Past and perspectives of exit tax

• Author: Adriano Di Pietro
• Pages: 1-11

Page 1

1. The unstable equilibrium of present national systems

After having influenced the present of exit tax at a national level, EC case law is now mortgaging its perspectives. The uncertainty does not come from the absence of specific EC law provisions, but rather from the pervasive effectiveness of EC freedoms and prohibition of discrimination.¹ Their primacy, also in the field of national income taxation, is affirmed and substantially consolidated, to such an extent that it has been generalized. As a consequence no field, even as specific as that of exit tax, could be left untouched.

The relevant national systems appeared steady and certain only on the surface. In fact, they relied on the sole national tax sovereignty on the territory, while such a sovereignty should have taken into account the EC system; they only considered effects on national market, while reference had to be made to the EC market; they regarded mobility as a limitation to national taxation - in order to reassert national powers of taxation - while such a mobility inspired and granted the implementation of the EC system as well as the full integration of common market. Also thanks to the Court of Justice, the unstable equilibrium of national systems has become a corollary of the integrated perspective of national tax systems within the framework of EC system. It stems from the compatibility judgment operated with respect to national options concerning exit taxes. ECJ case law has worked for the respect of both EC system and common market in the field of direct taxation, also in cases where national legislators had decided to maintain taxation on unrealized capital gains. This is the reason why, though limited to the two rulings which have been given on the Page 2 matter², sometimes leading to contradictory outcomes, it has played a systematic role. ECJ judgments, in fact, are characterized by such a systematic approach, which examines first of all reasons, grounds and effectiveness of latent capital gains taxation; then, once expressed a positive evaluation on exit taxes, the different exit tax regimes. So, up till now the focus has been on national characteristics, as revealed by case law as well as by grounds for recent infringement procedures against Spain, Portugal and Sweden. In fact, in ECJ's opinion, with a view to coherence of national systems, compatibility of national exit taxes depends on such characteristics. The aim is coherently stated and pursued. Both a compatibility check on the basis of EC principles - such as the one of proportionality - and an appreciation of possible national justifications are carried out.

On the other hand, outcomes are sometimes incoherent, though referring to similar regimes. As a matter of fact, the Court appreciated differently the anti-abuse justification as coherence of a national tax system. Thus, perspectives of national tax systems become increasingly precarious, although it is confirmed that taxation of latent capital gains as such is compatible with EC law.

2. EC compatibility of national systems: a difficult balance between national territoriality and EC coherence

2. 1 Past experiences and the overcoming of territorial taxation unity

The past cannot come back. It relied upon national systems aiming at affirming - always and in any instance - their tax sovereignty on capital gains which, though not yet realized, were deemed as acquired by the system itself. As such, they could not escape the levy, even though the individual taxpayer had passed to another tax jurisdiction. As regards the internal system, national tax sovereignty served national Page 3 financial interests; as regards EC system, it could only be justified with a view to prevent abusive utilizations.

Nowadays, national options are not absolutely free: they must comply with economical freedoms and, precisely, freedom of establishment, which have become a binding parameter for national options, by contributing to transform a merely internal solution into an EU issue. National regimes cannot alter, nor decrease, nor restrict the full achievement of EC Treaty. Territoriality, as their inspiring principle, has to be reconciled through coherence with the EC system and the common market.

A difficult balance which must take into account the dissociation, imposed by the EC framework, between the power of taxation and the relevant exercise. The first one being legitimate and compatible; the second one being compatible as well, but exclusively when the same conditions are met with reference to residents in a different territory and a different system. In the light of this, case law did not deem the principle of exit taxes incompatible, but rather it shared its ground and inspiration. In the name of EC law, the Court only put an end to the unity between powers of taxation and the relevant exercise, which had characterized national exit tax regimes since their introduction. Thus, it resulted in a dissociation, previously unknown in the purely domestic logic of taxation. The power of taxation - stating the national right to tax latent capital gains as ascertained at the time of the loss of residence - is kept intact and made consistent, also in the EC perspective, with its inspiring interest. The exercise of such a power - intended as the right to levy the tax relating to the amount of latent capital gains ascertained at the time of the loss of residence - is...