To ensure that tax-neutral cross-border transfers are also possible in the EU, the Council of Europe adopted the Fusion Directive (FRL) in 2009. The purpose of the FRL is to harmonise the tax system for cross-border contributions and conversions. Member States shall amend their national provisions in accordance with the FRL. At national level, it must therefore be examined whether the FRL is compatible with the UmwStG or which regulations need to be amended. The extent to which the freedom of establishment and the free movement of capital are effective must also be examined.

In the previous section it was stated that the transfer of an asset to the permanent establishment of another Member State may not trigger immediate taxation of the hidden reserves even if it excludes or restricts the right of taxation of the State of origin. The same applies to cases of departure of a company and the transfer of permanent establishment assets.

However, this result is based exclusively on the consideration of fundamental freedoms and thus on primary law. This leaves the examination of the impact of secondary law on the aforementioned assessment. Relevant here are the FRL[615] and the ATAD[616].

FRL obliges the national legislature to provide in its UmwStG rules that ensure the tax neutrality of EU contributions in cases where the transferred business assets contribute to the achievement of the taxable result of this permanent establishment even after the contribution, Art. 4 para. 1 and 2, Article 9 FRL. Conversely, the Directive authorises Member States to subject permanent establishment assets which are no longer attributable to a domestic permanent establishment after the transfer to (immediate) taxation. The question remains whether the FRL can thereby supplant the fundamental freedoms and thus grant the legislature taxation in cases of de-engagement.

In order to harmonise the prevention of abuse, ATAD obliges the Member States to adopt, by 31.12.2019, rules providing for the collection of an exit tax in five annual instalments if the de-entanglement is carried out by a downstream de-entanglement act of the taxable person (actual de-entanglement). Thus, ATAD is in contradiction with the abovementioned objectives of primary law[617] – in particular the harmonisation of the internal market – and it is necessary to clarify whether primary law should be given priority or whether the concrete requirements of ATAD can supplant the universal fundamental freedoms.

With the FRL, the EU legislature gives Member States clear guidelines on how Member States are to tax cross-border conversion operations. Under that provision, Member States are obliged to adopt national rules allowing mergers, divisions, transfers and exchanges of shares, even if they involve companies with capital of different Member States. The national conversion rules of each Member State are intended both to avoid taxation of conversion operations and to safeguard the financial interests of the participating Member States. In the course of the SEStEG, the legislature has therefore Europeanized both the UmwG and the UmwStG. This serves to harmonize the internal market, so that fundamental freedoms, the Merger Directive and the UmwStG should run in a triad. However, it has been shown in the preceding section that the current general rules on de-engagement, in particular as regards the regulatory example, are incompatible with fundamental freedoms. This is followed by the following questions.

It is questionable whether the de-tricking taxation of the UmwStG is compatible with the FRL at all. If, in the following, it turns out that the immediate taxation enshrined in the UmwStG violates the requirements of the FRL, the submitting legal entity could invoke the FRL directly, irrespective of the national rules, because of incorrect implementation. [619]

By type. 4, par. 1 FRL a merger, division or partial division shall not give rise to taxation of the hidden reserves dormant in the transferring assets. This applies according to m. Article 9 FRL also applies to the transfer of assets [620] to a limited liability company. However, the duty of tax neutrality becomes art. 4, par. 2 lit. (b) FRL is restricted to the effect that the granting of a continuation of book value is compulsory only for that asset which, after conversion, is ‘actually imputed to a permanent establishment of the receiving company in the Member State of the transferring company’ (permanent establishment condition) and ‘in order to obtain the taxable profit of that permanent establishment’

contributes (tax arrest condition).

The purpose of the permanent establishment condition is to ensure that the assets transferred remain part of a permanent establishment of the Member State of the transferring entity and thus remain under its tax jurisdiction.[621] In the absence of a definition of the term permanent establishment in the FRL, the definition of the relevant DTA applies to them.[622] The national definition according to § 12 AO is in this respect irrelevant.

With the tax arrest condition, the policymaker wants to ensure that the income generated from the assets is also subject to taxation at their place of origin. It is therefore not necessary to provide tax neutrality in those cases where the profits made on the assets remain untaxed on the basis of a national tax exemption provision or on the basis of a lack of national tax liability arrangements for permanent establishments in the Member State of the transferring entity. The FRL thus no longer forces the Member States to tax neutrality of the transfer if the income from the asset is exempt after the transfer.[624] The same must apply if the income is not included in the tax base under national tax law – For example, because they are not covered by the limited tax liability despite the allocation of permanent establishments.

According to h.L., the permanent establishment and tax liability condition is intended to ensure that the conversion for the Member State of the transferring legal entity does not result in a loss or loss of income. leads to a restriction of the taxation right.[625] However, Art. 4, par. 2 lit. b FRL well beyond the objective pursued by it. For clarification, imagine a German M-GmbH whose only operating site is located at the company's headquarters in the Federal Republic of Germany. According to § 20 UmwStG (or Art. 9 i. V. m. Art.) 4 FRL) M-GmbH transfers both its tangible and intangible assets to T-SL in exchange for new shares. A tax retroactive effect according to § 20 Abs. 5 and 6 UmwStG is not used.

While the tangible assets (WG1) are still attributable to the German permanent establishment on the basis of actual functional criteria[626], the intangible assets (WG2) are attributable to the permanent establishment located in Spain on the basis of the central function of the parent company[627]. Due to the altered allocation of intangible assets, the taxation right on the hidden reserves is to be divided between the Federal Republic of Germany and Spain. Due to the changed understanding of the agreement, the Federal Republic of Germany is still to be attributed the hidden reserves that arose during the assignment of the intangible assets to the domestic permanent establishment (Art. 13 para 2 OECD-MA). Because from the German agreement point of view, Spain is only entitled to a taxation right at the WG2 for the hidden reserves created after the transfer.[629]

Since the German taxation law on the hidden reserves existing at the transfer date is neither excluded nor limited in the course of the transfer, § 20 para. 2 S. 2 No. 3 UmwStG does not oppose the book value contribution of the tangible and intangible assets to the Spanish T-SL. Under national law, a tax-neutral contribution would thus be possible.

