The Fundamental Restriction to Establishment

The European Union Single Market has been described as one of the EU’s greatest achievements insofar as it grants Member States and its nationals the free movement of goods, capital, services, and labour within the EU. Many countries have decided to join the European Union on the basis of such fundamental freedoms as enshrined in the EU Treaty.

In particular, the freedom of establishment should operate to eliminate all the restrictions for nationals of a Member State’s territory to establish themselves in another Member State, as well as the restrictions on the setting-up of agencies, branches or subsidiaries by nationals of any Member State established within the territory of another Member State.  

Such freedom of establishment is granted under the conditions laid down for its own nationals by the law of the country where such establishment is effected. A number of ECJ judgements have rightfully confirmed that such establishment should not be fictitious and should therefore not constitute ‘wholly artificial arrangements’ and should carry out real economic activity. 

On this basis, a lot of international companies have benefited from the right of establishment and opted to set up companies throughout the European Union which in turn has allowed for increased trade and economic growth within the European Union as a whole. 

The main reason for an EU national to make use of the freedom of establishment is to maximise returns on their investment and increase their profits. For instance, companies might set up a subsidiary in a particular Member State which is geographically located in a way that would make sense for their operations from the logistics’ point of view. Likewise, companies might set up a subsidiary in a Member State where the languages spoken would best suit their operations. Amongst other reasons, companies have also set up subsidiaries in Member States that operate under more favourable tax systems than their home Member State. 

Malta tax rates and its favourable tax system present themselves favourably in a regulated onshore centre, one of its many redeeming qualities. Furthermore, Malta has a key geographical position in the middle of the Mediterranean Sea facilitating trade with Southern Europe and North Africa, and along all the main shipping routes. Malta offers English as one of its official languages which gives it a competitive advantage over other Member States, as well as its laws being drafted in English, allowing for added certainty. All these factors make Malta a very appealing option. These advantages, coupled with an EU framework which allows Member States to decide on their respective tax systems, allowed Malta’s financial services industry to flourish.

Recently, however, Malta, together with other Member States which operate under favourable tax systems have come under attack. Malta has been accused of operating as a ‘tax haven’ which leads to facilitation of the process for international companies to avoid or evade tax. A Regional German Finance Minister went as far as to say that a data leak showed that Malta has 70,000 offshore companies. Notwithstanding the fact that Malta’s Company Registry is public and no data leak is needed to obtain such information, this claim would mean that every single company incorporated in Malta, including companies utilised by Maltese nationals themselves, would somehow be offshore. No need to mention that such claims have been rebutted by the Maltese Government.

Unfortunately, such politically driven comments and efforts to undermine Malta and other Member States that operate favourable tax systems would make one wonder how supreme the fundamental freedoms really are nowadays. We have come to a sad point that exercising one’s right to freedom of establishment has led to being branded as a criminal and a tax evader.

With Malta’s accession to the European Union, Malta restructured its financial industry which meant that it had to do away with offshore companies, while still managing to continuously attract foreign companies, due to the reasons mentioned previously. Ex-Finance Minister Tonio Fenech stated that it is unfortunate that Malta’s attractive tax rates are deemed to make it a tax heaven, when all EU Member States, likewise, have the possibility of developing competitive tax rates, which would put them on the same level as Malta’s generous tax system. 

For as long as one of the fundamental freedoms allows for nationals to set themselves up in another Member State and such establishment is not wholly artificial, and for as long as tax policy remains the competence of each Member State, then politically driven attacks by certain Member States simply wishing to undermine other Member States due to a loss of tax revenue for them, should be condemned. The European Union Single Market has been a success story for decades. Let’s let it continue unhindered in its stride.


Dr Christian Ellul
E&S Consultancy Ltd.