National Grid Indus v. Inspecteur van de Belastingdienst Rijnmond/kantoor Rotterdam

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1 National Grid Indus Member State Case number Case name Date of decision Netherlands C 371/10 National Grid Indus v. Inspecteur van de Belastingdienst Rijnmond/kantoor Rotterdam 29 November 2011 Court/Chamber ECJ, Grand Chamber Procedure type Preliminary ruling Referral to the ECJ AG opinion Decision type Legal basis Host State / Home State Justifications Keywords 15 July 2010 Kokott, 8 September 2011, Text of AG Opinion Judgment Art. 43 EC Treaty, Art. 49 TFEU (Freedom of establishment) Home State balanced allocation of taxing powers; coherence of the tax system; tax avoidance exit tax; capital gains; corporate income tax; balanced allocation of taxing powers; coherence of the tax system; tax avoidance Summary Synopsis A company incorporated under the law of a Member State can invoke the freedom of establishment as provided for in Art. 49 of the Treaty on the Functioning of the European Union (TFEU) against that Member State, if this Member State imposed an exit tax upon the transfer of the place of effective management of that company to another Member State, and that transfer did not affect its status of being a company of the first Member State. Furthermore, the freedom of establishment does not preclude that a Member State definitively fixes the tax due on unrealized capital gains relating to the company's assets, without taking into account decreases or increases in value, when the company no longer obtains taxable profits in that Member State because of the transfer of the place of effective management to another Member State. In this context, it makes no difference that the taxed unrealized capital gains relate to exchange rate gains which cannot be reflected in the second Member State under the tax system in force in that State. However, the freedom of establishment precludes legislation of a Member State providing for the immediate recovery at the time of transfer, of tax on unrealized capital gains relating to assets of a company transferring its place of effective management to another Member State. Facts National Grid Indus is a limited liability company incorporated under Netherlands law. Until 15 December 2000, its place of effective management was the Netherlands. Since 10 June 1996, National Grid Indus had a claim of GBP 33,113,000 against National Grid Company plc., a company established in the United Kingdom. Due to an increase in value of the sterling against the Dutch guilder, an unrealized exchange rate gain was generated on that claim. On 15 December 2000, National Grid Indus transferred its place of effective management to the United Kingdom. The foreign exchange gain at that time was NLG 22,128,160. 1/5

2 National Grid Indus, in principle, remained liable to tax in the Netherlands, because companies incorporated under Netherlands law are deemed to be resident in the Netherlands. However, by virtue of the Netherlands United Kingdom tax treaty, National Grid Indus was deemed to be resident in the United Kingdom after the transfer of its place of effective management to the United Kingdom. As the company did not have a permanent establishment in the Netherlands within the meaning of the treaty, only the United Kingdom was entitled to tax its profits and capital gains following the transfer. As a result of the application of the treaty, National Grid Indus ceased to derive taxable profits in the Netherlands. The law of the Netherlands operated to tax all unrealized capital gains at the time of the transfer of the company s place of management. No deferral was possible. National Grid Indus was therefore taxed on, inter alia, the foreign exchange gain. The company appealed the immediate taxation of all capital gains at the time of transfer of its place of effective management. Legal background and issue Art. 2(4) of the Dutch Corporate Income Tax Act (CITA) provides that all companies established under Dutch law are deemed to be resident in the Netherlands. Based on Art. 16 of the Dutch Income Tax Act 1964 (ITA) in conjunction with Art. 8 of the CITA, business profits, including unrealized exchange rate gains, derived by a company, that have not yet been taken into account, are included in the profits for the calendar year in which the company ceases to derive profits from the business taxable in the Netherlands. Art. 4(3) of the 1980 Netherlands United Kingdom treaty provides that a company which is resident in both states is deemed to be a resident of the state in which its place of effective management is situated. Art. 7(1) of the treaty provides that business profits are taxable only in the state of residence of the company, unless the company has a permanent establishment in the other state. Based on Art. 13(4) of the treaty, gains derived by the alienation of property by a company are taxable only in the state of residence of the company. Art. 13(2) of the treaty provides that gains realized from the alienation of real estate by a permanent establishment or gains realized from the alienation of the permanent establishment may be taxed in the state were the permanent establishment is located. The issues were: (i) whether a company incorporated under the laws of a Member State which is subject to an exit tax following the transfer of its place of effective management to another Member state may rely on the EU freedom of establishment; (ii) whether an exit tax is incompatible with the EU freedom of establishment, if it is applied in the circumstances of(i) above, and without deferment of payment until the time of realization of capital gains, and also does not take into consideration subsequent decreases in value for the calculation of gains relating to business assets which were transferred to the other Member State; and (iii) whether it is relevant that the exit tax in question relates to a (currency) profit which accrued under the tax jurisdiction of the Netherlands, whereas that profit cannot be reflected under the tax system of the host Member State. Decision Scope The Court first noted that European Union law does not contain a uniform definition of the companies that may enjoy the freedom of establishment. This means that the question whether the EU freedom of establishment applies to a particular company is a matter that can only be resolved by the applicable national law. In addition, the ECJ held, based on its earlier decisions in Daily Mail and General Trust (C 81/87), Überseering (C208/00) and Cartesio (C210/06), that the question whether a company is faced with a restriction of the EU freedom of establishment can arise only if it has been established that the company actually has a right to that freedom. Because the relocation of its effective management did not affect its status as a company incorporated under Dutch law, the ECJ concluded that a Dutch company may rely on the freedom of establishment when challenging an exit tax imposed upon relocation of its place of effective management to another Member State. Restriction/discrimination The ECJ concluded that there was a restriction on the freedom of establishment because the transfer of a company s place of management within the Netherlands does not result in the taxation of unrealized capital gains, whereas the transfer of a company s place of effective management to 2/5

