date | theme

25. February 2021 | Tax assessment & tax collection at the German tax easing

09. February 2021 | Tax de-engagement & deferral: period and time of payment

04. January 2021 | Tax easing: Taxes on the departure of business assets abroad

06. June 2020 | European law-compliant interpretation and European law inconsistencies in cases of departure and tax easing

05. June 2020 | Anti-Tax Avoidance Directive (ATAD): Critical analysis of early taxation in cases of departure and tax easing (this contribution)

03. June 2020 | Exit taxation & tax easing: Critical analysis of (early) immediate taxation

27. May 2020 | Actual tax easing in cross-border conversions in light of the changed understanding of the agreement by the BFH (task of the final extraction theory)

26. May 2020 | Legal tax easing in light of the changed understanding of the agreement by the BFH (task of the final extraction theory)

25. May 2020 | Tax easing in light of the amended understanding of the agreement by the BFH

In addition to the regulations of the FRL and the general harmonisation of the internal market, the fight against tax evasion and tax evasion is also the focus of the EU. The Anti-Tax Avoidance Directive (ATAD), adopted in 2016, deals with the fight against tax avoidance practices. It is necessary to check how the content of ATAD relates to the FRL and what consequences ATAD has on the (German) conversion tax law. Nevertheless, the fundamental freedoms of nationals as well as the right of taxation of the Member State (to the extent that it applies) must be respected.

Until now, the focus of the EU has been on the harmonisation of the internal market and the associated removal of barriers to the internal market. With the “Directive laying down rules for combating tax avoidance practices with direct impact on the functioning of the internal market”[649], which was adopted on 12 July 2016, the EU has set itself the goal of incorporating selected OECD BEPS measures into secondary law and thus ultimately transforming them into the national rules of the 28 Member States in a uniform manner.[650] In particular with the measures set out in Art. 5 ATAD standardised – mandatory for Member States from 1.1.2020 – It now partially counteracts the tax-neutral transfer of assets and thus harmonisation.

According to Art. 5 para. 1 lit. (a) and (b) ATAD require Member States to adopt legislation providing for final taxation when assets are transferred from an EU permanent establishment to another State and the State of origin no longer has the right to tax the transferred assets on account of the transfer. According to Art. 5 para. 2 ATAD, the taxpayer should then be given the right to pay the resulting tax in five annual instalments in EU/EEA material conduct. The Directive acc. Art. 1 ATAD only on corporate tax entities.

In addition to the above-mentioned cases of de-engagement through the transfer of assets (Art. 5 para.) 1 lit. a and b ATAD), the exit tax is to be levied by the Member State also in cases of departure (lit. c) and relocation of functions (lit. d). In conversion cases, the taxation of derailment by ATAD is expressly unaffected[651]; presumably the guideline did not want to enter the scope of the FRL with the ATAD. Thus, ATAD’s influence is limited to the general deregulation standards of the KStG, whereas the specific deregulation standards of the UmwStG must comply with the requirements of the FRL while respecting fundamental freedoms and the general deregulation standards of the EStG are not subject to secondary legislation.

Relation between minimum protection concept and fundamental freedoms

2.1 Priority of fundamental freedoms

On the one hand, Article 5 of the Directive lays down clear rules on how Member States are to tax the transfer of assets. ATAD thus obliges the Member States to adopt legislation restricting the fundamental freedoms of their citizens, in particular the freedom of establishment. Article 3 ATAD also clarifies that these are only minimum standards and that Member States are free to adopt ‘the application of national or contractual provisions in order to ensure a higher level of protection of domestic corporate tax bases’. For the sake of clarification, it should be stressed once again that the directive does not intend to protect the Union citizen, but, exceptionally, the Member State. According to the directive, there seems to be no upper limitation on the rights of European citizens by further measures.

On the other hand, Member States must always respect the fundamental freedoms when transposing directives, i.e., despite directives, they may restrict the fundamental freedoms by means of a national standard only to the extent justified by overriding reasons of general interest. The Member States are thus in a conflict, as they have the obligation to transpose the directive on the one hand, but on the other hand, they must not induce a violation of fundamental freedoms through national legislation.

The tax concept and the tax deferral model of the art. 5 ATAD clearly shows that the guideline has been strictly based on the previous case law of the ECJ[652] on untaking processes.[653] With an immediate taxation in third-country matters and a taxation in EU/EEA cases extended to five years, which allows the collection of interest and the provision of a guarantee depending on the risk assessment of the individual case, the minimum interference in the fundamental freedoms of the Directive corresponds to the maximum permissible interference in the fundamental freedoms according to the previous ECJ case-law. The national legislator is – currently – in a tailor-made corset; If the directive is (slightly) undercut, the accusation of a violation of the directive threatens, while if the directive is (slightly) exceeded, the risk of a violation of fundamental freedoms arises.

