EUROPE - Poland is in breach of the freedom of movement of capital for maintaining a 5% cap on foreign investments set up for second-pillar pension funds, according to the European Court of Justice.

In 2007, the European Commission urged the Polish government to amend its second-pillar law, which stipulates that so-called Open Pension Funds (OPFs) can allocate no more than 5% of total assets to foreign investments.

But the Polish government rejected the Commission's recommendation, arguing that article 56 EC, which concerns the free movement of capital within the EU, did not apply to the country's second-pillar funds.

After the Commission failed to resolve the dispute again in 2008, it brought a case against Poland forward at the ECJ in 2009.

In December 2011, the court determined that the investment cap in Poland's law did in fact restrict the free movement of capital in a manner that "cannot be justified".

The court rejected the Polish government's argument that the investment activities of second-pillar funds were "not economic in nature" and clarified that "occupational pension funds operating in accordance with the principle of capitalisation engage - notwithstanding their social objective and the compulsory affiliation to the second pillar for the retirement scheme to which they belong - in economic activity". 

The court added that, apart from restricting Polish funds in their investments, the legal provision had also had a "restrictive effect" in relation to companies established in other EU member states, in that it constituted an "obstacle to the raising by such companies of capital in Poland".

"It must, accordingly, be held that the Republic of Poland has failed to fulfil its obligations under Article 56 EC," the court concluded.

The Polish government has so far declined to comment on the ruling.