National Grid Indus BV v Inspecteur van de Belastingdienst Rijnmond/kantoor Rotterdam: exit taxes in the European Union revisited

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1 National Grid Indus BV v Inspecteur van de Belastingdienst Rijnmond/kantoor Rotterdam: exit taxes in the European Union revisited By Christiana HJI Panayi Reprinted from British Tax Review Issue 1, 2012 Sweet & Maxwell 100 Avenue Road Swiss Cottage London NW3 3PF (Law Publishers)

2 Case Notes NationalGridIndusBVvInspecteurvandeBelastingdienstRijnmond/kantoorRotterdam: exit taxes in the European Union revisited It has long been argued that corporate exit taxes in the European Union are restrictive measures as they hinder a person s ability to move to another Member State. As they only apply to persons moving their tax residence abroad, such taxes could constitute an obstacle to free movement. 1 Furthermore, the imposition of exit taxes could lead to double taxation, as gains could be taxed twice: by the home state and by the host state. 2 Even if the home state taxes gains accrued up to the moment of emigration, if the host state does not provide for a step-up according to the deemed disposal value then the pre-emigration gain would be taxed twice. The same consequence would follow if neither state grants a tax credit for the tax levied by the other state, or if neither of the states takes into account decreases of value. 3 Additionally, in cases where there is transfer of assets, double taxation (and double non-taxation) could be the result of mismatches in valuation methods. 4 The Court of Justice of the European Union (CJEU) has now delivered its first judgment on corporate exit taxes in National Grid Indus BV v Inspecteur van de Belastingdienst Rijnmond/kantoor Rotterdam (National Grid Indus). 5 Up until this case, the CJEU had dealt only with cases challenging exit taxes imposed on individuals. 6 From the case law on individuals it was evident that the CJEU recognised exit taxes as a restriction to the cross-border movement of individuals. The imposition of immediate home state taxation on unrealised gains of emigrating persons when such gains were not taxed in a domestic scenario was thought to constitute differential treatment and restrict the freedom of establishment. Furthermore, the obligation for tax declaration at the time of transfer and the obligation to give a guarantee for tax deferral to be allowed were also considered restrictive measures. However, restrictive measures were permitted provided they were in place to achieve a justifiable end. Exit taxes have been justified 1 See Communication on Exit taxation and the need for co-ordination of Member States tax policies (Communication on Exit taxation), COM (2006) 825 final, 3. This Communication was released on December 19, This could be the case, for example, if the home state deems the emigrating person to continue to be tax resident for the purposes of the gains or if home state and host state each claim jurisdiction over gains from the capital gains of a former resident and a resident respectively, or if the underlying movable asset remains in the home state. 3 Also see Communication on Exit taxation, above fn.1, For example, if an asset is transferred from a home state that exercises its taxing rights at the moment of transfer, to a host state which values the transferred asset at book value but subsequently taxes any increase in value upon the disposal of the asset, this could lead to double taxation. The reverse would lead to double non-taxation. See Communication on Exit taxation, above fn.1, 7. 5 National Grid Indus BV v Inspecteur van de Belastingdienst Rijnmond/kantoor Rotterdam (Case C-371/10). 6 Hughes de Lasteyrie du Saillant v Ministère de l Economie, des Finances et de l Industrie (de Lasteyrie) (Case C-9/02) [2005] STC 1722; [2004] ECR I-02409; N v Inspecteur van de Belastingdienst Oost/kantoor Almelo (N) (Case C-470/04) [2008] STC 436; [2006] ECR I For an analysis of these cases and their applicability to corporate exit taxes, see C. HJI Panayi, Exit taxation as an obstacle to corporate emigration from the spectre of EU tax law [2011] Cambridge Yearbook of European Legal Studies

