european union single market capital flows

Consumers

Fiscality

Fraud and External Flows

The Free Movement of Capital

Banks and Businesses

Daniela CastroSebastien De Knoop

Nicolas MurciaCameron Trenfield

Lynn Van den Maegdenbergh

Capital flows in the Single Market

Consumers

Fiscality




Introduction

“As the European Union is growing, several objectives must be considered within the single market to reach a true political and economic

community of 27 Member States

as the free movement of capital is one of the fundamental principles of the Union”

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Timeline

1957Treaty of

Rome

Article 67:Full liberalization

of “Capital Movements”

1988Single

European Act

Directives:Effective

integration of “Capital

Movements”

2008-2010Lisbon Program

Objectives:Effective

integration of “Financial Services”

Free Movement of

Capital MANDATORY

1990

1997-1998Madrid

European Council

Capital Markets:Regulatory framework

01/1999

€

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Achieving the Free Circulation of Capital

Full liberalisation of capital movements between Member States (July, 1990)

Abolish restrictions on « Capital movements »

Safeguard Clause

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Establishing a European Financial Area

Progressive liberalisation of capital movements:

Capital operations in financial market securities

Operations involving financial credits

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The Legal Aspects of Intra-EU Investment

Capital movements:

« Acquisition of domestic securities »: Right to acquire stakes and to exercise the resulting voting rights under the same conditions as the domestic government.

Exceptions are based on economic, public security or public health considerations:

Microsoft (USA)

Privatization of a public company:France Telecom (France)

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Financial Assistance for Balances of Payments

The outstanding amount of loans to be granted to Member States under this facility is limited to € 12 000 million

The Commission is empowered, on behalf of the European Community, to contract loans on the capital markets or with financial institutions

Support made available by the European Central Bank (ECB) under the very short-term financing facility program

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Impact on Capital Markets

Harmonisation of capital markets increases transparency and avoid arbitrage disputes.

Business conventions Bonds

Equity markets:Non Par Value shares (NPV) (January 4th, 1999 )

Ratings: Sovereign debt Corporate debt

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Banks and the Free Movement of Capital

Cross-border payments

Cross-border credit transfers

Transfers of funds

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Cross-border Payments

Cross-border credit transfers Cross-border electronic payment transactions Cross-border checks

Regulation (EC) No 2560/2001 (Dec. 31st, 2001)To ensure that charges for those payments are the same as those for payments in euros within a Member State

COM (2005) 603 (December 1st, 2005)To put forward a common legal framework for retail payment services in the internal market

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Cross-border Credit Transfers

Directive 97/5/EC (February 14th, 1997)Strengthened by Regulation 2560/2001 (December 28th, 2001)

To ensure that credit transfers throughout the EU are performed rapidly and inexpensively

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Transfer of Funds

Regulation (EC) No 1781/2006 (November 15th, 2006)

To establish the traceability of transfer of funds which are applicable to all payment service providers

Objective: To further combat terrorist financing

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Businesses and the free movement of Capital

“European Company”

Annual Accounts

Payment and securities systems

Investor Compensation Schemes

Late Payments

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The Formation of a “European Company”

For the completion of an internal market,

“companies […] should be able to plan and carry out the re-organisation of their business on a

Community scale. […] Such re-organisation presupposes that existing companies from

different Member States are given the option of combining their potential by means of mergers.”

(Council Regulation (EC) No 2157/2001 of 8 October 2001)

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The Formation of a“European Company”

Four ways of forming a European Company: Merger Formation of a holding company Formation of a joint subsidiary Conversion of a public limited company previously formed under national law

Minimum Capital: € 120 000

Registered Office: where it has its true centre of operations

Statutes:• Administrative board (single-tier system)• Management board + supervisory board (two-tier system)

Taxation: treated as a multinational

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Allianz (Ger)First European Company

Largest financial services provider: 75% total revenues generated in Europe € 5.5 billion in operating profit (2005) Represented in 29 European Countries

