By Benedikt Pirker
Last week, the Court handed down a decision on the provisions of the Agreement on the Free Movement of Persons (AFMP) between Switzerland and the EU. It denied that a French national who had moved to Switzerland and who wanted to rely on the AFMP’s freedom of establishment provisions to challenge a French legal mechanism of exit taxation on unrealised capital gains could do so. The case is of interest for those following Swiss-EU relations, as the ECJ had (and missed) the opportunity to say more on the rather specific version of freedom of establishment enshrined in the Agreement. At the same time, there are also certain lessons to be learned for the interpretation of future agreements of the EU with third countries dealing with access to the internal market and the free movement of persons (looking at you, Brexit). Arguably, there is a certain meandering in the reasoning of the Court on the AFMP, and this latest case seems to demonstrate a return to the early days of a more restrictive interpretation, based to a substantial degree on the fact that Switzerland has said no to the internal market. Below, I will briefly explain the facts of Picart and the decision of the Court. Then, I will examine in more depth the above claim on the Court’s shift in interpretive methodology and the alternative approaches to the interpretation of the AFMP that could have been taken.
Mr Picart is a French national who transferred his residence from France to Switzerland and held significant shareholdings in a number of French companies at that time. He declared an unrealised capital gain on the shares, and appointed a tax representative in France and provided a bank guarantee to benefit from a suspension of payment of the tax payable on that capital according to French law. When he transferred the shares in 2005 and the suspension ended as a consequence, the French tax authorities reassessed the capital gain declared and made Mr Picart liable for addition income tax and social security contribution assessments with penalties. Mr Picart seized the courts and the Conseil d’État decided to refer a number of questions to the Court of Justice. Notably, the Conseil was unsure to what extent the freedom of establishment as known in the EU internal market law context was enshrined in the AFMP.
The background to the Conseil’s questions is the somewhat meandering case law of the CJEU on the proportionality of mechanisms of exit taxation of unrealised capital gains between Member States (see the overview of that case law in the Advocate General Mengozzi’s conclusions, paras 95-117).
The AFMP contains a number of relevant provisions in this regard. Put succinctly, the Agreement contains extensive provisions on the free movement of workers, a limited version of the freedom to provide services and a particular version of the freedom of establishment limited to natural persons (to name only the parts relevant for our present purposes). The case is of particular interest because to date the Court has only interpreted the AFMP’s provisions on the freedom of establishment with regard to their exclusion of legal persons. It has not yet clarified whether the freedom of establishment contains a mere prohibition of discrimination on the grounds of nationality or a more far-reaching prohibition of restrictions.
As to the relevant provisions, Article 16 (2) AFMP creates an obligation to interpret provisions of the Agreement that mirror EU law following the case law of the CJEU (although with a difference between case law handed down prior to the conclusion of the agreement and later case law). Chapter III of Annex I deals with self-employed persons. Article 12 provides that a national of one contracting party wishing to pursue a self-employed activity in the territory of another contracting party shall receive a residence permit valid for five years; this permit is to be renewed for another five years if evidence of such an actual activity can be produced. Article 13 deals with self-employed frontier workers, defined as self-employed workers that pursue their activity in the territory of one contracting party, but are resident in the territory of another contracting party, returning to their place of residence at least once a week. Article 15 lays down an obligation of equal treatment with regard to nationality.
The Court’s decision
The Court noted initially that it had already found that individuals could invoke free movement rights under the AFMP as a matter of principle against their own country (para 17). Without going into detail on the scope of freedom of establishment under the AFMP and reserving its judgment on whether shareholding-management activities constitute a self-employed activity for the purposes of the AFMP (para 21), the Court turned to the scope ratione personae of the freedom of establishment. Based on a literal reading of Articles 12 and 13 Annex I of the AFMP, it held that the right of establishment was restricted to two scenarios. The first one concerns nationals of one contracting party wanting to become established in the territory of another contracting party to pursue their activity there (para 22). Under the second scenario, the right would be invoked by self-employed frontier workers (para 25). Mr Picart fell under none of these scenarios, as he did not intend to pursue a self-employed activity in Switzerland and remained in Switzerland as his country of residence to pursue his self-employed activity from there.
Lastly, the Court held that the interpretation of the EU freedom of establishment could not be transferred to the AFMP presently because Switzerland had not joined the internal market, so that no automatic analogous interpretation of the AFMP could take place unless there were express provisions to that effect, which was not the case (para 29).