3 42 British Tax Review on a number of grounds, such as the preservation of the allocation of taxing powers between Member States and the prevention of tax avoidance or evasion. 7 But even if justifiable, the restriction must be proportional. The imposition of an obligation to make a tax declaration at the time of transfer of residence, setting out the accrued gain but without giving rise to immediate tax, was regarded by the CJEU as proportional. 8 However, a demand for guarantees before the tax could be deferred was not considered proportional. 9 Also, any home state exit tax mechanism had to take into account reductions in value arising after the transfer of residence, unless such reductions had already been taken into account in the host Member State. 10 In its Communication on Exit taxation, 11 the Commission recognised the problematic effect of exit taxes on cross-border movement and urged Member States to co-ordinate their exit tax policies. The Commission suggested a number of ways to ensure co-ordination and to resolve mismatches leading to double taxation or double non-taxation (e.g. cross-crediting of home state/host state taxes, requiring the host state to allow a step-up, etc). 12 Following this Communication, the European Council also adopted a resolution, 13 with some guiding principles for the transfer of economic activities 14 between Member States. The emphasis was on symmetrical treatment: the host state had to allow a step-up in the base cost when the home state taxed unrealised gains. 15 Apart from the tax considerations, there are also corporate law issues which create obstacles to cross-border corporate migration, or prevent it altogether. The interplay of the incorporation and real seat theories constrain the ability of companies to migrate. 16 Broadly, from an outbound/emigration perspective, the company may not be allowed to transfer its registered and/or administrative seat without having to wind-up and dissolve first. From an inbound/immigration perspective, the company may not be recognised in the host state as a foreign company, losing the protection of the limited liability status. In addition, the company may have to reincorporate in the host state or adjust part or its entire internal law. Whilst in some cases dealing with corporate immigration, obstacles imposed by the host state were found to be incompatible with freedom of establishment, 17 a different result was reached 7 N (C-470/04), above fn.6, [2006] ECR I N (C-470/04), above fn.6, [2006] ECR I See de Lasteyrie (C-9/02), above fn.6, [2004] ECR I and N (C-470/04), above fn.6, [2006] ECR I See N (C-470/04), above fn.6, [2006] ECR I-7409, at [53] [55]. 11 Communication on Exit taxation, above fn Communication on Exit taxation, above fn.1, Council Resolution 16412/08 of December 2, This is defined in para.a of Council Resolution 16412/08 of December 2, 2008 as any operation whereby a taxpayer subject to corporation tax or a natural person engaged in a business: 1) ceases to be subject to corporate or personal income tax in a Member State (the exit State) while at the same time becoming subject to corporate or personal income tax in another Member State (the host State); or 2) transfers a combination of assets and liabilities from a head office or a permanent establishment in the exit State to a permanent establishment or a head office in the host State. at Communication on Exit taxation, above fn.1, [C]. 16 See, generally, C. HJI Panayi, Corporate Mobility under Private International Law and European Community Law: Debunking Some Myths [2009] Yearbook of European Law 123, For example, non-recognition of the foreign company, imposition of additional compliance requirements, lack of legal standing, requirement to reincorporate or adjust part of its entire internal law, etc. See Centros Ltd v Erhvervs- Og Selskabsstyrelsen (C-212/97) [1999] ECR I-1459; Überseering BV v Nordic Construction Co Baumanagement GmbH (C-208/00) [2002] ECR I-9919; Kamer van Koophandel en Fabrieken voor Amsterdam v Inspire Art Ltd (C-167/01) [2003] ECR

4 Case Notes 43 in emigration cases. 18 Recently, in Cartesio Oktato es Szolgaltato bt (Cartesio), 19 it was found that it was not incompatible with the freedom of establishment for Hungarian law to prevent a company incorporated there to transfer its operational headquarters to Italy, without transferring its registered office; i.e. without a change in governing law. The requirement to dissolve and reincorporate was not in breach of the freedom of establishment. 20 Following this judgment there was a lot of speculation as to its effect on the exit tax debate. The writer has argued elsewhere 21 that the Cartesio 22 precedent was unlikely to be followed in the exit tax cases as the test of reincorporation did not make sense in the context of exit taxes for companies. A company could become non-resident for tax purposes irrespective of an obligation to wind-up. The salient matter for the home state (i.e. the exit state) was that the migrating company ceased to exist for tax purposes. As such, the exit tax would be imposed irrespective of whether the company was reincorporated elsewhere. Therefore, the exit tax consequences did not always follow the company law consequences of the transfer. Making the applicability of the freedom of establishment depend on the event of reincorporation in the host state seemed, to the writer, nonsensical. This view appears to have been largely followed in the National Grid Indus case. 23 This is the first judgment on exit taxes affecting corporate