Exit Tax: Fiscal Territoriality and Company Transfer | De Pietro | Eureopean Tax Studies

Exit Tax: Fiscal Territoriality and Company Transfer

Carla De Pietro [1]

1. Exit tax and the EU single market: the ECJ’s attempt to reconcile two conflicting concepts

While initial development of the European Court of Justice case law in direct tax matter is mainly focused on conditions of market access, subsequently and currently most ECJ cases concern definition of market equality. Thus, now the ECJ largely considers cases which concern member state tax jurisdiction delimitation, determining what exclusively pertains to member state sovereign tax jurisdiction and what can cause discrimination or restrictions in breach of EU law.

The most recent judgments of the Court highlight a progressively more strident contrast between the concept of the internal market, where allocation of taxing power should be neutral, and the existence of twenty-sevennational jurisdictions.

The Court now chiefly aims at developing the balanced allocation of taxing power between the state of departure and the state of destination as a mandatory requirement of public interest under its rule of reason. It is worth noting that the justification of balanced allocation of taxing power is closely connected with the abuse of rights doctrine, since abuse is an intentional disruption of fiscal territoriality and cohesion.

In order to develop this “balanced allocation of taxing power” the European Court of Justice in its decisions refers to international law criteria on which the OECD Model Convention against double taxation is based.

In respect to the above, the Court seems to consider that the source criterion prevails over the residence criterion. This conclusion can be inferred from the ECJ decisions dealing with capital income flow. On the one hand, the Court obliged the taxpayer’s residence state to apply credit, exemption or , in general, more favorable taxmeasures also to non-resident taxpayers [2]; on the other hand, in the opposite situation - specifically in the Class Act IV decision [3] - the Court did not consider the source state obliged to apply credit to non- resident taxpayers as well. This would imply that the source state should renounce ”its right to tax a profit generated through an economic activity undertaken on its territory”.

The choice to give the source criterion prevalence over the residence criterion is not justified under EU law and, therefore, one could doubt its legitimacy as a means of supporting a justification based on the territoriality principle. Nevertheless, given the lack of harmonization within the EU, the Court had to make a choice even if it could not be completely justified.

In this context, exit tax is an emblematic example of when the Court tries to develop a model, which inevitably is the result of trying to reach a compromise between the necessity of preserving source state taxing power and the necessity to guarantee fundamental freedoms provided in the EC Treaty [4].

Restrictions caused by levying a tax on emigration alone, without a real act of disposal, can only be justified by the right of each state to tax income produced within its territory. This is the case both when national legislation aims at curbing tax avoidance, such as in the de Lasteyrie case, and when the domestic measure has the purpose ofguaranteeing a balanced allocation of taxing power, such as in the N case.

2. Avoidance and proportionality: the first attempt to develop an exit tax model was with the de Lasteyrie case

In the de Lasteyrie case [5] the European Court of Justice stated that art. 167 bis of the Code Général des Impôts,which is now abrogated, was not compliant with freedom of establishment under the EC Treaty. French legislation provided for taxation upon tax residence transfer outside France on capital gains accrued on substantial holdings but not yet realized.

Payment deferral was subject to the condition that the emigrant taxpayer would declare the amount of tax due, apply for the benefit of suspension, designate a representative in France and, before his departure abroad, release guarantees sufficient to ensure the levy of the tax by the state.

The ECJ based its reasoning, firstly, on the argument that levying a tax - usually due at the moment of actual realization - restricts freedom of establishment if the payment is demanded exclusively upon transfer for tax purposes. A taxpayer willing to transfer his tax residence is in a disadvantageous position compared to the taxpayerwho continues to reside for tax purposes in France.

Thus, restrictions are not caused by taxation in itself, but by the fact that one has to pay tax when exercising one of the fundamental freedoms guaranteed by the EC Treaty.

Indeed , the ECJ allowed the source state to tax capital gains accrued during the entire period of residence for tax purposes in France, stating that a mandatory requirement of public interest existed , i.e. the anti-avoidance purpose of the French exit tax regime.

Nevertheless, the Court did not consider the provisions in question proportionate, since they contained a general presumption covering all cases of taxpayer’s transfer abroad and not only cases of tax avoidance.

The Court did not believe that art. 167 bis of CGI was intended to preserve the coherence of the French tax system. The applicable exit tax regime did not definitively assure taxation of accrued capital gains. A credit was guaranteed in the case of actual realization abroad and , in any case France renounced the levy of exit tax whencapital gains were not realized within five years of the transfer.

