The CJEU rules that a staggered tax charge on unrealised capital gains when an asset is transferred to a permanent establishment in a different Member State does not breach freedom of establishment (C-657/13 Verder LabTec GmbH & Co. KG v Finanzamt Hilden).
The German limited partnership, Verder LabTec, had transferred patent, trademark and model rights to its permanent establishment located in the Netherlands. The German tax authorities considered that the transfer of those rights triggered the disclosure of the unrealised capital gains pertaining to those rights at their arm's length value at the time of the transfer. However, the amount of the unrealised gains was not immediately subject to taxation in full. For reasons of equity, the amount was to be offset by a nominal item for the same value and incorporated in profits on a straight line basis over a period of 10 years.
Verder LabTec brought an action before the fiscal court of Düsseldorf claiming that the tax legislation regarding the staggered recovery of tax on unrealised capital gains undermines the freedom of establishment guaranteed by Article 49 TFEU. The tax court Düsseldorf decided to stay the proceedings and to refer the question whether the national rule stipulating the transfer of an asset from a domestic to a foreign permanent establishment of the same undertaking as withdrawal for non business purposes with the result that the disclosure of unrealised capital gains leads to a taxable profit linked to the withdrawal, in conjunction with the possibility of spreading that profit in equal proportions over five or 10 financial years is consistent with freedom of establishment under Article 49 TFEU to the ECJ for a preliminary ruling.
The ECJ ruled that the imposition of exit tax infringes the freedom of establishment (Article 49 TFEU) because there is a difference in treatment between a domestic transfer and the transfer of assets to another Member State, and this treatment can hinder the company from transferring assets to a permanent establishment in another Member State. According to the ECJ, however, this infringement can be justified by overriding reasons in the public interest related to the preservation of the allocation of powers of taxation as between Member States as long as the time limit for recovery of taxes was “proportionate”. As the taxation of income relating to assets transferred to another Member State generated after such transfer falls to the other Member State, in whose territory the permanent establishment is located, tax legislation such as that at issue is seen by the ECJ as appropriate for ensuring the preservation of powers of taxation between the Member States concerned.
The ECJ noted that it is proportionate for a Member State - for the purpose of safeguarding the exercise of its powers of taxation - to determine the amount of the tax due on the unrealised capital gains that have been generated in its territory pertaining to the assets transferred outside its territory, at the time when its powers of taxation in respect of the assets concerned cease to exist, namely, at the time of the transfer of the assets at issue outside the territory of that Member Sate.
Further, the ECJ confirmed its view that it was appropriate to give the taxable person the choice between the immediate payment of that tax and deferred payment plus interest, if appropriate, taking the risk of non-recovery of the tax which increases with the passage of time into account. Given that the recovery of tax on unrealised capital gains spread over five annual instalments, instead of immediate recovery, was considered to be a proportionate measure to attain the objective of preserving the allocation of taxation powers between the Member States, the ECJ ruled, that a staggered recovery of tax on unrealised capital gains over 10 annual instalments can only therefore be considered.