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Europe: High Financial Penalties for Infringements of Formal Obligations Incompatible with Freedom of Services

On September 12, 2019, the European Court of Justice ruled that very high financial penalties for infringements of formal obligations in the context of a secondment are incompatible with the freedom to provide services.

An Austrian contractor had contracted with a Croatian subcontractor to provide a service on Austrian territory. During an audit, the Austrian Tax Investigation Service established that for most of the employees, no payroll documents or work permits could be submitted. Both the manager of the Austrian contractor and the managers of the Croatian subcontractor were severely sanctioned for these infringements. The Austrian Court asked the Court of Justice whether these very high penalties were compatible with the freedom to provide services.

The Court of Justice ruled that EU law precludes penalties for infringements of formal obligations such as obtaining permits and retaining payroll documents:

  •  which cannot be less than a fixed minimum amount;
  •  which can be imposed cumulatively for each employee without a maximum;
  •  which are supplemented with an additional amount of 20% for litigation costs; and
  •  which, in the event of failure to pay the fine, can lead to imprisonment.

According to the Court, national legislation imposing such serious penalties for infringements of administrative obligations in the context of cross-border provision of services is disproportionate and therefore an unjustified obstacle to the freedom to provide services.

This judgment may have an impact on fines imposed for infringements of formal administrative obligations in the context of the provision of services in the EU.

Compliments of AEM Carnelutti, a Member of the EACCNY