Finally, the Court did not consider the French regime to be justified by the necessity to guarantee allocation of taxing power between the st ate of origin and the state of destination. The ECJ simply stated, without any furtherclarification, that ”the dispute does not concern either the allocation of the power to tax between Member States or the right of the French authorities to tax latent increases in value when wishing to react to artificial transfers of tax residence, but the question whether measures adopted to that end comply with the requirements of the freedom of establishment [6]“.

This is clearly an unjustifiable statement and, as I’m going to highlight below, it contradicts other statements made by the Court in the subsequent N case, which involved an exit tax regime that was the same as the French one, and in which the Court justified Dutch legislation as it is aimed at assuring a balanced allocation of taxing power.

In addition, the Court contradicted itself when it affirmed that the proportionality principle was respected whenproviding for the deferral of the payment without setting up any guaranty. As the French exit tax regime wasjustified under an anti-avoidance mandatory requirement of public interest, proportionality is consistentlyguaranteed only by giving the taxpayer possibility to rebut the presumption, or by levying tax only when a purelyartificial situation is ascertained.

Also the possible solution proposed by the Court of levying tax upon return of the taxpayer after a relatively short period of time abroad cannot be considered appropriate to assure proportionality in respect to an anti-avoidance justification. Also in this case a presumption of tax avoidance would be introduced and, in itself, it would not give the right to prove the absence of bad faith to the taxpayer.

3. The N case: exit tax as an appropriate measure for guaranteeing a balanced allocation of taxing power

The N [7] case, which came after the de Lasteyrie du Saillant [8] case, concerned the Dutch exit tax regime in regards to capital gains accrued on substantial holdings. The legislation in question was virtually the same as in the earlier French case [9].

And the Court’s reasoning was largely the same as that for the de Lasteyrie decision; it stated that the Dutch regime restricted freedom of establishment . Although, in fact, there were no obstacles for the taxpayers transfer abroad , taxation that was levied solely upon the basis of emigration, which causes a deemed realization, had the effect of dissuading taxpayers wishing to transfer their tax residence. Emigrant taxpayers were in a disadvantageous position in respect of taxpayers who remained in the Netherlands.

Thus, in the N case as well as in the de Lasteyrie case the dissuasive effect of the tax regime in questionrepresented a restriction of freedom of establishment. And this restriction was worsened, as with the French case,by the obligation to set up guarantees in order to obtain a payment deferral .

This hindrance of freedom of establishment was nevertheless justified by the Court. It considered that the Dutch regime assured the allocation of taxing power between member states on the basis of the territoriality principle.

As mentioned above, this is a recurring argument in recent case law for the Court. Indeed, this argument is now considered a mandatory requirement of public interest [10].

In the N case, the ECJ highlighted that, lacking the multilateral agreements that were envisaged in art. 293 ECaimed at preventing double taxation, it is reasonable that states rely on the OECD Model Convention.

Art. 13(5) of the OECD Model Convention attributes to the source state where the alienator resides the right to tax gains from the alienation of any property , other than that referred in the previous paragraphs of the article.

Furthermore, the Court highlighted what Advocate General Kokott stated in her Opinion [11]: the territoriality principle is applied within the Dutch system on the basis of a chronological criterion - the period of tax residence – so that exit tax is levied only on capital gains accrued during the period of tax residence in the Netherlands.

At the same time, in the Netherlands step up is granted: holdings are revaluated at their fair market value upon immigration.

It is worth noting that in its most recent judgments, the Court applies the principle of territoriality in connectionwith both tax system coherence and allocation of taxing power with a lack of clarity. The three concepts (territoriality, coherence and allocation of taxing power), on which a unique mandatory requirement of public interest has been based, have hardly become distinguishable from each other.

The most plausible explanation of their part in the Court’s reasoning, also in the light of its case law, is that the principle of territoriality is applied in its original formulation as a criterion that limits worldwide taxation by theresidence state and avoid double taxation. Thus, territoriality has the function of assuring a “balanced” [12] allocation of taxing power, whose coherence is the “domestic” condition.

Thus, in the N judgment, more than in the de Lasteyrie judgment, the Court gave value to the need to preserve source state taxing power.

In the N case the Court stated that the Dutch exit tax regime in question did not meet the proportionality test and, for this reason, it was not compliant with art. 43 EC.

In this respect, the Court did not consider the need to make a tax declaration upon transfer to be a determinant issue. Although the requirement to make a tax declaration, as the Court highlighted in its judgment, definitely had an influence on the restrictive effects of the legislation in question, it did not violate the proportionality principle. It would be more difficult from a practical point of view for the taxpayer to lodge a tax declaration, in the future, at the moment of actual realization.

