In 2004, in French income tax, significant investments of more than 25 % in corporations were taxed when the shareholder moved his registered office abroad. In this context, the hidden reserves accumulated on the participation were used for taxation. The ECJ had the first exit taxation case in the case law Lasteyrie du Saillant of 11.03.2004 – Az. C-9/02. The ECJ saw the taxation of a fictitious capital gain (exit tax) as a restriction on the freedom of establishment. In his critical analysis, Kanzlei Meyers & Partner AG discusses the measures to avoid tax evasion (exit tax, immediate taxation) and presents their relation to the freedom of establishment.

In 2004, the first case of exit taxation was submitted to the ECJ with the case of Lasteyrie du Saillant. [675] The French income tax law at that time saw in art. 167 a taxation of the hidden reserves grown in major holdings (> 25 percent) if the shareholder moved his residence abroad.

2nd Decision

The ECJ concluded that the taxation of a fictitious capital gain at the time of departure is likely to deter a French taxpayer from establishing himself in another Member State (here: Belgium) and thus restrict him in the exercise of his free right of establishment. It is true that in the main proceedings the ECJ recognised the objective of preventing tax evasion as a ground of justification. Instead of linking to an action specifically aimed at tax evasion or tax evasion, however, the standard was based on the departure of the taxpayer and went far beyond what would have been necessary to achieve the objective pursued by the standard.[677]

In the present case, the ECJ also examined whether the restriction can be justified by the objective of coherence of the French tax system. Since the French Government had stated in its written observations that the rule of temporary transfer of residence abroad is intended to prevent, the ECJ did not see the restriction of the freedom of establishment as justified. [678] In addition, the ECJ again confirmed that the objective of avoiding tax losses cannot justify a restriction on the freedom of establishment.[679] The restriction is also not lifted by a tax deferral if this is dependent on the provision of a security. This prevents the taxpayer from using these securities.[680]

First of all, it should be noted that the ECJ correctly measures the exit tax only on the freedom of establishment. Finally, the fact that triggers the restriction is the departure of the taxable person and the associated new professional establishment in Belgium. Indeed, the participation of the European citizen in a domestic or foreign company alone does not lead to any restriction.

The judgment is of particular importance for the question of whether a de-engagement tax can be justified with the aim of avoiding tax evasion. The reason for the French exit tax were cases in which shareholders moved abroad before the sale of their shares and thus deprived the capital gains of the French tax.[681] Although the ECJ confirmed that the avoidance of tax evasion was a legitimate objective to restrict the freedom of establishment and the exit tax was suitable to avoid such evasion. However, avoidance of tax evasion can also be achieved through measures that have a lesser impact on establishment. For example, the application of the exit tax could be reduced specifically to cases of tax evasion by only covering cases where the taxpayer sells his shares shortly after his departure before returning to France.[682]

Until the present decision in 2004, no legitimate reason was put forward to justify a general exit tax.