On 8 September 2011, Advocate General Kokott delivered her opinion in the National Grid Indus case (C-371/10), concluding that, where the assets of an EU resident company that migrates to another EU Member State can be traced relatively easily, the immediate collection of taxes upon exit on any built-in gains violates the freedom of establishment principle, because there are less restrictive measures available to collect any tax due.
National Grid Indus is the first opportunity for the European Court of Justice (ECJ) to rule on exit taxes levied upon the migration of a company to another EU Member State. Several infringement proceedings have been initiated by the European Commission because many member states have exit tax rules for corporations similar to the Dutch rules at issue in the National Grid Indus case.
According to AG Kokott, assessing the exit tax upon migration but deferring the payment of tax until the actual realization of any gains is appropriate and proportionate to safeguard the balanced allocation of taxing powers, similar to what the ECJ decided in the Lasteyrie du Saillant and N cases regarding the exit tax on individuals. In reaching this conclusion, AG Kokott first had to opine that the freedom of establishment applies to migrating companies. Referring to the ECJ decisions in the Daily Mail and Cartesio cases, several Member States had argued that the migration of companies is outside of the scope of the freedom of establishment. According to AG Kokott, however, the act of migration is covered by the freedom of establishment, regardless of whether domestic commercial law follows the real seat theory or the incorporation theory.
The facts of the National Grid Indus case are as follows: National Grid Indus BV was set up as a financing company to finance a joint venture of the U.K.-domiciled National Grid Transco group in Pakistan. However, the group changed its plans and did not enter into the JV, so National Grid Indus used the funds to finance U.K.-based companies. To facilitate the alternative financing and avoid foreign exchange risks, it was decided to move National Grid Indus’ place of effective management and business activities to the U.K. At the time of migration, an unrealized foreign exchange gain had arisen in the GBP receivable of National Grid Indus, which was not recognized by the U.K. because the GBP value of the loan receivable was unaffected by any change in the NLG/GBP exchange rate. Under these facts, where the asset(s) of the migrating company can be traced without difficulty, AG Kokott said that any exit tax assessed upon migration may not be collected before built-in gains are actually realized.
As the UK will not recognize future losses (as no foreign exchange losses in a GBP loan can arise in the U.K.), the Netherlands would have to account for any subsequent capital losses in the receivable. Whether subsequent capital losses have to be taken into account when other assets are affected by an exit tax must be determined on a case-by-case basis, according to AG Kokott.
Should the ECJ follow AG Kokott’s opinion, taxpayers with easily traceable assets may be able to carry out a tax neutral migration within the EU. However, the AG’s opinion would allow the immediate collection of tax only if assets cannot be traced easily; in other words, the immediate collection of exit tax is proportionate (and therefore does not violate the freedom of establishment) where the assets cannot be traced easily until the realization of built-in gains occurs, e.g. where many assets are transferred and where built-in gains are realized over time (e.g. due to depreciation or amortization). AG Kokott did not provide any examples of situations in which assets cannot be traced with reasonable effort and she was unclear about whether a per-company or per-asset approach is necessary in this regard.
Germany also applies exit tax rules where a company migrates to another member state and where Germany loses the right to tax the built-in gains in certain assets. An ECJ decision following the opinion of AG Kokott could mean that these rules would have to be amended to allow for full tax neutrality until the assets are sold (by postponing the payment of tax) where the assets of the migrating company can be traced relatively easily. This could create opportunities for taxpayers that, for example, wish to relocate a finance company or holding company to another member state. Several open questions remain after AG Kokott’s opinion, but hopefully the ECJ will clarify these issues in its decision in this case or in the other pending cases.
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