Unlike the UmwStG, the FRL is not only linked to taxation rights, but also to the allocation of assets. Since the intangible assets are no longer attributed to a German permanent establishment after the transfer, Art. 9 in the V. m. 4 FRL allow the German legislature to tax the hidden reserves. This makes it clear that the scope of application of the FRL’s deregulation standard (Art. 9 in the V. m. of Art. 4 FRL) goes far beyond that of the deregulation standard of the UmwStG (Section 20(2), p. 2 no. 3) and allows for taxation of hidden reserves in more cases than the UmwStG provides for. As a result, the scope of application of the special de-tricking standards of the UmwStG is smaller than the specifications of the FRL and is thus covered by the FRL.[630]

For the reasons set out in Section B, however, it follows that the fundamental freedoms preclude the regime of a Member State which provides for the immediate taxation of hidden reserves on the occasion of the transfer or transfer of assets and the departure of companies to other Member States. This inevitably raises the question of whether the FRL complies with the requirements of the fundamental freedoms or not. FRL may reduce the right of the Union citizen to freedom of establishment or movement of capital.

The above reasons and also the now established case-law of the ECJ[631] show that the transfer of an asset or the transfer of the registered office of a company to another Member State must not trigger immediate taxation of the hidden reserves contained in the unencumbered assets. As it has been shown, the ECJ case-law on the general derailment rules of different Member States is applicable to the specific derailment rules of the UmwStG[632], so that even a cross-border contribution must not trigger immediate taxation in the context of fundamental freedoms.

On the other hand, Art. 9 I. V. m. 4 para. 2 lit. b FRL the German tax legislator in the case of cross-border transfers an immediate taxation insofar as economic goods after the transfer are actually no longer attributable to a German permanent establishment (condition of permanent establishment). This clearly contradicts FRL and freedom of establishment.

4.2 Contradiction with the free movement of capital

While the transfer of an asset from one permanent establishment to another permanent establishment must be measured by the requirements of the freedom of establishment, the free movement of capital applies to the cross-border transfer. This is due to the fact that the provisions on the transfer also cover investments involving investments (portfolio investments) in which the shareholder has no dominant position. According to the view held here, the free movement of capital therefore obliges the legislature to include transfers involving third-country assets and interests in the scope of the UmwStG.

However, the FRL applies only to EU corporations (Art. 3 lit. a) that are resident for tax purposes in a Member State (Art. 3 lit. b). The FRL thus fails to meet the requirements of the free movement of capital for the territorial scope.

The fundamental freedoms are part of primary law and thus serve to achieve a common internal market (Art. 3 para 3 p. 1 TEU). While Articles 46, 50, 53, 114 and 115 TFEU empower the EU legislature to adopt directives as secondary law, they are intended to implement and safeguard fundamental freedoms and must not preclude the establishment of an internal market. Accordingly, the FRL (as well as the MTR[634]) has a reinforcing – and non-limiting – character for fundamental freedoms.[635]

The decree of the FRL was also based by the EU legislature on Article 50(2)(d) TFEU[636] and thus committed itself in particular to the realisation of the freedom of establishment (Article 50(1) TFEU). Thus, the secondary law FRL cannot displace the direct application of the freedom of establishment for the citizen[637], so that a contradiction between the FRL and the freedom of establishment is always in favour of the freedom of establishment.[638] According to Frotscher, the primary law priority should even allow “European law contrary to European law”.[639]

Similarly, Advocate General Kokott confirmed that the FRL does not constitute a final harmonisation measure in the area of conversion operations[640] and that a taxation of derailment must also be examined in the light of primary law where the FRL does not prohibit the taxation of derailment. [641] It also explicitly confirmed that the national legislature is bound by the fundamental freedoms in parallel in the implementation of secondary law (here: FRL).642 Similarly, the ECJ has confirmed the violation of the Finnish provisions on the introduction of the freedoms (freedom of establishment), although this provision is in accordance with Art. 10 par. 2 FRL.[643]

Although the FRL does not comply with primary law in the area of immediate taxation, it cannot, in my opinion, be called a violation of fundamental freedoms. Indeed, the existence of the directive alone cannot put cross-border conversion at a disadvantage compared with a purely national conversion and thus cannot deter European citizens from their right to free establishment or free movement of capital. The directive must be in accordance with art. 288 TFEU transposed into national law in order to have an effect for or against the citizen. Similar to a DTA, which can only restrict a right of taxation and not justify it, the Directive itself does not trigger an immediate taxation which could restrict the freedom of establishment or capital movement of the Union citizen. Consequently, the FRL cannot violate fundamental freedoms.[645] Only the national UmwStG can do this.[646]

Ultimately, the EU legislature has formulated with the FRL (only) the minimum requirements for the Member States, the compliance of which does not yet guarantee a Union-compliant legal situation. [647] The FRL cannot therefore supplant the requirements of the fundamental freedoms. In addition to the requirements of the FRL, a national regulation must also respect fundamental freedoms.[648] It is therefore not sufficient for the national legislature to be guided exclusively by the scope of action of the FRL (Art. 4 para 2 subpara b), without taking into account the freedom of establishment and capital movement. As a result, the primary legal requirements mentioned under section B. – irrespective of the existence and the requirements of the FRL – must be observed by the national legislature.