If cross-border measures in tax law are limited or discriminated against, the restrictions or discrimination are permissible if the legislature pursues a legitimate goal of its sovereign interests (e.g. public security, public health). The legitimate objectives are not regulated by law but are shaped by the case law of the ECJ. In addition to the recognized justification reasons in tax law (written and unwritten both measures), there are also unrecognized justification reasons in tax law.

Open and concealed discrimination as well as restrictions on the freedom of establishment can be imposed by the in art. 52 TFEU are justified. It is therefore permissible for a Member State to adopt, on grounds of public policy, public security and public health, measures which discriminate against or restrict nationals of other Member States. This derogation is irrelevant for tax rules.

If the exercise of the right of establishment is associated with the exercise of public authority, a citizen of the Union acc. Article 51, par. 1 TFEU does not invoke the right of establishment. This is not a justification, but an area exception. However, this norm comes – as does Art. 52 TFEU – no significance for tax law.

Open and covert discriminations as well as restrictions on the free movement of capital can be imposed by the in art. 65 TFEU may be allowed. According to Art. 65 para 1 lit. (a) TFEU does not affect the right of Member States to ‘apply the relevant provisions of their tax law which treat differently taxable persons whose place of residence or investment is different’. This tax clause is intended to take account of the fact that Member States have not yet agreed on a single European tax system within the framework of the envisaged harmonisation and therefore allows Member States, in principle, to apply their national tax rules even if they treat taxpayers with different residences and places of investment differently.[448] However, the scope of this discharge provision was limited by Declaration No 7 in the Final Act of the Maastricht Treaty[449] to the effect that it applies only to fiscal discrimination between Member States which already existed on 31 December 1993 (standstill).[450] The de-knitting standards relevant here were all codified by law after 1993 and therefore cannot be defined by art. 65 para 1 lit. a TFEU. In addition, the tax clause should no longer apply in relation to third countries. The relevance of the tax clause for the deregulation standards was thus effectively reduced to zero.[451]

Both hidden and open discriminations as well as restrictions on establishment According to settled case-law, however, the free movement of capital is permissible even if it pursues a legitimate objective justified by compelling reasons of general interest.[452] However, established case law then requires a proportionality test to ensure that discrimination or Restriction is suitable for the attainment of the objective in question and does not go beyond what is necessary for the attainment of the purpose.[453] The limitation or discrimination caused by a tax rule can only be justified by a tax reason.[454] For this purpose, the ECJ has so far allowed the following justifications in tax law, which it applies equally to restrictions on the freedom of establishment and the freedom of movement of capital.[455]

In international tax law, the territoriality principle applies.[456] According to this, states are entitled to tax income if they have a tax link with the tax subject (for example, the taxpayer's residence or habitual residence) or the tax object (for example, the location of the source of income). Thus, Member States are entitled to tax resident taxpayers on their world income and non-residents on their domestic income.[458] Correspondingly, the Member States can in principle only be expected to take into account losses of those sources of income whose profits they could have taxed.[459] The principle of territoriality has been incorporated into EU law by the ECJ and can now justify national rules that (aa) prevent the deduction of foreign losses in the country or (bb) provide for taxation in cases of de-involvement.[460]

In the case Futura Participations and Singer[461], the ECJ took the territoriality principle into account for the first time within EU law and recognized it as a ground for justification. Accordingly, Member States are entitled to adopt rules excluding the recognition of losses from sources of income for which the Member State does not have a positive right of taxation.[462] In this way, the ECJ recognises the permanent establishment principle of “symmetry between the right to tax profits and the possibility of deducting losses”, in principle also at EU law level.

