Tax: Exit Charges Go Back to ECJ

The Supreme Court of Amsterdam has recently referred a case to the European Court of Justice (ECJ) on the legitimacy of tax exit charges. Such charges can arise when a company seeks to migrate from one EU Member State to another. A number of Member States have such rules which generally apply to unrealised gains on individuals or companies when (a) they cease to be resident for tax purposes in the relevant state and (b) the unrealised gains relate to assets which are not connected to operations in the relevant state. The issue has always been whether such charges infringe the EU right to freedom of establishment and, despite previous ECJ case law and a 2006 Commission Report on the subject, the Supreme Court of Amsterdam determined that the legitimacy of such charges remains unclear in the case of corporate entities. The ECJ's ruling is likely to have implications for exit charge regimes across the EU, including the UK rules which are set out in the Taxation of Chargeable Gains Act 1992.

The Facts

National Grid Indus BV, a Dutch company, moved its central management to the UK during 2000. Prior to emigrating to the UK, National Grid held a large (and untaxed) inter-company receivable. Pursuant to the Dutch rules, a corporate income tax assessment was issued. It should be noted that the assessment was also based on the doctrine of abuse of law (fraus legis), a finding which was upheld by the Dutch Courts. However, the Supreme Court of Amsterdam felt it necessary to refer the case to the ECJ in July 2010 to determine whether the exit charge was permissible or whether it was incompatible with the EU right to freedom of establishment under Article 49 of the EU Treaty.

Previous Case Law and Developments

This latest reference to the ECJ follows a number of cases which seemed to provide a reasonably settled view of how EU law applies to exit charges. Previously, the ECJ has given broad support to exit charges which seek to preserve a reasonable allocation of taxation rights amongst EU Member States. Such charges, whilst potentially discriminatory, are often justifiable provided they are proportionate to Member States' objectives. Whilst emphasising the need in certain instances to defer the imposition of an exit charge (for example in the case of individuals who can be easily tracked through exchange of information provisions), it has previously been determined that there is no wider EU right for a company to transfer its residence from one Member...