Became a SE on October 13th, 2006 Supervisory Board with 6 members representing staff from all European Countries Simplified operating structures € 2.87 bn (9 first months of 2007) compared to € 2.07 bn (2006)

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New organizational structure

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Annual Accounts

Fourth Council Directive 78/660/EEC (Jul.25th ‘78)To coordinate Member States’ presentation and content of annual accounts and annual reports

Directive 2001/65/EC (Sept. 27th, 2001)Adopting the method of “fair value accounting”

Council Directive 2006/43/EC (May.17th,’06)Harmonize auditing of annual accounts

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Payment and Securities Settlement Systems

Directive 98/26/EC (June 11th, 1998)To reduce the risk associated with participation in payment and securities settlement systems (risk linked to insolvency of a participant).

Transfer orders and netting must be legally enforceable

Transfer orders may not be revoked once they have been entered into the system

The insolvency law applicable is the law of the Member State whose system is involved

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Investor Compensation Schemes

European Parliament and Council Directive 97/9/EC (March 3rd, 1997)

To protect investors following the failure of an investment firm.

Min. level of compensation/investor: € 20 000

Investors must submit their claims within maximum 3 months of the establishment of the eligibility

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Late Payments

Directive 2000/35/EC (June 29th, 2000)To encourage public authorities and companies to comply with payment deadlines in commercial transactions

Payment due within 30 days after the receipt of the invoice or the receipt of the goods/services

Interest on late payment = interest rate applied by the ECB to its main refinancing + 7%

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Consumers and the free movement of Capital

Actions of Injunction

Consumer Credit

Credit Agreements

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Action of Injunction

Directive 98/27/EC (May 19th 1998) To approximate the laws, regulations and administrative provisions of the Member States in order to protect the collective interests of consumers.

Entities:Bodies or organisations which have a legitimate interest in ensuring that the collective interests of consumers are protected

• Independent public bodies• Bodies whose mission is to protect these interests in compliance with criteria laid down in national law.

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Council Directive 87/102/EEC (December 22nd 1986)

European legislation harmonizes the general conditions relating to consumer credit

The EU market in consumer credit is still national

The EP Internal Market and Consumer Protection Committee plan to stimulate the European market while still protecting consumers.

Consumer Credit

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Benefits to Consumers

• All EU consumers will have the right to the same information in their country or other EU Member State

• It will be easier to calculate the total cost of a loan

• It will be standardized EU-wide and will be used as a basis for calculating the annual percentage rate of charge (APR)

• Protect consumers against taking on too much debt. It will be easier to pay off loans early

• A right of cancellation within 14 days will apply EU-wide.

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GDP Facts

European consumers owe more than US$1.18 trillion or nearly 1/10th of EU gross domestic product and this market is growing at 8% a year.

Britain and Ireland are among countries where borrowing is the most popular.

On average, Lithuanians and Slovakians owe less than US$148 while cash-rich spenders in Britain and Ireland owe more than US$4,440.

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Council Directive 93/13/EC

The existing Consumer Credit Directive is based on minimum harmonization.

The future legislation on credit agreements for consumers will harmonize the existing legislation

• ensuring the same level of consumer protection

• facilitating access to transnational credit at European level.

Credit Agreements

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Negotiations within the Council focused on:

Standard information for advertising

Pre-contractual information and contractual information to be included in credit agreements Right of withdrawal

Early repayment of the credit and the creditor’s right to compensation

The calculation of the annual percentage rate of charge (APR).

Credit Agreement

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Purchasing Property in another Member State

The free movement of capital includes the rights of citizens and businesses to

purchase shares in companies established in a different Member State and to

purchase properties

*Exceptions with new member states

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World Property Investment Hot Spot

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Fiscal Aspects of the Free Movement of Capital

Economic Stakeholders

Private Individuals

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Indirect Taxes on the Raising of Capital

Directive 69/335/EEC (Jul. 17TH 1969)

Abolishes stamp duty on securities. Transactions subject to capital duty are only taxable in the Member State in which a company’s main centre of management is located. Attempts to reduce double-taxation, capital duties and further the common market. Directive 74/553/EEC (Nov. 7th 1974)

The amount of Capital Duty charged is based on the value of the shares belonging to each member.