mobility. National Grid Indus BV, a company incorporated under Netherlands law, had its place of effective management in the Netherlands. Since 1996, it had a claim expressed in sterling against National Grid Company plc, a company established in the UK. Following the rise in value of the pound sterling against the Netherlands guilder, an unrealised exchange rate gain was generated on that claim. In 2000, National Grid Indus transferred its place of effective management to the UK and, by virtue of the relevant tax treaty, after the transfer it was deemed to be UK resident. The Netherlands tax authorities imposed a final settlement of the unrealised capital gains existing at the time of the transfer of the place of management and demanded immediate payment of the tax. National Grid Indus contested the final settlement, claiming that it was contrary to the principle of freedom of establishment and eventually the case was referred to the CJEU. The referring court asked whether a company incorporated under the laws of a Member State, which transferred its real company seat to another Member State, could invoke freedom of establishment if a final settlement tax was imposed by the first Member State in respect of that transfer. If that was the case, the referring court also questioned if it was contrary to freedom of establishment for the final settlement tax to be applied without deferment and without the possibility of taking 18 See R. v HM Treasury and IRC Ex p. Daily Mail and General Trust plc (81/87) [1988] STC 787; [1988] ECR 5483 and Cartesio Oktato es Szolgaltato bt (C-210/06) [2008] ECR I Cartesio (C-210/06), above fn.18, [2008] ECR I However, this situation was distinguishable from that where a company moved to another Member State and was converted into a form of company which was governed by the laws of that other Member State, i.e. transfer with reincorporation and a change of governing law. According to the CJEU, this latter situation could be covered by EU law. If the host state allowed such migration under its laws but the home state made it dependent on the prior winding-up or liquidation of the company, then this would be a restriction to the freedom of establishment: Cartesio (C-210/06), above fn.18, [2008] ECR I at [111] [112]. 21 See Panayi, above fn Cartesio (C-210/06), above fn.18, [2008] ECR I National Grid Indus (C-371/10), above fn.5.

5 44 British Tax Review subsequent decreases in value into consideration or whether this could be justified by the necessity of allocating the power to impose taxes between the Member States. The CJEU largely agreed with the decision of its Advocate General 24 and found that the charging of tax on unrealised capital gains relating to the assets of a company when it transfers its place of management to another Member State restricted the freedom of establishment. 25 However, the restriction was justified on the basis of ensuring the preservation of the allocation of powers of taxation between the Member States. 26 A Member State was entitled to tax the economic value generated by an unrealised capital gain in its territory, even if the gain had not yet been realised. 27 As far as proportionality was concerned, the Court distinguished between the ascertainment of the amount of tax and the recovery of the tax. The Court concluded that the immediate recovery of the tax at the time when the company transferred its place of management, without the company being given the possibility of deferred payment of the tax, was disproportionate. By contrast, the definitive establishment of the amount of tax, without taking into account subsequent decreases in value was not disproportional. Some interesting issues arise from the Court s judgment. First, the Court appeared to be trying to reconcile its judgment with the Cartesio decision. 28 It held that a company incorporated under the law of a Member State which transfers its place of effective management to another Member State, without that transfer affecting its status as a company of the former Member State, may rely on Article 49 of the Treaty on the Functioning of the European Union (TFEU) for the purpose of challenging the lawfulness of a tax imposed on it by the former Member State on the occasion of the transfer of the place of effective management. 29 The distinguishing factor here was that the Dutch legislation did not concern the determination of the conditions required by a Member State of a company incorporated under its law for that company to be able to retain its status as a company of that Member State after transferring its place of effective management to another Member State. Rather, the legislation: confine[d] itself to attaching tax consequences, for companies incorporated under national law, to a transfer of the place of management between Member States, without the transfer affecting their status of companies of the Member State in question. 