EU Internal Market Freedoms: Capital, Services, and Goods Regulation

Posted on Jan 6, 2026 in Law

1. Historical Development of Free Movement of Capital

Free movement of capital developed later and more cautiously than the other economic freedoms because the original Treaty rules were vague and ambiguous. Unlike goods, workers, establishment, and services, capital was not granted immediate liberalization or direct effect. During the 1960s and 1970s, the Court of Justice recognized direct effect for the other freedoms, but capital movements were excluded. Liberalization was meant to happen progressively through secondary legislation, mainly Council directives. This cautious approach was due to political and economic instability. Capital movements were seen as sensitive because they affect monetary policy, financial stability, and national sovereignty. Economic crises and the Luxembourg Compromise made harmonization very difficult. Real progress began in the mid-1980s with a renewed commitment to the Single Market and the Single European Act, which allowed qualified majority voting. Directives adopted in 1986 and 1988 completed liberalization by 1993. A decisive change came with the Maastricht Treaty, in force in 1994. Free movement of capital was placed in primary law (now Article 63 TFEU), fully liberalized, and given direct effect.

2. Capital Versus Payments Distinction

Payments are money transfers linked to a primary economic transaction, such as paying for goods or services. They are accessory to other freedoms like goods, services, or establishment. Capital refers to money transfers without a primary transaction and mainly concerns investment, such as buying shares, bonds, real estate, or transferring funds to establish a business. Capital is an autonomous freedom.

Different Liberalization Timelines

Payments were liberalized early, already in the 1970s, because free movement of goods and services would be ineffective without free payments. They were liberalized together with the other freedoms. Capital was liberalized much later and only fully liberalized in 1993–1994. This delay was due to vague Treaty wording, lack of direct effect, reliance on secondary legislation, and political and economic crises. Full liberalization came only with Maastricht and Article 63 TFEU.

Legal Consequences of the Distinction

For payments, the legality of restrictions depends on the primary transaction. If the main transaction can be lawfully restricted, the related payment can also be restricted. For capital, restrictions are assessed independently under Articles 63–66 TFEU. There is no link to a primary transaction, and any restriction must be justified under the capital rules. Trade agreements with third countries may liberalize payments without liberalizing capital investments. Article 63 TFEU applies both to intra-EU and extra-EU capital movements, which is unique among the freedoms. However, more exceptions apply to extra-EU movements.

ART 63 Prohibition: Restrictions on Capital and Payments

All restrictions on the movement of capital and payments are prohibited.

Justifications for Intra-EU Capital Movements (Article 65 TFEU)

For intra-EU capital movements, only Article 65 TFEU may justify restrictions. Member States may rely on grounds such as:

Tax distinctions based on residence or the place of investment.
Prevention of infringements of national law (including tax fraud and money laundering).
Prudential supervision of financial institutions.
Public policy or public security.

However, these justifications are interpreted very strictly by the Court of Justice. Measures must not constitute arbitrary discrimination or disguised restrictions and must comply with the principle of proportionality.

Main Exceptions under Article 65 TFEU

Tax Distinctions: MS may apply different tax rules based on residence or the place of investment. Only allowed if they reflect objective differences and are proportionate. Pure protection of tax advantages is not a valid justification.
Prevention of Breaches of National Law: To prevent tax fraud, money laundering, and to ensure prudential supervision of financial institutions. These are considered a legitimate public interest for maintaining financial stability.
Administrative and Statistical Controls: Member States may monitor capital flows for information purposes. The Court assesses control mechanisms by their level of restrictiveness: Ex-post declarations are generally lawful, as they do not delay movements. Ex-ante declarations may be lawful depending on timing; short notice is more acceptable than long delays. Prior authorization systems are in principle incompatible with Article 63 and allowed only in exceptional cases where no less restrictive measure exists.
Public Policy and Public Security: Real and serious threats such as terrorism, organized crime, or national security risks, provided the measures are proportionate.

