This posting reviews the judgment of the Court of Justice of the European Union in two joined cases: Eric Libert, et al v Gouvernement Flamand, (C‑197/11) and All Projects & Developments NV and Others v Vlaamse Regering, (C‑203/11).
The judgment which was rendered on 8 May 2013 is important because it addresses several issues concerning public service obligations, their relationship with the fundamental freedoms protected by EU law and the discretion of Member States to define and fund services of general economic interest.
The main points of the judgment are as follows:
First, any limitation or obstacle on inward or outward movement or establishment of individuals or undertakings is very likely to constitute a restriction prohibited by the Treaty.
Second, certain restrictions can be exempted on grounds of public policy or overriding reasons of public interest.
Third, restrictions intended to support social housing can be regarded as overriding reasons of public interest.
Fourth, exemption is available only to measures which are necessary and appropriate and where any authorisation procedure is based on objective and transparent factors, known in advance.
Fifth, requirements for the provision of social service can be considered as “public service obligations”.
Sixth, social housing may be supported both under restrictions which may be justified on the basis of overriding reasons of public interest [internal market rules] and under the exemption for public service obligations [competition rules].
Seventh, irrespective of their objective, tax measures for incentivising the provision of social housing are likely to constitute state aid.
Eighth, tax measures that do not satisfy the Altmark criteria will fall within the scope of Article 107(1) even if they are intended to compensate for an obligation to provide social housing.
The proceedings concerned restrictions on the transfer of property located in certain communes selected by the Flemish Government (the target communes) in Belgium. Property could be transferred only to persons who had, in the opinion of a provincial assessment committee, a “sufficient connection” with the communes in question.
In addition, there was a question on the compatibility of a social obligation imposed on developers. They had to use part of their building projects for the development of social housing units in return for which they benefited from tax incentives and subsidies.
Applicability of EU law
The Flemish Government claimed that those provisions concerned only a purely internal situation which was confined within a single Member State so that EU law was not applicable. The Court of Justice of the European Union disagreed. Although EU law did not apply to activities or situations confined in all relevant respects within a single Member State, it was not inconceivable in this case that individuals or undertakings established in other Member States would be interested in purchasing immovable property located in the target communes.
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Restriction of exit as well as entry
The Court, then, found that the Flemish law restricted exit from Belgium. It reiterated well-known case law that Articles 21, 45 & 49 TFEU “prohibit national measures which preclude or deter a national of a Member State from leaving his country of origin in order to exercise his right to freedom of movement within the European Union.” [paragraph 38] The Flemish law prohibited both other EU citizens from purchasing property in those communes and also deterred those who already owned property in the communes from leaving them to reside in another Member State or pursue a professional activity elsewhere because they would lose their sufficient connection with those communes.
Restriction of provision of services
Second, the Court also found that the Flemish law infringed Article 56 TFEU on the freedom to provide services. It “hindered the business activities of undertakings active in the property sector, as regards both undertakings established in Belgium which offer their services to, inter alia, non-residents and undertakings established in other Member States.” [paragraph 42]
Restriction of movement of capital
Third, the Flemish law also infringed Article 63(1) TFEU, as “restrictions on the movement of capital, include those which are likely to discourage residents of one Member State from making investments in immovable property in other Member States. That is the case, in particular, of national measures which make investments in immovable property conditional upon a prior authorisation procedure and thus restrict, by their very purpose, the free movement of capital.” [paragraphs 45-46] The Court clarified that “the restriction of the freedom of establishment and the freedom to provide services is an inevitable consequence of the restriction of the free movement of capital”. [paragraph 62]
The Court of Justice then went on to examine whether the measures in question could be exempted. National measures which are liable to hinder or make less attractive the exercise of fundamental freedoms may nevertheless be allowed provided that they pursue an objective in the public interest, are appropriate for attaining that objective and do not go beyond what is necessary to attain that objective.
