The European Court of Justice (ECJ) ruled on 29 November 2011 that Member States, in principle, may impose an exit charge on unrealized gains upon the transfer of an entity’s place of effective management to another EU Member State (C-371/10, National Grid Indus BV). However, it infringes the freedom of establishment if the exit charge has to be paid immediately upon the transfer of seat, without the possibility of tax collection being deferred. The case was the first opportunity for the ECJ to rule on exit taxes levied upon the migration of a company from one Member State to another. 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 National Grid Indus BV.
National Grid Indus BV held a GBP receivable, which was evidencing gains due to an increase in the exchange rate, when it transferred its real seat to the U.K. in 2000. This move did not affect the legal personality of National Grid Indus and the company was subsequently considered a U.K. tax resident under the Netherlands-U.K. tax treaty. The Dutch tax authorities levied an immediate exit charge on the built-in gains in the company’s assets, i.e. on its currency gains.
Several Member States argued that the migration of companies falls outside the scope of the freedom, based on the ECJ’s decision in the Daily Mail case. However, according to the ECJ, the act of migration is covered by the freedom of establishment at least when the company retains its legal personality based on the law of the country from which it migrated (a similar reasoning should apply to a Societas Europaea). The ECJ then held that the levy of an exit charge is a restriction of the freedom of establishment (because no exit charge is due on a domestic transfer of real seat), but that the charge is an appropriate measure to safeguard the balanced allocation of taxing powers. However, the immediate collection of the exit tax on unrealized gains goes beyond what is necessary to achieve its intended objective and, therefore, it violates the freedom of establishment. The Netherlands should allow companies to opt for deferral of tax collection until the capital gains are actually realized if and to the extent the companies are willing to and capable of tracing the transferred assets.
The ECJ decision also should apply to similar immediate exit tax charges imposed by other Member States (e.g. France and Germany). Member States have to grant the possibility of tax deferral until the gains on assets that are transferred abroad are realized. However, the ECJ decision does not clarify when such gains would be considered to be realized, especially where the assets usually are not sold, but are depreciated. This is relevant, for instance, with regard to the transfer of self-created goodwill.
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