Brexit and rights of third-country nationals under EU internal market freedoms

Richard Steppe and Wouter Devroe

LERU Brexit Seminar

LERU Brexit Seminar



After a Brexit, can companies established in Germany provide services to a recipient in France through a branch in the United Kingdom? This query, which has generally been addressed several times by the Court of Justice of the EU (the “CJEU” or “Court”), is topical ever since the referendum in the United Kingdom, yet transcends the Brexit phenomenon as it catalyses questions on the relationship between the internal market and (legal) persons from third countries. This blog post aims to provide a brief introduction to the curious status of third-country individuals and undertakings, in light of the freedom of establishment, the free provision of services, and the free movement of capital.

European Union 2016

Freedom of establishment

Following Article 49 TFEU, the ‘freedom of establishment’ implies that nationals of a Member State can establish themselves in a different Member State to pursue activities as self-employed persons as well as to set up agencies, branches, or subsidiaries.

Third-country nationals established outside the EU cannot rely on the freedom of establishment (e.g., Lasertec; Felixstowe). This freedom does not either extend to situations where Member State nationals, or companies formed in accordance with the laws of a Member State, establish themselves in third countries, or hold participations in companies established in third countries (e.g., Winfried Holböck). According to the CJEU, the Treaty provisions on the freedom of establishment can only be relied on by an EU national who seeks to establish himself in the territory of another Member State or “who finds himself in a situation which is connected with any of the situations contemplated by Community law”. Similarly, Recital 36 of the Services Directive explicitly submits that the concept of ‘service provider’, in the context of the freedom of establishment, “should not cover the case of branches in a Member State of companies from third countries”. Recital 23 of ‘CRD IV’ likewise holds that branches of credit institutions, with head offices outside the EU, should not enjoy the freedom of establishment (nor the freedom to provide services) in Member States other than those in which they are established. However, the freedom does apply to:

  • companies established in the EU that are mainly active in third countries, and thus mainly serve customers outside the EU (e.g., EC v UK); and
  • third-country nationals who simultaneously hold the nationality of a Member State (Micheletti).

Third-country nationals wishing to enter the EU internal market may also opt for the formation of a company in accordance with the laws of a Member State. Member States can restrict this incorporation, which third-country nationals cannot challenge on the basis of freedom of establishment. However, once incorporated, companies can freely provide their services and establish branches in other Member States (e.g., with less stringent company legislation – see Centros).

Freedom to provide services

  • 1. An ‘active’ and ‘passive’ freedom

The TFEU prohibits restrictions on the freedom of service providers, established in a Member State, to provide services to persons of another Member State. Hence, Article 56(1) TFEU itself already restricts the freedom to persons with Member State ‘nationality’. The freedom to provide services can be categorised into an ‘active’ and a ‘passive’ freedom, depending on whether a border is crossed by the service provider or the recipient. Furthermore, the service itself may likewise cross borders (so-called ‘services by correspondence’).

  1. Active freedom to provide services

The active freedom to provide services prohibits restrictions on providers upon crossing borders to provide their services. The Court stressed that the free provision of services does not apply to providers from third countries, even when they are established and provide services in the EU (see also Article 4(2) of the Services Directive). Considering that this freedom is only to be guaranteed for Member State nationals (see Opinion 1/94), it cannot be invoked by a company established in a third country. This principle is, among others, tempered where companies are established in a Member State, yet are aided by a third-country national to carry out their activities in another Member State. In such events, companies may invoke the freedom against national restrictions on the mentioned activities (see Sebat Ince).

  1. Passive freedom to provide services

The passive freedom to provide services implies that certain service recipients – i.e., Member State nationals – may not be hindered when crossing borders. The Service Directive’s definition of ‘recipient’ in its Article 4(3) sets a clear nationality criterion which, in principle, excludes third-country nationals. Nevertheless, in Svensson and Gustavsson, the freedom was invoked by third-country recipients. In this case, two Swedish citizens (prior to the country’s accession) attacked the restrictive nature of Luxembourgish legislation. While a lack of locus standi was argued by both the Advocate General and the government of Luxembourg, the Court did not delve into that issue and, instead, found an infringement of the freedom to provide services. Following Thorson, the ratio behind this decision may have been that,  irrespective of the nationality of those who invoked it, the freedom’s goal was affected.

  • 2. Services delivered in a third country or to third-country nationals in the EU

In the abovementioned situations, the freedom is invoked by the recipient; conversely, the recipient’s nationality is irrelevant when the service provider relies on the freedom (see also Oliver). According to the Court, the freedom seeks to eliminate restrictions on the provision of services by persons not established in the Member State where the service is provided. Consequently, the freedom applies whenever the provider offers services in a Member State other than the one in which he is established, “wherever the recipients of those services may be established” (e.g., EC v France). Finally, the free provision of services does not encompass the situation in which services are provided in a third country (e.g., Scorpio). To benefit from the freedom, the service is to be provided within the EU, with the Court excluding any provision of services ‘by correspondence’ outside Member States.