30 The Advocate General had reasoned in a similar fashion. She argued that the starting point, under EU law, is that the exit state must allow the emigration of companies incorporated under its law. It was only free to decide whether to permit the company to retain its status as a company 24 The opinion was delivered on September 8, 2011 and the judgment on November 29, National Grid Indus (C-371/10), above fn.5 at [40] [41]. 26 National Grid Indus (C-371/10), above fn.5 at [46] [51]. The need to maintain the coherence of the national tax system, as a justification, was considered to coincide with the balanced allocation of powers of taxation: [80] [82]. Also the risk of tax avoidance as a justification failed as the mere transfer of residence of the place of management of a company to another Member State could not give rise to a general presumption of tax evasion: [83] [84]. In these paragraphs, the CJEU uses avoidance and evasion interchangeably but probably means avoidance. 27 National Grid Indus (C-371/10), above fn.5 at [49]. 28 The Advocate General also dealt with this point extensively: National Grid Indus (C-371/10), above fn.5 at [17] [37] (AG). 29 National Grid Indus (C-371/10), above fn.5 at [33]. 30 National Grid Indus (C-371/10), above fn.5 at [31].

6 Case Notes 45 incorporated under national law. 31 A Member State could not be given the power to regulate, without being bound in any way by the freedom of establishment, the tax-law consequences of transferring a registered office or place of management, which the Member State permits while allowing the company to retain its status. EU law did not allow a Member State to prohibit emigration as such. 32 It would appear that the National Grid Indus case 33 puts to rest the argument that Cartesio 34 confers upon Member States blanket immunities vis-à-vis their exit tax regimes for companies. There is another distinguishing factor between Cartesio and National Grid Indus which was not alluded to by the CJEU or the Advocate General: the Court in Cartesio decided that a Member State has the right to impose an outright prohibition on the ability of a company to transfer its administrative seat to another Member State without reincorporation in that other state. The Court did not consider restrictive measures such as exit taxes which allowed this transfer but effectively made it more expensive or cumbersome. In effect, Cartesio looked at a case where the act of migration was prohibited altogether. The exit tax case law looks at the situation where the act of migration is allowed, but made more expensive. Therefore, the company law issues (and the case law on corporate mobility) may be irrelevant altogether. A second issue concerns the restriction on the freedom of establishment. The Court found that immediate taxation of unrealised capital gains when a Netherlands company transferred its place of effective management to another Member State was liable to deter such transfers. 35 Immediate taxation also placed the company at a disadvantage in terms of cash flow compared to a similar company retaining its place of effective management in the Netherlands. No capital gains tax would be levied on the assets of such a company until they were actually realised and to the extent that they were realised. 36 Contrary to the submissions of Member States, the fact that the gain was in effect an exchange rate gain which disappeared when the place of effective management was transferred to the UK did not mean that the gain had been realised. As the Court reasoned, the exchange rate gain that was taxed related to an unrealised capital gain which did not produce any profit 37 for National Grid Indus. Such an unrealised capital gain would not have been taxed if the company had transferred its place of effective management within Netherlands territory. 38 This appears to be a rather circular argument by the Court. The fact that the exchange rate gain did not produce any profit does not mean that it was not realised. Furthermore, the Court does not explain why the disappearance of the claim did not give rise to the realisation of the capital gain. On the one hand, the Court appears to assimilate an exchange rate gain with a normal gain in so far as restriction is concerned. On the other hand the Court concedes that it makes no difference to its analysis that the unrealised gains taxed relate to exchange rate gains which 31 National Grid Indus (C-371/10), above fn.5 at [35] (AG). 32 National Grid Indus (C-371/10), above fn.5 at [36] (AG). 33 National Grid Indus (C-371/10), above fn Cartesio (C-210/06), above fn.18, [2008] ECR I National Grid Indus (C-371/10), above fn.5 at [37]. 36 National Grid Indus (C-371/10), above fn The CJEU actually uses the term income but profit seems to make more sense. 38 National Grid Indus (C-371/10), above fn.5 at [40].

