CHAPTER 3: Provision of Services on
a temporary basis |
42. In some Member States it is not possible
to offer services other than on an "established" basis.
Furthermore, the requirements for a service provider to become
"established" in a Member State are different in each
EU country. The Commission believes that this is one of the barriers
to an effective internal market in services. The draft Directive
on Services therefore distinguishes temporary provision of services
in a host Member State from the provision of services on an established
basis. Temporary provision of services in a host Member State
according to the Services Directive would be permitted on the
basis of the home country rules of the service provider.
43. Traditionally, there has been a significant
emphasis on manufacturing and manufacturing jobs in the Member
States of the European Union. In this context, services are commonly
seen as quite separate businesses from those involved in manufacturing
goods. In fact, the production and supply of many goods requires
the supply of significant service inputs.
The production of a motor car for example, requires many service
inputs such as design, marketing, technical analysis and sales,
just as the supply of the car requires services such as finance,
insurance and training. Increasing the competitiveness of the
service sector should therefore help the competitiveness of the
44. The supply of some services can be subject
to particular regulations pertaining to the country in which they
are being supplied, or even to the region or locality of supply.
In some cases it may be argued that these regulations exist as
an indirect signal to consumers of the quality of the service
(e.g. that the service provider has been trained to a particular
standard). In other cases, the regulations serve primarily as
a means of protecting those providing the services and shielding
them from competition, for example the adoption of a standard
fee, or a requirement that no competitor to a particular activity
be allowed within a certain distance.
45. Any action taken to reduce these barriers
necessarily involves a judgment by the policymaker that it is
beneficial to switch the balance more towards the individual consumer
and away from established provider interests. It allows more competition.
But it may require greater vigilance on the part of consumers
and communities to ensure that greater competition does not compromise
the quality of the services provided.
46. The benefits to consumers from reduced restrictions
on trade arise as a consequence of greater competition among suppliers,
through reduction in barriers. As a result of greater competition,
consumers, and some producers, benefit, and do so to a greater
extent than the producers who suffer. There is a net gain,
because some consumption takes place that previously did not.
For these reasons the Commission brought forward its draft Services
Directive in January 2004.
47. Since the EC Treaty already makes provision
for a single market in services, one might ask why the Services
Directive is necessary. The Commission's answer is that earlier
elimination of various barriers has "been partly offset by
the erection of new legal barriers or by the increasing impact
of those barriers which were already there but whose effects became
evident only gradually as trade between Member States developed."
Moreover "one common feature of many
is that they
derive not from national legislation but from other forms of intervention
and regulation whose impact on the internal market is becoming
more and more relevant."
For example, authorisation procedures may involve bodies made
up of competing operators already present in the area concerned.
Authorisation may also involve excessive formalities and procedures,
coupled with a lack of transparency. In some cases it involves
authorities at several levels, regional and local as well as national.
Authorisation requirements which would allow the provision of
services across a whole country may require manifold applications
to local bodies.
48. In other words, to an established local service
provider, the provision of a particular service may seem quite
straightforward, whilst a new operator coming from outside the
area faces a jumble of requirements and little scope for redress
to make these requirements easier to understand. The new operator
faces no overt discrimination, but the effect is in opposition
to the judgment of the European Court that "A Member State
cannot make the provision of services in its territory
subject to compliance with all the conditions required for
establishment and thereby deprive of all practical effectiveness
the provisions of the Treaty whose object is, precisely, to guarantee
the freedom to provide services" (emphasis added).
49. For those service providers that wish to
establish in another Member State, the proposed Directive includes
a number of provisions requiring the simplification of national
rules of establishment to address such implicit discrimination.
However, such rules of simplification would not fully address
the provision of services on a temporary basis.
50. In the Services Directive, the Commission
therefore has distinguished temporary provision of services from
the provision of services in a host Member State on an established
basis. This is because firms wishing to provide a service in another
Member State may not wish, at least in the first instance, to
establish there. For example, a firm may want to bid for a construction
contract, but will not establish unless it wins the contract.
Or it may establish only if, after working on that contract for
some time, it decides to set up in business more permanently.
An architect may journey to another state to supervise construction
of a building for which he/she has won an open design competition.
A firm may be very uncertain as to demand for its service in the
other Member State, and therefore may go there on a temporary
basis to test the market.
51. It is clear that there are many instances
in which a legislative base for temporary provision of services
would be beneficial. The ability for a service provider to test
the market of a host Member State on a temporary basis and without
going through the regulatory hoops of establishing there is particularly
important for Small and Medium sized Enterprises (SMEs). As SMEs
are often seen as an important driving force of innovation and
competitiveness, it is particularly apt that cross-border trade
in services should be encouraged on a temporary basis as well
as an established one.
52. The draft Services Directive seeks to address
this by applying the Country of Origin Principle which allows
service providers to test the market of another Member State under
the national provisions of their Member State of origin. We discuss
this in greater detail in Chapter 5. The question that needs to
be asked therefore is what does temporary operation, as opposed
to establishment, mean?
THE DEFINITION OF "ESTABLISHMENT"
53. In the draft Directive "establishment"
is defined as it is in the EC Treaty as, "the actual pursuit
of an economic activity through a fixed establishment of the provider
for an indefinite period".
