date | theme

25. February 2021 | Tax assessment & tax collection at the German tax easing

09. February 2021 | Tax de-engagement & deferral: period and time of payment

04. January 2021 | Tax easing: Taxes on the departure of business assets abroad

06. June 2020 | European law-compliant interpretation and European law inconsistencies in cases of departure and tax easing

05. June 2020 | Anti-Tax Avoidance Directive (ATAD): Critical analysis of early taxation in cases of departure and tax easing

03. June 2020 | Exit taxation & tax easing: Critical analysis of (early) immediate taxation (this contribution)

27. May 2020 | Actual tax easing in cross-border conversions in light of the changed understanding of the agreement by the BFH (task of the final extraction theory)

26. May 2020 | Legal tax easing in light of the changed understanding of the agreement by the BFH (task of the final extraction theory)

25. May 2020 | Tax easing in light of the amended understanding of the agreement by the BFH

If a restriction of fundamental freedoms pursues a legitimate goal, the question of proportionality and suitability must be clarified in a further step. A restrictive measure (e.g. immediate taxation/exit taxation) must therefore be proportionate to the objective pursued and at the same time suitable for achieving the objective. In addition, the measure must have some necessity. It must therefore also be examined in tax law whether a restrictive measure fulfils these conditions and is appropriate for achieving the objective.

In the previous section it was explained that the restriction of fundamental freedoms by the regulatory example (§ 12 para 1 p. 2 KStG) cannot be justified with any legitimate aim and is therefore inadmissible. [563] Only if the German taxation law ends definitively can the tax derailment be justified in principle on the three recognised grounds that the measure is effective tax supervision, avoidance of tax evasion and the maintenance of a balanced distribution of taxation powers. In addition to the abstract justification, the measure must also respect the principle of proportionality. According to the Gebhard formula developed by the ECJ, restrictive measures must be applied in a non-discriminatory manner and must “be suitable to ensure the achievement of the objective pursued by them and [...] must not go beyond what is necessary to achieve that objective”[564]. In this regard, it has already been shown that effective tax supervision and avoidance of tax evasion can also be achieved by less stringent means than taxation of de-involvement, and that these two justifications clearly do not withstand a proportionality test and are obsolete for further examination.[565]

Ultimately, in order to justify a tax deregulation provision, only the objective remains of maintaining a balanced distribution of taxation powers, which in turn can only justify those provisions that provide for final taxation in cases where the German taxation law is legally excluded by the transfer of assets. Moreover, in these few cases, taxation without involvement is only permitted if the principle of proportionality is respected. This will be examined below.

The action of a Member State is appropriate if it promotes the objective pursued by it. [566] On the basis of experience and forecasts, it must be examined whether the measure can contribute to the pursuit of the interest pursued.[567]

If the Federal Republic of Germany finally loses the right to tax on the hidden reserves created up to then by the cross-border transfer, the taxation is undisputedly a suitable measure for securing the German taxation law. The (immediate) taxation of hidden reserves is thus an appropriate means of safeguarding national taxation powers.

In addition, the action chosen by the Member State must be necessary to achieve the objective pursued by it. If the Member State has another measure at its disposal, which also achieves the objective, but represents less interference with the fundamental freedoms of the citizen, this must be chosen. Consequently, a measure is necessary only if it is the mildest means of achieving the objective it pursues. [569]

In the case of tax easing, three measures must be distinguished, which guarantee the objective of maintaining a balanced distribution of taxation powers with varying degrees of restriction of the citizens in their fundamental freedoms:

Immediate taxation at the time of untaking is the strongest form of securing German taxation law. However, due to the associated liquidity disadvantage, it also restricts the taxpayer particularly severely in his fundamental freedoms, since he does not receive any proceeds from the sale that could be used to pay the unencumberment tax.

A stretched collection of the de-tricking tax on five or ten annual instalments safeguards the taxation interests of the Federal Republic to a medium extent and restricts the fundamental freedoms of the citizen also only to a medium extent in the case of extensive proof obligations by the taxpayer. By deferring taxation until the date of realisation, the interests of the taxable person are protected to the greatest extent possible. The tax liability of the State without entanglement is correctly determined, but its collection is delayed indefinitely and possibly exposed to the risk of tax loss that increases over time.

Finally, the achievement of the objective of the measure must be proportionate to the impairment of the fundamental freedom. [571] In the case-law of the ECJ, the examination of adequacy is usually not unique, since it is often included in the examination of necessity.[572]

With regard to the rules on tax emancipation, it is necessary to consider whether immediate taxation, the collection of tax in annual instalments or a deferral of taxation of unlimited duration respects the principle of proportionality.