3 another Member State results in immediate taxation of unrealized capital gains. The ECJ observed that this difference in treatment creates a cash flow disadvantage and deters a company incorporated under the law of the Netherlands from moving its place of effective management to another Member State. The ECJ held that the different treatment cannot be explained by an objective difference in both situations. For the taxation of capital gains generated in its territory, the situation of a company incorporated under the law of a Member State which transfers its place of management to another Member State, is similar to that of a company also incorporated under the law of the former Member State which keeps its place of management in that Member State. The ECJ rejected the argument of certain Member States that by moving the place of effective management to the United Kingdom, the foreign exchange gain disappeared and that therefore the taxation was in respect of a capital gain that had been realized. There was a firm statement that the taxation of foreign exchange gains constituted a taxation of unrealized capital gains. Justification According to settled case law, a restriction of the freedom of establishment is only justified by overriding reasons in the public interest. Furthermore, such restriction should be appropriate to attain its objective and should not go beyond what is necessary to do so. (i) Balanced allocation of taxing rights. The ECJ decided that the imposition of an exit tax may be justified by the need to ensure a balanced allocation of taxing rights between Member States. With reference to its decision in Test Claimants in Class IV of the ACT Group Litigation (C 374/04), the ECJ stated that the transfer of the place of effective management of a company of one Member State to another Member State cannot mean that the Member State of origin must abandon its right to tax a capital gain which arose before the transfer. Based on its decision in N (C 470/04), the ECJ held that a Member State, in accordance with the principle of fiscal territoriality and because of the fact that the taxpayer was a resident of that Member State linked to a temporal component of the taxpayer s tax residence during the period in which the capital gains arose, authorizes that Member State to tax those gains at the time the taxpayer leaves the country. The ECJ therefore ruled that the Dutch legislation at issue is appropriate to ensure the preservation of the balanced allocation of taxing powers between the Member States concerned. A Member State is allowed to tax the economic value generated by an unrealized capital gain even if the gain has not yet actually been realized. The intention is that unrealized capital gains relating to an economic asset are taxed in the Member State in which they arose, whereas capital gains realized after the transfer of the company s place of management are taxed exclusively in the host Member State in which they arise, thereby avoiding double taxation. With respect to the proportionality of the exit tax at issue, the Court held that a distinction must be made between (a) the determination of the amount of the tax, and (b) the recovery of the tax. (a) The determination of the amount of the tax. With respect to the determination of the amount of tax due, the ECJ ruled that it is proportionate for a Member State to impose exit taxes on the amount of unrealized gains recorded by a company at the moment of relocation without taking into account potential future decreases. In this context, the ECJ held that the taking into consideration of capital gains and losses realized after the transfer of the place of effective management of a company could disturb a balanced allocation of taxing rights. Referring to the principle of territoriality linked with a temporal component (i.e. the period during which a company was resident in the Member State of departure) and to the symmetry which has to be upheld between the right to tax profits and the possibility to deduct losses, the ECJ held that the Member State to which the place of effective management is transferred, and which from that moment exclusively taxes the company s profits has to take into account asset value fluctuations occurring after the transfer. A conclusion contrary to this could lead to double taxation or double non taxation. It is also in line with the principle of territoriality linked to the period in which the company was a resident of the Member State of departure that capital gains such as an exchange rate gain are taxed at the time of the transfer of the place of effective management of the company to another Member state. In addition, the ECJ observed that the fact that the Member State to which the company transferred its place of management does not take into account decreases in value does not impose any obligation on the Member State of origin, at the time of effective realization, to revalue the tax claim it had established at the time of transfer of the place of effective management. According to settled case law, the TFEU does not offer a guarantee to a company covered by the freedom of establishment that transferring its place of effective management to another Member 3/5