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Directive 2006/98/EC (Nov. 20th 2006)

Due to accession of Bulgaria and Romania.Complete Harmonization of indirect taxation.

Indirect Taxes on the Raising of Capital

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Taxation: Parent companies & Subsidiaries

The distribution of profit coming from and to a company whose main centre of management is located in a different Member State

Council Directive 90/435/EEC (23 July 1990) With amended Directives 2003/123/EC and 2006/98/EC

The Member State in which the parent company resides either cannot tax distributed profits or can offer corporate tax deductions to profits made by the parent company’s subsidiaries (located outside of the Member State but within the EU)

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Common System of Taxation

Directive 90/434EEC (July 23rd 1992)

Set common regulations for taxation on mergers, divisions and contributions of assetsCapital Gains are not taxable at the time of a transaction

When a merger entails the transfer of an asset from one member state to another, the former must renounce all taxing rights

Member States do not apply the provisions of the Directive when taxing a direct or indirect shareholder of certain corporate taxpayers.

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Taxation of Savings Income

Council Directive 2003/48/EC (23 June 2003)

Enables interest on savings received in one Member State by individuals who are resident for tax purposes in another Member State to be made subject to effective taxation in accordance with the laws of the latter Member State

Cooperation and exchange of banking information between member states is fostered

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Tackling Tax Obstacles to the cross-border provision of occupational pensions

Commission’s Objectives:

• Seek a coordinated approach adapted to the diversity of Member States' rules rather than attempting to achieve harmonisation;

• Call for the elimination of unduly restrictive or discriminatory tax rules;

• Present measures to safeguard Member States' tax revenues.

The EU is looking to abolish cross-border provision obstacles using the same cooperation tactics they use for interest tax savings.

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The main institution is the European Anti-Fraud Office (OLAF)

Objectives: Protect financial interests of European Union Fight fraud, corruption, and other irregularities

Methods Independent internal and external investigations Organizes cooperation between corresponding associations of member states

Fight against Fraud

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Money Laundering

Any illegal activities include:

Converting property acquired in a criminal manner

Helping someone who is laundering money

Acquiring property that was obtained illegally

Disguising any information concerning financial property

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Obligations of Businesses

Businesses are responsible vis-à-vis there customers

As soon as they establish a business relation

When there are transactions of EUR-15,000

In any suspicion of illegal activity

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FIU

Financial Intelligence Unit

Established in every Member State

Whenever suspicion arises, must notify the FIU

Commission facilitates interaction between FIU’s

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Customs Declaration

Anyone carrying more than EUR 10,000 must declare it at the borders of the Community

Information can be used by Member State to look into fraud

May share information with other member states

Professional Secrecy remains intact.

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Corporate Malpractice

Enhance transparency

Both within company and in transactions between companies

Clarify responsibilities of board members

Oblige all listed companies to make a public annual statement

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Financial Crime

Commission puts big emphasis on combating organized financial crime

If financial crime decreases, organized crime decreases too

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Financing of Terrorism

Combat financing of terrorism

Facilitation of the freezing of suspect bank accounts

Communication across Member States regarding suspect flows of capital

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Fraud in Numbers

Number of frauds decrease by 12%

Value of fraud increase from 328 to 353 million Euros (7%)

Using anti-dumping duties, Chinese bicycles importers evaded million of Euros

7.3 Billion Euros since OLAF creation in 1999

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External Capital

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Foreign Direct Investment

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World Destinations

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Intra and Extra Flows

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Conclusion

The free movement of capital, like the three other fundamental freedoms of the EU, has enabled its

Member States to achieve new levels of prosperity.

The fluidity of capital has facilitated transactions amongst any individual or entity in the EU.

The increased amount of cooperation forges stronger relationships amongst Member States and provides a

platform to further improve agreements.

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