Extra-EU Capital Movements: Articles 64 and 66 TFEU

For extra-EU capital movements:

Article 64 TFEU (the “grandfather clause”): Allows Member States to maintain restrictions that already existed before 1 January 1994 on certain types of capital movements with third countries, particularly direct investment, establishment, financial services, and the admission of securities. This means that some restrictions which would be unlawful within the EU may remain valid in extra-EU relations. Article 64 favors liberalization, as removing restrictions requires only a qualified majority, whereas introducing new restrictions requires unanimity.
Article 66 TFEU: Provides an emergency safeguard clause applicable only to extra-EU movements. It allows the EU to adopt temporary restrictive measures when capital flows to or from third countries seriously threaten the functioning of the Economic and Monetary Union. These measures are exceptional, time-limited (maximum six months), and have no equivalent in the intra-EU context.

Under Article 63 TFEU, all types of restrictions are covered. This includes direct discrimination, indirect discrimination, and non-discriminatory measures that hinder or make cross-border capital movements less attractive, such as authorization requirements or prior approval systems.

Freedom of Establishment

Freedom of establishment allows EU nationals and companies to move to another Member State and pursue an economic activity on a permanent and stable basis. This includes creating a new business (primary establishment) or opening branches, agencies, or subsidiaries (secondary establishment). The essential element is permanence: the activity must be carried out from a fixed base, for an indefinite period, and with genuine integration into the host State’s economy. This freedom can also be invoked against one’s own Member State, provided there is a cross-border element. Purely internal situations fall outside EU law. Certain activities involving the exercise of official authority may be excluded, but this exception is interpreted narrowly. Overall, the Court of Justice adopts a liberal approach, consistently favoring market integration and limiting acceptable restrictions. Companies also benefit fully from freedom of establishment. They may choose their place of registration freely, even if they carry out no real economic activity in that Member State. The Court prioritizes the registered office over the place of actual operations, accepting regulatory competition and forum shopping. Transferring a registered office to benefit from a more favorable legal regime is therefore lawful. Article 49 TFEU has direct effect, meaning individuals can rely on it directly before national courts. Nationality-based discrimination is prohibited, qualifications must be assessed proportionately and on a case-by-case basis, and authorities must give clear reasons when refusing access to a profession. Mutual recognition principles strongly limit national procedural barriers.

Free Movement of Services

Free movement of services applies where an economic activity is carried out temporarily in another Member State, without permanent establishment there. The provider remains economically based in the home State and stays in the host State only for as long as necessary to perform the service. The cross-border element may arise because the provider moves, the recipient moves, or the service is provided at a distance; physical movement is not essential. The distinction between establishment and services depends on duration, frequency, regularity, continuity, and intention, not on formal criteria such as having an office. Even long-lasting activities may still be classified as services if they are linked to specific contracts and lack permanent settlement. The Court has also recognized a right to receive services, meaning that tourists, patients, and consumers may travel to another Member State to receive services and must not be discriminated against. This includes access to related protections, such as compensation schemes.

Restrictions and Justifications

Justifications must pursue a legitimate public interest, such as public policy, security, health, or other recognized objectives. Purely economic aims, such as protecting domestic businesses from competition, are not accepted. Restrictions by states or private actors must be non-discriminatory, proportionate, and respect fundamental rights.

Services as an Economic Activity

The concept of “service” under Article 56 TFEU is interpreted broadly. An activity qualifies as a service if it is provided for remuneration, even if payment comes from a third party or the provider is non-profit. Sports, healthcare, private education, and activities involving chance may all fall within Article 56 if they have an economic character. By contrast, public education funded entirely by the State is excluded. Healthcare has been clearly recognized as a service, even when paid through social security systems. Prior authorization schemes are considered restrictive, although they may be justified in limited circumstances to protect the financial balance of national systems.

Posted Workers

Posted workers are employees temporarily sent to another Member State to provide a service. EU law seeks to balance service freedom with worker protection by guaranteeing minimum working conditions in the host State. Collective action that goes beyond what EU legislation allows may restrict the free movement of services and must be proportionate. Reforms to the Posted Workers Directive have strengthened worker protection while maintaining the core principle of service mobility.

