Upper Tribunal Tax and Chancery Chamber

[2024] UKUT 00319 (TCC)

Fecha: 23-May-2024

The Battleground

The Battleground

The jurisprudence of the CJEU

44.

It is well-established that the imposition of an exit tax, on a person transferring his tax residence from one EU member state to another, may constitute a restriction on that person’s freedom of establishment or on the free movement of capital. Exit taxes place a person that chooses to transfer to another member state in a worse position than if he had not done so. This renders any decision to transfer less attractive: National Grid Indus BV v Inspecteur van de Belastingdienst Rijnmond (Case C-371/10):

[37] In the case in the main proceedings, it is clear that a company incorporated under Netherlands law wishing to transfer its place of effective management outside Netherlands territory, in the exercise of its right guaranteed by Article 49 TFEU, is placed at a disadvantage in terms of cash flow compared to a similar company retaining its place of effective management in the Netherlands. In accordance with the national legislation at issue in the main proceedings, the transfer of the place of effective management of a Netherlands company to another Member State entails the immediate taxation of the unrealised capital gains relating to the assets transferred, whereas such gains are not taxed when such a company transfers its place of management within the Netherlands. The capital gains relating to the assets of a company transferring its place of management within the Netherlands are not taxed until they are actually realised and to the extent that they are realised. That difference of treatment relating to the taxation of capital gains is liable to deter a company incorporated under Netherlands law from transferring its place of management to another Member State (see, to that effect, de Lasteyrie du Saillant, paragraph 46, and N, paragraph 35).

45.

It has also been recognised that exit taxes may be justified by reference to the legitimate objective of preserving the origin member state’s right to tax activities carried on within its own territory: Nv Inspecteur van de Belastingdienst Oost (Case C-470/04):

[46] Thus, gains realised on the disposal of assets are taxed, in accordance with Article 13(5) of the OECD Model Tax Convention on Income and on Capital, and in particular in accordance with its 2005 version, in the contracting State of which the person making the disposal is a resident. As the Advocate General has observed in paragraphs 96 and 97 of her Opinion, it is in accordance with that principle of fiscal territoriality, connected with a temporal component, namely residence within the territory during the period in which the taxable profit arises, that the national provisions in question provide for the charging of tax on increases in value recorded in the Netherlands, the amount of which has been determined at the time the taxpayer concerned emigrated and payment of which has been suspended until the actual disposal of the securities.

[47] It follows, first, that the measure at issue in the main proceedings pursues an objective in the public interest, and, secondly, that it is appropriate for ensuring the attainment of that objective.

[48] Finally, it needs to be examined whether a measure such as that at issue in the main proceedings goes beyond what is necessary to attain the objective it pursues.

46.

There have been a number of cases before the CJEU which have considered the extent to which exit tax provisions of EU member states are so justified. In National Grid Indus and Commissionv Portuguese Republic (Case C-38/10), the CJEU held that, because the underlying domestic law did not permit deferral of payment, the exit taxes levied in those cases were disproportionate and unlawful.

47.

In DMC (Case C-164/12) and Verder LabTec GmbH & Co KG v Finanzamt Hilden (Case C-657/13), the underlying domestic laws permitted the taxpayer to elect to make payments in annual instalments over a period of five and ten years respectively. The CJEU held that the options were proportionate restrictions, and compatible with EU law. The CJEU noted that whilst member states were not required to defer the payment of tax until the ultimate disposal of the taxpayer’s assets, such an option is not unlawful (Verder LabTec at [45]). In the case of Wächtler (C-581/17) deferral of payment until the disposal of the asset was held to be proportionate.

48.

The CJEU has held that payment of interest in respect of exit taxes is a matter for the member states concerned - see for example DMC at [61] where the Court stated that interest may be charged in accordance with the applicable national legislation.