7 46 British Tax Review cannot be reflected in the host Member State under the tax system in force there. 39 This appears to be contrary to the approach of the CJEU in Deutsche Shell GmbH v Finanzamt fur Grossunternehmen in Hamburg, 40 a cross-border loss relief case, where the special nature of the currency loss of a foreign permanent establishment was taken into account in determining whether the loss was a terminal one. Arguably, in the few situations of corporate migration within the European Union where an exchange rate gain arises, the special nature of such a gain ought to be taken into account. A third issue is that the Court appears to deviate from some of the principles laid down in its exit tax case law on individuals. In contrast to the N case, 41 decreases of value were not to be taken into account when establishing the exit tax. As the Court reasoned, the tax due on the unrealised capital gains was determined at the time when the power of the Member State of origin to tax the company ceased to exist; in this case at the time of the transfer of the company s place of management. The taking into account by the Member State of origin either of an exchange rate gain or of an exchange rate loss occurring after the transfer of the place of effective management could not only call into question the balanced allocation of powers of taxation between the Member States but also lead to double taxation or double deduction of losses. 42 The fact that the final settlement tax related to a (currency) profit that accrued under the tax jurisdiction of the Netherlands and that the profit could not be reflected in the host Member State was irrelevant. This was in accordance with the principle of fiscal territoriality. 43 A possible omission by the host Member State to take account of decreases in value did not impose any obligation on the Member State of origin to revalue, at the time of realisation of the asset concerned, a tax debt which was definitively determined at the time when the company in question, because of the transfer of its place of effective management, ceased to be subject to tax in the latter Member State. 44 The TFEU offered no guarantee to a company covered by Article 54 that transferring its place of effective management to another Member State would be neutral as regards taxation. 45 This appears to be contrary to the step-up requirement suggested by the Commission in its Communication on Exit taxation 46 and the European Parliament in its resolution, 47 although, admittedly, the Court has refrained from imposing such an obligation on the host state in its exit tax case law on individuals. This is perhaps attributable to its overall reluctance when assessing 39 National Grid Indus (C-371/10), above fn.5 at [64]. 40 Deutsche Shell GmbH v Finanzamt fur Grossunternehmen in Hamburg (C-293/06) [2008] STC 1721; [2008] ECR I N (C-470/04), above fn.6, [2006] ECR I National Grid Indus (C-371/10), above fn.5 at [59]. The Court also used a weak argument to differentiate between this case and the N case, by connecting corporate profits to the balance sheet: see [57]. Also see L. Sheppard, Exit Taxes on European Restructuring [2011] Tax Analysts 1446, National Grid Indus (C-371/10), above fn.5 at [60]. 44 National Grid Indus (C-371/10), above fn.5 at [61]. 45 National Grid Indus (C-371/10), above fn.5 at [62]. 46 Communication on Exit taxation, above fn Council Resolution 16412/08 of December 2, 2008, above fn.14.