The principle of proportionality was violated, as the Court had stated in the de Lasteyrie judgment, by the need to set up guarantees in order to obtain the deferral of payment.

Thus, the solution of the Court was the automatic deferral of payment until actual realization.

Although the release of guarantees was designated to make it easier for the source state to levy tax less restrictive measures should apply. In the Court’s opinion, effective measures are contained in the council directives concerning mutual assistance by the member states [13].

Finally, the Court stated that in order to assure a full implementation of the principle of proportionality states must take into consideration decreases in value at the moment of realization.

But this is another discrepancy in the ECJ’s development of a balanced allocation of taxing power justification. It is, indeed, worth noting that the principle of territoriality, on which art. 13(5) of the OECD Model Convention is based, legitimizes the right of the state of residence to assess the amount of tax due, automatically guaranteeingpayment deferral until actual realization. However, contrary to what the Court stated, art. 13(5) of the OECD Model Convention does not allow the state of previous residence to take into account at the moment of realizationdecreases in value accrued after emigration. They can only be taken into account by the state of current residence.

4. Company transfer exit tax: a question of freedom of primary establishment

The N and de Lasteyrie cases dealt with exit tax upon transfer of individual taxpayers. The principles that the Court states in these judgments are general, so they can be interpreted as applying to juristic persons as well as toindividuals [14].

The problem arising with regard to juristic persons is the possibility to apply articles 43 and 48 EC so that the origin state is considered obliged to guarantee their transfer without lost of legal identity.

However, two decisions of the European Court of Justice represent an obstacle to the application of articles 43 and 48 EC: the Daily Mail [15] case and the more recent Cartesio case.

Daily Mail General Trust plc, which was a company incorporated in the United Kingdom, wished to transfer its central management to the Netherlands.

The purpose of the Daily Mail’s transfer was to move its tax residence and subsequently to sell some of its holdings, and in so doing avoiding UK capital gains tax [16]. British legislation required the Treasury’s consent for company transfer. In the case in question the consent was denied since the Daily Mail did not want to pay tax before leaving the country.

Consequently, the Daily Mail referred to the Court preliminary questions, wanting to know if in the Court’s opinionthe relevant British legislation hindered freedom of establishment under the EC Treaty.

However, the ECJ did not consider these questions, but instead focused on whether member states can preventcompany transfer abroad by forcing them to wind up.

It is worth noting that in this case there were no company law obstacles to the transfer: both the UK and the Netherlands followed (and still follow) the incorporation theory. Thus, the Daily Mail could transfer its central management without losing its legal identity.

The Court’s preliminary statements highlighted that freedom of establishment is one the fundamental freedoms guaranteed by the EC Treaty and that relevant norms had been directly applicable since the end of the transitional period. These provisions allow not only individuals but also companies to freely move to another member state. This is possible under art. 48 EC, which grants companies the same rights that individuals have in exercisingfreedom of establishment.

The ECJ made the following very clear statement in the Daily Mail case – a statement that they were to re peat several times: Even though those provisions are directed mainly to ensuring that foreign nationals and companies are treated in the host Member State in the same way as nationals of that State, they also prohibit the Member State of origin from hindering the establishment in another Member State of one of its nationals or of a company incorporated under its legislation which comes within the definition contained in Article 58 [17].

With this statement, the Court explicitly recognized the possibility of applying, at least in principle, art. 43 EC even to companies exercising their right of primary establishment.

The Court, reiterating what the Commission stated in regard to the case in question , highlighted that “the rights guaranteed by Articles 52 et seq. would be rendered meaningless if the Member State of origin could prohibit undertakings from leaving in order to establish themselves in another Member State[18].

At the same time, contradicting the previously mentioned statements, it affirmed that companies, unlike individuals, are ”creatures of the law”, existing only by virtue of national legislations. The Court stressed the differences existing between member states both in regard to connecting factors and in regard to transfer possibilities.

To take into account these differences, art. 220 EC (now 293 EC) [19] provides for the negotiations of multilateral conventions that would allow companies to transfer without losing their legal identity.

On the basis of this argument the Court denied that articles 52 and 58 EC (now 43 and 48 EC) could be applied in the Daily Mail case. It stressed the necessity for member states to adopt legislation that specifically grants mutual company recognition. The Court concluded by stating that the status of community law at that time did not allow articles 52 and 58 EC (now 43 and 48 EC) to be interpreted so that they would confer companies the right to transfer place of management abroad, retaining their original legal identity.

