipt of a grant for study abroad : First, the applicant for a grant must have attended an education or training course for at least one year in Germany and second, the applicant must continue only that same education or training in another member State. The Court held that on account of the personal inconvenience, additional costs and possible delays which it entails, the German legislation is liable to discourage citizens of the Union from leaving Germany in order to pursue studies in another member State. It therefore constitutes a restriction on freedom of movement for citizens of the Union.

The Court recalled that recalled that national legislation of a member State which places certain of its nationals at a disadvantage simply because they have exercised their freedom to move and to reside in another ember State constitutes a restriction on the freedoms conferred by Article 18(1) EC on every citizen of the Union (see Case C‑406/04 De Cuyper, paragraph 39; Case C-192/05 Tas Hagen and Tas, paragraph 31; and Case C-76/05 Schwarzand Gootjes-Schwarz, paragraph 93). The opportunities offered by the Treaty in relation to freedom of movement for citizens of the Union cannot be fully effective if a national of a member State can be deterred from availing himself of them by obstacles placed in the way of his stay in another Member State by legislation of his State of origin penalizing the mere fact that he has used those opportunities (see, to that effect, Case C‑224/98 D’Hoop, paragraph 31; Case C‑224/02 Pusa, paragraph 19; and Schwarz and Gootjes‑Schwarz, paragraph 89).

Interestingly, the Court added that that consideration is particularly important in the field of education in view of the aims pursued by Article 3(1)(q) EC and the second indent of Article 149(2) EC, namely, inter alia, encouraging mobility of students and teachers (see D’Hoop, paragraph 32, and Case C-147/03 Commission v. Austria, paragraph 44).

There's a lot, really a lot that can be written about this judgment. It shows for one thing how real, effective and far reaching is the concept of a single European market for education.

Regulating the Internal Market and EC Powers

Professor Derrick Wyatt of the Faculty of Law, Oxford University has written a very stimulating article on the competence of the EC to regulate the internal market. In fact the article is a rigorous critique of the case law of the Court of Justice and in particular of its judgment in Case C-376/98 Germany v. European Parliament and Council on the power of the EC to regulate tobacco advertising.

This is what the abstract states:

"The claim of the Court of Justice in the Tobacco Advertising case that the Community institutions lack a general competence to regulate the internal market does not withstand critical examination. The Tobacco Advertising case contained both competence restricting and competence enhancing elements. The principal competence restricting elements were
(a) that obstacles to trade could be addressed by removal of the obstacles, but not by a ban on the subject matter of the trade;
(b) that harmonisation could only be justified by distortions of competition if those distortions were appreciable;
(c) that in principle all provisions of a contested internal market measure must contribute to the internal market aims of the measure in question.
The principal competence enhancing element was the proposition that a measure which makes some contribution to the internal market may be adopted as an internal market measure even if its main aim is public health protection; despite the fact that harmonisation of public health requirements is in principle ruled out by the Treaty. A further competence enhancing element was that the Court adopted an impressionistic approach to assessment of the requirement that distortions of competition must be appreciable if they were to justify harmonisation, leaving open the possibility that this requirement might be relaxed or sidestepped by the lawmaking institutions. The competence restricting elements of the Tobacco Advertising case have been contradicted or eroded by subsequent case law, such as the British American Tobacco case, and the Swedish Match case. After the latter case, obstacles to trade can be addressed by simply banning the trade. After the British American Tobacco case, it seems that hypothetical obstacles to trade, resulting from disparities between national labelling rules, can be addressed by eliminating the disparities in question, even if this makes no contribution to cross border trade in the products in question. In the Leitner case, the Court confirms that its approach to the requirement adopted in Tobacco Advertising, that distortions of competition must be appreciable in order to justify harmonisation, will be an impressionistic one. And in Rundfunk the Court considers that as long as a measure makes a contribution to the internal market, it is legitimate for that measure to regulate situations which have no link at all with freedom of movement - something of a retreat from the Tobacco Advertising case, but in line with case law dating from the 1960s which gives wide reading to competence to coordinate national social security rules in order to provide freedom of movement for workers. More broadly, it is noted that Community competence has not in practice been confined to removing obstacles to trade and distortions of competition, but extended to harmonising national rules which facilitate freedom of movement and to removing differences between national rules which create uncertainty for those contemplating cross border transactions. This aspect of Community competence to regulate the internal market is potentially far reaching, and could lead to the use of such measures as instruments of general governance. This does not seem consistent with a scheme of attributed competences, nor with a system in which decisions are to be taken “as closely as possible to the citizen,” in accordance with the principle of subsidiarity."