The Court defined the objective of the Flemish law in question “to guarantee sufficient housing for the low-income or otherwise disadvantaged sections of the local population.” [paragraph 51] It acknowledged that “requirements relating to social housing policy in a Member State can constitute overriding reasons in the public interest and therefore justify restrictions such as those established by the Flemish Decree.” [paragraph 52]
However, it found that the requirement for “sufficient connection” had no direct link to the objective of making housing available to poor people. It applied to all persons irrespective of their income. It went “beyond what is necessary to attain the objective pursued.” [paragraph 55]
It also noted that “less restrictive measures other than those set out in the Flemish Decree could meet the objective pursued without necessarily resulting in a de facto prohibition on purchasing or leasing by any prospective buyer or tenant who does not fulfil the aforementioned conditions. Provision could, for example, be made for subsidies for purchase or other subsidy mechanisms specifically designed to assist less affluent persons, in particular those who are able to prove that they have a low income, to purchase or rent immovable property in the target communes.” [paragraph 56]
The Court also considered the implications of the fact that prior authorisation was necessary. A derogation from a fundamental freedom can be justified only if it is “based on objective and non‑discriminatory criteria known in advance, in such a way as adequately to circumscribe the exercise of the national authorities’ discretion.” [paragraph 58]. “Consequently, a prior administrative authorisation procedure … cannot be considered to be based on conditions capable of adequately circumscribing the exercise of the provincial assessment committee’s discretion and such a procedure cannot therefore justify a derogation from a fundamental freedom guaranteed by EU law.” [paragraph 60]
Public service obligations
Once it established that the Flemish law constitute a restriction and that it could not benefit from possible exemptions, the Court turned its attention to the issue of the “social obligation” that was imposed on economic operators when a building or land subdivision authorisation was granted. The Court concluded that “the obligation imposed on those economic operators to discharge the social obligation provided for by that decree, in so far as its purpose is to guarantee sufficient housing for the low-income or otherwise disadvantaged sections of the local population, may be justified by requirements relating to social housing policy in a Member State as an overriding reason in the public interest.” [paragraphs 66-67]
It was left for the referring national court to assess whether that obligation satisfied the principle of proportionality; i.e. whether it was necessary and appropriate to attain the objective pursued. [paragraph 68]. This is quite important. Although Member States have discretion to define SGEIs, they may not establish procedures which impose restrictions contrary to fundamental freedoms. If such restrictions are unavoidable, they must be necessary and appropriate.
However, this finding is also rather puzzling. With respect to the requirement for “sufficient connection” the Court was certain that it was neither necessary, not appropriate. In the case of the “social obligation” it is clear that it has a direct link with the policy objective of increasing the supply of social housing. Therefore, it was necessary. It is not clear why the Court left the assessment to the referring national court. Perhaps it could not be certain about its appropriateness and whether subsidies to developers could have been less distortionary than the imposition of an outright obligation to build social housing.
The Court also clarified that “on account in particular of the wide discretion enjoyed by the Member States, it is not inconceivable that the social obligation may be regarded as a ‘public service’ [in the meaning of Article 106(2) TFEU]. In that context, the fact … that the social obligation does not directly benefit individuals – the applicants for social housing – but rather the social housing companies, is irrelevant with regard to the classification of the service in question.” [paragraph 88]
Existence of state aid
The Court found that there was state aid in the compensation for the social obligation. The compensation was in the form of (i) a reduced rate of VAT on the sale of housing and reduced stamp duty for the purchase of building land; (ii) a purchase guarantee in respect of the housing developed; and (iii) infrastructure subsidies. The fact that the measures had a limited regional scope and applied to certain communes only was not sufficient to eliminate any effect on trade. Undertakings from other Member States could be discouraged from offering their services.
It was then left to the national court to determine whether the aid satisfied the criteria laid down in the relevant rules for the compatibility of state aid for SGEI.
In what appears to be the first reference in an EU judgment, the Court also mentioned de minimis aid granted on the basis of Regulation 1998/2006] for not being able to affect trade but left it to the national court to determine whether the Regulation applied in this case.
The Court also considered whether the compensation could satisfy the Altmark criteria so that it could not be classified as state aid. It found that it was not possible to identify, in a sufficiently objective and transparent manner, the parameters on the basis of which such compensation was calculated and left that assessment to the referring national court.
Restrictions of any kind are contrary to the freedoms protected by the Treaty. However, in certain situations they may be exempted if they are necessary for the achievement of public policy objectives and if they are proportional and non-discriminatory.
These findings are not novel. What is novel in this case is that public measures for the support of SGEIs can be exempted either on the basis of internal market rules or competition rules. National courts have discretion to review the applicability of the exemptions to internal market rules and whether such measures contain state aid. National courts also have discretion to determine whether non-notified aid indeed satisfies the criteria for compatibility as laid down in Commission rules [in this case the Commission SGEI Decision].
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