In the recent Cartesio case [20], the Court repeated almost unchanged what it had stated in the Daily Mail judgment more than twenty years ago. The Court did not consider the Commun ity legal context in which the Daily Mail judgment was issued to have altered.

Once again the Court had to deal with the problem of the applicability of articles 43 and 48 EC to the origin state and the possibility of the state to limit a company’s freedom of primary establishment .

Cartesio was a limited partnership registered in the Hungarian commercial register. The company sought to transfer its place of management to Italy, retaining its status as a Hungarian company and thus remaining subject to Hungarian company law .

Hungary follows the real seat theory instead of the incorporation theory. A company cannot transfer its place of management abroad and retain its legal identity. If it does transfer, the company must wind up and re incorporate in the state of destination.

Taking these principles into consideration, the Hungarian court denied Cartesio the right to amend its registration in the lo cal commercial register in order to record the new Italian location as its place of management.

Subsequently, the company appealed against the first instance decision. Cartesio argued that Hungarian legislation violated EU law – in particular articles 43 and 48 of the EC Treaty, as they believed these norms guarantee the same rights of freedom of establishment to companies as to individuals.

The Court of Justice stated, as it did in the Daily Mail case, that given the lack of harmonization at EU level regarding connecting factors and considering that art. 48 EC establishes three equal criteria - real seat, law of incorporation, place of registration – each member state has the right to chose one of them and the Court cannot - even when considering compatibility with freedom of establishment - disqualify this choice.

Thus, the Court was of the opinion that it could not rule on Hungary’s decision that a company can be subject to its legislation only when the place of management is located within Hungarian territory, with all the consequences that follow, in particular the need to wind up when the company transfers its place of management abroad.

Furthermore, in the Cartesio case, the Court issued a clear statement clarifying a point that was only implicit in the Court’s Daily Mail judgment. It different iated between the case when a company transfer s abroad but wants to remain subject to the origin state’s legislation, and the case in which a company renounces its original nationality and wishes to be subject to the destination state’s law. Only in the second case would national legislation lose its ”immunity” (this is the word that the Court uses in the judgment) [21]. In such a situation the state of origin cannot hinder a company wishing to transfer abroad without retaining its nationality. Limits in exercising freedom of establishment can be introduced only if there are mandatory requirements of public interest. In such an event the obligation to wind up need s to be evaluated.

It is worth noting that the Court did not consider the fact that a company cannot simply decide to transfer abroad and remain or not remain subject to the origin state’s legislation. The lost or retention of legal identity depends exclusively on connecting factors and in general on company law adopted by the states.

Both the incorporation theory and the real sea t theory, at least under their original form, require the winding up of a company that wishes to transfer its legal and/or real seat abroad. Therefore, when the Court recognizes the discretionary power of states in choosing connecting factors, without any obligation to apply them in compliance with the EC Treaty, in principle it denies a juristic person the possibility to transfer abroad, renouncing its original nationality and retaining its legal identity.

The position of the Court will inevitably have important consequences both from a company law and from a tax law point of view. The Court declared that the origin state could impose the winding up of a company wishing to transfer. And in so doing the Court tacitly legitimized a tax regime that has immediate taxation of income, including accrued and not yet realized capital gains.

The tax consequences created when a company winds up at the moment of the transfer are the same as for the de Lasteyrie and N cases, where the Court believed that the Treaty had been violated. These consequences are immediate taxation upon emigration of all accrued and not yet realized capital gains simply as a direct result of exercising a fundamental freedom.

It is clear that the Court’s position in the Daily Mail and Cartesio cases does not allow for the application upon emigration of all the stated rules that protect taxpayers when the origin state applies an exit tax.

It is also clear that discrimination exists against companies that transfer their centre of management from a state that follows the real seat theory in respect to those companies that transfer their place of management from a state follow ing the incorporation theory. Only in this last case is it possible for a company to transfer its place of management abroad without losing its legal identity [22]. And only in this case do the principles that the Court expressed with regard to exit taxes apply. This means that these principles could be applied in the Netherlands or in the United Kingdom, where incorporation theory is followed. Nevertheless, they could not be applied for instance in France, where a company is obliged to wind up at the time of emigration. Thus, paradoxically, the Dutch exit tax regime, under which an exit tax is levied immediately at the time of a company’s emigration, could be considered to be in violation of the EC Treaty and as a result the Netherlands should amend it. On the contrary, tax regimes under which the consequences are the same but determined by the winding up of the company that wishes to transfer abroad would be considered in compliance with the Treaty.

