Opinion Statement of the CFE on the decision of the European Court of Justice of 29 November 2011 on case C-371/10, National Grid Indus BV and business exit taxes within the EU Prepared by the ECJ Task Force of the CFE Submitted to the European Institutions in March 2013
This is an Opinion Statement prepared by the ECJ Task Force on the National Grid Indus B.V. case and exit taxation on business in the EU 1. The CFE is the leading European association of the tax profession with 32 national tax adviser organisations from 24 European countries representing over 180,000 tax advisers. CFE is registered in the EU Transparency Register (no. 3543183647 05). 1. This Opinion Statement focuses on the case National Grid Indus B.V. 2 and addresses the compatibility of exit taxation on businesses with EU fundamental freedoms. The case was decided by the Grand Chamber. 2. The ECJ decided further cases on issues related to exit taxation immediately after National Grid Indus, such as Commission v Spain 3, Commission v Portugal 4 and DI.VI 5. Although these decisions are not the object of this Opinion Statement, consideration of specific issues arising from those will be included in this document where appropriate. 3. After illustrating the facts of the National Grid Indus case and its preliminary questions, this document will focus on selected critical points from National Grid Indus by pointing out the differences between it and its most immediate precedent, the N 6 case, also taking account of the subsequent cases 7 before formulating the Statements. 1 The facts and the preliminary questions 4. National Grid Indus BV, a subsidiary of a UK company, was formed on 10 June 1996 as a limited liability company under Dutch Law. Its purpose was to invest in a Pakistani joint venture for an electricity project, which eventually came to nothing. For this reason, National Grid Indus limited its activity thereafter to the financing of the group companies resident in England, until in December 2000 it transferred its place of effective management and its entire business activity to London. The grounds for this move were justified according to the findings of the referring court. 5. On the date of incorporation of National Grid Indus, the parent company had made a contribution in kind consisting of an intra-group loan for 33,113,000 GBP in favour of National Grid Company plc, a company resident in the United Kingdom. 6. During the time the company was resident in the Netherlands, a rise in the value of the pound sterling against the Dutch guilder gave rise to an unrealised exchange gain, which was not immediately taxed under Dutch Law because the company had been able to show the loan in its tax 1 Members of the Task Force are: Paul Farmer, Daniel Gutmann, Volker Heydt, Eric Kemmeren, Michael Lang, Franck Le Mentec, Pasquale Pistone, Albert Rädler, Stella Raventos-Calvo (Chair), Isabelle Richelle, Friedrich Roedler and Kelly Stricklin-Coutinho. Although the Opinion Statement has been drafted by the ECJ Task Force, its content does not necessarily reflect the position of all members of the group. 2 The joined cases were decided by the Third Chamber of European Court of Justice (President and Rapporteur: K. Lenaerts) on 10.2.2011 after hearing the Opinion of Advocate General Juliane Kokott at the sitting on 11.2.2010. 3 Case C-269/09, decided on 12 July 2012. 4 Case C-38/10, decided on 6 September 2012. 5 Case C-380/11, decided on 6 September 2012. 6 C-470/04, decided on 7 September 2006. 7 i.e. Commission v Spain, Commission v Portugal and DI.VI. 1
balance sheet at the historic rate. When the company transferred its place of effective management to the UK, the exchange rate gain was NLG 22.128.160. 7. As a result of the transfer, the Dutch Tax Authorities decided that National Grid Indus should be taxed inter alia on the exchange rate gain. The case reached the Gerechtshof (Regional Court of Appeal) Amsterdam which referred the following questions to the ECJ for a preliminary ruling: (i) (ii) (iii) If a Member State imposes on a company incorporated under the law of that Member State which transfers its place of effective management from that Member State to another Member State a final settlement tax in respect of that transfer, can that company, as Community law stands, rely on Article 49 TFEU 8 against that Member State; (ii) if the first question must be answered in the affirmative: is a final settlement tax such as the one at issue, which is applied, without deferment and without the possibility of taking subsequent decreases in value into consideration, to the capital gains relating to the assets of the company which were transferred from the Member State of origin to the host Member State, as assessed at the time of the transfer of the place of management, contrary to Article 49 TFEU, in the sense that such a final settlement tax cannot be justified by the necessity of allocating powers of taxation between the Member States?; and (iii) Does the answer to the previous question also depend on the circumstance that the final settlement tax in question relates to a (currency) profit which accrued under the tax jurisdiction of the Netherlands, whereas that profit cannot be reflected in the host Member State under the tax system in force there? 2 The National Grid Indus decision 8. The ECJ decision has two main aspects: on the one hand, it seems to set the general framework for all cases of exit taxes on businesses; on the other hand, the specific circumstances of National Grid Indus deserve a detailed analysis of some of the findings since the facts of the case are unusual. 