8 Case Notes 47 the compatibility of one Member State s tax measure with EU law, to take into account the tax treatment in the other Member State. 48 Finally, an interesting development in National Grid Indus 49 is the CJEU s suggestion that Member States should give companies the option of choosing between immediate payment of the exit tax or deferred payment with all its ensuing administrative difficulties. However, it appears that this option would only be available when the nature and extent of the company s assets make it easy to carry out a cross-border tracing of the assets on which the exit tax was imposed. 50 As the CJEU held, national legislation offering a company transferring its place of effective management to another Member State the choice between, first, immediate payment of the amount of tax, which creates a disadvantage for that company in terms of cash flow but frees it from subsequent administrative burdens, and, secondly, deferred payment of the amount of tax, possibly together with interest in accordance with the applicable national legislation, which necessarily involves an administrative burden for the company in connection with tracing the transferred assets, would constitute a measure which, while being appropriate for ensuring the balanced allocation of powers of taxation between the Member States, would be less harmful to freedom of establishment than the measure at issue in the main proceedings. If a company were to consider that the administrative burden in connection with deferred recovery was excessive, it could opt for immediate payment of the tax. 51 Here, the Court seems to indulge in judicial legislation. By stipulating what would be less harmful to freedom of establishment, the Court is, to an extent, setting out prescriptive guidelines to Member States on how to design their exit tax rules. A prima facie reading of the Court s decision appears to suggest that taxpayers now face the following dilemma: either pay the exit tax immediately (and suffer in terms of cash flow as well as forego the possibility of taking into account decreases in value) or defer the payment (and suffer the administrative burden in connection with the tracing of the assets). It is important to note that the disadvantages arising from the latter option are merely administrative disadvantages for the recovery of the claim and not the ascertainment of it. The Court emphasises repeatedly that in so far as the recovery option is concerned, the claim is already ascertained. 52 Arguably, this means that decreases in value are 48 See the most recently decided case: Banco Bilbao Vizcaya Argentaria v Administracion General del Estado (C-150/10) and the analysis in C. HJI Panayi, European Community Tax Law and Companies: Principles of the European Court of Justice, in Gerner-Beuerle and Fleet (eds), Gore-Browne on EU Company Law, (Jordan Publishing). Tax treaties tend to be taken into account: Bouanich v Skatteverket (C-265/04) [2008] STC 2020; [2006] ECR I-923; Amurta SGPS v Inspecteur van de Belastingdienst/Amsterdam (C-379/05) [2007] ECR I-9569; [2008] STC 2851; Commission v Italy (C-540/07) [2009] ECR I-10983; Commission v Spain (C-487/08). 49 National Grid Indus (C-371/10), above fn National Grid Indus (C-371/10), above fn.5 at [72]. According to the Court, when the asset situation of a company is so complex that an accurate cross-border tracing of the assets is almost impossible, then the administrative burden of deferral would not be any less of a hindrance than immediate recovery: [71]. 51 National Grid Indus (C-371/10), above fn.5 at [73]. 52 See, for example, National Grid Indus (C-371/10), above fn.5 at [72] ( tracing of the individual assets for which a capital gain was ascertained at the time when the company transferred its place of effective management to another Member State ), [77] ( the tracing of assets relates only to the recovery of the tax debt, not to its ascertainment ), [78] ( the assistance of the host Member State will concern not the correct ascertainment of the tax but only its recovery ).