5. The current EU context: has the Daily Mail case actually been ”superseded”?

Advocate General Poiares Maduro in his Opinion [23] issued in the Cartesio case came to different conclusions from those reached by the ECJ. He considered the Hungarian legisl ation in question to be in breach of freedom of establishment under art. 43 EC. The Advocate General highlighted that the forced winding up of a companywishing to transfer represents in effect a negation of freedom of establishment . He was of the opinion that EC Treaty provisions are directly applicable even in cases of primary establishment. Therefore, the Advocate General considered the Daily Mail case to have been “superseded” as the EU context had changed after the Daily Mail ruling. More specifically, the Advocate General emphasized that after the Centros [24], Überssering and Inspire Art [25] judgments, the Court excluded that the existence and the functioning of juristic persons is entirely dependent on state legislation regarding incorporation. Thus – he highlighted – Member states should adopt a law of incorporation compliant with articles 43 and 48 of the EC Treaty.

In my opinion, the Advocate General’s arguments are entirely sound. Tito Ballarino, one of the most eminent academic authorities in this field, highlighted that “the authors of the Treaty could not have predicted the direct effect of the Treaty, as this direct effect was a concept established by the European Court of Justice” [26].

The development of the Court’s rule of reason presupposes Treaty provision s being directly applicable. Thus, art. 293 EC no longer has the function that the authors of the treaty originally intended.

Furthermore, art. 293 was not included in the Lisbon Treaty. Even if the Treaty is still not in force, the omission makes clear the present position of the EU legislator regarding art. 293 EC ’s usefulness.

In the Überseering judgment, the Court affirmed that the fact that member states never reached the agreement on the conventions of art. 293 EC - the argument on which the Court based its decisions in both the Daily Mail and Cartesio cases - does not exclude the direct applicability of articles 43 and 48 of the EC Treaty [27]. Indeed – the Court continued - in some previous judgments the Court itself had already stated that art. 293 EC provides for the conclusion of multilateral conventions between member states only “ ’so far as necessary’, that is to say if the provisions of the Treaty do not enable its objectives to be attained [28]“. The Court added that, although the conventions under art. 293 EC, like the harmonizing dire ctives of art. 44 EC, aim at facilitating the exercise offreedom of establish ment, its exercise certainly does not depend on the adoption of these conventions and directives [29].

Furthermore, in the Überseering ju dgment the Court reaffirmed its ruling in the previous Centros case: freedom of establishment presumes that the state of destination recognizes companies duly incorporated in the origin state. Thus, in the Überseering judgment the Court stated: “the requirement of reincorporation of the same company in Germany is? tantamount to outright negation of freedom of establishment [30]“.

It is difficult to understand why this obligation should exist only for the state of destination and not for the state of origin, which could – in the light of what the Court ruled in the Daily Mail and Cartesio judgments - legitimately impose winding up on a company wishing to transfer abroad.

The argument that states of origin determine the existence and the functioning of a company cannot be considered adequate both from a legal point of view and in terms of creation of an internal market.

In addition, the lack of harmonization concerning connecting factors also has a negative impact on freedom of secondary establishment.

Germany imposed Uberssering’s reincorporation in keeping with the real seat theory, in which a company winds up in cases of ‘real’ seat transfer. Once again, it is difficult to understand how the Court could legitimize a partial application of real seat theory: it has authorized the origin state to impose winding up on a company wishing to emigrate but, at the same time, the Court has not allowed the state of destination to apply the same principle.

Freedom of establishment guaranteed by the EC Treaty is not dependent on any particular circumstance and it is not open to a Court’s different interpretation determined by the fact that it is dealing with the origin state or the state of destination.

Advocate General Colomer, in his Überseering case Opinion stated that there is no clear basis for distinguishing “between a – very qualified – right of primary establishment and a practically unlimited right of secondary establishment [31]“.

In his point of view, the Centros case changed the community context that existed at the time of the Daily Mail case. The Advocate General highlighted that in the Centros case the Court did not mention either the Daily Mail judgment or art. 293 EC, but it did state the need to evaluate possible violations of articles 43 and 48 EC, given the mandatory requirements of public interest.

With regard to the missing mention of the Daily Mail case, the Advocate General drew a parallel between this case, in which a British company wished to transfer its place of management to the Netherlands with the exclusive purpose of avoiding capital gains tax, and the broad concept of establishment applied by the Court in the Centros case. In keeping with this wide concept of establishment, the Court allowed the registration of a Centros branch in the state of destination where the entire business activity was carried on. Since no business activity was carried on in the state of incorporation, the entire operation was clearly aimed at exploiting the origin state ’s legislation.

