In case of appeals to tax rulings, one usually has to deal with facts of German tax law. If the objection decision of the tax office made in this case does not appeal to the taxpayer, he can submit the facts to the tax court for clarification. The Bundesfinanzhof is the only other authority available. However, this only applies if a revision is permitted. However, in some cases, issues involve issues related to European law. In particular, freedom of establishment is a prominent topic. Therefore, if an application for freedom of establishment is submitted to the Finance Court or later to the Federal Finance Court for assessment, these courts often refer instead to the European Court of Justice in Luxembourg. In the past, the lawsuit on the freedom of establishment in relation to the exit tax was decisive in German legislation and case law. And if the reformed exit tax also makes this conditional, then one can certainly soon expect a new complaint about the freedom of establishment before the European Court of Justice.

From objection to action before the European Court of Justice

1st action on freedom of establishment: national law vs. European law

As a rule, tax officials deal with simple matters when appeals are made by taxpayers. Solving them usually requires few circumstances. Nevertheless, it may happen that the taxpayer insists on a clarification before the tax court. Above all, such cases are noticeable that are of fundamental importance for German tax law. If the tax court makes a decision that gives rise to a review, the case can be submitted to the highest authority in national terms, namely the Bundesfinanzhof.

However, in rare cases a tax aspect that interferes with European law must also be clarified. The Finance Court can already refer to the European Court of Justice in Luxembourg for clarification. At the latest at the Federal Finance Court, an examination of the facts under aspects of European law can be considered.

In which cases the jurisdiction ends in Germany and is instead subject to the European Court of Justice, we want to deal with in our article. Of course, it is primarily a question of tax law. We also consider the impact of such supreme court decisions on German legislation and case law.

2nd action on the freedom of capital and establishment: tax and European law

First of all, we want to discuss the nature of tax law issues that also have a corresponding relevance in European law. After all, in the EU it is generally the case that tax law is subject to national legislation. Therefore, the relationship between national tax laws and jurisdictions on the one hand and European law on the other can only indicate a conflict between the two. In fact, this is also the case when claims relating to taxes contrary to European law are brought before the European Court of Justice.

In particular, two aspects of European law enshrined in proceedings before the European Court of Justice stand out as conflicting with national tax law. On the one hand, it concerns the free movement of capital and on the other hand the free movement of persons within the European Union and the states of the European Economic Area (EEA) and Switzerland, which are also affiliated in legal terms. Since the term free movement of persons is also common under the term freedom of establishment, which is more suitable for our tax approach, we prefer to use this term in the following.

With regard to the validity of the fundamental freedoms presented here, the freedom of movement of capital and freedom of establishment, we would like to refrain in the further course of the article, for the sake of simplicity, from always having to point out that this applies both to all member states of the EU and to the other countries of the EEA contractually bound by the EU rules as well as to Switzerland. So when we talk about the EU, it includes all the other countries to which these rules also apply.

The freedom of establishment is in fact the extension of the national rights of the citizens of the respective EU member states to the EU level. On the one hand, there is a reference to the personal freedom to establish a residence of one's own choice. On the other hand, it also includes the freedom that leaves every citizen free to set up a business anywhere within the EU that they choose. So if someone wants to move from Berlin to Munich, for example, then he invokes the personal right to have the freedom to choose the place freely. Of course, this also applies when starting a company.

So European law transfers this freedom to the other EU member states. That is why it goes without saying to us as citizens of the EU, for example, when an Italian citizen opens a restaurant in Kautokeino or a Finnish citizen offers a liquorice shop in Orleans for critical gourmets. This makes the freedom of establishment one of the most important rights that characterises the EU and from which EU citizens benefit the most.

We want to deal only marginally with the free movement of capital within the EU. This fundamental right allows both natural and legal persons within and outside the EU to transfer money and securities without restriction. In this way, the EU ensures that funds and capital can be moved across borders free of national provisions, as was the case before within the individual EU member states. This ensures that no national preferences affect the investment climate.

