EC law and exit tax: limits, future perspectives and contradictions

• Author: Andrea Carinci
• Pages: 1-10

Page 1

The issue of exit taxes, namely the issue of the different kind of taxation connected with the transfer of the tax residence, offers a special observation post, in a certain sense, on the EU integration process, on its limits and contradictions, also beyond the scope of the tax matter.¹

Prior to any considerations, it should be taken into consideration that direct taxation, due to a clear decision stated in the Treaty, has never been placed in the forefront in the EU implementation process. Contrary to indirect taxation, where the harmonization of national legislation was seen as a necessary step for the creation of the common market², for direct taxation only a rapprochement of legislations has been assumed, indeed limited to anything which had a direct impact on the establishment or functioning of the common market³. On the matter, in fact, the EC actions are really limited: only Directives on distribution of dividends⁴, cross border transaction⁵ and the Directive on the payment of passive incomes between different Member States⁶. All these initiatives, indeed, have not touched upon, nor undermined, Member States' taxing power, or, where they did, they did so only marginally. If we can talk now about a limitation of this full taxing power in favour of the European harmonization, as we know, it is just thanks to the Court of Justice, that which started to rule on the different national regimes, even on matters that are out of the EC harmonization process, to ensure the effectiveness of rules and principles considered fundamental, even in fields that still remain within Member States' competence⁷. This Page 2 is the origin of the so-called process of "negative harmonization". But it has been only a negative process of harmonization/rapprochement, realized through the elimination of parts of the national legislation that are considered non compatible with rules, principles and fundamental values of the EC law.

The matter of exit taxation shows indeed how false is the perspective which still considers direct taxation just a marginal and incidental aspect of common market implementation. In fact, the transfer of residence is an event that really impacts on the freedoms of the Treaty (free movement of persons and freedom of establishment, but also free movement of capitals), and so the complete realization of the European juridical common space, for whose purpose these freedoms were outlined. Moreover, the possible violation of these freedoms could be related - but not solely - to the tax regimes, in particular direct taxation, in the different national legislations. This is true also for legal persons, for which, indeed, the matter would pertain to corporate law and be related to the possibility granted by individual Member States to the transfer of a company's seat abroad. Once more, in fact, the impact of the issue of the transfer of seat on EC freedoms becomes relevant just because of the fiscal component. The possibility to deny the transfer of seat causes the liquidation of the company wanting to transfer abroad, and so the related fiscal regime and the taxation of the accrued but not yet realized capital gains. At the end only the fiscal issue, and in particular the regime provided for the taxes on profits, influences the determination of the place of establishment of whoever wants to transfer the residence; the articles published in this issue further clarify this point.

Moreover, the issue of exit taxes shows that the Court of Justice could not solve by itself all the problems that exit taxation cause for operators.

It ss undeniable that only thanks to the Court of Justice the matter is today relevant not only for operators but also for national legislators, who have to verify, after the judgements of 11th March 2004⁸ and 7th September 2006⁹, the EC compatibility of their national regulations. It has to be stated, indeed, that the Court in these two judgements has given an important contribution to the matter, within the process of negative harmonization. By criticising some aspects of the analysed rules, specifically Page 3 the French and the Dutch ones, the Court clarified which elements (immediate collection, the need of guarantees, etc...) have to be excluded from the structure of the exit tax, and drawing in this way- so in the negative - a possible EC model of tax related to the loss of residence by an individual. In the view of the Court, if normally the tax on capital gains concerns the moment of their realization, consequently it cannot be applied on the mere loss of residence, but it will be necessary to wait the moment of the effective realization, in order to take also into account possible capital gains or capital losses¹⁰; at the moment of the loss of residence the State of origin may only impose, consequently, a preserving assessment aiming at determining, and so crystallizing, the capital gains accrued but not yet realized. Equally, guarantees to preserve the tax credit¹¹ cannot be envisaged, in case of postponed collection, because Member States can (and have to) apply the Directive of Council 19th December 1977, 77/799/EC, on the mutual assistance by the competent authorities of the Member States in the field of direct taxation¹², as amended by Council Directive 2004/106/EC of 16 November 2004¹³, and the Directive of Council 76/308/EEC of 15 March 1976¹⁴, as amended by Council Directive 2001/44/EC of the 15th of June 2001¹⁵ on mutual assistance for the recovery of claims related to taxes on income and capitals¹⁶.

These are very precise conditions. However - as shown in the articles published here - national regulations still are at the moment, and therefore after the above-mentioned judgements, quite complex and non homogeneous.

Thus, while some States do not provide for taxation on hidden reserves held by individuals at the moment of their transfer of residence (for instance, Italy, Spain, Portugal and France in particular, that had to eliminate its exit tax after the judgement Hugues de Lasteyrie,), many other States have an exit tax provision.

According to the judgement Hugues de Lasteyrie, however, the tax on capital gains accrued by shareholders, who transfer their residence, if it is provided for, is not collected at the moment of the transfer of the residence, but only at the time of sale Page 4 (or other similar event). At the moment of the transfer, in fact, an assessment can take place only on the accrued capital gains, considering the market value of the held shares. Some States (Ireland and the United Kingdom) ask for other conditions, namely the re-entry of the transferred holder within a specific period of time, while other States limit the taxing power to a specific time frame (the Netherlands, Sweden and Austria). Both cases have the same aim, namely regulating against tax avoidance (even if it is more evident in the former than in the latter case), with the intent to avoid the transfer of residence finalized...