The application of this broad concept of establishment allowed Centros to achieve the same ends that the DailyMail wished to obt ain. And, although this argument was used by the Danish government before the ECJ, the Court considered the Centros case to be a legitimate example of the right of secondary establishment. However, authorizing a company to set up a branch in a member state where the whole activity is carried on, with thesingle purpose of exploiting the incorporation state’s legislation, amounts , in fact, to allowing the company to transfer its place of management to a state other than the state of origin [32].

With regard to the missing mention of art. 2 93 EC, A d v ocate General Colomer argued that is necessary to consider the mandatory requirements of public interest when evaluating the existence of a restriction of freedom of establishment. And the recognition by the Court of these interests is confirmation of the direct applicability of EC Treaty provisions.

This direct application, from Advocate General Colomer’s point of view implies “the abandonment or, in any event, a qualification, of the reservation contained in Article 293 EC” [33].

Furthermore, the Advocate General highlighted that the wording of art. 293 EC is clear: it “contains only an invitation to Member States to enter into negotiations and, what is more, only ‘so far as necessary’. Article 293 EC is not therefore comparable to a true exclusion from the legislation and is rather an admonition to Member States ? Being thus an admonition it cannot, as such, hinder the effectiveness of one of the fundamental freedoms” [34].

Concluding on this issue, Advocate General Colomer stated that, although in the Daily Mail case there was a clear judgment which declared that the state of origin is completely free to chose the connecting factors, it cannot be denied that member states must make sure their legislation conforms with the EC Treaty provisions, given the direct applicability of articles 43 and 48 EC.

Indeed, the Court had already refer red to the argument based on the interpretation of art 293 EC before the Daily Mail judgment . In the Mutsch case [35], which was cited as a supporting case for this interpretation of art. 220 EC (now 293 EC) in the subsequent Gilly judgment [36], the Court stated that art. 220 (now 293) EC provided formember states to initiate negotiations only ”so far a s necessary” . Thus – the Court argued - when an invoked right falls within the scope of the EC Treaty, the same right must be guaranteed even if member states have not yet concluded the conventions of art. 220 EC (now 293 EC ).

Advocate General La Pergola, in his Centros case Opinion [37], believed that articles 43 and 48 EC granted the right to constitute a company in compliance with the legislation of a member state in order to carry on its activity in the same state or in another member state. This new company has the right to establish itself – exercising its right of primary establishment or its right of secondary establishment – wherever it prefers within the EU. Thus, the Advocate General was of the opinion that in cases of company transfer mutual recognition doctrine - which was affirmed in the Cassis de Dijon case - should apply.

In the more recent Sevic judgment [38], the Court had to decide whether German legislation, under which cross-border merger was not admissible, was in breach of articles 43 and 48 of the Treaty. Given that the Court did not consider the relevant German laws compliant with the EC Treaty, it is wor th noting that – once again - the Courtstated that EC Treaty provisions are directly applicable.

The Dutch government pointed out that the proposal for a directive on cross-border mergers of companies with share capital stated the need to adopt legislation that facilitate cross-border mergers. The Court, however, firmly rejected this argument and stated “whilst Community harmonization rules are useful for facilitating cross-border mergers, the existence of such harmonization rules cannot be made a precondition for the implementation of the freedom of establishment laid down by Articles 43 EC and 48 EC[39].

From the above, it is possible to conclude that, notwithstanding what the Court recently affirmed in the Cartesio case, the community context in which the Daily Mail judgment was issued has significantly changed since then, and therefore this judgment should be considered “superseded “.

The European Commission in the communication entitled “ Exit Taxation and the Need for Co-ordination of Member States’ Tax Policies” [40] stated that the rules affirmed in the de Lasteyrie and N cases apply to companies as well .

This statement implies the recognition of the necessity for a company to maintain its legal identity upon transfer without any obligation to wind up.

Fundamentally, the EU Commission based this position on the provisions contained in the Council Regulation on the Statute for a European Company [41], under which a Societas Europaea transfers its “registered office” to another member state, retaining its legal identity. Thus, an SE transfer does not determine the company’s winding up.

The EU legislation dealing with SE ’s is therefore founded on the principle that their transfer cannot determine the dissolution of the company.

Art. 7 of the EC Regulation states that both the registered office and the head office mu st be located within the same country. This means that a company retains it s legal identity even if upon transfer it loses any connection with the origin state.