The common argument that immediate taxation should be necessary and appropriate to safeguard the interests of taxation is the difficulty of tracking the asset in the aftermath of de-entangling. Compared to the purely national case, the German Treasury is said to have only limited access to information about the whereabouts of the economic asset and is thus exposed to the risk of not becoming aware of a realisation act.

The risk of not collecting the tax is also mentioned. On the one hand, tax recovery abroad is made more difficult[574] and, on the other hand, the taxpayer's credit position is subject to changes over time, so that the risk of tax loss after departure increases.[575]

If linked exclusively to the act of realisation – i.e. to the sale, withdrawal or other departure of the asset from the business assets – the collection of the tax would also be solely at the discretion of the taxpayer. [576] In the case of usable assets, the taxpayer could defer the collection of taxes by the departing country indefinitely by protecting the assets depreciated to zero and possibly no longer needed in his business from disposal.[577] In many cases, it may therefore be more favourable for the taxable person to leave the consumed asset unused on the business, instead of triggering subsequent taxation through its disposal. It is therefore understandable that the ECJ allows the Member States to link the taxation date to a different situation than the actual realisation.[578] The ECJ, on the other hand, leaves open what other situations this could be.

In cases of transfers, there is also the special case that the assets are not simply transferred from a (domestic) permanent establishment to a (foreign) permanent establishment, but the nature of the transfer process also entails a change of entity of the asset, which, according to general taxation principles, constitutes an exchange process and thus an act of realisation.[579]

In the receiving state, the tax-related asset is regularly valued at its common value in the opening balance sheet, so that the hidden reserves created in the country of origin have an increasing effect on the depreciation base and thus have a tax-reducing effect.[580] In the area of corporate tax law, the approach becomes common value with implementation of ATAD[581] from 1.1.2020 for the host Member State by type. 5 par. 5 ATAD mandatory.

Current assets are, by nature, intended to serve the company only temporarily, and thus generally leave the company’s assets for profit at the latest one year after they have been unwrapped. As a result, the immediate taxation of assets of working capital due to the de-entanglement cannot in principle be disadvantaged.

While in the case of the departure of private individuals, the information content and the enforcement possibilities of the exiting state decrease, this is not the case in the operational area. In cases of operational de-engagement, the statutory seat, the parent company or a permanent establishment remains in the country, which obliges the emigrant company to submit tax returns and pay taxes in the country of departure. In contrast to private removal cases, companies have to move away from the idea that a de-engagement act restricts the country of origin in its possibilities of clarifying the facts and recovering claims. For example, the conclusion of a double taxation agreement with the foreign permanent establishment leads to an exclusion of German taxation law, but this does not in any way reduce the information content and enforcement possibilities in the domestic and foreign assets of the German taxpayer. If a lack of information about the whereabouts of the assets and the risk of non-enforcement of the tax actually serve as a reason for early tax collection, this must not be made dependent on the criterion of loss of taxation rights, but must be based on other characteristics, such as the obligations to cooperate with the German tax administration or the physical transfer of assets to (third-country) foreign countries.

In addition, it should be noted that even in the case of physical transfers, the information access of the German tax administration remains unchanged if the taxpayer’s parent company remains in Germany and the right of the German tax administration to provide information and to carry out an audit continues. [582] In the case of EU conduct, the information access of the German financial administration is additionally secured via the EU Administrative Assistance Directive[583].[584] Also, the possibility of tax collection also remains if the parent company of the taxpayer remains in the country, since the tax administration can continue to enforce the parent company assets in accordance with the provisions of §§ 249 ff. EU-wide recovery of claims is secured by the EU Recovery Directive[585].[586] The argument, unfortunately also accepted by the ECJ so far, that in cases of unencumberment the risk of non-collection increases over time, can be invalidated by the fact that even if the asset remains in the Federal Republic of Germany, the risk of the Treasury increasing over time that it cannot realise the tax on a later realised increase in value – for example due to the insolvency of the taxpayer or the accidental loss of the asset; In this respect, the risk of tax loss in cross-border situations is not greater than in purely domestic cases.[587]

Only in third-country matters, namely when the parent company and economic property are located in the third country, are the possibilities of the German Treasury with regard to the tracing of the economic property and for enforcement into (foreign) assets reduced. If, by way of exception, such third-country matters fall within the scope of the fundamental freedoms (e.g. in the context of the free movement of capital), the taxpayer may be required to provide annual information on the whereabouts of the asset[588] and the tax loss may be ensured by providing collateral, e.g. in the form of a bank guarantee.