9. In respect of the first aspect, the ECJ held that the Dutch provisions concerned the tax consequences of the transfer of a Dutch company to another EU Member State without the transfer changing its status as a Dutch company, rather than the effect of transferring the effective place of management whilst seeking to retain company status in the Member State of departure 9. The tax consequences of the transfer of a business are analysed in section 3, because, despite the narrow fact pattern arising in National Grid Indus, the Task Force believes that the decision has a strong potential to influence cases on exit taxes that are yet to be decided by the Court or that have been decided after National Grid Indus (such as in particular Commission v Portugal 10 and DI.VI. 11 ). 10. As to the second aspect of the National Grid Indus decision, the fact pattern of National Grid Indus raises specific points concerning the taxation of currency gains, which only arise from the perspective of one of the Member States involved. Such issues will be dealt with in section 4. 3. The Tax Consequences of the Transfer of Business 8 Previously Article 43 EC. 9 Such as Cartesio (C-210/06, decided on 16 December 2008) and VALE Építési Kft (C-378/10, decided on 12 July 2012). 10 See footnote 4. 11 See footnote 5. 2
11. We note that National Grid Indus relates to the transfer of the seat of a company and that in Commission v Portugal, the ECJ has extended its conclusions to the transfer of assets of a permanent establishment 12, thus broadening the scope and application of National Grid Indus. 3.1 The existence of a restriction of freedom of establishment 12. The answer of the Court could hardly be different: it is clear that a company incorporated under Netherlands law wishing to transfer its place of effective management outside Dutch territory, in the exercise of its right guaranteed by Article 49 TFEU, is placed at a disadvantage in terms of cash flow compared to a similar company retaining its place of effective management in the Netherlands, because the first company is taxed on unrealised capital gains whereas the second company is not taxed until its assets are actually realised and only to the extent that they are realised. That difference in treatment, which is liable to deter a company from moving to another Member State, and which cannot be explained by an objective difference of situation, constitutes a restriction that is in principle prohibited by the Treaty provisions on freedom of establishment 13.We regard this as settled case law considering that the Court has confirmed this position in Commission v Portugal 14 and DI.VI 15. 3.2 Justification of the restriction 13. The ECJ had already ruled in N that the exit tax provisions were designed to allocate taxing powers between Member States and, on the basis of the territoriality principle. The power to tax increases of value in company holdings 16 was a legitimate objective, which could justify the restriction. National Grid Indus does not deviate from this principle 17. DI.VI. further refines the boundaries within which this justification may be invoked, by excluding that a previously granted tax reduction may be clawed back as a consequence of the transfer of residence of a corporate entity to another EU Member State 18. Commission v Spain adds that the misfunctioning of mutual assistance is not a proportionate justification for the restriction on fundamental freedoms 19. Consequently, Member States should not be able to rely on the possible difficulties in obtaining the information required or on the shortcomings of cooperation between the tax authorities 20 to invoke such justification in the presence of their own shortcomings. This shows the willingness of the ECJ to apply the concept of estoppel in this context. 3.3 Proportionality: decreases in value 14. Having accepted the justification to the restriction, the ECJ analyses the issue of proportionality from two perspectives: that of the amount of tax to be paid and that of the time of actual payment of the tax. 12 Para. 23. 13 Paras. 37 to 41. 14 Paras 26 and 29. 15 Para. 37. 16 Para. 41. 17 Paras. 46 and 48. 18 Para. 48. 19 Para. 75. 20 Para. 72. 3
3.3.1 The Tax Payable 15. One of the most controversial findings of the Court is the final assessment of the tax payable. In N, the ECJ had been very clear in that respect: Finally, in order to be regarded in this context as proportionate to the objective pursued, such a system for recovering tax on the income from securities would have to take full account of reductions in value capable of arising after the transfer of residence by the taxpayer concerned, unless such reductions have already been taken into account in the host Member State 21. In short: either the receiving MS operates the step up, by taking into account, as the acquisition price, for future calculations, the amount that the MS of origin has taxed, or the MS of origin has to take into account any possible decreases in value that occur after the taxpayer has left the country. 16. Advocate General Kokott instead assumed that the host States normally assesses the company assets and liabilities at the market value when the company first becomes taxable in that State (known as step up ), double taxation would be avoided and subsequently losses in the host State would be taken into account. 22 In fact, that is not always the case 23. 17. If it is the aim of a legislator to impose tax only on the capital gains accruing during the taxpayer s residence, even a step up in value at the time of moving in cannot justify disregarding losses in value after the taxpayer has moved. Nor can the reference to the Commission s recommendation on exit tax constitute the grounds for such reasoning 24. 18. Advocate General Kokott discusses the OECD model tax convention, and concludes that it does not contain an express provision for the case of a cross-border transfer of the place of management (and even if it did, we note that what is under analysis here is EU law). The reference to Dutch domestic law in that respect does not add to the reasoning, as it is that very provision which is under scrutiny. 