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European Court allows for exit-tax - A Blog from Freemont Group

Freemont Group
29 November, 2011

The European Court of Justice has ruled that member states are allowed to tax companies for unrealized capital gains when they relocate their seat of effective management to another member state. Though the subject of an exit-tax is not covered directly by any EU treaty, the present ruling C-371/10 is as good as a law.

The ruling followed a dispute between National Grid Indus B.V. (NGI), a Dutch company that moved to the UK, and the Dutch tax authorities. NGI held a claim against an affiliated company since 1996. Following the rise in value of the pound sterling against the Dutch guilder, an unrealised exchange rate gain was generated on that claim. When NGI transferred its place of effective management, the unrealized capital gains became subject to a final settlement tax. To clarify certain aspects of this claim, the Dutch court of Amsterdam presented the case to the European Court of Justice.

The ECJ ruled that a final settlement tax on unrealised capital gains does not violate the freedom of establishment pursuant to EU treaties. However, the immediate tax on capital gains in case of transfer of management to another EU member state, compared to a move within the same territory, does place the company in a disadvantage. It limits the freedom of establishment, hence the court ruled that certain amendments have to be made. Since capital gains relating to the assets of a company transferring its place of management within the Netherlands are not taxed until they are actually realised, companies that relocate to another member state should have the same option.

In other words, a company that transfers its management from one member state to the next can be subject to an exit-tax on unrealised capital gains. This exit-tax may contain all tax claims on the company up until the date of management transfer. The taxing country should allow companies to pay their taxes over unrealised capital gains once they are indeed realised. The taxing country does not have to take into account future losses, and may even charge interest. We can assume that future legal disputes concerning exit-taxes will be dealt with likewise.


About the Author

Freemont Group

Freemont Group is a comprehensive provider of fiduciary services, including corporate formation and administration, trust, fund formation, legal-and tax services. Contact: info@freemontgroup.com


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