With regard to final foreign losses – i.e. losses of foreign permanent establishments or subsidiaries, which, for example, are no longer available for offsetting against future profits in the permanent establishment state due to a liquidation – the ECJ has exceptionally considered it necessary to take them into account in the state of residence. In Case Timac Agro[465], the ECJ partially amended its case-law and found that, at least in the case of intra-group sales of companies and premises, final losses no longer have to be taken into account. The BFH joined the amended case-law and extended it also to ordinary sales of foreign entities.[466] Because the territoriality principle according to earlier case-law of the ECJ only justified the exclusion of a loss deduction in the country of residence, this justification was for a long time not suitable for allowing a de-involvement tax.[467]

2.4.1. Objective: Avoiding a threat to tax law

Only with the case-law on N[468] in 2006, which was later confirmed in the Rs. National Grid Indus[469], the ECJ further developed the principle of tax territoriality and extended it to the division of positive tax rights (profits). To this end, the ECJ adds a temporal component to the principle of territoriality[470] and grants Member States the right to tax gains arising during their fiscal residence on their territory.[471] Even upon termination of the tax liability, the State of origin retains the power to tax the gains arising during the existence of the tax liability.[472]

However, there may be acts of the taxable person which jeopardize the right of taxation of the State of origin on the hidden reserves created in its territory. According to the ECJ, the danger can be caused in particular by the departure of the taxpayer[473], the transfer of the tax-detained assets to a foreign permanent establishment[474] or the transfer of the same to a foreign limited company[475]. Measures taken by the State of origin which, in such cases, serve to safeguard the right of taxation against the gains arising within its jurisdiction may, according to the established case-law of the ECJ, be justified by the objective of a balanced distribution of taxation powers.[476] However, it is questionable and to be clarified below what must be understood by a ‘endangering of the right of taxation’.

2.4.2. Endangerment of taxation law for legal reasons

It is undisputed that there is always a threat to the taxation right if the taxation right of the country of origin ends – for example due to DTA regulations – and the country of origin is already prevented from taxing the hidden reserves created in its territory for legal reasons. In such cases, national deregulation rules which provide for the determination and collection of the tax at the time of loss of the taxation right may be justified by the objective of a balanced distribution of taxation powers.[477]

Due to the changed understanding of the agreement of the BFH, the German taxation law is not excluded by the transfer or transfer of the asset in the vast majority of cases for legal reasons and is therefore not jeopardized for legal reasons.[478] However, the right of taxation of the State of origin may also be jeopardised if real reasons jeopardise subsequent tax collection. The reasons for an actual factual danger could first be the limited access of the country of origin to information about the whereabouts of the asset abroad[479] and the increasing risk of tax recovery after the transfer of assets abroad. It is not finally clarified by the highest court whether such actual reasons for danger can justify the final tax.

So far, the ECJ has not been able to comment on such situations. One of the four relevant proceedings submitted to the ECJ was based on a situation in which the country of origin had already completely lost its taxation right for legal reasons.[480] In another procedure, the State of departure (Netherlands) did not apply the new understanding of the agreement represented by the BFH.[481] In the third procedure, the right of taxation of the State of origin was not lost, but the ECJ nevertheless recognised the justification for maintaining the division of taxation powers, because it wrongly assumed that the right of taxation had been lost.[481] In the fourth procedure, the ECJ was not able to clarify whether the right of taxation of the State of origin continues, and in this respect rejected the case again to the referring court.[483]

First, the judgment in DMC, in which the ECJ states that final taxation is justified if the State of origin is “actually prevented from exercising its tax sovereignty over income” leads to the assumption that even actual reasons can justify final taxation alone. In paragraph 57, however, the ECJ then states that ‘in the present case, however, it is not clear from the facts of the main proceedings that the Federal Republic of Germany actually forfeits any right to tax the unrealised gains [...]’ and, in that regard, reverts the burden of finding to the referring court. This makes it clear that the ECJ also makes a loss of the taxation right of the State of origin a condition for a possible justification in this case. The choice of words “actually”, which cannot be a translation error, since in the Rs. DMC the official language was German, therefore seems somewhat unfortunate. In addition, the expression ‘actual’ occurs exclusively in the abovementioned procedure; in the later proceedings Verder LabTec[485] and A Oy [486], no further reference is made to this.

Therefore, it remains open what the ECJ could mean by a “real threat” if it does not want to link directly to the continued existence of the taxation right. Subsequently, it is examined whether the right of taxation of the country of origin can actually be endangered by the transfer of an asset abroad compared to the fact that the asset remains in the country of origin because less information is available to the country of origin following the transfer of the asset or its risk of tax loss increases. For this purpose, the following three case constellations are to be considered differentiated: