A company transferring its place of effective management should be provided the choice between immediate payment of the tax due and deferral of payment until the capital gains are actually realised.

' />A company transferring its place of effective management should be provided the choice between immediate payment of the tax due and deferral of payment until the capital gains are actually realised.

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Case C-371/10 - Exit tax on Capital Gains upon Transfer of Resi

Dr. Trudy Marie Attard | Published on 02 Dec 2011

Chetcuti Cauchi Lawyers

Case C-371/10 concerned a Dutch company, National Grid Indus BV, which transferred its tax residence to the UK by moving its place of effective management. Due to the transfer, the Netherlands assessed the company on its unrealised currency exchange gain and imposed tax.

Primarily, the Court of Justice of the EU held that legislation that imposes an assessment of unrealised gains on companies transferring their residence abroad but not on transfers within the Netherlands, goes against the freedom of establishment protected under the founding treaties. The Court held that the restriction was somewhat justified in principle by the need to maintain a balanced allocation of taxing powers between Member States, as the Netherlands was not obliged to give up its taxing rights.

It held, however, that legislation levying corporate exit tax on unrealised capital gains immediately upon the transfer of a company‘s effective management to another Member State is disproportionate. Tax levied immediately on such unrealised gains would be proportionate and in the interest of the proper allocation of taxing rights were there was an option of deferral until such gains are realised.

The Court went beyond its previous decisions and limited the practical effect of its judgment by expressly stating that Member States may charge interest on the deferred payment of exit charges and may request the emigrating taxpayer to provide security for the deferred tax payment, such as a bank guarantee. It held that the state of origin does not need to take into account subsequent losses incurred in the destination territory. 

The company would therefore have the choice of undergoing a cash-flow disadvantage upon payment of the exit tax or an administrative burden in connection with tracing the transferred assets.



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