UK and International Tax news

Dutch Corporate Exit Tax

Wednesday 18th January 2012

The Court of the European Union (ECJ) has recently published its decision in the National Grid Indus [NGI]case (Case C-371/10) which concerned exit tax rules applied to a transfer of a company’s place of effective management to another member state.

NGI was a Dutch company which relocated its place of effective management from the Netherlands to the UK. NGI held a sterling denominated receivable from a UK group company and this showed an unrealised FX gain at the time of emigration.  In December 2000, NGI’s tax residency was changed to the UK after relocation per the then UK – Netherlands tax treaty which overrode domestic law. After the company had moved to the UK, the FX gain vanished as the company changed its currency for acconting policy to sterling.  Dutch domestic law charged tax on the FX gain on exit but the Dutch court referred the matter to the ECJ on the grounds that the tax charge could potentially infringe the right to freedom of establishment under Art 43 ECT, now Art 49 TFEU.

The ECJ held that where a member state applies a final settlement tax on the transfer of the place of effective management, the taxpayer should be able to rely on Article 43 ECT.

The Court then considered whether the possibility of deferring that tax and the taking account of subsequent decreases in value after the transfer of the effective place of management could be justified by the necessity of allocating powers of taxation between the member states. In addition, the Court went on to consider the situation where the final settlement tax relates to a gain which would not be recognised as a profit in the other state, i.e. a currency gain that would not arise in another member state.

Given the Dutch rules placed a cash-flow disadvantage on NGI which did not arise if the effective management was relocated within the Netherlands, this deterred companies relocating which was a restriction on the freedom of establishment.

The ECJ did state that such a tax could be justified by the necessity to ensure a balanced allocation of taxing rights between member states, but this needed to be proportionate.

It did not however matter whether the tax was on a gain that would not arise in the subsequent member state, although an exit tax regime that did not take into account subsequent decreases in the value of assets was not as such in breach of the freedom of establishment.

The ECJ suggested that legislation covering an exit tax should have two options, being the immediate payment of tax on unrealised gains, and a deferment until the disposal of the asset, potentially with interest.

This decision could well have implications in the UK as, where a company migrates its tax residency to outside the UK, a tax charge arises as if there had been a disposal of the company’s assets [s.185 TCGA92].  Although the tax can be deferred, there are conditions which include the requirement for the migrating company to be owned at least 75% by a UK resident company.

Thus the NGI decision could be considered as an authority for arguing that the UK rules are in breach of EU law on the grounds where the exit charge cannot be postponed, and where the postponed tax is triggered by the migrated subsidiary ceasing to be a 75% subsidiary of a UK company rather than a disposal by that company of the assets held at the date of the migration.

If you would like to discuss the above decision in more detail, please contact Keith Rushen on 0044 (0)20 7486 2378 

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