The Court chooses a rather narrow solution in Picart, sticking to the letter of the AFMP and a literal interpretation. This is not a new phenomenon. Effectively, the Court has done this already in the first cases on the AFMP. In particular, it has repeatedly used the argument that Switzerland deliberately said no to the European Economic Area and the EU internal market in order to conclude the Bilateral Agreements, among which the AFMP (see e.g. here and here).
This particular argument has always been somewhat wanting. If it is understood as meaning that the Court will not apply the methods of interpretation of EU law to the Agreement, this must necessarily signify that the methods of international treaty law (Articles 31 ff. Vienna Convention on the Law of Treaties) apply. However, the non-adherence to another international treaty is an argument that does not really fit well within these rules. Moreover, in applying the Vienna Convention rules often a good case can be made for interpreting agreements like the AFMP in a similar manner to EU law (see in more detail here and here). Namely, agreements like the AFMP contain provisions resembling EU law and objectives that point towards creating a legal situation similar to that of the internal market. While this reading of the Court’s argument thus runs into trouble, it is at the same time difficult to see what other reading one is supposed to adhere to. In later cases, the Court left this argument aside and opted for an interpretation of the AFMP closer to parallel provisions of EU law (see e.g. here). Picart can in this context be read as a return to the previous approach. The Court emphasizes this by only quoting its own earlier case law in the decision (see para 29).
Two elements merit closer comment before this background. First, the decision in the case is already not fully convincing in its substance. Second, the Court’s reasoning might foreshadow an approach also taken towards other agreements in the future.
On the first point, a literal interpretation based on the supposedly clear wording (to the extent one wants to believe that exists) is always a rather safe option for a court. However, a closer look reveals that the solution found by the Court for the freedom of establishment as enshrined in the AFMP is not the only possible solution.
Take the Advocate General, for example. While partly concurring with the Court on Article 12 and 13 Annex I AFMP, he argued that, moreover, the notion of a self-employed activity should be interpreted more narrowly in the AFMP. Notably, shareholding-management activities in his view were only included under the freedom of establishment in EU law because Article 49 TFEU refers expressly to the right to set up and to manage undertakings (AG conclusions, para 68). The context and objectives of the AFMP gave no indication that the notion of a self-employed activity should be read more broadly than its “ordinary meaning”, namely an activity pursued by a person outside a relationship of subordination with regard to conditions of work and remuneration and under the person’s personal responsibility (AG conclusions, para 69). Consequently, for the Advocate General the freedom of establishment under the AFMP only encompassed the right to a self-employed activity and not a right to set up and to manage undertakings (AG conclusions, para 70). Moreover, he found based on his reading of the prohibition of discrimination based on nationality contained in Article 15 (1) Annex I AFMP, that the freedom of establishment under the AFMP encompassed only a prohibition of discrimination and no broader prohibition of restrictions (AG conclusions, para 74). This meant for the Advocate General that measures that hinder a national of one contracting party to establish itself in another contracting party were not covered by the AFMP.
Now, the first part of that argument is hard to sustain. In practice, would this mean that a Union citizen moving to Switzerland to engage in a self-employed activity would first fall under the AFMP, but no longer or in a different way at a later point if for example she then has employees and is thus suddenly “managing an undertaking”? The second part, however, at least provides some insights as to how the material scope of the freedom of establishment could be read, a topic that the Court neglects due to its focus on the personal scope. The Advocate General argues in favour of a limited scope, without a prohibition of non-discriminatory restrictions. Again, another reading is possible in this respect. In the doctrine, solid arguments have been made to read the freedom of establishment in the AFMP as including a prohibition of restrictions (see e.g. here or here). Notably, the Court itself has hardly ever given much weight to the wording of the Treaties in developing the prohibition of restrictions under the freedom of establishment in its case law. In Picart, however, the Court unfortunately leaves all these issues open for another day.
On the second point, apart from dogmatic criticism, we should also see the Court’s message in the case, a message that arguably goes beyond the confines of Swiss-EU relations. In these days, the Court also has to prepare the ground for the interpretation of future agreements with as of yet unpredictable, but in all likelihood similar features to some of the Bilateral Agreements. A core argument supporting the narrow approach taken by the Court is that a country – here Switzerland – has said no to the internal market. Arguably, nothing seems to prevent this argument from resurfacing in the interpretation of future agreements in the post-Brexit context.