The free movement of capital in European tax law prohibits national provisions restricting cross-border capital movements. The standstill clause of the type must be observed here. 64 TFEU, which allows for the continuation of existing schemes (before 01.01.1994). In addition to the EU-wide application, the free movement of capital also applies to third countries and their movement of capital (with EU relations), which is a significant difference to the freedom of establishment.

The free movement of capital in European tax law prohibits national provisions restricting the movement of capital between different Member States or Member States and third countries. In this context, capital movements are understood to mean the transfer of value in the form of money capital or material funds.[381] According to the Capital Movements Directive[382], direct investment[383] and securities transactions were worthy of protection. Direct investment refers to ‘the establishment and extension of branches or new undertakings owned exclusively by the lender and the complete takeover of existing undertakings’[384] and ‘participation in new or existing undertakings with a view to establishing or maintaining lasting economic relations’[385].[386] In 1994, Art. 73b of the EC Treaty (now Article 63 TFEU) was superseded, but the wording was essentially changed to the present Article. 63 TFEU, so that for the purpose of determining the substantive scope of application the

Freedom of movement of capital can still be used to the then definition.[387]

Since the free movement of capital by art. 63 TFEU is not only guaranteed between Member States, but also between Member States and third countries, the scope of protection of the free movement of capital in European tax law goes well beyond that of the freedom of establishment and also covers third-country relations. In contrast to the freedom of establishment, third-country nationals can also invoke the freedom of movement of capital.[388]

2nd standstill clause

The application of the free movement of capital to third-country relations is, however, restricted by the standstill clause of Article 64 TFEU. As of 31 December 1993, there was already a national or Community legislation that discriminated against third-country residents, this (discriminatory) regime against third-country nationals continues to apply from 1 January 1994. A third-country resident cannot invoke the free movement of capital in such cases. Consequently, if the transfer of business assets to a limited liability company involving third-country nationals leads to taxation, the third-country national may invoke the free movement of capital only if the legislation leading to taxation has not yet existed on 31 December 1993.

According to the UmwStG of 1977, which was in force on 31.12.1993,[389], the tax-neutral transfer of operating assets to a corporation required, among other things, that the acquiring corporation be subject to unlimited corporate tax in the Federal Republic of Germany (§ 20 para 1 p. 1 UmwStG 1977), that the transferor be subject to unlimited corporate tax or income tax (§ 20 para 3 p. 1 UmwStG 1977) and that the taxation right of the Federal Republic of Germany with regard to the profit from the sale of the granted shares by a DTA is not excluded (§ 20 para 3 p. 1 UmwStG 1977).

2.1. introduction of SEStEG

According to the legal situation introduced under the SEStEG and applicable from December 13, 2006, the transferor and the acquiring corporation must in principle comply with the EU founding and residence requirement according to § 1 para. 2 No. 1 of the UmwStG. In addition, the German tax law with regard to the sale of the transferred business assets according to § 20 Abs. 2 S. 2 No. 3 UmwStG are not excluded or restricted.

For transfers with the participation of third countries, this meant that the transfer under the UmwStG 1977 was not tax neutral in the vast majority of cases, because there was no unlimited tax liability of the transferor or the acquiring capital company. According to the legal situation in force since December 13, 2006, the tax neutrality of third-country transfers is ruled out in the vast majority of cases because the EU founding and residence requirements are not met or because the German tax law on the transferred assets is lost. Ultimately, the transfer of third countries is not tax-neutral both under the legal situation until 31.12.1993 (UmwStG 1977) and under the current legal situation (UmwStG 2006); However, the rules excluding tax neutrality are fundamentally different.

If a legislative act adopted before 31.12.1993 is amended, the standstill clause will in principle cease to apply. The legislator can only then exceptionally on Art. 64 TFEU, where the new regime is ‘essentially equivalent to the former regime’ or merely alleviates or removes an obstacle which, under the former regime, prevented the exercise of Community rights and freedoms. If, on the other hand, a measure is based on a fundamental idea other than the former right and introduces new procedures, it cannot be treated as equivalent to the provisions existing at the time specified in the Community act concerned. Due to the fundamentally different nature of the legislation, which leads to the exclusion of tax neutrality for third-country contributions under the UmwStG 1977 and under the UmwStG 2006, the Federal Republic of Germany cannot therefore invoke the standstill clause, so that the third-country resident has the scope of protection of the free movement of capital.