Influence of EC law on Dutch exit tax provisions
| Author | Suzanne Boers |
| Pages | 1-23 |
Page 1
In the Netherlands, many types of exit tax provisions exist, which are applied both to private individuals in certain situations, transferring their permanent residence to another country and to companies that cease to be tax residents in the Netherlands.1 In this contribution, section A will discuss the Dutch exit taxes for individuals and section B will cover the Dutch exit taxes on companies. Section C will recapitulate the examinations and contain concluding remarks.
The Netherlands has included in its national tax law various exit tax and claw back provisions for emigrating individuals. The first type of Dutch exit taxes for individuals is the exit tax upon emigration of individuals that have a substantial participation2 in either Dutch or foreign corporations (as known from the N case3). In short, the transfer of the tax residency of an individual substantial shareholder is considered a deemed alienation of the shares. The taxable amount consists of the capital gain on the shares (i.e. the difference between the historical purchase price of the shares and the fair market value at moment of emigration). This taxable amount is recorded through a preserving assessment, and will only be collected if the shares are sold within ten years after emigration or if the company is liquidated and all reserves are distributed within ten years.4 According to Page 2 the current provisions, the collection of the tax is automatically and unconditionally deferred for ten years in case of an emigration to another Member State.5 There is a deduction allowed for the foreign tax paid on the sale of the shares in the form of a tax credit.6 If after ten years the shares are still held by the shareholder, the amount outstanding on the preserving assessment shall be completely remitted.7
Secondly, the Netherlands applies certain exit tax and claw back provisions to emigrating individuals with respect to pension claims and specific insurance claims related to the personal dwelling or to pension deficits. For instance, an exit tax is levied upon emigration of an individual on the fair market value of the pension rights, accrued in the period of Dutch residency. Also, if a Dutch resident tax payer transfers his pension claim to a pension insurer or pension fund located outside the Netherlands, an exit tax is levied on the fair market value of the transferred pension rights.8 Previously deducted premiums for specific insurance policies such as life annuities are also taken into account in the exit taxation upon emigration of individuals and endowment assurance claims connected to the personal dwelling (after deduction of the exempt amount) are deemed to be distributed at the moment just before the transfer of residency of the insured person.9 These exit taxes are also executed by means of a preserving assessment.10
Thirdly, the Netherlands levies an exit tax on individual entrepreneurs that transfer their residence and their enterprise outside the Netherlands. If all assets of the enterprise, or an independent part of the business, are moved to a foreign country and at that moment or at any later moment in time the entrepreneur ceases to be taxable in the Netherlands, the exit tax applies. The assets of the transferred business will then be deemed to have been disposed at fair market value for income tax purposes.11 Page 3 Contrary to the first two types of exit taxes on individuals mentioned above, this exit tax on private entrepreneurs is not executed through a preserving assessment, but collected immediately at the moment of the transfer of the tax residence, even though there is no actual realisation moment. This same issue of final taxation of profits also appears in the Dutch exit taxes applied to legal entities transferring their tax residency, and will be further discussed in that section.
As can be derived from the above, the Dutch tax legislation contains three types of exit taxes for individuals that have different objects of taxation. The Dutch exit tax on individual substantial shareholders involves the value increase of the shares. The claw back provisions regarding pension rights, insurance claims related to the personal dwelling and to pension deficits involve mainly a taxation of premiums that have been previously deducted from the Dutch income or a taxation of the fair market value of claims built up in the Dutch period. Finally, the exit tax on private entrepreneurs involves any previously untaxed profits of the enterprise. This would concern the value increase of the business assets of the enterprise, which may consist in tangible or intangible assets or perhaps also a shareholding in another company.
From its introduction in Dutch tax law, the compatibility of the Dutch exit tax on substantial shareholders through the preserving assessment, has been questioned by many scholars.12 Therefore, the proceedings before the Court in Hughes de Lasteyrie du Saillant case were also important for the Netherlands.
The French exit tax at issue in the Hughes de Lasteyrie du Saillant case was largely similar to the exit tax as applied at that time in the Netherlands, containing a deemed disposal of the shares upon emigration of a substantial shareholder for French taxation purposes. The actual Page 4 payment of the tax could be deferred, provided a bank guarantee was given and a French tax agent was left behind on behalf of the emigrating taxpayer. After five years, the tax claim was fully remitted. As known, the European Court of Justice found these French exit tax provisions incompatible with EC law, because they constituted a prohibited restriction to the freedom of establishment of article 52 (now article 43) of the EC Treaty. The Court ruled that the French exit tax at issue could not be justified by overriding reasons in the public interest.13
Prior to the Court's decision in Hughes de Lasteyrie du Saillant, the Dutch preserving assessment system was also bound to certain conditions. The deferral of tax payment was only granted at request of the taxpayer at issue and provided a bank guarantee was given to secure future payment. In reaction to the Court's ruling in Hughes de Lasteyrie du Saillant, the Dutch tax legislator made several amendments to the preserving assessment system in order to abolish its restricting elements. The main amendment accomplished that the deferral of the tax collection is currently granted automatically and without guarantee in case of a transfer to another EU-Member State. Furthermore, future decreases in value of the shares or claims are also taken into account. The preserving assessment can be partially remitted in case of a decreased value of the shares or claims at the moment of actual disposal. These amendments were introduced in the Dutch legislation at the end of 2004, with retroactive effect to 11 March 2004 (the date of the Court's ruling).14Similar adjustments were made in the preserving assessment system that is applied to the exit taxes with regard to pension and other specific claims of emigrating individuals (the second type of exit taxes for individuals).
After these amendments, the Dutch government took the position that in any case, the Dutch exit tax provisions for emigrating individual shareholders as applied as of 11 March 2004 do not constitute any restriction for taxpayers to exercise their basic freedoms enshrined in the EC-treaty.15 Since this was not to be considered acte clair or acte éclairé, Page 5 the Dutch Court of Appeal in Arnhem asked preliminary questions to the European Court of Justice with regard to the compatibility of the Dutch exit tax provisions on emigrating shareholders with EC-law, which case led to the N case16. The case concerned the emigration of a substantial shareholder, N, from the Netherlands to the United Kingdom in 1997. At the same time that N transferred his residence, the management of his three fully owned Dutch limited liability companies was transferred to the Netherlands Antilles. N received a preserving assessment with regard to the deemed disposal of his shareholding in the three companies. He requested a deferment of payment, which in the legal context of that time, was at first made subject to the provision of security. After five years, N started running a farm with an apple orchard in the United Kingdom.
The first two preliminary questions to the Court essentially concerned the question whether an individual such as N could rely on the freedom of establishment of article 43 or on the freedom of movement of article 18 of the EC Treaty17. Since it took five years for N to start his economic activities in the United Kingdom, it could be questioned whether it is plausible that these activities...
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