19. Despite quoting the N decision 25, the ECJ follows the recommendation of Advocate General Kokott in saying: However, in contrast to the position in N, the failure of the Member State of origin to take into account ( ) decreases in value that occur after the transfer of a company s place of management cannot be regarded as disproportionate to the objective pursued by the national legislation at issue 26. 20. From the combined reading of paragraphs 58 and 61 of the NGI judgment we understand that the home State is under no obligation to take into account what happens after emigration. This is a clear statement indicating the Court s support for the so called one country approach, consistent 21 Para. 54. 22 Para. 47 of the Opinion. 23 Many countries do not allow for the step up. Spain and Italy, for example, do not. They would take as the acquisition price the book value and thus double taxation would be unavoidable. 24 COM(2006) 825 final. 25 Para. 54: It should be recalled that in N, which related to national legislation under which a private individual was subject, at the time of the transfer of his residence for tax purposes to another Member State, to tax on the unrealised capital gains relating to a substantial shareholding he had in a company, the Court held that, in order to be regarded as proportionate to the objective of ensuring a balanced allocation of powers of taxation between the Member States, a system of tax must take full account of decreases in value that may arise after the transfer of residence by the taxpayer concerned, unless those decreases have already been taken into account in the host Member State (N, paragraph 54). 26 Para.56. 4
with the De Lasteyrie judgment 27. The so-called one-country approach could prove easy to handle, but it could in fact lead to double taxation and have some shortcomings in cases of post-emigration losses. 21. Furthermore, from the perspective of the host state, future judgments could clarify whether or not there is an obligation for such country to grant a step-up in the taxable basis 28. In paragraph 61 a reference to the tax system of the host Member State will in principle take account of capital gains and losses realised after the transfer of the place of management may be interpreted as being the situation that happens in most cases including National Grid Indus, but does not necessarily also imply the existence of an obligation for such country to do so. 22. We could envisage a legal basis for obliging the state of immigration to take losses into account only if there is a comparator where the host state does not accept the step-up basis. 23. The members of the Task Force do not fully understand the rationale behind this decision and do not agree with the distinction drawn. 24. First, it does not seem justified by the fact that in N the decreases in value could originate in the loss of the shareholdings, while in National Grid Indus, the exchange rate differences having disappeared, the loss could occur because the company did not obtain payment of the debt in full 29. What the ECJ says of the assets of National Grid Indus, namely: (a) the assets of a company are assigned directly to economic activities that are intended to produce a profit 30 ; (ii) the extent of a company s taxable profits is partly influenced by the valuation of its assets in the balance sheet, in so far as depreciation reduces the basis of taxation 31 ; and (iii) the fact that the profits of a company which transfers its place of management are, after the transfer, taxed exclusively in the host Member State, can equally be said of the capital gains in the N case. 25. The Task Force cannot understand why 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 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. That would in particular be the case if a company possessing a claim such as that at issue, expressed in sterling, transferred its place of management from a Member State whose currency is the euro to another Member State in the euro zone 32. 26. The Task Force fails to see why the ECJ should be concerned by the double taxation when, in some decisions, it has said that nothing in the Treaty prevents the existence of double taxation 33. By the same reasoning, it should not be concerned by the risk of double deduction of losses, as both situations may arise from the interaction of two legal systems, or, in the words of the Court, the parallel exercise of taxing rights by two Member States. This view seems to be confirmed later on: the Treaty offers no guarantee to a company covered by Article 54 TFEU that transferring its place of 27 The one country approach is described by the ECJ itself in paragraph 43 of Deutsche Shell, (C-293/06): Freedom of establishment cannot be understood as meaning that a Member State is required to draw up its tax rules on the basis of those in another Member State in order to ensure, in all circumstances, taxation which removes any disparities arising from national tax rules (...). 28 Commission v Portugal has not clarified this. 29 Para. 55. 30 Para. 57. 31 Para. 57. 32 Para. 59. 33 See the CFE Opinion Statement on outbound payments of dividends and double taxation, Commission v. Italy, C-540/07; http://www.cfe-eutax.org/node/2324. 5
