Brussels, 29/11/2011 (Agence Europe) - In principle, a member state may charge a tax on unrealised capital gains relating to the assets of a company when it transfers its place of management to another member state. However, immediate recovery of the tax at the time when the company transfers its place of management, without the company being given the possibility of deferred payment of the tax, is not compatible with EU law. Such, in substance, is the context of the ruling pronounced by the EU Court of Justice on Tuesday 29 November in response to the various questions referred to it by the Regional Court of Appeal, Amsterdam (Case C-371/10).
In the case in hand, the company under Netherlands law, National Grid Indus BV, with its head office in the Netherlands, had held since 1996 a claim expressed in sterling against National Grid Company plc, a company established in the United Kingdom. Following a rise in value of the pound sterling against the Netherlands guilder, an unrealised exchange rate gain was generated on that claim. On 15 December 2000, National Grid Indus transferred its management to the UK. By virtue of a double taxation convention, it was deemed to be resident in the UK and consequently ceased to obtain profits taxable in the Netherlands. Under Netherlands legislation, a final settlement of the unrealised capital gains existing at the time of the transfer of the place of management was drawn up by the Netherlands tax authorities, who demanded immediate payment of the tax. The company challenged that decision, maintaining that it was counter to the principle of freedom of establishment (Article 49 TFEU). The Court in the Netherlands referred the matter to the Court of Justice of the EU.
First of all, the Court of Justice finds that the company is entitled to cite Article 49 to challenge the decision. Under national legislation, the transfer of a Netherlands company's place of management to another member state entails the immediate taxation of the unrealised capital gains relating to the assets transferred, whereas such capital gains are not taxed when a Netherlands company transfers its place of management within Netherlands territory. That difference of treatment is liable to deter a company incorporated under Netherlands law from transferring its place of management to another member state and constitutes a restriction that is in principle prohibited by the Treaty provisions on freedom of establishment.
The Court recalls, however, that, in the absence of any unifying or harmonising measures of the EU, member states retain the power to define, by treaty or unilaterally, the criteria for allocating their powers of taxation, particularly with a view to eliminating double taxation. Subsequently, the Netherlands could quite legitimately impose a tax on capital gains within the ambit of its powers of taxation before the transfer.
In order to assess the proportionality of such legislation, however, two things must be examined: - the amount of the tax at the time when the company transfers its place of management to another member state, and recovery of the tax. Regarding the amount of the tax, one may consider that the member state of origin complies with the principle of proportionality if, for the purpose of safeguarding the exercise of its powers of taxation, it determines definitively the tax due on the unrealised capital gains that have arisen in its territory at the time when its power of taxation in respect of the company in question ceases to exist (i.e. upon transfer). The Court goes on to specify that the member state of origin is not under any obligation to take into account decreases or increases of value which may occur after company transfer as this could not only bring into question the balanced repartition of the power of taxation between member states but also lead to double taxation or double deduction of losses. According to the Court, however, immediate recovery of tax on unrealised capital gains, as imposed by the Netherlands legislation, is disproportionate. In those circumstances, national legislation offering the choice to a company transferring its place of management between, on one hand, immediate payment of the amount charged (disadvantageous for the company concerned but dispensing it of later administrative charges) and, on the other, deferred payment (where necessary, together with interests and involving, for the company, an administrative charge linked to follow up of assets transferred) would be a measure less detrimental to the freedom of establishment than immediate recovery. (FG/transl.jl)