4 State will be neutral as regards taxation due to disparities in the tax legislation of the Member States. The ECJ therefore ruled that that the freedom of establishment does not preclude legislation of a Member State under which the amount of tax on unrealized capital gains relating to a company s assets is determined definitively, without taking account of decreases or increases in value which may occur after the transfer of the place of effective management to another Member State. In this context, it makes no difference that the unrealized capital gains that are taxed relate to foreign exchange gains which cannot be reflected in the new Member State of establishment under the tax system in force there. (b) The recovery of the tax. With respect to the collection of the tax, the ECJ ruled that national legislation providing taxpayers an option either to (i) settle their exit tax liabilities immediately, i.e. at the time the company transfers its place of effective management to another Member State; or (ii) defer payment of such taxes to the time when the capital gains are realized, would be less harmful to the freedom of establishment than legislation providing only for the first option. The ECJ noted that the first option provides the benefit of eliminating the administrative burden of tracing relevant assets until the moment of realization, while the second option removes the cash flow disadvantage of having to pay the tax upfront. The ECJ took the view that under the second option, Member States would be permitted to charge interest on the deferred tax payment. The potential risk of non recovery of the tax, which increases with time, might be taken into account by the Member States in their domestic rules on the recovery of deferred tax debts. The ECJ rejected the argument that a deferred payment of tax would result in an excessive tracing burden for the tax authorities because they would have to monitor all assets of a company in respect of which a capital gain had been ascertained at the time of the transfer of the company s place of effective management. The Court observed that the tracing only relates to the recovery of tax and not to the determination of the amount of tax due. The Court ruled that in so far as a company has opted for a deferred payment of tax, the tracing of the assets in respect of which a capital gain has been determined at the time of the transfer of its place of effective management is not an excessive administrative burden. Hence, in these circumstances, the burden to be borne by the tax authorities of the Member State of origin in connection with checking the declarations relating to such tracing cannot be regarded as excessive. Furthermore, the ECJ deemed sufficient the existing possibilities for mutual assistance between Member States as provided for under Directive 2008/55/EC on mutual assistance in the recovery of tax claims. The provisions of the Directive are sufficient to enable Member States to check the returns made by companies opting for deferred payment of tax. The Court also stated that the assistance need concern only the recovery of the tax, and not the ascertainment of the correct amount due. The Directive does enable a Member State to obtain information as to whether or not gains in respect of a certain asset of a company have been realized. The ECJ therefore ruled that a measure is disproportionate which permits, at the time of a transfer by a company of its place of effective management to another Member State, the immediate recovery of tax on unrealized capital gains relating to the assets of that company. (ii) Tax coherence. With respect to the need to maintain the coherence of the national tax system, the ECJ ruled that this coincides with the balanced allocation of taxing rights. The Court stated also that the justification of maintaining the coherence of the tax system would be treated as disproportionate if it provides only for the immediate recovery of the tax due in relation to the transfer of the company s place of effective management to another Member State and not for a tax deferral. The Court held that in that case only the determination of the amount of tax due at the time when the company transfers its place of effective management would not be disproportionate. (iii) Tax avoidance. The ECJ also rejected the argument that a restriction in this case could be justified by the risk of tax avoidance. According to settled case law, the mere fact that a company is transferring its place of management to another Member State cannot imply a general presumption of tax evasion, nor justify a restriction of a fundamental freedom. Cases referred to Case 81/87 Daily Mail and General Trust C 210/96, Cartesio C 9/02, de Lasteyrie du Saillant C 470/04, N C 208/00, Überseering 4/5

5 C 264/96, ICI C 298/05, Columbus Container Services C 157/07, Krankenheim Ruhesitz am Wannsee Seniorenheimstatt C 96/08, CIBA C 442/02, Caixa Bank France C 446/03, Marks & Spencer Overseas C 196/04, Cadbury Schweppes and Cadbury Schweppes Overseas C 524/04, Test Claimants in the Thin Cap Group Litigation C 303/07, Aberdeen Property Fininvest Alpha C 231/05, Oy AA C 414/06, Lidl Belgium C 540/07, Commission v. Italy C 374/04, Test Claimants in Class IV of the ACT Group Litigation C 311/08, SGI C 262/09, Meilicke C 365/02, Lindfors C 403/03, Schempp C 194/06, Orange European Smallcap Fund C 293/06, Deutsche Shell C 478/98, Commission v. Belgium C 436/00, X and Y C 334/02, Commission v. France Summary author Authentic language Text of Judgment René Offermanns and Bob Michel Dutch Case C 371/10 Citation: NL: ECJ, 29 Nov. 2011, Case C 371/10, National Grid Indus v. Inspecteur van de Belastingdienst Rijnmond/kantoor Rotterdam, ECJ Case Law IBFD Copyright 2012 IBFD All rights reserved Disclaimer 5/5