9 48 British Tax Review not to be taken into account in the deferral situation either. As the Court stated, the Mutual Assistance Directive provides Member States tax authorities with the machinery to deal with the administrative burden in connection with deferred recovery i.e. the tracing of assets for recovery purposes and not for valuation purposes. 53 What is clearly inferred from the Court s reasoning is that no administrative difficulties arise in connection with immediate payment; as that is final subsequent decreases in value are not taken into account. Furthermore, contrary to its case law on individuals, 54 the provision of a bank guarantee as an insurance against the risk of non-recovery of the tax appears to be condoned by the Court. 55 Therefore, even though the Court provides for an option between immediate payment and deferral, by removing some of the incentives of deferral, this may not in reality be an attractive option for companies. An emigrating company would effectively have to compare the cash flow disadvantage arising from immediate payment of the exit tax with the administrative burden of tracing the transferred assets for the purposes of deferred recovery. Decreases in value would not be taken into account and bank guarantees may be required to defer payment of the tax debt. One could argue that the deviations from the case law on individuals suggest that the Court is more protective of emigrating individuals than emigrating companies. The National Grid Indus case 56 makes the emigration of companies more cumbersome and costly than the emigration of individuals. Whilst this may not be an intentional result, one cannot help but wonder whether the Court will eventually pay more deference to national legislation dealing with corporate mobility issues (and their tax consequences) than to national legislation dealing with the emigration of individuals. This would have to be a quasi-political decision as the EU legal framework does not make it more difficult to collect taxes from emigrating companies than emigrating individuals. 57 Whether the judgment will be followed in subsequent cases of corporate emigration remains to be seen. 58 A number of cases are still pending 59 and infringement proceedings have been launched against many Member States. Infringement proceedings have also been launched against Norway by the EFTA Surveillance Authority. 60 Furthermore, there are concerns that the UK tax legislation may in the future be targeted for imposing restrictive exit taxes on companies that transfer their residence abroad. Under this legislation, a company ceasing to be UK-resident is deemed to have disposed of its assets. 61 Only assets which are situated and remain in the UK and which relate to a trade carried on by a 53 National Grid Indus (C-371/10), above fn.5 at [78]. 54 In both de Lasteyrie (C-9/02), above fn.6, [2004] ECR I and N (C-470/04), above fn.6, [2006] ECR I-7409, the provision of a guarantee was deemed to be restrictive of freedom of establishment. See analysis in C. HJI Panayi, above fn National Grid Indus (C-371/10), above fn.5 at [74]. 56 National Grid Indus (C-371/10), above fn See Council Directive 76/308/EEC of March 15, 1976 on mutual assistance for the recovery of claims resulting from operations forming part of the system of financing the European Agricultural Guidance and Guarantee Fund and of agricultural levies and customs duties. The directive was recently repealed by Council Directive 2010/24/EU of March 16, 2010 concerning mutual assistance for the recovery of claims relating to taxes, duties and other measures. 58 See L. Sheppard, Exit Taxes on European Restructuring [2011] Tax Analysts Commission v Portugal (C-38/10); Commission v Denmark (C-261/11); Commission v Netherlands (C-301/11); Commission v Spain (C-64/11). 60 See analysis in F. Zimmer, Exit Taxes in Norway (2009) 1 World Tax Journal TCGA 1992 s.185.

10 Case Notes 49 continuing UK permanent establishment are excluded from the charge. 62 Whilst there are provisions for the deferral of tax where the company transferring its residence is a 75 per cent subsidiary of a UK-resident company, 63 there is no general right to defer payment. Other legislative provisions have raised concerns as well. 64 Within the loan relationships and the derivative contracts regimes, there are provisions for companies ceasing to be UK resident. 65 To the extent that all these rules provide for the immediate payment of tax without the possibility of deferral, following the National Grid Indus case, they might be considered incompatible with the EU s fundamental freedoms 66. Christiana HJI Panayi * 62 TCGA 1992 s.185(4). 63 TCGA 1992 s.187. For commentary, see D. Goldberg, The Ordinary and Extraordinary Power of the European Court of Justice VI (2007) 2 GITC Review 17; G. Airs, The UK s Corporate Exit Charge and the EC Treaty [2006] (852, September) Tax Journal See Corporation Tax Act 2009 s.859, which imposes deemed realisation at market value of assets ceasing to be chargeable intangible assets. 65 See Corporation Tax Act 2009 s.333 and s.609 respectively. 66 Apart from freedom of establishment, it has been argued elsewhere that the free movement of capital may also be triggered. This could be the case if there is a transfer of shares to a non-resident transferee company in which the transferor company has no definite influence. See, for example, X and Y (C-436/00) [2002] ECR I-10829, discussed in C. HJI Panayi, above fn.6. EU law; Exit charge; Freedom of establishment; Place of effective management; Proportionality; Relocation * Dr Christiana HJI Panayi, Senior Lecturer in Tax Law, Centre for Commercial Law Studies, Queen Mary, University of London and Researcher at the Institute for Fiscal Studies.