Mutual Recognition and Preventing New Obstacles

Mutual Recognition (Cassis de Dijon)

Products lawfully marketed in one Member State must be accepted in others when no EU harmonization exists. This principle removes the need for products to comply with multiple national regulations, reducing costs and facilitating trade. Refusal is allowed only for legitimate public interests such as public health, consumer protection, environmental protection, road safety, fair trading, and fiscal supervision, and any refusal must pass a strict proportionality test, demonstrating suitability, necessity, and balance between restriction and benefit. The burden of proof lies on the refusing State, which must show that no less restrictive measure could achieve the objective. The principle was later reinforced by Regulation 2019/515, which established clear procedures for assessing goods, set deadlines, required national authorities to justify refusals, and strengthened cooperation through SOLVIT. The principle has been extended beyond goods to services, establishment, and professional qualifications, ensuring broader market access.

Prevention of New Obstacles (Directive 2015/1535)

This directive establishes an ex ante control system for national technical regulations. Member States must notify draft rules to the Commission and other Member States and respect a standstill period before adoption, lasting three months as a general rule, extended to six months if objections arise, and up to 12–18 months if EU harmonization is in progress. The notification system allows early evaluation of potential market barriers, promotes amendments or harmonization, and prevents fragmentation. Non-notified rules are unenforceable against individuals, as confirmed in the Cia Security case, with Lemmens clarifying that only the technical parts of such rules are affected. The system ensures transparency and coherence in national regulation, complementing other positive integration tools.

Legal Harmonization (Positive Integration)

Legal Harmonisation (Core Positive Integration)

Legal harmonization is essential where mutual recognition cannot remove legitimate barriers or practical obstacles. It aligns or replaces national rules, particularly when Member States apply different standards for health, safety, or environmental protection that block trade. After the Single European Act, Article 114 TFEU enabled faster harmonization through the ordinary legislative procedure and qualified majority voting, allowing the adoption of regulations, directives, and decisions. Harmonization can be:

Full: Setting uniform EU rules with no deviation allowed.
Minimum: Setting binding floors while allowing stricter national rules.
New Approach: Where essential requirements are set at the EU level and technical details are defined through standards.

Some areas, such as taxation, social security, and free movement of persons, still require unanimity, making integration slower in these sectors.

Types of Harmonization

Exhaustive harmonization ensures free movement and exclusivity, with EU rules fully replacing national law. Optional harmonization allows operators to choose the EU regime, granting free movement, while national regimes remain available. Minimum harmonization sets binding EU standards but permits stricter national measures, so free movement is not automatically guaranteed. Reflective harmonization relies on soft coordination, sharing best practices and reporting obligations without binding effects, leaving Member States autonomous.

Solving De Facto Obstacles: Standardisation, Accreditation, Certification

Many barriers are technical rather than legal, such as differing product specifications, voltages, plugs, or certification procedures. EU standardization through CEN, CENELEC, and ETSI replaces national standards and ensures interoperability across Member States. Compliance with European standards is voluntary but provides a presumption of conformity, facilitating market access, reducing checks, and enhancing trust. Accreditation guarantees the competence of conformity assessment bodies, while certification confirms that products meet EU standards, building cross-border confidence.

SOLVIT and Competition Law

SOLVIT is a free, fast, informal network that resolves problems caused by national authorities misapplying Single Market rules. It handles cross-border issues such as professional qualifications, social security rights, market access, residence permits, and vehicle registration. The mechanism typically resolves cases within ten weeks and complements formal legal procedures.

Competition Law (Necessary Complement): Competition law prevents private actors from creating barriers that undermine market integration. It prohibits price-fixing, market division, abuse of dominance, anti-competitive mergers, and cartels. By ensuring markets remain open and competitive, competition law allows the benefits of integration, such as lower prices and innovation, to materialize, supporting the effectiveness of both negative and positive integration measures.

