The Verder LabTec case law of 21.05.2015 – Az. C-657/13 concerned Verder LabTec GmbH & Co. KG (German partnership), in which two Dutch limited partners were involved. In 2005, Verder LabTec transferred patent, trademark and utility model rights from its German parent company to its Dutch subsidiary. Here, a final taxation was due, which was distributed over ten annual installments. The ECJ saw in the final taxation a restriction of the freedom of establishment. However, the question arose whether the measure of final taxation, since it is spread over ten annual instalments, is proportionate here. The ECJ has confirmed this; the measure of final taxation is appropriate and proportionate in order to ensure the tax distribution of the hidden reserves that have been created so far. In his critical analysis, Kanzlei Meyers & Partner AG discusses the grounds for the judgment of the ECJ and also explains the relationship between the BFH case-law and the ECJ case-law.

Subject of Rs. Verder LabTec was also the German de-tricking tax. Verder LabTec GmbH & Co. KG, based in the Federal Republic of Germany, involved two Dutch limited partners. In 2005, Verder LabTec GmbH & Co. KG transferred its patent, trademark and utility model rights from its German headquarters to its headquarters in the Netherlands.

Nevertheless, sentence 3 of § 4 para. 1 EStG were only introduced within the framework of the SEStEG and sentence 4 only with the Annual Tax Act 2010, both standards apply according to § 52 para. 8b EStG already for transfer cases before 1.1.2006 and thus also for the year in dispute underlying the main proceedings.[765] Similarly, the intangible assets transferred in the assessment period 2005 were also subject to final taxation, which could be distributed over ten annual instalments on the basis of the then equity regime in the then permanent establishment administration principles[766].

2nd Decision

The ECJ followed its previous case-law[767] and reiterated that the restriction on the freedom of establishment imposed by immediate taxation may be justified by respecting the allocation of taxation powers between Member States. Consequently, the application of immediate taxation can be a legitimate means if it is aimed at ensuring the taxation of hidden reserves created in the country. With reference to the collection of the tax in five annual instalments still considered proportionate in the DMC procedure[768], the ECJ had to inevitably also assess the collection of the tax in ten annual instalments as a proportionate measure.[769]

However, on closer examination of the facts and the legal situation, it is questionable whether, in the present case, the restriction of the freedom of establishment can actually be justified by the objective pursued, namely the safeguarding of the allocation of taxation powers between Member States. In paragraph 46, the ECJ, referring to the order for reference, erroneously considers that the proceeds from the assets transferred to the Dutch permanent establishment are exempt from tax in the Federal Republic of Germany. On this basis, the ECJ grants the Federal Republic of Germany the right to take measures aimed at “ensuring the taxation of these hidden reserves which arose before the transfer under the tax jurisdiction of the Federal Republic of Germany”.[770] However, such a measure can only be justified by the objective of maintaining a balanced distribution of taxation powers between the Member States if the transfer of the asset prevents the Federal Republic of Germany from effectively exercising its tax power over the income.771

3.2. Opposition between BFH and ECJ case-law

Incidentally, it is questionable how such contradictory judgments of the BFH regarding the distribution of profits on the one hand and the ECJ regarding tax easing on the other could have occurred. In the case of Verder LabTec, the Commission has recognized the connection of the contested facts with the BFH judiciary and has shown that the Federal Republic of Germany has not lost the right of taxation on the previously created hidden reserves due to the changed understanding of the DTA and therefore no measure is necessary to secure the German taxation law. Advocate General Jääskinen took up this argumentation in his Opinion, but then transferred the precedent decision of the ECJ in the Rs. National Grid Indus to the present German proceedings[773], since in his opinion the two cases were comparable. However, Jääskinen misunderstood that both Member States (the Netherlands and Germany) have a fundamentally different understanding of the agreement, so that the decision-making principles of the National Grid Indus judgment cannot be transferred to the present procedure. [774]

Due to the uncertainty surrounding the BFH decision, the Advocate General finally advised the General Court not to comment on the Commission’s arguments because it is based on its interpretation of changes in the Bundesfinanzhof’s case-law on the question of whether a transfer of assets to a foreign permanent establishment entails a de-integrating of the assets leading to a loss of the taxation power of the State concerned. The ECJ finally invoked the order for reference, which showed that the income from the permanent establishment located in the Netherlands ‘is exempt from tax in the Federal Republic of Germany’[776], and only on this false premise did it come to the conclusion that the de-engagement provision in question is justified with the aim of a balanced distribution of taxation powers.

But even if it had been found that the changed understanding of the BFH under the agreement law was incorrect and the aforementioned measure could have been justified with the aim of a balanced distribution of taxation powers, the ECJ would have had to consider the measure as not proportionate:

Due to the fact that the parent company remains in Germany and the tax declaration obligation of Verder LabTec GmbH & Co. KG thus remaining in the Federal Republic of Germany also for foreign assets and income, the Federal Republic of Germany retains all information rights about the whereabouts of the economic asset. Likewise, the possibilities of the tax administration for tax collection – in particular enforcement at the German parent company – remain unchanged. No assets were physically transported abroad and

thus not withdrawn from the German enforcement possibilities. In general, the ECJ’s approach is too inaccurate. Due to the transparency principle applicable in German tax law for co-entrepreneurships,[782] the corporate tax liability ultimately arises from a possible sale of the transferred assets not at the level of the limited partnership, but at the level of the limited partnerships.

According to the preliminary reference procedure, these are two Dutch limited companies,[783] which, however, had no significant significance for the ECJ and was not reproduced by it. The change in the purely accounting classification of assets exposes the collection of corporate tax liabilities of the Dutch limited partners to no greater risk than was the case without transfer. As a result, the change in allocation neither excluded nor limited the German taxation right on the hidden reserves generated in Germany. The Federal Republic of Germany also loses no access to information about the whereabouts of the assets and is not affected in its ability to recover tax claims. Thus, contrary to the reasoning of the judgment, the Ratierliche Exitbesteuer can neither be justified nor respect the principle of proportionality.