By Andreas Georgiou (Durham Law School, Durham University)
On 23 February 2016, the Grand Chamber of the CJEU delivered its judgment in Case C-179/14 Commission v Hungary. The Court upheld the Commission’s action for failure to fulfil obligations on the issue of Hungary’s legislative framework for the issuance of tax advantaged recreational vouchers. This comment will focus on the second part of the judgment concerned with public monopolies, social policy and free movement.
The Court in this case was asked to determine whether the Hungarian legislative framework governing the issuance of the Széchenyi leisure card (SZÉP card) and the Erzsébet system of vouchers violated European law. Both the SZÉP card as well as the Erzsébet system entailed the conferral of a tax advantage to employees by means of vouchers exchangeable for leisure, meals, accommodation and other services.
With regard to the SZÉP card, the Court investigated four complaints:
- branches of foreign companies could not obtain the status of ‘service provider’ required for issuing the SZÉP card;
- Hungary failed to recognise the activity of groups whose parent company was not formed in accordance with Hungarian law, did not have its registered office in Hungary and did not take a legal form prescribed by Hungarian law;
- strict criteria indirectly restricted authorisation for issuance of the SZÉP card to three Hungarian banks;
- issuance was made conditional upon permanent establishment in Hungary.
In the second part of the judgment, the key issue was that the Hungarian National Foundation for Recreation (HNFR) had the exclusive right of issuing and promoting Erzsébet vouchers. The Erzsébet system was connected to funding social policy measures pursued by the HNRF, including direct assistance to socially disadvantaged persons.
The SZÉP card
The Court dealt with the SZÉP card and the Erzsébet system separately. The former was found to be contrary to the provisions of Directive 2006/123 on the following grounds:
- On the issue of excluding branches of foreign companies, the Court reaffirmed its position in Rina, that a breach of Article 14 of Directive 2006/123, which prohibits Member States from making a service activity subject to the requirements listed in points 1-8 therein, could not be justified;[i]
- Hungary’s failure to recognise the activity of foreign groups was contrary to Article 13(3)(a) of the Directive.[ii] This provision prohibits directly or indirectly discriminatory requirements, including the obligation that a provider takes a ‘specific legal form’;[iii]
- On the third issue, the Court noted that even if not directly discriminatory, the ‘combined effect’ of the SZÉP conditions was overly restrictive and disproportionate. Therefore, Hungary’s legislative framework violated Articles 15(1), (2)(d) and (3) of Directive 2006/123;[iv]
- On the requirement of permanent establishment, the Court disregarded the justifications put forward by Hungary and found a breach of Article 16(2)(a) of the Directive. It was made clear that, in any event, these requirements would not satisfy the proportionality test in Article 16(1) of the Directive.[v]
The Erzsébet system
More important for the purposes of this comment is the Court’s approach in relation to the Erzsébet system and its compatibility with Article 49 TFEU on the freedom of establishment and Article 56 TFEU on the free movement of services. The Court first addressed whether the activity in question fell under the scope of EU law, noting that ‘economic activity’ and ‘service’ can be considered as equivalent in the context of this case.[vi] The Court held that the ‘decisive factor’ for determining the reach of both Article 49 and 56 is that an activity is not ‘provided for nothing’, and dismissed Hungary’s claim that non-profit making activities fall outside the scope of free movement per se.[vii] In this particular case, the issuance of vouchers gave rise to ‘payment of consideration to the HNRF’, which represents ‘remuneration’ for recipients of the vouchers.[viii]
The Court then turned to Hungary’s claim that the Erzsébet system pursued a public interest objective and should, thus, be regarded as a non-economic activity. Indirectly, questions concerning the degree of freedom that Member States are permitted in organising their social policy also resurfaced with this contention, which was previously explored in “social solidarity” cases.[ix] Addressing Hungary’s claim directly, in Commission v Hungary the CJEU deemed the public policy objective insufficient to ‘alter’ or ‘deprive’ the activity of its ‘economic character’.[x] As such, the national legislation in question was held to constitute a restriction both of the freedom of establishment and the freedom to provide services contrary to Articles 49 and 56.[xi]
If such a restriction was to be found a non-discriminatory breach of Articles 49 and 56, it could be justified by a category of case-based exceptions referred to as ‘overriding reasons in the public interest’. In Commission v Hungary, the Court observed that the fact that the Erzsébet system helps finance social action does not in itself amount to an ‘overriding reason in the public interest’ and could thus not be held to be a justified breach of Articles 49 and 56.[xii] Importantly, the Court drew a distinction with gambling cases such as Läärä and Liga Portuguesa, where public monopolies financing social action had been justified. According to the Court gambling cases involved a limited number of overriding reasons in the public interest including consumer protection, the prevention of fraud and preserving public order, and were examined ‘in the light of’ certain moral, religious and cultural factors’ [emphasis added] associated with betting.[xiii]
Generally, proportionality is the last step in justifying restrictions of free movement. If a specific justification is accepted, this test seeks to determine if the restriction in question is suitable and necessary to the aims sought by the national measure. In this case, the Court indicated that Hungary failed to demonstrate how the restriction complies with the principle of proportionality.[xiv]
The concurrent application of fundamental freedoms is not problematic in this case. While some inconsistency with the case law on the free movement of capital can be observed, it is justifiable and practicable to apply object-oriented freedoms such as establishment and services concurrently in cases such as Commission v Hungary.