You should read the whole article. Download it from here.

Gambling, crime, addiction : Joined Cases C-338/04, C-359/04 and C-360/04 and Case E-1/06

... There's just sex and drugs missing from list but they don't figure in either the Court of Justice's judgment in Joined Cases C-338/04, C-359/04 and C-360/04 Placanica or the EFTA Court's judgment in Case E-1/06 EFTA Surveillance Authority v Kingdom of Norway. We'll have to make do with betting, gambling, crime, fraud and addiction for now. Monopolies too.

First, the Court of Justice judgment. That has already been noted up admirably on the ECJ Blog so there's no need for much detail here. The point was whether national legislation which sought to eliminate crime and fraud from betting and gambling activities by setting up a state controlled licensing system and other measures was compatible with the EC Treaty.

The Court of Justice held that national legislation that prohibits the pursuit of the activities of collecting, taking, booking and forwarding offers of bets, in particular bets on sporting events, without a license or a police authorization issued by the member State concerned, constitutes a restriction on the freedom of establishment and the freedom to provide services, provided for in Articles 43 EC and 49 EC respectively. It also held that it is for the national courts to determine whether, in so far as national legislation limits the number of operators active in the betting and gaming sector, it genuinely contributes to the objective of preventing the exploitation of activities in that sector for criminal or fraudulent purposes.

More particularly, the Court of Justice held that Articles 43 EC and 49 EC preclude national legislation, such as that at issue in the main proceedings, which excludes from the betting and gaming sector operators in the form of companies whose shares are quoted on the stock market. Also, Articles 43 EC and 49 EC preclude national legislation, such as the Italian legislation in issue, which imposes a criminal penalty on persons for pursuing the organized activity of collecting bets without a license or a police authorization as required under the national legislation, where those persons were unable to obtain licenses or authorizations because that member State, in violation of Community law, refused to grant licenses or authorizations to such persons.

So that is an interesting but pretty straight forward judgment, the Court of Justice coming down pretty hard on the clear infringements of the Treaty but otherwise letting the national courts decide the issue of the appropriate nature and proportionality of the restrictions of the general system in Italy.

Second, the judgment of the EFTA Court in Case E-1/06, handed down a few days later, is interesting too. In that case, the Norwegian authorities wanted to curb what they considered to increasing addiction to gaming machines. What they did was introduce a state controlled monopoly on the operation of gaming machine granting it to a state-owned body called Norsk Tipping AS. The EFTA Surveillance Authority considered that the new state monopoly constituted a prohibited restriction on the freedom to provide services and the freedom of establishment.

The EFTA Court dismissed the EFTA Surveillance Authority's action. It cited the Court of Justice's judgment in Joined Cases C-338/04, C-359/04 and C-360/04 Placanica and basically held that the Norwegian system was an appropriate and proportionate system to curb gaming addiction. As a consequence, any restriction on the freedom to provide services and the freedom of establishment was justified on grounds of the protection of the public interest.

Freedom of establishment, company taxation and thin cap legislation: Case C-524/04

The Court of Justice has handed down a rather long and complex judgment dealing with the ability of a company to deduct from tax the interest on loan finance granted by a parent company. The case is C-524/04 Test Claimants in the Thin Cap Group Litigation v. Commissioners of Inland Revenue.

You'll have to read the whole thing for yourselves as our level of understanding of (and interest in, pun intended) company taxation is even more limited than that our comprehension of string theory.

But here's an attempt at unraveling it. The United Kingdom had tax legislation in force containing anti-avoidance rules targeted at ‘thin capitalization’. Thin capitalization, as everyone except us seemed to know, consists in financing a company by way of loan in preference to equity capital, in order to benefit from a more advantageous tax treatment. Where a company repays loan interest, such payments are deductible from taxable profits. By contrast, distributions of profits are subject to advance corporation tax. The British system, in force in various forms until 2004, restricted the deductibility of interest paid by United Kingdom subsidiaries to non-resident companies but did not restrict the deductibility of interest paid to another resident company.

The Court of Justice handed down a judgment in 2002 in Case C-324/00 Lankhorst-Hohorst about the German "thin capitalization" system. Seeing an opportunity to get some money back, a number of groups of companies brought claims in England for restitution and/or compensation regarding the tax disadvantages which they alleged to have arisen as the result of the application of the United Kingdom tax legislation to them. Each of those groups has a United Kingdom-resident subsidiary which was granted a loan by a company established in another member State. The High Court then referred a number of questions to the Court of Justice, asking inter alia whether the British system was prohibited by Article 43 EC on freedom of establishment.

