Dutch Exit Tax Is Disproportionate, ECJ Holds

Dutch Exit Tax Is Disproportionate, ECJ Holds

The European Court of Justice held in National Grid Indus (C-371/10) that EU law doesn't in principle preclude taxation of unrealized capital gains when a company transfers its place of effective management to another member state but that Dutch legislation prescribing the immediate recovery of that tax is incompatible with EU law. In 2000, National Grid Indus BV, a company incorporated under Dutch law, transferred its place of effective management to the United Kingdom without maintaining a permanent establishment in the Netherlands. The company's only asset was a receivable in U.K. currency that, at the time of the company's migration, contained unrealized foreign currency gains. The Netherlands levies corporate income tax if a company ceases to be resident in the Netherlands. As a result, the unrealized currency exchange gain was taxed at the time of the transfer of the company's effective place of management. The court of appeal in Amsterdam referred the case to the ECJ to establish whether such exit taxation is compatible with EU law. On whether National Grid Indus can rely on the Treaty on the Functioning of the European Union's article 49 on the freedom of establishment when challenging the exit tax, the Court held that it could because under Dutch law (which applies the incorporation theory), the company's transfer of its place of effective management to the United Kingdom did not affect its status as a company incorporated under Dutch law. The Court found that the Dutch exit tax violates the freedom of establishment because a company wishing to transfer its place of management to another member state is placed at a disadvantage in terms of cash flow when compared with a similar company retaining its place of management in the Netherlands. However, the Court held that the exit tax can be justified by the need to safeguard the balanced allocation of tax powers between member states. The Court noted that it has previously held that the transfer of a company's place of effective management to another member state cannot mean the member state of origin has to abandon its right to tax a capital gain that arose within the ambit of its tax powers before the transfer. The Court further held that the member state of origin may establish the amount of tax due at the time of the transfer and is not required to take into account any subsequent decreases or increases in the asset's value. Taking gains or losses into account after the transfer would disturb the balanced allocation of member states' tax powers and could also lead to double taxation or double deduction of losses, the Court said. It added that EU law provides no guarantee that a company's transfer to another member state will result in neutral taxation. However, the Court held that the Dutch rules requiring the immediate recovery of the tax at the time of the company's transfer are not proportional and are therefore incompatible with EU law. The Court noted that there are drawbacks to requiring an immediate recovery of the tax (such as cash flow problems) and to deferring the recovery of the tax until the gain is realized (such as excessive administrative burdens that might result from the company and tax authorities having to trace the transferred asset). Because of those considerations, national legislation that gives a company the choice of immediately paying the tax (which might create a cash flow problem but would free the company from subsequent administrative burdens) or of deferring the payment of the tax (which might entail administrative burdens from tracing) would constitute a measure that is more appropriate for ensuring a balanced allocation of tax powers and less harmful to the freedom of establishment than the Dutch legislation, the Court held.

For a related ECJ release, see Doc 2011-24903 <a href="/lr/resolve//18tp2"> <img src="//s3.amazonaws.com/binary.taxnotes.com/image/etl/doclink.gif" border="0" alt="2011 WTD 230-23: Court News Releases"/></a> <a href="https://s3.amazonaws.com/pdfs.taxnotes.com/2011/2011-24903-1.pdf" title="PDF: 2011-24903"><img src="//s3.amazonaws.com/binary.taxnotes.com/image/etl/pdficon_small.gif" width="14" height="14" border="0"/></a>. For prior coverage of the advocate general's opinion, see Doc 2011-20126 <a href="https://s3.amazonaws.com/pdfs.taxnotes.com/2011/2011-20126-1.pdf" title="PDF: 2011-20126"><img src="//s3.amazonaws.com/binary.taxnotes.com/image/etl/pdficon_small.gif" width="14" height="14" border="0"/></a> or 2011 WTD 186-3 <a href="/lr/resolve//18th4"> <img src="//s3.amazonaws.com/binary.taxnotes.com/image/etl/doclink.gif" border="0" alt="2011 WTD 186-3: News Stories"/></a>. For prior analysis, see Doc 2010-24608 <a href="https://s3.amazonaws.com/pdfs.taxnotes.com/2010/2010-24608-1.pdf" title="PDF: 2010-24608"><img src="//s3.amazonaws.com/binary.taxnotes.com/image/etl/pdficon_small.gif" width="14" height="14" border="0"/></a>or 2010 WTD 228-7 <a href="/lr/resolve//190hp"> <img src="//s3.amazonaws.com/binary.taxnotes.com/image/etl/doclink.gif" border="0" alt="2010 WTD 228-7: News Stories"/></a>. For the reference document, see Doc 2010-24854 <a href="https://s3.amazonaws.com/pdfs.taxnotes.com/2010/2010-24854-1.pdf" title="PDF: 2010-24854"><img src="//s3.amazonaws.com/binary.taxnotes.com/image/etl/pdficon_small.gif" width="14" height="14" border="0"/></a> or 2010 WTD 224-22 <a href="/lr/resolve//1915g"> <img src="//s3.amazonaws.com/binary.taxnotes.com/image/etl/doclink.gif" border="0" alt="2010 WTD 224-22: Other Court Documents"/></a>.

