On September 8, 2011, Advocate General Kokott of the European Court of Justice (“ECJ”) in Luxembourg issued an important opinion on the levying of an immediate final levy on businesses that relocate their real company seat to another Member State. The case involved National Grid Indus, a Dutch company which relocated its place of effective management and business operations from the Netherlands to Great Britain. As a result of the relocation, the Dutch Revenue imposed a corporate income tax assessment in order to include the unrealized gains and reserves in the exit tax. Advocate General Kokott considers that the Dutch levy is, under certain circumstances, contrary to the Treaty on the Functioning of the EU. She believes that the levy should be deferred until the date a ‘non-emigrating’ company actually realizes the unrealized gains and reserves.
Facts
The case involved a private limited liability company which, up until December 15, 2000, had its place of effective management in the Netherlands
Since 1996, this company held a receivable of GBP 33,113,000 on a group company resident in Great Britain. On December 15, 2000, the deferred foreign exchange profit amounted to more than NLG 22 million as a result of an exchange rate rise in the British pound against the Dutch guilder.
On that same date the company relocated its effective management to Great Britain. Based on the tax treaty concluded between both countries, the company was regarded as a British resident company after the relocation of the real seat. Because the company no longer had a permanent establishment in the Netherlands after the relocation of its real seat, the right to tax the profit generated by the company’s business operations was, pursuant to the tax treaty, allocated exclusively to Great Britain.
According to Supreme Court case law, the application of the tax treaty meant that the company ceased to generate taxable profit from its business operations in the Netherlands. Therefore, exit tax was owed on the capital gains present at the time of the relocation of the real company seat. That is why the tax inspector took the position that the company had to be taxed on the deferred foreign exchange profit.
The company appealed this decision before the Haarlem District Court, which ruled in favor of the tax inspector. The company, in turn, appealed this decision before the Amsterdam Court of Appeals. The Court of Appeals concluded that the levying of an exit tax when a company relocates its real seat from one Member State to another, restricts the freedom of establishment.
Nevertheless, the domestic measure could be justified due to compelling reasons of public interest, in particular the principle of territoriality, related to a temporal component. In order to answer this issue decisively, the Court of Appeals decided to refer a number of questions to the ECJ, in particular whether the exit tax is contrary to the freedom of establishment. And, if this is the case, whether the levying of exit tax could be justified by the necessity to allocate the right to taxation between the Member States.
Advocate General’s opinion
The Advocate General firstly confirmed that the company could successfully invoke the freedom of establishment against the Netherlands, if a Dutch company relocates its place of effective management to another Member State, as a result of which the Netherlands would wish to impose an immediate final levy on the capital gains without the possibility to take any later losses into account.
The Advocate General also concluded that the exit tax has a restrictive and deterrent effect, because it is not imposed if the company’s real seat is relocated within the Netherlands. The Advocate General subsequently assessed whether the Netherlands could invoke a justification that, in light of the intention of the exit tax, would be appropriate and proportionate. According to the Amsterdam Court of Appeals, the rule’s intent is to ensure that the total profit generated by a company in the period that it was resident in the Netherlands, is also taxed there. The Advocate General concluded that the exit tax is, in principle, an appropriate measure to achieve this.
In order to assess whether the exit tax was proportionate, Advocate General Kokott distinguished between the determination of the profit subject to exit tax, and the collection of the tax owed. She considered the rule to be proportionate in respect of the determination, but as regards the collection of the tax owed, she concluded that if it is relatively easy to monitor the assets, an immediate final levy would be disproportionate and, as such, unjustifiable. In that situation, she does not consider it problematic for the Member State of departure to wait with collecting the tax owed on the capital gains until the date they are actually realized. This also applies to deferred foreign exchange profits. The Member State of departure must set-off any accrued deferred valuation decreases in total against the exit tax levy, unless the new host Member State allows for a step-up, on the basis of which it can be assumed that this Member State will take valuation losses into account after the date of emigration.
According to the Advocate General, an immediate exit tax is permissible if this involves a business whose asset situation is so complex that an accurate cross-border monitoring of all the assets and their deferred capital gains by the Member State of departure is almost impossible, due to the nature and/or scope of the assets, or if this would entail high costs.
Because the other justification grounds also lead to the same conclusion, Advocate General Kokott advised the ECJ that the exit tax levy can be justified if the assets of the ‘emigrating’ company could not reasonably be monitored until the date at which they are realized, but that this levy is disproportionate if it is relatively easy to monitor the assets. In that case, the final levy would be contrary to the freedom of establishment if the levying thereof is immediate. Whether post-emigration valuation losses are permissible can only be determined on a case-by-case basis.
We will have to wait and see if, and to what extent, the ECJ follows the Advocate General’s opinion in its judgment, which is expected early next year.