Case Law: C-478/98. Commission of the European Communities v. Kingdom of Belgium (ECJ 26 Sept. 2000)

8 Colum. J. Eur. L. 311 (2002)

Tom Van Dyck. LL.M. Assistant, Institute for European Economic Law, Katholieke Universiteit Leuven; Attorney, Brussels. The author would like to thank Prof. Jules Stuyck for his valuable comments.

Free movement of capital: Integration of European financial markets; Eurobond loans issued abroad; Sale restrictions; Withholding tax


In 1994, The Kingdom of Belgium (“Belgium”) made a DEM I billion (EUR 511,290,000) issue of bonds on the eurobond market, which accordingly was underwritten by an international syndicate of banks and financial institutions. The issue was conditioned, however, on a remarkable sale restriction, which provided that any sale to Belgian residents, other than to so-called sophisticated investors, would be prohibited. This sale restriction was expressly authorized in a Royal Decree and was contained as an express term in the prospectus, as follows:

The Bonds may not be offered or sold, directly or indirectly, to residents of, or corporations or other legal entities having their domicile in, The Kingdom of Belgium except, provided that the offer or sale does not constitute an offer to the public of The Kingdom of Belgium, to (i) a bank… (ii) a broker, similar intermediary or institution of international standing whose business involves dealing in securities or managing customers funds … and (iii) an insurance company …

The Commission of the European Communities (the “Commission”) considered this outright prohibition to be a restriction on the free movement of capital and therefore incompatible with Article 56 (Ex-Art. 73b) of the TEC, which prohibits all restrictions on the movement of capital and payments, unless justified under the EC Treaty. The Commission, after having investigated the matter, accordingly launched the pre-contentious procedure in compliance with Article 226 (Ex-Art. 169) of the TEC. Not convinced by the response submitted by Belgium, the Commission then delivered a reasoned opinion to which Belgium did not respond. Consequently, the Commission initiated the procedure at hand before the European Court of Justice (the “ECJ”).


It might be helpful to the U.S. educated reader to briefly restate the general principles behind the eurobond market that are reflected in the case at hand.

A “traditional” eurobond issue essentially involves a bond issue, managed by European banks, whereby the bonds – typically denominated in a currency other than that of the issuer and often listed on either the London or Luxembourg Stock Exchange – are sold to a syndicate of European investors.3 Issuers include multinational companies, governments or government institutions, as well as international and multinational organizations. Technically, eurobonds are tradable debt instruments, and therefore mostly issued in bearer form. As a result, eurobonds can be freely negotiated, “almost like currency”. Moreover, most eurobond issues are structured in such a way that potential investors are not required to identify themselves to the issuer, meaning that, once a eurobond is issued, it more or less starts a life on its own on the secondary market, which is almost exclusively over-the-counter.

Eurobonds typically are subjected to various kinds of sale restrictions, many of which are triggered by the vigorous requirements of national securities laws and regulations (most notoriously the U.S. Securities and Exchange Act of 1933). Accordingly, an issuer will seek to avoid application of those securities laws and regulations by imposing sale restrictions, or by semi-private offering and placing techniqtues, as well as by selective and limited applications for stock exchange listing.

Finally, it must be observed that the structure of a bond issue will be vitally affected by tax considerations.9 Contrary to the default tax regulation of several Member States, including Belgium, which levy a withholding tax on interests, it will be the market expectation that, in the case of eurobonds, the interest to be paid by a bank – appointed by the issuer as paying agent – is paid free of withholding tax.