In the case-law X and Y of 21.11.2002 – Az. C-436/00, the ECJ dealt with a Swedish tax deregulation norm. The dispute concerned the transfer of holdings in a (Swedish) subsidiary to a Belgian limited company and the question of whether the transfer could be tax-neutral (at book values). According to Swedish tax law, a tax-neutral transfer could only take place if it was a Swedish participation chain. In the event of a dispute, immediate taxation would therefore have occurred and tax neutrality would have been denied. The ECJ saw immediate taxation as a restriction on fundamental freedoms and stated that this measure is neither necessary nor proportionate. In a critical analysis, Kanzlei Meyers & Partner AG addresses the questions in the ECJ judgment and also shows which problems the ECJ has left open in the judgment.

Already in 2002, the ECJ dealt in Rs. X and Y AB with the compatibility of tax easing standards and European law. In the framework of a binding request for information, the natural persons X and Y in Sweden sought an undertaking that the transfer of their holdings in Swedish X AB to the subsidiary of a Belgian limited company could take place at book value. Swedish tax law provided for tax neutrality for this type of transfer only if it was a purely Swedish chain of participation.

2nd Decision

The ECJ found that the standard in question is suitable for restricting both the freedom of establishment and the freedom of movement of capital. At that time, however, the question of which of the two fundamental freedoms is to be applied depended solely on whether ‘this participation enables the decisions of that company to be influenced and enables it to determine its activities’[667] and rejects the clarification of those questions of fact to the referring court.

Regardless of which of the two fundamental freedoms applies, a possible restriction on both fundamental freedoms may be justified by the same overriding reasons of general interest. [668] The ECJ found in this context that the objective of avoiding the reduction of tax revenue cannot justify a restriction of fundamental freedoms.[669] Similarly, the blanket suspicion of tax evasion or the necessary effectiveness of tax control were not sufficient reasons for the de-involvement tax in question, since the norm in question was not specifically aimed at avoiding artificial structures of tax evasion.[670]

2.1 Necessity and proportionality of the measure

In addition, the ECJ denied the necessity and proportionality of the measure in order to ensure the coherence of the tax regimes in individual cases. Tax coherence can only be proportionate if the tax disadvantage is directly linked to a tax advantage of the same person (personal coherence). In the present case, however, the Swedish Government wanted to invoke a coherence idea based on the state by neutralising the accumulation of hidden reserves (tax advantage) initially tolerated by the Swedish administration by means of the transfer taxation (tax disadvantage).

In order to distinguish between freedom of establishment and capital movement, the ECJ still focused on the specific facts at that time. However, at the latest with Rs. Glaxo Welcome[672], the ECJ changed its case law and since then focuses exclusively on the subject matter of the standard. [673] Since this standard covers both control and portfolio holdings, it must be measured in the light of the new case law against the requirements of the free movement of capital. The corresponding norm in German tax law (§ 21 UmwStG), on the other hand, would also have to be assessed according to the free movement of capital. According to § 21 Abs. 2 UmwStG tax neutrality can only be claimed if the acquiring corporation holds the majority of the voting rights following the exchange of shares, does not exclude that the transferring entity in need of protection transfers a portfolio participation in a tax-neutral manner if the acquiring corporation holds the majority of the voting rights together with other shares after the transfer.