Court of Justice of the European Union

Judgment of 25 April 2013 (Case C-64/11)

«Member State failure to comply – Freedom of establishment – Article 49 TFEU – Restrictions – Tax Legislation – Immediate taxation of unrealised gains – Company redomiciliation, termination of the activity of a permanent establishment or transfer of the assets of an establishment »

The Court of Justice of the European Union was requested to rule in the context of an appeal on the possible conflict between the provisions of article 17(1)(a) and (c) of the Company Tax Law ("Ley del Impuesto sobre Sociedades") with article 49 of the Treaty on the Functioning of the European Union ("TFEU"), which prohibits restrictions on the freedom of establishment.

The Court ruled that, by establishing the immediate taxation of latent gains (i.e., unrealised) arising from the redomiciliation of a Spanish company to another Member State, or from the transfer of the assets of a permanent establishment located in the Spanish territory to another Member State, the above mentioned provisions of article 17 of the Company Tax Law create a situation of inequality vis-à-vis similar transactions that are purely domestic (that is, exclusively carried out within the Spanish territory).

The Court concluded that article 17(1)(a) and (c) of the Company Tax Law exceeds what is necessary to achieve its goal, inasmuch as in a cross-border situation – the situation of a company that transfers its residence abroad, or of a permanent establishment that transfers its assets abroad – it provides for immediate payment of unrealised gains tax, while in the pure domestic situations– where the transactions are carried out within Spanish territory – the corresponding gains do not have any immediate tax consequences. The Court concluded that there is an unjustified breach of the freedom of establishment set forth in article 49 of the TFEU.

Court of Justice of the European Union

Judgment of 30 May 2013 (Case C-651/11)

«VAT – Sixth Directive 77/388/EEC – Article 5(8) – Concept of "transfer of a totality of assets or part thereof – Disposal of 30% of the shares in a company to which the transferor supplies services that are subject to VAT»

Following a reference for a preliminary ruling, the Court was requested to rule on the interpretation of the articles 5(8) and 6(5) of Sixth Council Directive 77/388/EEC of 17 May 1977 (corresponding to articles 19 and 29 of the the Council VAT Directive 2006/112/EC, of 28 November - «VAT Directive»), namely on the concept of «transfer of a totality of assets or part thereof».

The Court examined the question of whether the transfer of 30% of the shares held in a company (to which the transferor provided services subject to VAT) could be considered as a transfer of a business as a going concern, under the terms and for the purposes of articles 19 and 29 of the VAT Directive.

Having denied such an understanding, as such transactions merely relate to a sale of shares and not the transfer of a business as a going concern, the Court was also asked to examine if, should all the other shareholders, who also supplied services that are subject to VAT to the company whose shares have been disposed of, transfer all the other shares in that company to the same person (almost) at the same time, could that operation be considered as a transfer of a business as a going concern.

The Court also ruled negatively, notably by arguing that in the light of the wording of the «TOGS’s» no-supply rules, one will have to conclude that they would not apply where a number of distinct transferors are selling their shares to the same transferee.

As to the deductibility of the input VAT borne by the transferor of the shares, the Court reaffirmed that there is a right to deduct VAT where the input transactions have a direct and immediate link with output transactions giving rise to the right to deduct. As the disposal of shares is an exempt transaction under Article 13B (d) (5) of the Sixth Directive, the right to deduct will exist only if the cost of the services supplied in relation to that disposal is part of the general costs relating to its overall economic activity, without being incorporated in the sale price of those shares.