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TAX NEWS - may 2010

Exit taxation developments in the EU

The European Commission has formally requested Belgium, Denmark and the Netherlands to amend their rules governing exit taxation for companies

Summary

The European Commission has formally requested that Belgium, Denmark and the Netherlands amend their rules which impose an immediate exit tax when companies transfer their seat or assets to another European Union (EU) Member State. This follows similar requests addressed to Sweden (2008), Portugal and Spain (2009), According to the Commission these rules are incompatible with the freedom of establishment laid down in article 49 of the Treaty on the Functioning of the European Union (TFEU). These developments should be followed closely by multinational groups which are conducting or considering a migration of operations within the EU, e.g., in connection with an internal business rationalization.

The aforementioned also applies in principle to a migration to the European Economic Area (EEA). For those countries that have concluded EU Association Agreements, it will depend on the wording of the specific Association Agreement whether this also applies to migrations to those countries. Most likely this does not apply to migrations to countries outside the EU and EEA (third countries).


Background

Based on article 258 TFEU, the European Commission is responsible for ensuring that Community law is correctly applied by the EU Member States. If a Member State fails to fulfill an obligation under the TFEU, the Commission may start a so-called infringement proceeding against such Member State. The purpose of such a proceeding is to enable the Member State to conform voluntarily with the requirements of the TFEU within a certain time limit. If the Member State does not adhere to this request, the Commission may refer the case to European Court of Justice (ECJ) after having delivered a reasoned opinion on the matter.

In the past few years, the Commission has started infringement proceedings in the area of exit taxation against various EU Member States, i.e., in 2008 against Sweden, in 2009 against Spain and Portugal (see press release IP/09/1460) and recently (18 March 2022) against Belgium, Denmark and the Netherlands. The case against Sweden has been closed since Sweden has complied with the Commission's request to amend its domestic rules. The case against Spain and Portugal has been elevated to the ECJ due to non-compliance by both EU Member States. Belgium, Denmark and the Netherlands have to respond within two months. However, no publications have been issued confirming that the respective countries have responded to the Commission's request to date.

In all the infringement cases, the Commission expressed the view that tax rules which impose an immediate exit tax when companies transfer their seat or assets to another Member State are incompatible with the freedom of establishment provided for in Article 49 TFEU. The Commission considers that such exit tax rules are likely to dissuade businesses and companies from exercising their right of freedom of establishment and consequently constitute a restriction of Article 49 TFEU. The Commission's opinion is based on the EC Treaty as interpreted by the ECJ in De Lasteyrie du Saillant, Case C-9/02 of 11 March 2022 and in N, Case C-470/04 of 7 September 2006, and on the Commission's Communication on exit taxation (COM(2006)825 of 19 December 2021). Based on this case law the Commission is of the opinion that immediate taxation of accrued but unrealized capital gains at the moment of exit is not permitted if there would be no similar taxation in comparable domestic situations. According to the Commission, European law requires that EU Member States defer the collection of their taxes until the moment of actual realization of the capital gains. Although not mentioned by the Commission, also relevant in this respect is the ECJ decision in the X and Y, Case C-436/00 of 21 November 2002, in which the same reasoning was applied by the Court.

The Commission has formally requested that Belgium, Denmark and the Netherlands amend their domestic rules to bring it in line with article 49 TFEU. It is anticipated that similar infringement proceedings will be opened against other EU Member States which apply similar exit taxation rules.


Implications

The De Lasteyrie du Saillant and the N cases concerned exit tax provisions for individuals and not for corporations. Nevertheless, in our view it follows from these cases that, in general, the exit tax charged upon a relocation of residency by a corporation must be regarded as a restriction of the freedom of establishment. Although there might be a valid justification for this restriction, the question is whether the sanction of immediate taxation is proportionate. It is likely that this will be considered disproportionate by the ECJ. The ECJ has indicated that there is a less far-reaching system available, i.e., the system of issuing "protective assessments" which do not result in immediate taxation. As such, there seem to be good arguments to challenge an exit tax which has been levied in the past, or to take the position that upon a future migration no immediate exit tax would be due.

It should also be noted that in itself, the principles of De Lasteyrie du Saillant do not apply to intercompany transfers of assets. These transfers of assets would normally attract immediate tax consequences in domestic situations. The Commission, however, considers that the principles of De Lasteyrie du Saillant not only apply to the transfer of the seat of a company to another EU Member State, but also to exit charges when a company transfers single assets or liabilities to a permanent establishment situated in another EU Member State and vice versa, where a similar transfer of assets from a head office to a branch in the same EU Member State would not attract any immediate tax consequences.

The position taken by the Commission in the infringement proceedings provides further support that an exit tax on corporate migration within the European Union is incompatible with the freedom of establishment as laid down in article 49 TFEU. Therefore, these developments should be followed closely by any multinational group which is conducting or considering a migration of operations within the European Union, e.g., in connection with an internal business rationalization.

The aforementioned should, in principle, also apply to a migration to European Economic Area (EEA) countries (e.g., Iceland and Norway). The Commission is of the opinion that EU Member States should only be allowed to sustain their exit tax claims at the moment of transfer of the assets or migration of the company if there is no adequate information exchange relationship with the EU/EEA country concerned. An important difference between EEA countries and EU Member States is that the EU tax directives do not apply to EEA countries, especially those directives that provide for mutual assistance in the field of information exchange. In relation to EEA countries this can be significant in the case of exit tax collection since the EU Member States are not able to investigate on the basis of these directives whether there has been any abuse. However, it can be concluded from ECJ case law that the exchange of information on the basis of a tax treaty may also qualify as sufficient in this regard. The Netherlands, for example, has signed tax treaties with Norway and Iceland that provide for the possible exchange of information. The possibility of exchanging information pursuant to a tax treaty deprives the EU Member States of the possibility of alleging that a justification exists for imposing the exit tax.

In respect of countries that have concluded an EU Association Agreement or a similar agreement with the EU it will depend on the wording of the Association Agreement whether the above also applies to migrations to those countries. For example, Switzerland is a member of EFTA and has entered into several agreements with the EU. Switzerland is not part of the EEA. In this respect, Switzerland can be considered as a "normal" third country.

For other third countries, the free movement of capital (article 63 TFEU) is relevant since this is the only freedom that also is applicable for third countries. Therefore, the main question is whether this freedom applies and, if so, if one can rely on this freedom in respect of exit taxes. In our view, based on ECJ case law, the free movement of capital will most likely not apply with respect to the migration of companies. In that case, companies cannot rely on the TFEU in case of a migration to a third country.
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