Fiscal Obstacles to Trade

1. Customs Duties and Charges Having Equivalent Effect (CEEs)

Prohibited between Member States by Articles 28–30 TFEU. CEEs include any economic charge imposed solely on imported goods, even if it is not collected at the border. Internal taxation applies equally to both domestic and imported goods, whereas CEEs target only imports, distorting competition. When domestic production is minimal or nonexistent, like in the Coffruta case, it is considered internal taxation, not a CEE, because the tax applied to all products. When domestic producers receive reimbursements: if both domestic and imported goods pay a tax initially, but domestic producers are later reimbursed while importers are not, the measure is a CEE. A lawful exception exists for payments made for specific services rendered by the state. The CJEU allows such payments only if:

The service is optional for the importer.
It provides a specific advantage.
The amount is proportionate to the cost.

Otherwise, the charge is classified as a CEE.

Discriminatory Internal Taxation (Article 110 TFEU)

Internal taxation is legal under EU law but becomes unlawful when it discriminates against imported products. Article 110 TFEU prohibits discriminatory taxation that protects domestic goods. The provision differentiates between two situations:

Identical or Quasi-Identical Products (Paragraph 1): Any higher tax on imported goods constitutes automatic discrimination, as illustrated by Italian sugar taxed at 10% versus French sugar at 5%.
Products in Competition (Paragraph 2): Discrimination occurs only if the higher tax on imports produces a protectionist effect, influencing consumer choice—demonstrated in the Cofrutta case, where imported bananas taxed at 50% led consumers to switch to domestic pears taxed at 0%.

Conversely, small differences in taxation, such as Belgium taxing imported wine at 25% and domestic beer at 19%, are not illegal if they do not significantly affect consumption patterns. Article 110 covers both direct (product) and indirect (raw materials) taxation, but discrimination is assessed based on its effect on the final product’s price and competitiveness. The burden of proof lies with the party alleging discrimination (usually the European Commission or a company). Therefore, EU law allows Member States fiscal sovereignty but requires internal taxes to be objective and non-discriminatory.

Monopolies and EU Law (Articles 34 & 37 TFEU)

Articles 34 and 37 TFEU regulate monopolies of a commercial character, which are exclusive rights granted by a Member State to commercialize goods. These monopolies can cover imports, exports, wholesale, or retail sales, but the rules differ depending on the type of activity:

Imports and Exports: Any monopoly covering imports or exports is generally presumed discriminatory. This is because such monopolies directly affect cross-border trade, and the EU assumes they disadvantage foreign operators unless proven otherwise. For instance, if a state grants exclusive import rights to a domestic company, this is usually treated as incompatible with Articles 34 and 37 unless justified.
Retail Sales: Monopolies at the retail level are not automatically illegal. The presumption of discrimination does not apply here, and the burden of proof lies on the complainant. This reflects the principle that domestic retail arrangements may affect competition but do not directly impose cross-border restrictions unless they disadvantage imported products in practice.

Monopolies are not prohibited outright but must comply with EU law by ensuring non-discrimination, both de jure (formally by law) and de facto (in practice). Any measures linked to monopolies, such as licensing fees, administrative rules, or restrictive conditions, are evaluated to ensure they do not disproportionately hinder foreign operators. Case Example – Frazen (Sweden): Sweden’s retail alcohol monopoly complied with Article 37 because it treated domestic and foreign products equally at the retail level. However, licensing fees for wholesalers disproportionately burdened foreign operators, even if formally applied to all, violating Article 34. Public health was invoked as justification, but the proportionality test failed: the measure was adequate but not indispensable, and the trade restriction outweighed the public interest.

Proportionality Test

Any exception under public interest must meet three criteria:

Adequacy: The measure effectively achieves the intended goal.
Indispensability: No less restrictive alternative exists.
Balancing: The benefits to public interest must outweigh the restriction on trade.

Technical Obstacles: Quantitative Restrictions and Measures Having Equivalent Effect

Articles 34–36 TFEU govern non-fiscal obstacles to trade, such as quantitative restrictions (QRs) and measures having equivalent effect (MEEs).

