A recall by the CJEU that fundamental freedoms are still the heart of Europe

In its Judgement of 6 March 2018 the Court of Justice of the European Union (‘CJEU’) ruled that the new Hungarian legislation(1) (‘the Law’), which deprived anyone of their rights of usufruct if they did not demonstrate a close family tie(2) with the owner of agricultural land, was contrary to the European law. The CJEU recalls the fundamental principles and freedoms of Europe, in particular the rules of non-discrimination, freedom of establishment and the free movement of capital.

1. Case C-52/16 – SEGRO vs. Sarvar District Property Registry
SEGRO is a commercial company with its seat in Hungary while its members are EU nationals located in Germany. SEGRO had acquired usufruct rights on agricultural lands in Hungary. Following the entry into force of the Law, according which usufruct rights may only be granted or preserved in favor of persons who justify close family tie with the owner of the agricultural land concerned, the Administrative Department deleted those rights without compensation.

2. Case C-113/16 – Günther Horvath vs. Vas Region Administrative Department
Mr. Günther Horvath is an Austrian national located in Austria and has a registered right of usufruct over two parcels of agricultural land in Hungary since 1999. By a decision of 12 October 2015, the Administrative body deleted those rights of usufruct without compensation.

3. Request for preliminary ruling
SEGRO and Mr. Günther Horvath both brought an action before the Administrative and Labour Court of Szombathely, Hungary. For both procedures, the aforementioned Court decided to file a request for preliminary ruling, and both cases were joined. As for the questions referred, the Court asks whether Articles 49 (freedom of establishment) and 63 (free movement of capital) of the TFUE as well as Articles 17
(right to property) and 47 of the Charter of Fundamental Rights must be interpreted as precluding a national legislation under which the rights of usufruct over agricultural lands are extinguished, and consequently, deleted from the property registers, if the holder of these rights does not demonstrate close family tie with the owner of the land.

4. Recall of the EU’s principles
The Court first considers the freedoms at stake in the proceedings, and assesses that the Law should be examined exclusively on the light of the free movement of capital(3).
EU Law generally prohibits restrictions on movement of capital in Member States. The Court observes that the Law restricts that freedom by providing the extinction of rights of usufruct acquired by contract, including those held as a result of the exercise of EU nationals’ free movement of capital, whether a compensation is granted or not.
Not only the Law deprives nationals of other Member States to benefit from free movement of capital or enjoyment of property, but these provisions are also likely to discourage non-residents to make investments in Hungary.
As to the criterion of the existence of close family tie to justify the right of usufruct on agricultural lands, the Court points out that although it may seem independent from the nationality of the usufructuary as well as of the origin of capital, that requirement forms an indirect discrimination(4).

5. The Court’s reasoning
The Court recalls that indirect discrimination may only be permitted on objective considerations, for overriding reasons of public interest, and with respect to the principle of proportionality. Those measures should therefore be appropriate and limited to what is necessary.


(i) Use of agricultural land
According to Hungary, ownership of agricultural land should be limited to persons farming the land. The new legal dispositions aim to prevent the acquisition of such land for purely speculative purposes.
The Court agrees that preserving the farming of agricultural lands to a permanent rural population, as well as to encourage a reasonable use of the land may justify a restriction to the free movement of capital. However, the Court sets forth that restricting the right of usufruct to anyone who demonstrates close family tie does not appear appropriate to the objectives pursued by the Hungarian government.
The existence of such family tie cannot guarantee that a local usufructuary will work the land himself, neither shall it imply that a third party will necessarily acquire such right for speculative purpose without any intention to cultivate the land.


(ii) Exchange control and abusive practices
The Hungarian Government holds that the Law aims to remedy the irregularities affecting all rights of usufruct ab initio since all non-residents should have been granted an authorization issued by the National Bank to acquire these rights.
Hungary also brings the argument that the Law wishes to prevent purely artificial arrangements leading to eventual abusive practices.

(iii) Final decision
The Court dismiss all arguments and concludes that the criterion and restriction chosen by Hungary are unrelated to the objective persued, and the legislation goes beyond what is necessary to attain its objective, and thus is not proportional. Therefore the national dispositions do not comply with the EU law principle of free movement of capital.

6. Opinion of the Advocate General
The Court followed the Advocate General’s opinion and considered that neither of the three grounds brought by the Hungarian Government could justify the Law. Other criteria’s would permit the objectives of the Government to be attained.
The Advocate General proposes a first remedy and suggests that the legislation could require that agricultural land be worked by the holder of the usufructurary right himself (or its shareholders if the holder is a legal person), and therefore respect the freedoms of movement without discriminating foreign nationals.
In terms of regulating exchange control, the Advocate General recommends to link a breach of an administrative control with a financial penalty rather than the radiation of the property register.
Eventually, an adequate measure compliant with the principle of proportionality should enable national courts to carry-out a case-by-case examination in order to assess an abusive practice.

7. The heart of Europe
Restrictions on capital movement between Member States and the exceptions raised by the Hungarian Government to that effect failed to convince the CJEU. Indeed, the Court reaffirms its role of guardian of the Treaties as well as the EU cornerstone values such as free movement of capital and non-discrimination which are still the heart of Europe. The principles recalled preserve and guarantee trade and economic growth in the EEA(5) as well as they counterbalance an inward-looking attitude observed across Europe.

 

Marc PICAT & Camille CLAUSS

 

1 Law n°CCXII of 2013, introducing certain provisions and transitional measures concerning the Law of 2013 on arable land
2 ‘Close members of the family’ means spouses, direct ascendants, adopted children, children and stepchildren, adoptive parents, stepparents, foster parents and brother and sisters
3 The Court recalls that ‘any restrictions on freedom of establishment resulting from [the Hungarian law] are an inevitable consequence of the restriction of the free movement of capital’, and therefore does not need an independent examination (Case Glaxo Wellcome, c-182/08)
4 The Court emphasizes on the restrictions set by the Hungarian Government to foreigners to acquire full ownership of agricultural lands. Investments in agricultural lands were only made possible through the acquisition of usufruct. Consequently, the likelihood for foreigners to hold close family tie with the owner was extremely limited
5 European Economic Area

29-06-2018
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