With an a contrario argument, one could state that the provision under which a n SE can transfer itself without losing its legal ident ity simply demonstrate s that the EU legislator, aware of the fact that it is not possible at a national level, wanted to provide economic operat ors with an instrument designed to facilitate business activities within the EU market. However, it is worth noting that member states should first be aware of how important it is for a company to be able to operate easily within the single ma rket. Ease of operation would have advantages for Member states as well. Indeed, MoMiG [42], the German law that modifies limited partnership legislation, allowscompanies to transfer their place of management abroad without having to wind up. This legislation is designed to render German companies more competitive, and removing them from the disadvantageous position in with they were in respect to foreign companies that can easily transfer themselves within the single market.

6. Concluding remarks

The Court’ s position on exit tax for individuals owning substantial holdings is in my opinion largely correct, notwithstanding the inconsistencies discussed above. In pr inciple, a state of origin can legitimately apply an exit tax. Never theless, the need to respect freedom of establishment does not give the origin state the right to levy the tax i mmediately upon transfer. This is not in compliance with the EC Treaty both when the national legislation has an anti-avoidance purpose and when it is designed to preserve a balanced allocation of state taxing power.

At the moment of the taxpayer’s transfer a preserving assessment applies, so the due amount is determined butpayment is automatically deferred until the moment of actual realization.

The Court’s solution, in respect to the principle of proportionality, aims at preserving the origin state’s taxing power, guaranteeing the taxation of capital gains accrued during the whole period of residence for tax purposes. Nevertheless, tax can be levied only when those capital gains are actually realized, so that emigrant taxpayers are in the same position as taxpayers who remain within the country.

In principle, the same exit tax regi me could apply to juristic persons as well. The Court’s statements have a general nature so that they do not apply to individual taxpayers only. However, these rules can apply to juristic persons only when they retain their legal ident ity upon tax residence transfer. Thus, these rules apply to a company that transfer s its place of management from a state where incorporation theory is followed but not when the company transfer s its legal and/or real seat from a state where real seat theory is followed . In this last case,the company is obliged to wind up, in keeping with the original form of real seat theory. From a tax point of view this is virtually the same as levying an exit tax immediately upon the company’s trans fer. Indeed , in such a case the company does not exist anymore and needs to be reincorporate d in the host state.

It is clear that discrimination exists against companies that transfer their tax residence from a state where real seat theory is followed in respect to those companies transferring for tax purposes from a state where incorporation theory is followed. It is only in this last situation that an exit tax regime can be applied in compliance with the EC Treaty.

Furthermore, as the Court stated in the Überseering case, the forced winding up of a company upon transfer amounts to negation of freedom of establishment.

Nevertheless, in the very recent Cartesio case, the ECJ repeated almost unchanged what it had already stated in the Daily Mail case more than twenty years ago: due to the lack of harmonization in regard to connecting factors, member states are allowed to force a company to wind up at the moment of its transfer.

However, the EU context has changed considerably since then and thus it would be difficult to dispute the direct application of articles 43 and 48 EC a s well as the need to guarantee a company’s existence at the moment of its transfer.

Indeed, neither the theory of incorpo ration nor the real seat theory in their original form allow s a company to transfer its legal and/or real seat and have its connection with the state of origin cease while continuing to exist as a company.

Advocate General Poires Maduro’ s solution seems to have merit, in particular in the light of the Court’s case law evolution. He argues that , as under current EU Law m ember states are allowed to follow both the incorporation theory and the real seat theory, they should be obliged to apply them in compliance with freedom of establishment as defined in articles 43 and 48 EC and to guarantee company transfer with retention of their legal identity [43]. This would allow the application of an exit tax regime in keeping with the Court’s de Lasteyrie and N rulings.

Austria is an emblematic example of how to apply real seat theory in compliance with freedom of establishment. It allows companies to transfer their place of management and retain their legal ident ity. Therefore, after the de Lasteyrie judgment, Austria amended its companies exit tax regime, excluding immediate taxation upon transfer for tax purposes [44].