It has been shown that in EU cases there is neither a difficult access to information nor an increased risk of tax failure. In third-country constellations, more lenient means are also available for securing taxation power. Accordingly, the ECJ has so far classified immediate taxation as disproportionate in all proceedings.[589]

However, it must not be ignored that a deferral of the exit tax for an indefinite period up to the realization date would allow the taxpayer to delay the tax collection for an indefinite period – for example by avoiding the disposal of an economic good that has long since become worthless.[590] Therefore, the tax levy must not be based either on the date of unbundling or on the date of realisation.

As stipulated by the ECJ, a different time must be used. [591] However, no sufficient connecting points for an alternative time of tax collection can be identified. Therefore, the tax can only be levied on a flat-rate basis after the de-entangling. In Case DMC[592], the ECJ considered a period of five years to be proportionate without obtaining a statement from the German Federal Government on the basis for calculating the deferral period and without setting out its own considerations for recognising the deferral period. In the case of Verder LabTec[593], the ECJ subsequently considered a deferral period of ten years as a proportionate logical conclusion.

The most obvious deferral period is the normal service life of the asset. With regard to the wording of § 7 Abs. 1 pp. 1 and 2 EStG, a deferral under corresponding application of the official Afa table[594] would therefore be appropriate, but this would entail a considerable administrative burden. An analysis of the average commercial depreciation period of German industrial companies makes it clear that the depreciation period across all assets in plant construction is 4.0 years, in consumer goods production is 4.5 years and in software companies is 3.5 years. On the other hand, the average operating life of the assets of supermarket chains is 11.9 years. This may be due to the extensive real estate usually located in the assets of this sector[596], which is due to the localization principle according to art. 6 OECD-MA can hardly be untangled anyway.[597] The arithmetic mean of the useful life of all assets listed in the official Afa table is even 11.6 years, although no weighting of the individual assets was made here.[598] Taking into account that current assets, by definition, are intended to serve the company only temporarily and thus generally retire from operating assets within one year[599], the following fictitious realisation dates are considered appropriate here:

Current assets: maximum one year,

Assets of fixed assets: five years.

For current assets, therefore, a tax levy in the year of tax deregulation is appropriate. In practice, tax assessment and collection are in any case carried out only after the submission of the annual tax return, i.e. in the assessment year following the de-entangling operation, so that the dates of the profit realisation and the tax assessment and collection are almost identical.

In the case of assets of fixed assets, the question remains whether the tax may be levied on a rating basis in annual instalments or only at the above-mentioned fictitious realisation date in a sum. It is clarified that immediate taxation is not necessary in order to safeguard the interests of taxation. Then, for a rating tax levy in the first, second, third, fourth and fifth years, nothing else can apply. Therefore, in the view of the present case, the State of origin does not in principle have the right to early rating tax collection. Something else can only apply if the assets in the incoming state are valued at the market value in the context of a step-up and are depreciated therefrom and the rated taxation in the outgoing state is contrasted with a rated depreciation in the incoming state. Therefore, the following applies:

If the asset is valued at the market value in the destination country and made available for tax depreciation, the rating tax collection is proportionate in the opinion held here, because the depreciation in the destination country and the depreciation in the host country are almost neutralized. This is likely to be the rule, especially in EU matters, because according to art. 5 par. 5 ATAD obliges Member States, in the area of general corporate tax deregulation provisions, from the assessment year 2020 onwards to tax entanglement with market values, so that the taxable person is penalised at the most by the difference between the different tax rates or a different period of use. If the taxpayer does not receive a step-up in the incoming state, only a downstream tax collection in a sum can be proportionate at the fictitious realization time.[600] The same applies to assets of fixed assets which are not subject to depreciation, in particular land and share capital participations. This view is also not in contradiction with the previous ECJ judgment. Although the ECJ has seen in two decisions[601] the tax collection in five and ten annual instalments as appropriate, because over time he saw an increasing risk of non-collection of the tax.[602] However, the DMC decision was based on the transfer of a limited partnership shareholding, which was valued at market value on the basis of the refusal to transfer book values to the acquiring company and thus enables – as is customary in German tax law when acquiring a share of a co-entrepreneur – a write-down of all assets of the co-entrepreneurship from market value via the increase of the hidden reserves in the supplementary balance sheet. Rs. Verder LabTec concerned the transfer of patent, trademark and utility model rights to a Dutch establishment which could be depreciated from market value under Dutch law; the tax advantage resulting from the depreciation was even put forward by the German and Belgian governments as a justification for the exit tax.

