In 1997, taxpayer N moved his residence from the Netherlands to the UK. N was the sole shareholder of three limited companies which have their registered office in the Netherlands. Under Dutch tax law, an exit tax was set, but was deferred with the granting of security. The ECJ found that the exit tax constitutes a restriction on the freedom of establishment. In his critical analysis, Kanzlei Meyers & Partner AG discusses the content of the ECJ ruling and reviews the ruling of the ECJ.

The taxpayer N was the sole shareholder of three Dutch companies and moved his tax residence from the Netherlands to the UK in 1997. Although the Netherlands set an exit tax, it initially deferred it against the granting of security until the actual sale of the shares.

2nd decision of the ECJ

In its judgment in Case N, the ECJ first confirmed its case law in Case Lasteyrie du Saillant insofar as the imposition of an exit tax constitutes a restriction on the freedom of establishment.[684] However, the ECJ for the first time recognized the objective of a balanced distribution of taxation powers as a legitimate objective for setting a de-integrating tax in the case N in the area of exit tax if the exiting state loses the right to tax on the hidden reserves created in its territory. [685] In the present case, the measure was also suitable for achieving the legitimate objective, but not proportionate in so far as the Dutch Government required a security for deferral. In order to ensure the Dutch taxation law, it would not have been necessary to use collateral, since the Netherlands was able to obtain all necessary information from the United Kingdom on a possible sale of the shares under the then Mutual Assistance Directive[686] and could also collect the tax claim from a taxpayer resident in the United Kingdom under the then Recovery Directive[687].

In addition, in the present case, which emphasizes the unencumberment of private assets, the ECJ considered the inclusion of subsequent impairments in the influx state by the exit state as necessary.[689]

By recognising in 2006 the objective of maintaining a balanced distribution of taxation powers, including in cases of derailment, as a justification, the ECJ gave the Member States the only effective means of protecting their domestic tax revenue. Of particular importance is paragraph 46 of the judgment, according to which the loss of the Dutch taxation right at the time of departure derives from art. 13, par. 5 DTA, which, as you know, also deprived the Netherlands of the right to tax the hidden reserves arising within its territory. The decision therefore makes no conclusion that the departing State may also levy an exit tax if it retains the right to tax on the hidden reserves created in its territory, as is the case, for example, in the changed understanding of the agreement in the case of business assets.

In the present proceedings, the question also remained open as to whether the obligation of the departing State to take account of subsequent impairments also applies to entrapment taxes on business assets. While the tax treatment of impairments in private assets can only be carried out in the narrow scope of application, i.e. when value increases are also taxable[690], the standard case in business assets is that assets – in particular fixed assets – are consumed after a certain period of use. In addition, tax entanglement with the common value in the host country in any case leads to impairments, so that the departing state could tend to be exempted from such an obligation.