The European Court of Justice held in National Grid Indus (C-371/10) that EU law doesn't in principle preclude taxation of unrealized capital gains when a company transfers its place of effective management to another member state but that Dutch legislation prescribing the immediate recovery of that tax is incompatible with EU law.

The European Court of Justice held in National Grid Indus (C-371/10) that EU law doesn't in principle preclude taxation of unrealized capital gains when a company transfers its place of effective management to another member state but that Dutch legislation prescribing the immediate recovery of that tax is incompatible with EU law. In 2000, National Grid Indus BV, a company incorporated under Dutch law, transferred its place of effective management to the United Kingdom without maintaining a permanent establishment in the Netherlands. The company's only asset was a receivable in U.K. currency that, at the time of the company's migration, contained unrealized foreign currency gains. The Netherlands levies corporate income tax if a company ceases to be resident in the Netherlands. As a result, the unrealized currency exchange gain was taxed at the time of the transfer of the company's effective place of management. The court of appeal in Amsterdam referred the case to the ECJ to establish whether such exit taxation is compatible with EU law. On whether National Grid Indus can rely on the Treaty on the Functioning of the European Union's article 49 on the freedom of establishment when challenging the exit tax, the Court held that it could because under Dutch law (which applies the incorporation theory), the company's transfer of its place of effective management to the United Kingdom did not affect its status as a company incorporated under Dutch law. The Court found that the Dutch exit tax violates the freedom of establishment because a company wishing to transfer its place of management to another member state is placed at a disadvantage in terms of cash flow when compared with a similar company retaining its place of management in the Netherlands. However, the Court held that the exit tax can be justified by the need to safeguard the balanced allocation of tax powers between member states. The Court noted that it has previously held that the transfer of a company's place of effective management to another member state cannot mean the member state of origin has to abandon its right to tax a capital gain that arose within the ambit of its tax powers before the transfer. The Court further held that the member state of origin may establish the amount of tax due at the time of the transfer and is not required to take into account any subsequent decreases or increases in the asset's value. Taking gains or losses into account after the transfer would disturb the balanced allocation of member states' tax powers and could also lead to double taxation or double deduction of losses, the Court said. It added that EU law provides no guarantee that a company's transfer to another member state will result in neutral taxation. However, the Court held that the Dutch rules requiring the immediate recovery of the tax at the time of the company's transfer are not proportional and are therefore incompatible with EU law. The Court noted that there are drawbacks to requiring an immediate recovery of the tax (such as cash flow problems) and to deferring the recovery of the tax until the gain is realized (such as excessive administrative burdens that might result from the company and tax authorities having to trace the transferred asset). Because of those considerations, national legislation that gives a company the choice of immediately paying the tax (which might create a cash flow problem but would free the company from subsequent administrative burdens) or of deferring the payment of the tax (which might entail administrative burdens from tracing) would constitute a measure that is more appropriate for ensuring a balanced allocation of tax powers and less harmful to the freedom of establishment than the Dutch legislation, the Court held.

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Dutch Exit Tax Is Disproportionate, ECJ Holds