Now that it has been clarified that immediate tax collection – with the exception of working capital assets – is fundamentally disproportionate, the question arises as to whether a tax determination at the time of de-entangling is permitted. The ECJ has consistently allowed this in its previous case law. [604] This concession to the Member States has its origins in Case N[605] and the Opinion in Case National Grid Indus, in which the Advocate General considers that the tax assessment secures the domestic tax base ‘without the taxpayer entailing any discernible additional expense compared with a subsequent tax assessment’[606].

While a tax assessment combined with a tax deferral does not disadvantage private citizens to a significant extent (e.g. when taking out loans), a tax liability in the company sector leads to considerable disadvantages. Finally, accounting companies have to passivate a tax that has been legally assessed in their German trade balance as “other liabilities”[607] and correspondingly recognise it as tax expense in their profit and loss statement. This increases the company’s debt ratio while simultaneously reducing its annual profit under commercial law. This deteriorating net worth and earnings situation affects the reputation on the capital market, the possibility of taking out bank loans and reduces the distribution volume. These disadvantages – which primarily affect companies and not private individuals – have not yet been brought forward in any ECJ proceedings and have therefore not yet been taken into account.

Since a tax may not be levied immediately, a tax determination at the time of de-engagement is not necessary and goes beyond what is necessary to achieve the objective. Only the documentation of the value of the asset at the time of transfer or transfer is compatible with the objective of a balanced allocation of taxation powers, for example by valuation of the asset and its (separate) determination. It is not necessary to fix the tax resulting from the multiplication of the notional sale price by the individual tax rate in order to ensure a balanced allocation of taxing powers. This calculation can also be made at the later lump-sum realization time at the then valid tariff tax rate.

The Federal Government has already developed an exemplary solution for this. Section 4g of the EStG does not provide for the tax to be fixed, but for the intra-balance-sheet neutralisation of the profit from the de-integrating operation by creating a tax offsetting item.[608] This, in turn, only leads to tax fixing and collection at the time of its dissolution. In this way, the Federal Government avoids the aforementioned disadvantages and counteracts practical problems such as the retroactive assessment, the treatment of subsequent changes and the fact that a sold economic asset is no longer available for inspection.[609]

It is in accordance with the principle of fiscal territoriality that a State is entitled to tax increases and has to take account of any impairments incurred during the existence of its tax law. It would be contrary to the symmetry of taxation if a State only had to take into account the right to tax the hidden reserves that have arisen within its jurisdiction and, in addition, losses that have arisen after the date of departure. This is the responsibility of the incoming state. Accordingly, ATAD obliges in art. 5 par. 5 Member States shall also apply the common value to the tax-related asset. Otherwise, a double loss deduction would also threaten if later impairments occurring in the departure state and a partial depreciation of the common entanglement value in the inbound state would be taken into account.[610] Consequently, it is legitimate under European law that the country of origin no longer takes into account the impairments occurring after the date of de-entanglement.[611]

It has been shown that early tax assessment is a violation of fundamental freedoms and must only take place at the time of tax collection. If there is a lack of tax determination, the collection of tax interest can logically not be in accordance with basic freedoms.[612] In addition, the departing state would also receive no interest if the asset remained in the country.

To clarify whether the country of origin can demand a security – e.g. in the form of a bank guarantee – for the tax that has not yet been collected, imagine a German parent company that has acquired an asset for the purchase price of EUR 100, which rises to a market value of EUR 1,000 within a short time. The economic good can now be handled as follows:

It will be left in the German parent company and sold in five years for the purchase price of EUR 1,000. It is tax-free, in the form that the Federal Republic of Germany also loses the right to tax on the hidden reserves of EUR 900 created until then. After five years, it will be sold abroad at the purchase price of EUR 1,000. It is obvious that the federal government’s recovery risk is equally high in both cases. Untangling the economic asset alone does not generally reduce the risk of the country of origin in collecting the tax. Therefore, the formation of an offsetting item can in principle only be made conditional on the provision of a guarantee in absolute exceptional cases[613], for example, if in the country of destination it is not possible to enforce the tax liability with the help of the recovery directive and the taxpayer does not leave sufficient assets in the country.[614]