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Footnotes    (↵ returns to text)
  1. PhD student of tax law at both University of Bologna and Tilburg University.
  2. See ECJ 04 March 2004, C-334/02, Commission/France [2004], ECR I-2229; ECJ 7 September 2004, C-319/02, Petri Maikel Manninen [2004] ECR I- 7477; ECJ 15 July 2004, C-315/02, Lenz [2004] ECR I-7063; ECJ 6 June 2000, C-35/98, Verkooijen [2000], ECR I-4071.
  3. ECJ 12 December 2006, C-374/04,Test Claimants in Class IV of the ACT Group Litigation [2006], ECR I-11673.
  4. EC Treaty.
  5. ECJ 11 March 2004, C-9/02, de Lasteyrie du Saillant [2004], ECR I-2409.
  6. ECJ 11 March 2004, C-9/02, de Lasteyrie du Saillant [2004], ECR I-2409, paragraph 68.
  7. See ECJ 07 September 2006, C-470/04, N [2006], ECR I-7409.
  8. See ECJ 11 March 2004, C-9/02, de Lasteyrie du Saillant [2004], ECR I-2409.
  9. It is worth noting that the Dutch exit tax regime in question in the N case had already been amended when the de Lasteyrie judgment was made. In particular, the necessity of setting up guarantees in order to obtain payment deferral had been abolished. Thus, the deferral had become automatic in the case of transfer to a member state. The N case dealt with the previous exit tax regime. For more details, see S. Boers, Influence of EC law on Dutch exit tax provisions, Studi Tributari Europei, n. 1/2009, ste.seast.org.
  10. ECJ 13 December 2005, C-446/03, Marks & Spencer plc v David Halsey (HM Inspector of Taxes [2005] ECR I-10837; ECJ 18 July2007, C-231/05, Oy AA [ 2007 ], ECR I-6373.
  11. Opinion of Advocate General Kokott , delivered on 30 March 2006, C-470/04, N, paragraphs 96 – 97.
  12. This term is not used in the N judgment, but the ECJ very often uses the adjective when it refers to the allocation of state taxing power. Ex multis, ECJ 13 December 2005, C-446/03, Marks & Spencer plc v David Halsey (HM Inspector of Taxes [2005] ECR I-10837; ECJ 29 March 2007, C-347/04, Rewe Zentralfinanz [2007], ECR I-2647; ECJ 18 July 2007, C-231/05, Oy AA [2007], ECR I-6373.
  13. Council Directive 77/799/EEC amended by Council Directive 2004/106/EC;Council Directive 76/308/EEC amended by Council Directive 2001/44/EC.
  14. GREGGI M., Tax mobility within the EU: the quest for a new European Nomos, Studi Tributari Europei, n. 1/2009, “ste.seast.org”; TERRA – WATTEL, European Tax Law, Kluwer, 2008, p. 788.
  15. ECJ 27 September 1988, C-81/87 The Queen/Treasury and Commissioners of Inland Revenue, ex parte Daily Mail and General Trust PLC [1988] ECR 5483.
  16. In the Netherlands step up is granted: holdings are revaluated at their fair market value upon immigration.
  17. ECJ 27 September 1988, C-81/87, The Queen/Treasury and Commissioners of Inland Revenue, ex parte Daily Mail and General Trust PLC [1988] ECR 5483, paragraph 16.
  18. ECJ 27 September 1988, C-81/87, The Queen/Treasury and Commissioners of Inland Revenue, ex parte Daily Mail and General Trust PLC [1988] ECR 5483, paragraph 16.
  19. EC Treaty.
  20. ECJ 16 December 2008, C-210/06, Cartesio.
  21. ECJ 16 December 2008, C-210/06, Cartesio, paragraph 112.
  22. Under the incorporation theory, at least in its original form, a company wishing to transfer its registered office abroad must wind up.
  23. Opinion of Advocate General Poiares Maduro, delivered on 22 May 2008, C-210/06, Cartesio.
  24. ECJ 09 March 1999, C-212/97, Centros [1999], ECR I-1459.
  25. ECJ 30 September 2003, C-167/01, Inspire Art [2003] ECRI-10155.
  26. BALLARINO T., Sulla mobilità delle società nella Comunità Europea. Da Daily Mail a Überseering: norme imperatve, norme di conflitto e libertà comunitarie, in Rivista delle Società, 2003, fasc. 4, 669 ss.
  27. ECJ 5 November 2002, C-208/00, Überseering [2002] ECR I-9919, par. 60.
  28. ECJ 5 November 2002, C-208/00, Überseering [2002] ECR I-9919, par. 54.
  29. ECJ 5 November 2002, C-208/00, Überseering [2002] ECR I-9919, par. 55.
  30. ECJ 5 November 2002, C-208/00, Überseering [2002] ECR I-9919, par. 81.
  31. Opinion of Advocate General Dámaso Ruiz-Jarabo Colomer, delivered on 4 December 2001, C-208/00, Überseering BV, paragraph 36.


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