In cases of departure and de-entrapment, the fundamental freedoms of the EU must be respected. There are always disputes between Member States as to which Member State is allowed to tax. This can mean an enormous effort for taxpayers, as they try to avoid double taxation. We show to what extent there can be a taxation of hidden reserves in the event of a change of location or a move away with simultaneous participation in a corporation.

At the beginning of this article there is a short excursion on the emergence of de-emergence and de-emergence. Basically, these regulations exist by states, since in the near future or already in the past taxation substrate is lost or has already been lost. This is usually because the territorial link to which countries link their taxation is eliminated. This can happen due to various incidents.

On the one hand, the taxpayer may waive his limited or unlimited tax liability. On the other hand, this is the case if Germany applies the exemption method for foreign income in accordance with Article 23A OECD-MA 2017. In addition, however, only a restriction can be made, for example by applying the credit methodology in accordance with Article 23B of the OECD-MA 2017. However, even this case is not entirely satisfactory for countries, as long as the taxation substrate has already been in that country before.

Thus, logically, there is a need to tax the property again before the loss of assets. The problem why hardly anyone should agree with an advance taxation is that money is only earned with these assets in the future and thus only existing hidden reserves are taxed.

If natural persons with 1 % or more are involved in corporations, there is a fundamental taxation right of the Federal Republic of Germany, also in the case of investments in foreign companies according to Article 13 paragraph 5 OECD-MA. It is therefore also understandable that sales of shares are usually taxed in the seller’s country of residence. Therefore, if a natural person moves away, this substrate and the right of taxation would disappear. As a result, § 6 (1) sentence 1 AStG restricts these situations to the extent that the exit taxation applies to shareholdings pursuant to § 17 EStG. Ultimately, this results in a taxation of the capital gains, whereby the departure is tantamount to a fictitious sale.

Now it is just as possible that in the case of a corporation based in Germany, the taxation right of Germany is limited or even completely eliminated by various events occurring. Accordingly, taxation under § 12(1) KStG is eligible. This then leads to a taxation of the hidden reserves, since de facto no sale has taken place and there is talk of a so-called fictitious sale. This is the case, for example, if assets are transferred from the parent company, i.e. the domestic location, to a foreign permanent establishment. This process can also be referred to as object-related de-knitting. In addition, in the event of a relocation of the administrative headquarters, a case of de-entangling can also occur, but the subject-related one. Nevertheless, it is always necessary to apply the economic approach.

At the same time, there is a rule in § 4 (1) sentence 3 EStG, similar to the removal according to § 4 (1) sentence 2 EStG, which defines a de-entangling. In accordance with Article 7, 5 OECD-MA, profit from permanent establishments is generally exempted from taxation in Germany. Nevertheless, the underlying de-knitting profit according to § 4g EStG can be stretched to five years.

Case C-9/02 Lasteyrie du Saillant

First of all, we consider the case of Lasteyrie du Saillant (C-9/02) of the ECJ. The plaintiff initially lived in France and held a 25 % shareholding in a limited company. Then he moved to Belgium so that he could do business there and the departure tax on his share capital was incurred. It should be noted that only the increase in value, i.e. the value of the shares that exceeds the original cost, is taxed.

However, since there could be a breach of the freedom of establishment in this case, it is necessary to examine whether the EU citizen, i.e. the French national, is disadvantaged compared to other EU citizens. Since the Member State of origin of France is significantly worse off leaving than remaining in France, this constitutes a restriction in breach of the freedom of establishment. It is understandable that this restriction is a serious obstacle and a reduction in the attractiveness of a change of residence.

In the course of this decision of the ECJ, § 6 (5) AStG a.F. was also introduced in Germany. Consequently, EU/EEA nationals do not have to fear immediate taxation. At most, a deferral of the possible taxation was possible at that time.

2.1.2 Case N (C-470/04)

Case N (C-470/04) concerned a similar case, but the notional taxation was deferred. For this, however, the taxpayer had to deposit collateral, which was also subsequently classified by the ECJ as illegal. The collateral to be provided was perceived as a limitation and the fact that future impairments are not taken into account in the original State. It was also necessary that a tax return should be submitted before leaving.

The ECJ has classified the other two regulations as disproportionate except for the preparation of a tax declaration and thus declared them unlawful.

2.1.3. Case Wächtler (C-581/17)

Another case showed a German national who held shares in a Swiss company. According to § 6 AStG, the departure to Switzerland triggered a taxation in Germany, as Switzerland is a third country. However, the Free Movement Agreement between Switzerland and the EU extends the application of fundamental freedoms to situations with Switzerland.

Thus, the tax was granted in Germany, but a deferral also had to be guaranteed, which was not planned at the beginning.

After the removal cases just presented, there are similar cases in which it is a question of the de-entangling in the context of corporate taxation. For example, in this case, the National Grid Indus had moved its administrative headquarters from the Netherlands to Great Britain. Thus, the Dutch taxation law also ended. However, since a claim was in a foreign currency, the Dutch tax administration wanted to tax the unrealised gain.

However, it is questionable whether taxation is appropriate. Because of the freedom of establishment, the transfer of the head office should not put the Dutch company at a disadvantage compared to a company which operates exclusively in the Netherlands. But the increase in value that has arisen in the Netherlands should also be taxable here. A distinction must therefore be made between the taxation and the collection of the tax. The Dutch tax administration is therefore justified. However, direct collection constitutes a disproportionate measure vis-à-vis society. On the other hand, taxation would be possible if the increase in value was realised. This leaves the taxpayer with a choice between immediate taxation and deferment of payment, as this entails an increased administrative burden. If impairments occur, they do not have to be taken into account in the operational sector, this was still the case in Case N.

2.2.2. Case Verder LabTec (C-657/13)

The Verder LabTec case should also be mentioned in this context, as intangible assets are transferred from the German limited partnership to the Dutch establishment. This entails taxation according to § 4 (1) sentence 3, 4 EStG. However, this tax payment is extended to a period of ten years in order for the expense to be within a reasonable range. There is no restriction on the freedom of establishment, as there is a risk of non-recovery in this case.

The introduction of the ATAD Directive added new rules for EU Member States. For example, Article 5 of the ATAD requires Member States to introduce an exit taxation system and an installment payment scheme for corporations. In addition, natural persons experienced an enormous cut through the abolition of the interest-free deferral of the exit tax until realisation due to the abolition of § 6 (4) AStG a.F. Now there is only a seven-year installment payment concept in the new version of § 6 (4) AStG. Further decisions by the ECJ in these cases will follow in the future, as the topic continues to enjoy high relevance.