According to Spanish income tax law, when a taxpayer's place of residence is transferred, all income not yet allocated is drawn into the taxable year of the transfer of residence. In this final taxation, the ECJ saw in its judgment of 12.07.2012 – Az. C-269/09 a restriction of fundamental freedoms, since here the transfer of residence is accompanied by a liquidity disadvantage. According to the ECJ, while the measure of final tax recovery was appropriate to achieve the objective, it was disproportionate, since there is an EU-wide recovery directive that ensures tax collection. In his critical analysis of the ruling, Kanzlei Meyers & Partner AG considers the ECJ’s decision to be legal, as the Spanish final taxation serves more to collect early tax than to share tax bases.
The Spanish income tax law saw in art. 14, par. 3 of Law 35/2006 stipulates that taxpayers must include all income not yet allocated in the assessment year at the latest, in which their tax liability ends due to the transfer of their residence. Therefore, in the event of a departure, taxpayers had to subject their income already earned to taxation, whereas if they remained in Spain they would not have had to do so until later.
2nd Decision
Due to the liquidity disadvantage associated with the departure, the ECJ saw this as a restriction on the exercise of freedom of movement and freedom of establishment. Although the measures were appropriate to ensure the legitimate objective of effective recovery of the tax liability, they go beyond what is necessary. Finally, the recovery of the tax liability is also guaranteed throughout the EU by the Recovery Directive. The ECJ stressed, with reference to Case C-334/02[726], that Member States cannot derive any justification for restricting fundamental freedoms from the practical difficulties in implementing the Directive.[727] This interference with fundamental freedoms is therefore disproportionate.
In addition, the ECJ had rejected as grounds for justification the objective of maintaining a balanced distribution of taxation interests for the present restriction. This was due to the fact that the income as such was already established and the Spanish tax law was secured; It was only about the nature and timing of the tax collection.[728]
The first four procedures were each based on a national standard which provided for the taxation of unrealised gains at the time of the de-entangling. The focus was on securing the domestic taxation medium of the Member States in which the tax should be determined and collected. At the level of the grounds for justification, the maintenance of a balanced distribution of taxation powers was recognised as a legitimate objective and the measures did not in all cases respect the principle of proportionality.
3.2 Spanish tax easing: early tax collection
However, the present procedure was not concerned with securing the Spanish taxation law by setting a tax. On the contrary: the income of the taxpayer was already fixed at the time of the departure, so that the Spanish tax law was not threatened by the departure. With the standard in question, the Spanish government only sought early tax collection.[729]
However, the objective of a balanced allocation of taxation powers can justify only those measures intended by Member States to ensure the taxation of capital gains arising during the existence of domestic tax liability and which, in the absence of such a measure, would be deprived of the taxation right of the Member State creating value. [730] Since the measure taken by the Spanish Government in the present procedure was not intended to safeguard the Spanish tax law but only the early collection of tax, the ECJ rejected the argument that the rule pursues the objective of a balanced distribution of taxation powers, already at the level of the justification test.731 It did not even allow a proportionality test to be carried out.
4th Conclusion
From the judgment, the decisive general conclusion can thus be drawn that a de-entangling tax can only be justified by the objective of maintaining a balanced distribution of taxation powers if the State of origin loses the right to tax on the gains arising in its territory.[732]
This article does not replace tax or legal advice in an individual case. Facts, current law, jurisdiction, documentation and implementation remain decisive.