  • 3. Derived rights

As the freedom to provide services only applies to EU citizens, third-country nationals cannot directly rely on it – even when legally residing in a Member State. Nonetheless, they may obtain derived rights. In Carpenter, for instance, Ms Carpenter – a national of the Philippines – was to be deported from the United Kingdom, having overstayed her visitor permit. In the event of a deportation, Mr Carpenter – her husband – would likewise need to emigrate, or face a separated family. Mr Carpenter provided services in other Member States on a regular basis. Therefore, by reference to the fundamental right to respect for family life, the CJEU concluded that denying residence rights to Ms Carpenter restricts Mr Carpenter’s freedom to provide services.

Free movement of capital

  1. Principle: applicability to third-country nationals

The free movement of capital implies, following Article 63(1) TFEU, a prohibition of all restrictions on capital movements between Member States, yet also between Member States and third countries. Therefore, this freedom can be invoked by (legal) persons from third countries (e.g., Skatteverket v A). In addition, a (legal) person resident in the EU can invoke this freedom against national restrictions on capital transactions to or from third countries (e.g., Itelcar on inbound capital movements and Emerging Markets on outbound capital movements). Following Advocate-Generals Kokott and Cruz Villalón, there seems to be no difference between intra-EU and third-country situations as regards the test for restrictive measures.

  1. Exceptions established by the Treaties and EU Court of Justice

The assimilation between intra-EU and third-country capital movement is not complete. First, Articles 64 and 65 TFEU themselves enlist restrictive measures towards third countries that may be taken by the European Parliament, Council, or Commission. In addition, Member States may, following Article 64(1) TFEU, continue the application of certain restrictions on capital movements to and from third countries (e.g., with regard to direct investment) where these measures already existed before December 31, 1993 (or December 31, 1999 for Bulgaria, Estonia, and Hungary).

Furthermore, a series of restrictions result from EU case law. The freedom of capital can be limited by national legislation (1) relating to situations that are not objectively comparable; or if (2) the legislation (absent any relevant harmonisation) can be justified on the basis of overriding reasons in the public interest (e.g., Guy Riskin). In this context, the Court repeatedly concluded that capital movements to and from third countries take place in a different legal context relative to intra-EU movement. National restrictions on capital movements to and from third countries can, in that regard, likewise be justified on the basis of overriding reasons in the public interest that would not be valid for restrictions between Member States (e.g., Orange European Smallcap Fund).

The Court also indicated that certain freedoms may take precedence over the free movement of capital. In particular, the latter freedom should not undo the above-mentioned limits that apply to third-country nationals and situations under the freedom of establishment (e.g., Kronos International). This would be the case when the free movement of capital were to be applied to the national conditions under which third-country nationals gain access to a Member State market (e.g., Itelcar).

To determine which freedom takes precedence, the Court practices the following test: if a national measure concerns only the relations within a group of companies, or only intends to apply to those shareholdings which enable the holder to exert a “definite influence” on a company’s decisions and to determine its activities, the restrictions on the free movement of capital are an unavoidable consequence of restrictions on the freedom of establishment. In such cases, freedom of establishment prevails (e.g., Thin Cap Group Test Claimants; C. Baars), which results in less protection for third-country situations.

This distinction does not offer much certainty for third countries. For example, a national measure which only applies from a certain shareholding threshold onwards (e.g., 10%) is not necessarily exclusively applicable to shareholdings exerting a “definite influence” and, as a result, the non-applicability of the free movement of capital cannot be automatically deduced (e.g., Kronos International). Moreover, if national measures are applicable regardless of the percentage of shares held, the Court may still deem the free movement of capital as non-applicable if it considers that the acquisition of a “definite shareholding” was apparent from the facts (e.g., Belgische Staat v KBC). On the other hand, the Court analysed a later case under the free movement of capital even though the facts disclosed a 100% shareholding, ruling that the extent of the shareholding was irrelevant for the application of the national measure.


It is clear that third-country nationals may also, whether in a direct or indirect manner, derive certain rights from the freedoms described in the Treaties. This is important in the context of a Brexit, as it may ‘soften’ the effects of a ‘hard’ Brexit.

However, it emerges that reality can differ from what the Treaty articles may, seemingly, convey. Freedoms explicitly applicable to third-country nationals (free movement of capital) appear, notably in light of CJEU jurisprudence, not to provide unconditional support. In addition, those freedoms which, following a textual interpretation of the Treaties, appear to be confined to EU nationals (freedom of establishment; free provision of services) turn out to be more inclusive towards third-country situations than considered at first glance (both in terms of primary and derived rights).


Richard Steppe
KU Leuven

Richard Steppe is a Ph.D. Fellow (‘Aspirant’) of the Research Foundation Flanders (FWO) at the KU Leuven, Faculty of Law (Institute for Consumer, Competition & Market). His doctoral research focuses on price discrimination in the EU acquis (covering, among others, competition, intellectual property, and data protection laws).

Wouter Devroe
KU Leuven

Prof Wouter Devroe is Professor of EU Economic law and vice-dean for research at KU Leuven Law. He is professor of Competition Law at Maastricht University, external member of the Belgian Competition Authority and attorney at the Brussels Bar (Allen&Overy).

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