5th action concerning freedom of establishment in the case of the Exit Tax

Even before 2004, the exit tax showed the potential with which national tax law can oppose European law. In the case of the exit tax, this is noticed both in German law and in the tax law of other member states as only partially compatible with European law. This is the first time this has come to light in the case of Lasteyrie-du-Sailant before the European Court of Justice. This action on the freedom of establishment concerned the application of the French exit tax to the departure to Belgium of a French citizen after whom the case is named. In particular, the aspect that a move within France would not lead to a corresponding taxation sounds convincing in this context.

In this regard, the European Court of Justice ruled in 2004 that the Exit Tax in the then valid statutory form does not in principle constitute a violation of the freedom of establishment enshrined in European law. However, the European Court of Justice made it clear that tax assessment must not be carried out immediately. Rather, the judgment requires that the tax assessment of the exit tax includes a deferral of unlimited duration. The deferral should also be granted without interest, which basically postpones the payment of the tax to the time when the shareholding is actually sold from abroad. Alternatively, the deferral should also be waived if the taxpayer moves from the EU to a third country.

Now this decision of the European Court of Justice on the right of establishment also had an impact on other national tax laws. Based on this judgment, the EU Commission found that the German exit tax also conflicts with European law and should therefore be abolished at best. Although Germany has by no means complied with this maximum requirement, it has had to make certain changes to the Foreign Tax Act in order to at least be able to justify conformity with European law. In concrete terms, this ruling by the European Court of Justice led to the legislature extending the External Tax Act to include the possibility of deferring the Exit Tax. These changes to the law were then confirmed by later proceedings in the context of an action concerning the freedom of establishment with regard to the exit tax at the Bundesfinanzhof as being in accordance with European law. However, it is legitimate to ask whether these judgments, which have been passed at national level, are also equivalent at the level of the European Court of Justice.

6th Amendment of the law, ergo renewed action on freedom of establishment?

In fact, this question has gained immediate importance recently. In recent years, the European Court of Justice has issued several rulings on tax easing, in which, however, legal persons instead of natural persons wanted to use the possibility of deferral. Here too, the lawsuit on freedom of establishment was at the heart of the proceedings. However, the European Court of Justice ruled that a deferral of the de-entangling tax over a period of at least five years is compatible with the freedom of establishment.

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Action for Freedom of Establishment

In the meantime, the legislature has taken these judgments as an opportunity to amend the regulation on deferral of the exit tax again in the course of the ATADUmsG. The attempt is now being made to transfer the determination in court judgments of the legitimacy of a five-year deferral of legal persons to the exit tax of natural persons. For this purpose, the reformed External Tax Act for removal cases provides for a possibility to pay in installments within seven, instead of only five years as previously.

However, it is doubtful whether the new regulation on the payment of the exit tax is in line with European law on freedom of establishment and the existing rulings of the European Court of Justice. After all, the European Court of Justice has already ruled, contrary to this seemingly comparable approach, in which natural and legal persons are treated on an equal footing, that natural and legal persons are by no means uniform. Because unlike natural persons, legal persons only have an economic purpose. Natural persons, on the other hand, can also seek to move abroad for reasons other than tax. The payment of an exit tax based on a purely fictitious profit would be an important reason that can strongly influence the decision to move. In other words, it restricts the freedom of establishment.

Because natural persons can also have personal reasons for moving abroad, it is understandable that one should not assume in principle a purely tax reason for moving abroad. But this was also an argument that France, for its part, cited in the case of Lasteyrie-du-Sailant before the European Court of Justice to justify its exit tax. This is because, according to the argument, the exit tax is an important state instrument to prevent taxation of the profits from the sale of a company abroad and thus potential tax evasion.

Now it remains to be seen whether the legislature rightly risked an action on freedom of establishment before the European Court of Justice. Because the probability that this new regulation for the deferral of the exit tax will remain without objection, is already unlikely due to the criticism of the speaker’s draft in many circles already generally and specifically expressed.

In addition, the adoption of the reformed foreign tax law is also risky for another reason. Because the law is interpreted in such a way that an exit tax, which arose in a previous year and could therefore be deferred under the then still valid rules, would be subject to the new, more restrictive rules when the change in the law comes into force. Whether such a retroactive change of law is then also compatible with the Basic Law, one can also doubt.

Tax advisor in the case of a claim for freedom of establishment