NGI BV made an unrealised currency exchange profit of NLG 22m prior to the transfer of its effective place of management to the UK. Under Dutch law, this profit was deemed to be realised at the time of the transfer and NGI was assessed to tax. The taxpayer argued that this ‘exit tax’ was contrary to the freedom of establishment and contravened EU law.

The Court, agreeing with the taxpayer, ruled that there was a disparity between the tax treatment of companies wishing to move their place of management within the Netherlands (where no exit taxes apply) and those moving to another member state (where they do). The Court opined that the imposition of exit taxes per se may be justified to ensure the balanced allocation of taxing rights but that such rules had to be proportionate for them to be compatible with EU law. The Dutch rules were not. The Court ruled that the national legislation should have given the taxpayer an option either to settle tax liabilities at the time of transfer or defer until such time as the gains became realised.  

Infringement proceedings have been commenced by the EU Commission against member states who currently charge exit tax (such as Ireland, Denmark, Spain and Portugal). These countries will now have to review their legislation to ensure compatibility with EU law or amend accordingly.