QRs: Involve total or partial bans on imports, e.g., France banning German cars.
MEEs: Are broader and include any state measure—direct or indirect, legislative, administrative, or even omissions—that may restrict trade. MEEs can be discriminatory, treating imported products differently, or non-discriminatory, applying equally but still hindering market access.

Key Case Law on MEEs

The Dassonville case established that any state measure capable of hindering trade qualifies as an MEE, even non-binding or informal guidance. Discriminatory measures are automatically prohibited unless justified under Article 36 (public morality, policy, security, protection of health/life, national treasures, industrial or commercial property), while non-discriminatory measures must satisfy proportionality tests.
The Cassis de Dijon case expanded the scope of MEEs by condemning non-discriminatory measures that effectively hinder market access. This case introduced the principle of mutual recognition: if a product is legally sold in one Member State, it should generally be allowed in others. It also broadened the public interest exceptions beyond Article 36, allowing considerations like consumer protection, environmental protection, or public safety. After Cassis, the presumption is that a measure restricting trade is incompatible with the Single Market unless justified and proportionate.
The Keck case further refined non-discriminatory measures, distinguishing between product characteristics and selling arrangements. Product characteristics (e.g., composition, labeling, packaging) remain subject to MEE rules and proportionality, while selling arrangements (e.g., hours of sale, location) are generally legal unless they create de facto discrimination. De jure discrimination occurs when rules formally treat domestic and imported products differently; de facto discrimination occurs when neutral rules disproportionately disadvantage imports.
The Commission v. Italy (towing trailers) case clarified that measures affecting market access or causing de facto discrimination fall under MEE scrutiny. These measures must meet a three-step proportionality test: adequacy, indispensability, and balancing the public interest against trade restriction.

Levels of Economic Integration

The evolution of integration moves through distinct stages:

(FTA) Free Trade Area: The most basic form, covering only trade in goods among member countries. Goods originating from member states can move freely without tariffs or quotas. However, each member maintains autonomy in setting trade policies toward non-members.
(CU) Customs Union: Building on an FTA, a customs union also harmonizes external trade policies. Members apply a Common External Tariff (CET) and adopt a Common Commercial Policy (CCP) toward third countries, meaning they negotiate and implement trade agreements collectively.
(CM) Common Market: Incorporates the internal freedoms of a customs union and adds free movement of workers, services, capital, and establishment. Citizens and companies of member states can work, invest, or operate businesses across borders, and capital can move freely.
(EU) Economic Union: This model combines a common market with a common economic policy, including fiscal, monetary, employment, and regional policies. It may involve a single currency, banking coordination, and centralized economic governance. The economic union integrates internal markets and coordinates policy-making, sometimes surpassing member state autonomy.

Historical Evolution of European Economic Integration

Europe’s integration began with ambitious treaty goals aimed at creating a supranational common market. The Economic European Treaty (1977) aimed for a common market within 12 years. The Single European Act (1987) introduced the Single/Internal Market, eliminating internal borders and allowing free movement of goods, persons, and capital. The single market differs from the common market in that it removes internal border controls, while the common market primarily guarantees freedoms but retains some internal supervision. The Maastricht Treaty (1992) sought to establish an economic and monetary union, introducing a single currency and coordinating fiscal and economic policies. Later treaties—Amsterdam, Nice, and Lisbon—did not substantially advance economic integration beyond Maastricht. Additional measures outside treaty revisions, such as post-2011 financial crisis agreements, aimed to strengthen integration, particularly regarding fiscal coordination and banking stability.

Goals Versus Achievements

Customs Union: Achieved by July 1968, ahead of initial targets.
Common Market: Delayed by political crises and vetoes; fully realized only in the 1990s. The Schengen Agreement (1995–1996) facilitated free movement of people.
Monetary Union: Introduced in 1999 for 11 states, creating the euro; however, financial crises exposed weaknesses, highlighting the need for stronger fiscal and social alignment.