effective management to another Member State will be neutral as regards taxation. Given the disparities in the tax legislation of the Member State, such a transfer may be to the company s advantage in terms of tax or not, according to circumstance. Freedom of establishment cannot therefore be understood as meaning that a Member is required to draw up its tax rules on the basis of those in another Member State in order to ensure, in all circumstances, taxation which removes any disparities arising from national tax rules 34. 27. We do not understand the relevance of the distinction from N and hence any possible difference concerning the levying of exit taxes on individuals, unless this may be related to the specific fact pattern of NGI 35. 3.3.2 Immediate recovery of the tax 28. In addition to the issue of the losses, the Gerechtshof of Amsterdam questioned the proportionality of the Dutch provisions because they required immediate payment of the tax, without the possibility of deferment. One wonders at this requirement of Dutch Law, since following the decisions in De Lasteyrie du Saillant 36 and N, it was consolidated case law that such imposition was disproportionate. But apparently none of the ten Member States which submitted observations had the same view because all sustained that deferred recovery of the tax would necessarily mean that the various assets in respect of which a capital gain had been ascertained at the time of the transfer of the company s place of management might have to be traced in the host Member State until the time of realisation. Organising such tracing would involve an excessive burden both for the company and for the tax authorities 37, thus compromising the public interest objective pursued by the legislation at issue. 29. On this point, however, the Court is clear: first, not waiting until the time of actual realisation of the gain could result in cash-flow problems for the company. When analysing the administrative burden that deferment of tax could cause to the company, the ECJ admits that such burden may depend on the number and nature of assets in each case and adopts the best possible solution: it is for the company to evaluate whether in its case it is more burdensome to keep track of the assets or to pay the tax immediately. 30. This approach is confirmed by paragraph 32 of Commission v Portugal and paragraph 81 of Commission v Spain showing that the immediate payment of tax is to be regarded in general as disproportionate. 3.3.3 Tax Deferral Requirements 31. The Court has raised the possibility that in some circumstances such as the ones of the NGI case it may be appropriate to require the payment of a bank guarantee for the purpose of obtaining the deferral. Although it may seem a deviation from its previous case law 38 we believe that the proportionality of bank guarantees as a tool to secure the effective recovery of tax is to be regarded as an exceptional situation, which will have authority only in cases that are particularly difficult to trace. 34 Para. 62. 35 For example, it is unclear how the law would apply to a case of an individual whose assets are business assets, or a legal entity with no business activities or a pure holding company. 36 C- 9/02. 37 Para. 67. 38 De Lastyerie, paragraph 47 and N, paragraph 51. 6
32. A separate issue arises as to the right to request the payment of interest in connection with a deferral, as indicated by the Court in paragraph 73. There would only seem to be a case for charging interest where in the domestic situation there would be immediate collection of tax. In that context we would question whether the language of deferral of payment of tax is the appropriate language to use. 4. Taxation of unrealised gains 33. The second point of the ruling refers to unrealised capital gains that are taxed relate to exchange rate gains. The specific circumstances of NGI therefore relate to the nature of the asset concerned. It consisted of a loan/receivable against one of the group s companies and it did not change during the time the company was resident of the Netherlands. On the balance sheet the loan was registered in pounds sterling and it still was in sterling pounds when the company transferred its seat to the UK. While the company was resident of the Netherlands, it received and was taxed on interest from the loan in GBP. When the company moved to the UK, the loan continued to be shown in pounds and therefore, in the UK, there had been no actual gain with respect to the initial situation. The question was not whether the capital gain had been already realised, despite it being questionable whether a real profit for the company has been produced. 34. Considering the specific asset involved, a loan receivable in British pounds, the suggested step up in basis by the Court in 54 to 61 cannot be applied successfully in the NGI case. A British Pound is a British Pound before and after the transfer of residence of NGI from the Netherlands to the UK. Therefore, when considering the amount of the loan, there is simply no gain or loss. As a consequence, no obligation to provide a step up in the taxable basis exists in this case for the United Kingdom. Accordingly, this case does not fit in the general framework developed by the ECJ on exit taxes: the Netherlands is the only Member State that could take into account a decrease in value arising from the currency results. 5. The Statements 35. The Confédération Fiscale Européenne welcomes the confirmation that companies have a full right to exercise the freedom of establishment. Where national company law permits movement, companies can rely on Article 49 of the Treaty on the Functioning of the European Union to challenge fiscal restrictions on their right of establishment in the same way as natural persons. We also welcome that the Court has made clear that the case law on exit taxes is also applicable in respect of companies. 36. The Confédération Fiscale Européenne has concerns about the restrictions that the Court nevertheless appears to accept on the exercise by companies of their right of free movement, in particular the extent of a possible requirement of a bank guarantee and the possible charge to interest. 37. The Confédération Fiscale Européenne welcomes the attention the ECJ gives to the cash-flow problems for businesses. 7