Global Tax Alert | 19 July 2013
EU Court of Justice rules on Danish exit tax
On 18 July 2013. the Court of Justice of the European Union (CJEU) released its decision in the infringement procedure against Denmark regarding the taxation of transfers abroad of assets.1 The CJEU held that an immediate taxation of built-in-gains in assets which companies transfer to another Member State constitutes an infringement of the freedom of establishment pursuant to Art. 49 TFEU (Treaty on the Functioning of the European Union).
Under Section 8 paragraph 4 of the Danish Corporate Tax Act, the transfer abroad of assets and liabilities is deemed to be a disposal at fair market value upon the transfer if these assets and liabilities are no longer subject to Danish taxation after the transfer. Such a loss of taxing right may occur, e.g., where a domestic entity transfers assets to its foreign permanent establishment or where a foreign entity transfers assets from its Danish permanent establishment to its foreign head office or to a permanent establishment outside Denmark. The capital gain is taxable in the year of the transfer with no possibility to apply for a deferral of the tax payment.
The EU-Commission challenged this tax regime before the CJEU with respect to transfers to EU and EEA countries. The decision is the last one in a series of decisions on exit tax provisions of various Member States.2
As in its previous decisions on exit taxation, the CJEU held that the Danish provision at issue violates the freedom of establishment pursuant to Article 49 TFEU. Since a domestic transfer of assets does not constitute a taxable event, whereas a transfer abroad does, the tax provisions at issue contain an unequal treatment of a domestic and a cross-border intra-union event. A taxation of built-in-gains in assets and liabilities which are transferred abroad can in principle be justified. However, a deferral needs to be available until a realization event, like a disposal, takes place.
For the first time, the CJEU specifically addressed the question of the treatment of certain assets “which are not meant to be realized.” The Court stated that Member States are entitled to apply a different criterion than the actual realization of the asset as the event which actually triggers the exit taxation.
The CJEU also decided that the provision at issue constitutes an infringement of the freedom of establishment of Article 31 EEA (European Economic Area) in cases of transfers to Iceland, Norway or Liechtenstein as with respect to each of the countries mutual assistance procedures with respect to information exchange and with respect to the enforcement of tax claims are available.
The Danish Ministry will need to address the question of whether the Danish exit taxation rules need to be amended with regards to (1) transfer of assets and liabilities out of Danish tax jurisdiction to another EU-/EEA-Member State (which was the subject of the CJEU decision in the instant case) and (2) the situation where a Danish company migrates (which the CJEU did not address in the instant case).
Based on the decision, it could be expected that the Danish rules on exit taxation should be amended so that the taxpayer is entitled to deferral of the payment of the “exit tax amount” in order to be compatible with the freedom of establishment of the TFEU and the EEA. However, the CJEU did not take the opportunity to specifically clarify the conditions that a Member State can impose when granting deferral of the payment of tax. It will be of particular relevance whether the taxpayer will be required to pay interest on the exit tax amount and/or provide a bank guarantee for the exit tax amount.
1. Case reference C-261/11.
2. National Grid Indus, C-371/10; Commission v Portuguese Republic, C-38/10; Commission vs. the Netherlands, C-301/11; Commission v Kingdom of Spain, C-64/11.
For additional information with respect to this Alert, please contact the following:
Ernst & Young P/S, Copenhagen
- • Niels Josephsen
+45 5158 2773
- • Jens Wittendorff
+45 5158 2820
Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft, Munich
- • Dr. Klaus von Brocke
+49 89 14331 12287
EYG no. CM3664