In the judgment of 23.11.2017 – Az. C-292/16, an Austrian crediting permanent establishment was to take place by way of transfer to an Austrian corporation by the company A., which is resident in Finland. As a result, Finland applied immediate taxation because the transferred establishment still had a limited Finnish taxation right, which was destroyed by the transfer. The ECJ considered this to be a restriction on the freedom of establishment, since the measure of immediate taxation, while appropriate, was disproportionate in order to achieve the objective of tax allocation. In his critical analysis of the judgment, Kanzlei Meyers & Partner AG notes that in addition to the freedom of establishment, the freedom of movement of capital should also have been examined in the judgment of the ECJ. In any case, the principles established by the ECJ for removal and transfer cases also apply to transfers.

In November 2017, the subject of Rs. A Oy was the transfer of an Austrian crediting permanent establishment to an Austrian corporation by the Finnish resident A. The DBA Finland/Austria sees differently than the OECD-MA for the sale of a permanent establishment located in Austria according to art. Article 13, par. 3, p.m. 23, par. 2 lit. (b) only the credit method, so that prior to the transfer operation Finland had a limited right to tax assets located in Austria, which was completely excluded in the course of the transfer. As a result, Finland immediately taxed the assets transferred at market value. Finland calculated according to the requirements of Art. 10 paragraph 2 FRL indicates a fictitious tax amount corresponding to the Austrian tax on a sale.

2nd Decision

In this regard, the ECJ considered a restriction on the freedom of establishment[794] and, in accordance with its now established case-law, recognised the maintenance of a balanced distribution of taxation powers as a legitimate objective.[795] Although immediate taxation is an appropriate measure for achieving the legitimate objective, it is not proportionate. In addition, the taxpayer must be granted the choice between an immediate taxation and a tax deferral with acceptance of proof obligations and interest.

In its judgment in Rs. A Oy, the ECJ again confirmed that the principles resulting from the Rs. National Grid Indus apply to cases of removal and transfer in addition to cases of consignment.

Moreover, it is clear from the Opinion of Advocate General Kokott that a restrictive measure can only be justified by the objective of a balanced allocation of taxation powers if the Dutch ‘taxation power ends’[797] and thus ‘access to the hidden reserves created at the permanent establishment is definitively lost’[798]. Since the contribution of a permanent establishment is indeed one of the few cases in which the right of taxation of the State of the transferring entity is completely lost[799], immediate taxation could be justified by the objective of a balanced distribution of taxation powers.

3.1 Critical reasoning of the ECJ: No freedom of movement of capital

The judgment is critical especially with regard to the fundamental freedom in question. In the DMC case, the ECJ has already stated that ‘a national regime which applies not only to holdings which make it possible to exercise a certain influence on the decisions of the company and to determine its activities, but also applies independently of the extent of the shareholder’s participation in a company, both under Art. 49 TFEU and under Art. 63 TFEU may apply[800]. Since the Finnish transfer rules allow tax neutrality in domestic cases even if the transferor cannot subsequently exercise a certain influence on the decisions of the acquiring company, the ECJ would have had to examine the rules in question consistently also against the requirements of the free movement of capital, with the result that they also have to grant a tax deferral for transfers made to third countries.