A clear definition of "temporary" on the other hand
is not readily available.
54. "Temporary" would seem not to be
a solely temporal concept, such as a period less than a particular
number of weeks. "Temporary" has been "defined"
in the case law of the European Court of Justice in the context
of determining whether a business is established. The "temporary"
nature of activities has to be determined not only by reference
to the duration of the provision of the service but also to the
"regularity, periodicity, or continuity". Further, the
fact that the provision of services is temporary does not mean
that the service provider may not have some form of infrastructure
in the host Member State (e.g. an office or consulting rooms)
if needed to perform the service in question.
55. In their evidence session with us, Clifford
Chance expanded on these necessary attributes: "you need
to look at all the factoral circumstances surrounding the particular
business concerned to decide whether this business is participating
in the economic life of the host Member State and is therefore
providing services on an indefinite basis". The European
Court of Justice case law considers whether the service provider
has a permanent infrastructure in the host Member State. For example
in the case of a nursing home which has patients, the service
provider requires the infrastructure of a building with carers
who are on duty all the time. By its nature this is indefinite
and the service would therefore be considered established. A travelling
hairdresser who goes to a Member State once a week and maintains
a salon in that Member State, on the other hand, need not be established,
as the existence of a salon in which he or she works one or two
days a week is not an indication of a permanent presence. (Q 526).
56. Although testing whether a service activity
has these attributes provides some guide, it is clear that it
does not provide a straightforward answer to the question most
important for a SME which is whether the business will be treated
as established or not. This is of great importance because if
the service the SME provides is considered by the local legal
representative to be established, the business will have to comply
with all the rules for establishment in the host Member State.
If on the other hand, the service is considered temporary such
regulatory burden does not apply and the SME's home country rules
57. Such uncertainty could also offer opportunities
for service providers operating in their own country to fight
competition from temporary service providers from a different
58. The significance of this uncertainty is difficult
to estimate precisely, although it is clear that this question
is proportionately more significant for small firms, which might
be ruined by the expenses of litigation should the basis of their
operations in another Member State be challenged, than for larger
concerns. Also, SMEs may well decide that it is not worth offering
their services in a host Member State if they must be established.
The uncertainty of no clear definition for "temporary"
is a further barrier to intra-EU trade in services for some service
59. This last point was taken up by the Federation
of Small Business (FSB) who told us that they would like to see
"a clear definitive set of guidelines" to determine
"temporary" as at the moment "the legislation and
the interpretation of the legislation is unclear and there are
unclear sets of principles." (Q 138) The FSB witnesses suggested
there could be "a grey black list or a grey list so that
nothing is definitive, but you have a guide in principle so people
have something to work towards" (Q 145). The FSB suggestion
of a "grey black list" further indicates how difficult
it is to achieve clarity in the definition of "temporary".
60. Despite this difficulty, establishing certainty
about the meaning of "temporary" is particularly important
if the Services Directive is going to be effective in encouraging
SMEs to trade their services across EU borders. As the Minister,
Douglas Alexander told us, "up to 90% of service providers
are SMEs" (Q 483). To ensure there is a wider opportunity
for services to be triggered across the European Union, the EU
must ensure that SMEs are able to test the market in another Member
State on a temporary basis, without having to fully commit to
permanent establishment. "At the moment SMEs are often deterred
from providing a service in other Member States because of lengthy
and costly authorisation procedures" (Q 483).
61. SMEs in particular find the legal uncertainty
created by the lack of a positive definition of temporary operation
a major barrier to exploring entry to a market. We therefore urge
the Government to push for greater clarity on the meaning of "temporary".
62. Some witnesses would prefer a positive definition
of "temporary". On the other hand, it is possible that
producing a clear definition of "temporary" could itself
introduce inflexibilities in the marketplace. At the moment the
position appears to place the onus on the relevant authorities
to justify the need for a business to become "established"
in a Member State. Producing a clear definition of "temporary"
could result in a business being required to prove that its operations
are "temporary" otherwise the presumption is that it
will need to become "established" in the Member State.
There is a fine balance to draw here if the objective is to secure
maximum market flexibility. Those who are concerned about "temporary"
provision of services under a country of origin principle may
favour a restrictive definition of "temporary". If establishing
a positive definition of "temporary" remains elusive,
we recommend a set of clear guidelines is established in order
to ensure that freedom to provide services on a temporary basis
is made more predictable and involves fewer obstacles.
21 To take an example, the Commission in its Impact
Assessment on the Services Directive quotes a lift (elevator)
manufacturer's estimate that soon only 8% of its labour force
will be engaged in manufacturing with the remainder associated
with providing related services. Back
To see this, take the example of an airline that introduces a
new low cost service in place of an existing higher cost service.
The airline's profits (and many other elements, such as staff
wages) are lower, but consumers benefit on their existing flights
through lower fares and, in particular, some journeys are made
that would not have been undertaken at the previous higher prices. Back
Report from the Commission to the Council and the European Parliament
on the State of the Internal Market in Services, COM (2002) 441. Back
Case C-43/93 Raymond Vander Elst v Office des Migrations Internationales
 ECR I - 3803, at
para. 17. Back
Article 43 of the EC Treaty Back
Case C 55/94 Gebhard  ECR I - 4165, at para. 27. Back