The relevant Treaty provisions on the free movement of capital and third countries

Art. 63 of the Treaty on the Functioning of the European Union (TFEU) guarantees that: 

"all restrictions on the movement of capital between Member States and between Member States and third countries shall be prohibited."

This extension of the rights of free movement of capital to third countries not only goes beyond the other fundamental freedoms in the Treaty – free movement of goods, people and services - but also goes beyond any comparable foreign investment law or constitutional provision in any other jurisdiction in the world.

Nevertheless, this does not mean that EU Member States cannot protect themselves from proposed foreign investments posing a legitimate national or public security concern or that the free movement of capital is always unconditional.  The Treaty contains a number of limited exceptions allowing them to do so:

• Grandfathered restrictions: Art. 64(1) TFEU allows Member States to continue to apply restrictions which existed with regard to third countries in respect of direct investment on 31st December 1993 (or in the case of Bulgaria, Estonia and Hungary, 31st December 1999).
  
  
• Public policy or public security: Art. 65 (1b) TFEU and Art. 52(1) give Member States the possibility to take restrictive measures if justified by public policy or public security reasons.

Nevertheless, the Court of Justice of the European Union (CJEU) has made it clear in its jurisprudence that exceptions to the fundamental Treaty principles must be construed narrowly and the measures taken must be suitable, proportionate, transparent, and subject to judicial review. In addition, the CJEU has established that "…those grounds must…be interpreted strictly, so that their scope cannot be determined unilaterally by each Member State without any control by the Community institutions." (see cases §17 in C-54/99a>, §47 in C-503/99, §48 in C-483/99, §72 in C-463/00)

Equally, under Art. 65(1) TFEU, there is nothing that prevents Member States from applying the relevant provisions of their tax law to distinguish between the countries of residence of taxpayers and to distinguish according to where their capital is invested.  Member States are also able to act to prevent infringements of national law and regulations in particular in the area of taxation and prudential financial regulation.

In addition, the Treaty gives the EU itself the ability to act in two situations:

• Under Art. 64(2) TFEU, the EU can adopt measures on the free movement of capital involving direct investment, establishment, the provision of financial services or the admission of securities to capital markets.  Under Art. 64(3) TFEU, the EU can take a step backwards on the liberalisation of capital movements to and from third countries, but only provided that there is unanimity among Member States and that the European Parliament has been consulted
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•  Under Art. 66 TFEU,, the EU can act to take temporary safeguard measures in exceptional circumstances where movements of capital to or from third countries cause or threaten to cause serious difficulties for economic and monetary union.

So far, in the history of the EU, there has been no need to use these two provisions. Nevertheless, they remain available in case of need.