ATAD assumes in recital 2 that its requirements are in accordance with EU law.[654] In the event of conflict, however, the Directive is subject to review in accordance with primary law[655] and, in the event of doubt, must be interpreted in accordance with EU law. In the event of a primary infringement of the Directive, taxpayers may invoke the fundamental freedoms vis-à-vis ATAD.[656] In preliminary ruling proceedings (Article 267 TFEU), the ECJ decides on the interpretation of the acts of the institutions and thus also on the Directive. In cases of clear primary infringement, the ECJ can therefore reject the Directive.[657] If the Directive is too much infringed on fundamental freedoms, priority must therefore be given to the fundamental freedoms as part of primary law, so that national legislators are prohibited from transposing passages of directives contrary to the EU.[658]

2.2 No legitimacy for the violation of fundamental freedoms by Art. 3 ATAD

In Article 3, the Directive also allows Member States to adopt rules that go beyond the minimum protection provided for in the Directive. However, the directive does not give the Member States a ‘free pass’ to adopt arbitrary standards. These standards, which go beyond the minimum protection provided by the Directive, remain, like the standards adopted under the Directive, open to full control by primary law.[659]

However, the minimum protection concept of the Directive does not seem to be mature, especially in the area of tax easing. Even though the directive seeks to provide only a minimum level of protection for the domestic corporate tax base, the Member States must, to the detriment of their tax liability under Art. 5 par. 2 ATAD grant the taxpayer in EU/EEA cases the right to pay the tax in five annual instalments. This provision, which is clearly intended to comply with the current ECJ case-law, is contrary to the minimum protection character of the directive. On a sober view, the minimum protection concept is at least in the area of the species. 5 par. 2 ATAD is therefore repealed, since otherwise Member States would have the possibility to apply immediate taxation ‘in order to ensure a higher level of protection’.

Instead, the German legislature is included in § 4g EStG, which according to § 12 para. 1 S. 1 KStG also applies to corporate tax deregulation, must carry out an extension. In future, the German legislature may not make the application of § 4g EStG subject to the condition that the unencumberment is carried out by an unlimited taxpayer and that it is an economic asset of the fixed assets. In addition, the legislature has to extend the scope of application of EU factual conduct to EEA factual matters.[660]

The Directive provides for taxation if, following the transfer of the asset, the State of origin ‘no longer has the right to tax the transferred assets’. This wording is ambiguous and inevitably leads to speculation as to whether final taxation will occur once all hidden reserves have been withdrawn from the taxation of the State of origin, or whether the withdrawal of the right to tax future hidden reserves is sufficient.

In the light of the interpretation of the Directive in accordance with primary law, final taxation can only be justified on the basis of the arguments in p. 127 f. if the State of origin also loses the right to tax the hidden reserves arising in its territory up to the date of deregulation. If the State of origin retains the right to tax the hidden reserves created in its territory, the objective of a balanced distribution of taxation powers is safeguarded even without final taxation. In such cases, final taxation would, in the absence of a justification, constitute an unjustifiable restriction on the freedom of establishment. In the light of an interpretation of the Directive in accordance with primary law, the national deregulation rule may provide for final taxation only in cases where the State of origin loses the right to tax both on future increases in value and on increases in value arising within its territory.

2.4. No lump-sum obligation to collect partial payments in case of loss of taxation right

According to the Directive, the taxpayer receives the right to defer the tax payment in EU/EEA material conduct (Art. 5 para 2 ATAD). However, according to guidelines, tax collection should not take place in a sum after five years, but in five uniform annual installments. In doing so, the guideline obviously wishes to comply with the ECJ case-law.[661] Although the ECJ considers a ratified tax collection in five or ten uniform annual instalments to be appropriate in two judgments, this case-law was issued on usable assets that were accessible in the host state to a depreciation of market value.[662]

According to the view taken here, however, in the case of assets of fixed assets, a rated tax levy before the fictitious realisation date is only proportionate and compatible with primary law if it is neutralised in the host country by a corresponding tax relief in the form of a depreciation from market value, as in the two judgments cited above. It will be the exception that in EU/EEA matters no depreciation from the market value is possible in the host state, after all, ATAD determines in EU/EEA cases according to art. 5 par. 5 ATAD for the host country the tax involvement at market value. Due to the comprehensive DTA network in the EU/EEA and the associated localization principle according to Artt. 6, 12, par. 1 OECD-MA, real estate – as a rule for non-utilizable assets of fixed assets – will generally not be untangled for tax purposes.

Therefore, there remains a small scope of application in which movable assets of the fixed assets are not subject to scheduled depreciation, such as domains or shareholdings. However, the national legislature has to implement ATAD only to the extent that it is lawful and does not violate primary law. [663] In these cases, it is considered that the Directive must be interpreted in accordance with primary law and that the tax should not be levied in five annual instalments, but in a sum, and only after the expiry of the fictitious five-year period of implementation.

It should also be mentioned that it is unproblematic that in third-country cases there is an immediate taxation anyway. Finally, the transfer of assets whose scope of protection does not extend to third countries must be assessed on the basis of the freedom of establishment. In addition, ATAD does not infringe the free movement of capital, since ATAD is limited to the transfer of assets and thus to the use cases of freedom of establishment. [665] The free movement of capital, which also applies to third-country matters, must be examined only in cases of transfers which in turn are not covered by ATAD.