Impact of ECJ Rules on Dutch Exit Taxation
On 29 November 2011 the European Court of Justice (ECJ) ruled in the National Grid Indus case on the Dutch exit taxation of unrealised gains of a company which transferred its place of effective management to another EU Member State. The ECJ held that imposing such exit taxation of unrealised gains is in principle compatible with EU law, however, the requirement of immediate collection of such exit tax, without offering the possibility of deferral of payment, is considered as a restriction of the EU freedom of establishment.
Anticipating on this ECJ Judgement, the Dutch State Secretary of Finance published a degree which addresses this problem for corporate exit taxation and exit taxation of natural persons. According to this degree a taxpayer can opt for a deferral of payment of exit tax. Taxand Netherlands discusses the incompatibility of the Dutch exit taxation with EU law and reasons why taxpayers should file a timely objection against the collection of exit tax.
In the underlying case, National Grid Indus BV transferred its principal place of business to the United Kingdom (UK). The Company had a receivable on a British entity in pound sterling (GBP). As the value of the pound sterling rose against the Dutch currency (NLG), there was an unrealised capital gain on the receivable. Based on the Tax Treaty between the Netherlands and the UK, by changing its principle place of business, the Company became a tax resident of the UK. As a result thereof the UK became exclusively entitled to levy taxes on the company, including taxation of the unrealised foreign exchange gain. Since the unrealised foreign exchange gain had arisen in the GBP receivable, this gain was not recognised at UK level since the GBP value of the loan receivable was unaffected by any change in the NLG/GBP exchange rate.
Still the emigration of the BV triggered Dutch corporation tax (article 15c Dutch Corporate Income Tax Act) on the unrealised foreign exchange gain.
The main question in this case was whether the aforementioned exit taxation was compatible with the EU freedom of establishment.
The ECJ ruled on 29 November 2011 that the transfer of the principle place of business of a company within the EU does not has to be tax neutral and the exit State is allowed to levy a final exit tax on unrealised gains of a company on the moment of emigration. In earlier ECJ case law (N-case, C470/04) the ECJ held that future losses of unrealised gains of the assets transferred should be taken into account by the State that levies exit tax. However, in National Grid Indus the ECJ held that it is irrelevant whether the Member State which has the exclusive right to tax company's profits as of the emigration date, takes into account value changes of the assets. Furthermore, the ECJ ruled that Member States are allowed to safeguard their taxation rights and are allowed to demand a bank guarantee.
The ECJ held, however, that the immediate collection of the exit tax on unrealised gains goes beyond what is necessary in order to achieve the objective of exit taxation and is therefore considered to be in breach with the freedom of establishment. Anticipating on this ECJ Judgement, the Dutch State Secretary of Finance published a degree which offers migrating companies the choice between immediate payment of exit tax or the deferral of payment on the tax until the disposal of the assets.
The ECJ is very clear in its judgment; the levy of exit taxation for an emigrating company within the EU is allowed. The exit tax is final and future value changes do not have to be taken into account by the exit State. However, since the immediate collection of exit tax is not in line with the freedom of establishment, the exit State should provide for the possibility of deferral of payment.
Due to this new published degree on exit taxation, the deferral of payment of exit tax is now possible for an emigrating company. This new policy rule is retroactively effective as of 29 November 2011. Furthermore, interest is due on the deferred taxation and the exit State is allowed to ask for a bank guarantee in order to safeguard its claim.
The possibility of the deferral of payment can become an interesting tax planning tool for companies who are considering an emigration. For example in the event a Dutch company with intangible assets deciding to transfer its principle place of business to another Member State with a lower effective tax rate and the costs for the deferral of payment (interest and bank guarantee) are ultimately lower compared to the total tax benefit due to this lower effective tax rate.
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