How to differentiate between freedom of establishment and freedom to provide services?

Aleksandra Auleytner Legal advisor Senior Associate in Domański Zakrzewski Palinka

EC concept of freedom of establishment

The freedom of establishment is one of the core elements of the Common Market. Under this concept, natural persons and business entities may: establish agencies and branches; establish and manage enterprises; and hold shares in companies in other Member States. Natural persons may also engage in business activity on their own account.

The freedom of establishment requires, also, that foreign entities are treated equally with domestic entities. All restrictions on the freedom of establishment for entities from one Member State in the territory of another Member State are prohibited, unless they are justified by public order, security, or health concerns. In principle, the freedom of establishment can be breached by any domestic law or regulation which leads to a less favourable treatment of entities from another Member State. The decisions of the European Court of Justice (the "ECJ") show that the requirements of citizenship, differential tax regulations, or domestic preferential treatment are among the provisions violating the freedom of establishment.

In principle, the Polish Act on Business Activity dated November 1999 19 (Journal of Laws No. 101, Item 1178), adjusted Polish law to Community law and established a framework in which businesses from other Member States can benefit from the freedom of establishment before Poland's accession to the EU.

Freedom of establishment versus free movement of

services

After Poland's accession to the EU, it may no longer be necessary to make use of the freedom of establishment to run a business here. Instead it may be enough to just rely on the free movement of services, another core principle of the European Union.

Article 49 of the Treaty establishing the EC prohibits restrictions on the freedom of a business, or individual, from one Member State providing services to nationals in other Member States. For instance, in order to limit costs, an entrepreneur may sometimes be interested in carrying out business in another Member State, without establishing a branch or daughter company in that State. Therefore, two questions arise: how should these two freedoms be differentiated? And at what point does a business offering services have to establish an enterprise in the State in which the service is rendered?

Temporal presence

Article 50 of the Treaty provides that, without prejudice to the right of establishment, the person providing a service may, temporarily, pursue his activity in the State where the service is provided - under the same conditions as are imposed by the State on its own nationals. The word "temporarily" gives the first hint on how to differentiate these two freedoms.

ECJ case law has defined the concept of "establishment" in a very broad way, so that a Community national can participate in the economic life of any Member State. In contrast, where the provider of services moves to another Member State, the Treaty provisions on free movement of services require that he conducts his activity on a temporary basis. As the ECJ stated in case C-55/94, and subsequent cases, the temporary nature of the activities has to be determined in the light, not only of the duration of the provision of the service, but also of its regularity, periodicity or continuity.

The long duration of activities does not necessarily have to imply that the participation of the entrepreneur in the economic life of the host Member State is constant. This has been confirmed by the ECJ in a number of cases, for example in the case C-131/01, concerning the performance of activities by a patent agent. The ECJ held that, although the representative activity of a patent agent before a national patent office includes a number of activities (such as pursuit of patent applications) which continue over a certain time, it could not be assumed that such activity automatically entails a stable and continuous participation in the economic life of the host Member State.

Infrastructure in the host Member State

If follows from ECJ case law, initiated by judgment in case 55/94, that the fact that the provision of services is temporary does not prevent the provider of services from developing some form of infrastructure in the host Member State (including an office, chambers or consulting rooms) - so long as the infrastructure is necessary for the purposes of performing the services in question. For example, in case C-298/99, the ECJ stated that an Italian law that prohibited architects established in other Member States and providing services in Italy, from having permanent infrastructure in Italy was inconsistent with the free movement of services.

ECJ case law shows that an activity may be governed by different provisions of the Treaty, depending on the frequency of participation by the entrepreneur in the economic life of the host Member State. For instance, according to the ECJ judgment in case C-439/99, the organization of trade fairs can be an economic activity falling within the Treaty provisions on the freedom of establishment when that activity is pursued by a national of one Member State in another Member State on a stable and continuous basis from a principal or secondary establishment. On the other hand, it can also be covered by the Treaty provisions on services, when it is carried out by a national of one Member State who moves to another Member State in order to carry on that activity on a temporary basis.

Although ECJ case law has given certain indications as to when the establishment of a business presence in a Member State can be required, these indications do not answer all questions arising in this respect. Therefore, the ECJ points out that it will be always up to the national court to determine, having regard to the duration, regularity, periodicity whether certain activity constitutes establishment or service.