However, Commission v Hungary suggests that free movement is perhaps too blunt of an instrument to deal with delicate political issues. State monopolies, by their very nature, have the potential to violate free movement, insofar as foreign providers are prevented from accessing the domestic market. Therefore, as a rule, the Court evaluates public monopolies at the justification/proportionality stage. In other words, public monopolies fall within the scope of EU law irrespective of a potential absence of Union legislation on the substantive issue in question, as was the case with social policy in Commission v Hungary.[xv] This methodology is inherently circular: once a national measure falls under the scope of European law, the Court is obliged to take into account the fundamental status of free movement provisions and limit the scope of any exceptions to this rule.
Even more paradoxical is the distinction between economic and non-economic activity in the context of solidarity raised in Commission v Hungary. It should be noted that solidarity is an area where the Court has demonstrated caution in the past.[xvi] While such caution is in some cases evident at the justification/proportionality stage, the Court primarily deals with this issue at the definitional stage. If strong solidarity elements undermine all economic considerations, the activity in question is deemed non-economic and beyond the scope of free movement.[xvii] Nevertheless, as Commission v Hungary indicates, examining solidarity in the light of free movement is akin to walking into an elephant trap. It is perhaps impossible for any court to draw a line between activities provided for ‘nothing’, where market forces are excluded altogether, and activities which are provided for almost ‘nothing’, which fall within the scope of ‘economic activity’ and EU law. However ‘practical’ an approach,[xviii] addressing the issue of solidarity at the definitional stage reveals the Court’s own limitations.
Taking this argument a step further, a point often overlooked is that solidarity and social action can be necessary features of a Member State’s political economy. The Treaties do not preclude national diversity in this respect: the very existence of exceptions to free movement provisions highlights that a degree of healthy diversity is both desirable and necessary. Therefore, the distinction between economic and non-economic activity effectively requires that a judicial body strikes the right balance between the liberalisation of economic movements and preserving such diversity. This is a task that has proven challenging for the Court, with Volkswagen standing out as a notable example. Albeit in the context of the capital freedom, in Volkswagen[xix] the Court initially made a choice for liberalisation over regional business practices, only to retreat in Volkswagen II[xx] and accept partial fulfilment of the conditions of the first judgment. These judgments serve as evidence of the Court’s trepidation when faced with cases requiring what is essentially economic assessment.
On a side note, the Court in Commission v Hungary cites Deliège in support of the proposition that ‘services’ must not be defined restrictively. It must be remembered that Deliège sets out a ‘special purpose’ test for identifying non-economic activities. It is not inconceivable, at least in principle, that social action could serve a ‘special purpose’ irrespective of the activity’s economic character. Ultimately, the reference to Deliège serves as a reminder that the definitional scope of free movement suffers from a degree of obscurity and irregularity.[xxi]
Returning to the issue of public monopolies, this has troubled the CJEU for years. In the gambling line of cases the Court has, on occasion, endorsed a highly deferential “soft” proportionality measure where controversial morality issues were raised by the Member States.[xxii] Commission v Hungary stands as evidence of the exceptional – and exceptionally ambivalent – nature of gambling cases. In relation to this, the Court draws emphasis on the absence of ‘comparable objectives’ in its judgment.[xxiii] Leaving aside the political pressures the Court faced in gambling cases, can solidarity ever be considered ‘comparable’? Insofar as a deferential proportionality review transforms morality into a distinct justification for public monopolies, it is difficult to see why other considerations such as social policy are subordinated.
Admittedly, the outcome of Commission v Hungary is not controversial: Hungary failed to illustrate a clear connection between the Erzsébet system and social policy, and the justifications put forward were unconvincing and ill-elaborated. As AG Bot noted in his Opinion, Hungary adopted a self-contradictory approach by claiming both that the Erzsébet system constitutes a non-economic activity and that social policy reasons justify a potential breach of free movement provisions.[xxiv] Nevertheless, owing to the Court’s own limitations as a judicial body, it is to be hoped that the Court demonstrates caution in construing the definitional scope of Articles 49 and 56 in cases where a clearer link between social policy and the activity in question is established. It further remains to be seen if public monopolies set up as part of a Member State’s social policy system can ever be justified and compatible with free movement.
[i] paras 44-45.
[ii] paras 60-68.
[iii] Article 15(2)(b).
[iv] para 92.
[v] para 116.
[vi] paras 148-154.
[vii] para 154.
[viii] para 156.
[ix] See generally, Tamara Hervey, ‘“Social Solidarity”: A Buttress Against Internal Market Law?’ in Jo Shaw (ed.) Social Law and Policy in an Evolving EU (OUP, 2000) 31.
[x] para 157.
[xi] para 164.
[xii] para 167.
[xiii] para 168-169.
[xiv] para 172.
[xv] Subject only to manifest error control by Commission.
[xvi] See eg, Case C-157/99 Smits and Peerbooms  ECR I-5473. For solidarity in the context of competition rules see, Case C-67/96 Albany International BV v Stichting Bedrijfspensioenfonds Textielindustrie  ECR I-5751.
[xvii] See, Vassilis Hatzopoulos, Regulating Services in the European Union (OUP, 2012) Chapter 2 and 159-161.
[xviii] ibid 161.
[xxi] See generally, Andrea Biondi ‘Recurring Cycles in the Internal Market: some reflections on the law of free movement of services’ in A Arnull, P Eeckhout & T Tridimas (eds.), Continuity and Change in EU Law: Essays in Honour of Sir F.Jacobs (OUP, 2007).
[xxii] See generally, Norbert Reich, ‘How Proportionate is the Proportionality Principle’ (2011) http://www.jus.uio.no/ifp/forskning/prosjekter/markedsstaten/arrangementer/2011/free-movement-oslo/speakers-papers/norbert-reich.pdf
[xxiii] para 169.
[xxiv] Opinion of AG Bot, para 209.