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Dutch Exit Taxation Under Review


On 24 November 2010, the European Commission ("EC") decided to refer the Netherlands, Denmark and Spain to the EU's Court of Justice ("ECJ") for their provisions which impose an immediate exit tax on companies that transfer their seat, permanent establishment or assets to another Member State.

According to the EC, such rules are considered to be incompatible with the freedom of establishment. This is the third step, after a reasoned opinion, in an infringement procedure, the EC has taken against these countries. Taxand Netherlands assesses the impact this case may have on other jurisdictions who decide to transfer their seat, PE or assets to another Member State.

The EC opinion is based on the findings of the European Court of Justice ("ECJ") in the case of Lasteyrie du Saillant of 11 March 2004, Case N of 7 September 2006 and the Commission's statement on exit taxation of 19 December 2006. It follows from this case law that it is not permitted to impose immediate taxation of accrued, but unrealised capital gains, at the moment a business exits its jurisdiction, if there is no similar taxation in comparable domestic situations. This means that a Member State must defer its tax collection until the moment the capital gains are actually realised. Furthermore based on this case law Member States should take into account an eventual decrease of the unrealised capital gain after exit.

The outcome of this case can have implications in the following situations:

  • When tax is imposed on a transfer of business assets to a business abroad, where the company or individual emigrates (or the company transfers its effective place of management) abroad as well.
  • When tax is imposed on the transfer of business assets which were part of a Dutch permanent establishment when the (effective management of the) company or the individual owner is no longer located in the Netherlands.

It is interesting to note that recently the Court of Appeals of Amsterdam has also put questions to the ECJ on the application of a Dutch final exit tax levied upon emigration of a Dutch BV to the UK. In this case the tax payer disputed the permissibility of the exit tax, inter alia on the same grounds as the EC infringement procedure.

Taxand's Take

The disputed immediate taxation of unrealised capital gains in case of a change of residency of a company is currently a much discussed item in the Netherlands.

We expect that the ECJ will rule that the Dutch exit tax on business in its current form discriminates against companies that wish to relocate and constitutes a breach of the European freedom of establishment.

If the ECJ's ruling will indeed be in line with our expectation, the question remains how the Dutch government will amend its legislation to realise compatibility with the EU laws. This is impossible to predict at this stage. A possible alternative for the immediate taxation, which may be in line with EU laws, could for instance be imposing a preserving assessment with a 10 year term which takes into account any decrease in value of the latent capital gains.

Since actions of the European Commission do not result in legal proceedings being deferred, we recommend in those cases where exit taxation is levied, to file a timely objection against the tax assessment taking the position that the assessment is incompatible with the European freedom of establishment.

Your Taxand contact for further queries is:
Marc Sanders
T. +31 2 0757 0905

Taxand's Take Author