The Court held that the British system was caught by Article 43 EC. The Court found that the United Kingdom thin capitalisation provisions gave rise to a difference in treatment between resident borrowing companies according to the place in which the lending company has its seat and that the tax position of a company which pays interest to a non-resident company is less advantageous.

But, the Court continued, the may be justified where it specifically targets wholly artificial arrangements, which do not reflect economic reality, with a view to escaping the tax normally due. By preventing the practice of thin capitalization, the United Kingdom legislation is an appropriate means of attaining that objective. To be justified the legislation must be proportionate to attain the objective of the prevention of abusive practices. National legislation is proportionate if, in the first place, the taxpayer is given an opportunity, without being subject to undue administrative constraints, to provide evidence of any commercial reasons there may have been for entering into a transaction and, in the second place, if the re-characterisation of interest paid as a distribution is limited to the proportion of the interest which exceeds what would have been agreed had the relationship between the parties been one at arm’s length. The Court held that the British system did not fulfill that condition from 1988 to 1995, when it was changed, and did satisfy that the second condition from 1995 to 2004. It is for the national court to examine whether the first condition is satisfied.

For the rest, go and read the judgment.

Safeguard measures against Bulgaria already

The Community has wasted no time in taking safeguard measures against new member State Bulgaria.

The Commission adopted Regulation 1962/2006 on the basis of Article 37 of the Act of Accession because the Bulgarian authorities had failed to take the requisite measures to ensure the airworthiness of aircraft for which they issued safety certificates. As a consequence, aircraft certified by the Bulgarian authorities are not granted unrestricted access to the EU transport market.

Scary.

National champions, mergers, state interference and the Commission's position

Those following the debate raging in Europe about government interference in proposed mergers may wish to look at this declaration made by the Commission in the plenary session of the European Parliament on March 15th 2006.

The Commission makes two basic points. The first is :

"The Commission will always look with concern at any attempt by national governments, directly or indirectly, to interfere unduly in the process of cross-border corporate restructuring in Europe. The Treaty enshrines the principle that there should be no unjustified impediment to the fundamental freedoms it establishes, and in particular the free movement of capital, or to the right of establishment, within it. Fundamental to these rights is the freedom for companies to re-structure, including by change of ownership."

The second :

"The Commission has two principal legal instruments at its disposal - the single market rules in the EC Treaty and Article 21 of the EC Merger Regulation - for addressing undue interference by national authorities in relation to corporate restructuring. It has the duty to enforce these rules accordingly wherever appropriate."

The Commission recently started proceedings against Poland on the basis of Article 21 of the Merger Regulation for interfering with the Unicredit/HVB merger. See the press release on this case.

The Antitrust Hotch Potch had a good post on the matter a while back.

Freedom of establishment, tax deductions and Marks and Spencer

Fellow bloggers over at the Comparativelawblog have a terrific write up and analysis of the Court of Justice's judgment in Case C-446/03 Marks & Spencer plc v. David Halsey (HM Inspector of Taxes) so we won't say much about it.

Marks & Spencer is a large British retail store which had expanded to continental Europe. It is also the purveyor of dowdy underwear favored by British women but not much by others. The stores did not adapt to competition from trendy competitors and was pretty much down on its luck. It's continental subsidiaries suffered losses from the mid-1990s until their closure in 2001. As a result, Marks & Spencer sought to set off its continental losses against tax owed by the group in the United Kingdom.

Problem was, British tax law did not allow that : No relief was possible for losses incurred by foreign subsidiaries. The British Revenue authorities thus refused the relief. Marks & Spencer challenged that refusal because British tax law did allow relief for losses incurred by domestic subsidiaries and the difference in treatment of foreign and domestic subsidiaries was, according to Marks & Spencer, contrary to Articles 43 and 48 EC on freedom of establishment.

The Court of Justice agreed in principle with Marks & Spencer. But then it held that a difference in the taxation of domestic and foreign subsidiaries could be justified because such differential treatment pursues a legitimate objective of avoiding the risk of tax avoidance and double relief.

That was not the end of the story, for the Court held that the British tax legislation in question was not proportionate and went beyond what was necessary to achieve its aim where :

- the non-resident subsidiary has exhausted the possibilities available in its State of residence of having its losses taken into account in its state of residence

- there is no possibility for the foreign subsidiary's losses to be taken into account in its state of residence for future periods either by the subsidiary itself or by a third party in particular where the subsidiary has been sold to that third party.

In the end, therefore, Marks & Spencer win the case on narrow grounds and the British government loses.