Exit Taxes and the European Community Law in the light of Spanish Law

• Author: Adolfo Martín Jiménez; Jose Manuel Calderón Carrero
• Pages: 1-48

Page 1

1. Preliminary remarks

The object of this work is the study - from the European Community point of view of matters raised by so-called exit taxes that EU Member States impose as a consequence of a transfer of residence or domicile by a natural or legal person to the territory of another Member State. ¹As it is known, the European Court of Justice has issued on this type of obligations twice (the cases of Lasteyrie du Saillant and N²), and indirectly in another series of pronouncements (notably the cases Van Hilten³ and Daily Mail⁴). Likewise, the European Commission has taken position in this matter by underlining the criteria that should be observed by Member States when they are configuring and applying their exit taxes in connection with transfers of residence to another Member State by natural people and entities (as well as the transfer of assets between a parent company and its permanent establishment in another Member State), through a Communication of 2006, Exit Taxation and the need Page 2 for Co-ordination of Member States' tax policies (COM (2006) 825 final)⁵. The third element to keep in mind to approach the study of this matter refers to the jurisprudence that ECJ has elaborated from Commercial or Corporate Law point of view in connection with the Community compatibility of Member States' internal Law concerning the nationality and legal status of companies in the field of community cross-borders situations; particularly, we analyze the impact on this sector of the ECJ pronouncements in the cases Daily Mail⁶, Centros⁷, Überseering⁸, Sevic⁹ and Inspire Art¹⁰.

Being a work focused on a national perspective, the analysis is fundamentally centred on the questions raised by Spanish tax legislation in connection with transfer of residence or domicile by natural people and entities to the territory of other Member States. On this respect, our study is structured in two separate parts. On the one hand, we will examine the problem referred to natural people, by stressing that, although the Spanish Law does not generally contemplate exit taxes in a strict sense, there are elements in the legislation of the Impuesto sobre la Renta de las Personas Físicas (IRPF, from now onpwersonal income tax¹¹) that has restrictive effects similar to the application of exit taxes and, as such, we think that doubts can be raised about compatibility of those taxes with Community Law. On the other hand, we try to analyze the questions that are raised concerning the transfer of the registered office or the actual centre of administration of a company with Spanish residence to another Member State, in cases when the Spanish fiscal legislation establishes an exit tax as a consequence of the transfer of residence by a legal entity to another Page 3 State. This tax liability is also required in the cases of transfer abroad of goods assigned to a permanent establishment located in Spain.

The main conclusion that may be drawn from this study resides in the verification of the existence of several friction points between Community Law and Spanish tax legislation, as regards taxation on natural as well as legal personalities. In this sense, we understand that Spanish legislation is not aligned with the Community case-law on exit taxes, neither it observes the guidelines elaborated by the Commission in this matter correctly.

2. Exit taxes on individuals in Spanish law

First of all it should be observed that the legislation does not envisage exit taxes per se on the transfer of fiscal residence of individuals to the territory of another State (either member of the European Union or not). Which means that current regulation of the Spanish Impuesto sobre la renta de las personas físicas (Law 35/2006, of November 28)¹² does not establish an exit tax generally applicable in connection with the transfer abroad of the (fiscal) residence of individuals.

In fact, Spanish legislation does not expressly regulate the matter of the loss of fiscal residence for transfer of the taxpayer's domicile to the territory of another Member State (except when referring to the deduction of withholding taxes referring to the period when the subject was still a resident in compliance with art.52 RDLeg.5/2004, of March 5, on non-residents' income tax¹³).Therefore, such matters should be solved through the (in negative) application of the criteria linking the fiscal residence to Spain. The transfer of Page 4 the fiscal residence to Spanish territory instead is the object of a regulation which in its general configuration aimed to facilitate tax management of such a new fiscal status (see, on the practice of withholding tax, art.99.8 Law 35/2006), and in its special character to facilitate workers' transfer in Spanish territory (special regime for home-coming subjects, as article 93 Law 35/2006). In this sense, it is not possible to find here any point of substantive friction between the Community Law (and ECJ sentences Lasteyrie du Saillant¹⁴and N¹⁵) and the Spanish legislation on IRPF regulating fiscal residence.

However, it should be pointed out that the Spanish legislation on IRPF establishes three measures that could have restrictive effects on changes of fiscal residence by a taxpayer to another EC Member State, although without really articulating any provision on exit taxation.

In the first place, art. 14 of the Law 35/2006¹⁶ contains the regulation on the temporary allocation of revenues, by establishing in section 3 a special rule specifically referred to the changes of residence:

"In the supposition that the taxpayer changes his residence status, all pending incomes relating to a given tax period will have to be integrated in the taxable base of the last tax period, in compliance with conditions to be indicated through regulations, in which case a recalculated reverse charge may be applied, without sanction, delay interest or supplement."

Regulated by art. 14.3 of Law 35/2006 the case presents certain similarities with an exit tax which is not configured as an anti-abuse clause, as it happened for the Dutch case object of ECJ sentence in the case N¹⁷. In this respect, denying that the specific attribution norm linked to the change of fiscal residence can have restrictive effects from a fiscal point of view, seems difficult, due to the fact that without the change of residence the income would not be integrated in the taxable base nor subject to taxation until the Page 5 supposition of the corresponding attribution norms converged; thus, the application of the norm generates an anticipation of tax payment motivated by a residence change, which can discourage or restrict the exercise of a fundamental Community freedom, in case of transfer to an EU Member State or also a Country which is part of the European Economic Space, in both cases regardless of the qualification of such State as a tax haven. The Community case-law in the case N could be applied in this hypothesis, so that the abovementioned norm of special attribution motivated by the residence change would not be valid and replaced by the general rule of article 14 of the Law 35/2006, without prejudice for the taxpayer's obligation to settle tax on unrealised incomes. Needless to say, such non-application should be limited to the cases of residence changes to EU Members States.

In the second place, on IRPF matters the law establishes a regime of "extension of the fiscal residence" internationally known as "extend unlimited tax liability" or "trailing taxes". In short, article 8.2 of the law 35/2006 of IRPF established that:

"Individuals of Spanish nationality who have established their place of residence in a Country or territory considered a tax haven will not lose their condition of taxpayers. This measure will be applied in the tax period when the residence change has taken place and for the following four tax periods".

The above does constitute an anti-abuse clause that penalizes residence changes from Spain to a country or territory qualified as tax haven by the Spanish legislation. In this respect, it should be remarked that the Spanish list of tax havens (Real Decreto 1080/1991¹⁸) includes EU Members States (as Cyprus) and States part of the European Free Trade Association (EFTA) (as Liechtenstein), which could raise doubts about its compatibility with the Community Law, as we shall see. Page 6

Returning to the above-mentioned anti-abuse clause, it should be highlighted that its assumption refers to a situation where an individual with Spanish nationality and who is fiscally resident in Spain in the tax period where he made a residence change to a country or territory qualified as tax haven calls for a change of fiscal status with respect to the Spanish (fiscal) legislation and administration, by making reference to his condition of non resident, deriving precisely from the transfer of (fiscal) residence to another country or territory. The Spanish norm does not allow the...