Emigration and immigration of a business

Transcription

Emigration and immigration of a
business: impact of taxation on
European and global mobility
Name:
ANR:
Study:
Study year:
Submission Date:
Supervisor:
Exam Committee:
Loes Brilman
547909
Fiscal economics
2012/2013
24 June 2013
Mr. dr. D.S. Smit
Prof. dr. P.H.J. Essers
Prof. dr. E.C.C.M. Kemmeren
Emigration and immigration of a business: impact of taxation on European and global mobility
1
PREFACE
This master thesis is written in the context of my study Fiscal Economics at Tilburg University. Against the background
of the EUCOTAX Wintercourse, the central theme of this thesis is the impact of taxation with respect to the
emigration and immigration of a business on European and global mobility. Being the internationally oriented person
that I am, I felt honored of having the chance to participate in this international project. Witnessing my enthusiasm, I
proudly present this thesis. In the course of writing this thesis, I received guidance, input, and advice from inspirational
people, and I wish to take the occasion to briefly pay my gratitude.
Firstly, I want to thank my supervisor, Daniël Smit. His advice and criticisms inspired me to continue and improve my
work every single time. Additionally, I want to thank mr. Dusarduijn, professor dr. Essers, professor dr. Kemmeren,
drs. Peters, professor dr. Stevens, and last, but not least, Mark Vitullo for their feedback, advice, and support provided
during the Wintercourse meetings. Moreover, for their enthusiasm and support during the Wintercourse-week in
Osnabruck, I express my gratitude to prof. dr. Essers, prof. dr. Kemmeren, and Femke Poort. Similarly, I want to thank
my group mates of the other participating Universities for the cooperation and fun during the Wintercourse-week. I also
especially want to thank my Wintercourse colleagues, Minne Bosma, Celeste Krens, Alexandra van der Kruk, and Yvette
Timmermans. You were not only of support throughout this project but throughout this entire year. We had a lot of
fun and an unforgettable time, not only in Osnabruck.
Finally, I want to thank my parents and sisters, boyfriend and friends. Even when confronted with my ‘thesis stress’,
their support has been unconditional. Most importantly, I want to thank my grandfather who has always been my
counselor, equipped with good advice and support. Even though he passed away recently, the idea of him and what he
would have said or done helped me throughout the process of writing this thesis.
Loes Brilman
Tilburg, June 2013
2
CONTENTS
PREFACE ........................................................................................................................................ 2
CONTENTS .................................................................................................................................... 3
LIST OF ABBREVIATIONS .........................................................................................................11
INTRODUCTION ........................................................................................................................ 12
Background..................................................................................................................................................... 12
Research question ........................................................................................................................................... 13
Normative framework ..................................................................................................................................... 13
EUCOTAX comparative law .......................................................................................................................... 13
Research design .............................................................................................................................................. 14
1.
NORMATIVE FRAMEWORK .............................................................................................. 15
1.1
Introduction ......................................................................................................................... 15
1.2
European and global mobility ............................................................................................. 16
1.3
Fiscal sovereignty ................................................................................................................ 16
1.4
The benchmark: international tax neutrality ...................................................................... 17
1.4.1
Theories on international tax neutrality.............................................................................................. 17
1.4.1.1
1.4.1.2
1.4.1.3
Capital export neutrality (CEN) ...................................................................................................................................... 18
Capital import neutrality (CIN)....................................................................................................................................... 19
Inter-nations neutrality ..................................................................................................................................................... 21
1.4.2
Critical analysis ................................................................................................................................... 21
1.4.3
Synthesis: international tax neutrality serving as a benchmark .......................................................... 24
1.4.3.1
1.4.3.2
1.4.4
2.
International tax neutrality and the internal European market ................................................................................. 24
International tax neutrality and fiscal sovereignty ....................................................................................................... 25
Conclusion: CIN as a benchmark....................................................................................................... 26
EMIGRATION OF A BUSINESS ......................................................................................... 28
2.1
Introduction ......................................................................................................................... 28
2.1.1
The purpose and justification of exit taxes ......................................................................................... 28
2.1.2
Why are exit taxes problematic? ......................................................................................................... 29
2.2
Distinction between ‘types’ of businesses ........................................................................... 30
A.
Dutch tax system .................................................................................................................................... 30
B.
EUCOTAX comparative law .................................................................................................................. 31
2.3
The concept of residency..................................................................................................... 35
3
A.
Dutch tax system .................................................................................................................................... 35
2.3.1
Natural persons................................................................................................................................... 35
2.3.2
Legal entities....................................................................................................................................... 36
B.
2.3.3
Natural persons................................................................................................................................... 37
2.3.4
Legal entities....................................................................................................................................... 39
2.4
The concept of residency under tax treaties ....................................................................... 40
2.5
Incorporation versus real seat jurisdictions ........................................................................ 41
A.
Dutch tax system .................................................................................................................................... 42
B.
2.6
How does a business lose its status as a resident?.............................................................. 43
A.
Dutch tax system .................................................................................................................................... 43
2.6.1
Natural persons................................................................................................................................... 43
2.6.2
Legal entities....................................................................................................................................... 44
2.6.3
The influence of tax treaties on the status as a resident ..................................................................... 45
2.6.3.1
2.6.3.2
B.
Transfer of the place of effective management ........................................................................................................... 45
Revised DTCs .................................................................................................................................................................... 45
2.7
Business-emigration (for tax purposes) .............................................................................. 47
A.
Dutch tax system .................................................................................................................................... 47
2.7.1
Dutch meaning of business emigration .............................................................................................. 47
2.7.2
How to emigrate from the Netherlands.............................................................................................. 48
2.7.2.1
2.7.2.2
B.
Natural persons .................................................................................................................................................................. 48
Legal entities ....................................................................................................................................................................... 49
2.8
Specific tax provisions on business-emigration .................................................................. 53
A.
Dutch tax system .................................................................................................................................... 53
2.8.1
Some preliminary remarks .................................................................................................................. 53
2.8.1.1
2.8.1.2
2.8.1.3
2.8.2
Exit provisions for businesses in the personal sphere ........................................................................ 54
2.8.2.1
2.8.2.2
2.8.3
Purpose and scope; the Dutch ‘total profit concept’ .................................................................................................. 53
Subject of Dutch exit provisions .................................................................................................................................... 53
Object of Dutch exit provisions ..................................................................................................................................... 54
Partial settlement ............................................................................................................................................................... 54
Final settlement .................................................................................................................................................................. 56
Exit provisions for businesses in the corporate sphere....................................................................... 57
2.8.3.1
Partial settlement ............................................................................................................................................................... 57
4
2.8.3.2
B.
Final settlement .................................................................................................................................................................. 58
2.9
Recovery of exit taxes .......................................................................................................... 63
A.
Dutch tax system .................................................................................................................................... 63
2.9.1
Recovery provisions and Law on deferral of exit taxation .................................................................. 63
2.9.1.1
2.9.1.2
2.9.1.3
Background: why the amendment of the Recovery Ac? ............................................................................................ 63
Current state of affairs ...................................................................................................................................................... 66
The amendments of the Recovery Act .......................................................................................................................... 66
B.
EUCOTAX Comparative law.................................................................................................................. 67
2.10
Treatment of assets upon departure.................................................................................... 69
A.
Dutch tax system .................................................................................................................................... 69
B.
2.11
Procedural obligations ......................................................................................................... 71
2.11.1
Upon emigration ............................................................................................................................. 71
2.11.1.1
2.11.1.2
2.11.2
The period after emigration ............................................................................................................ 73
2.11.2.1
2.11.2.2
2.12
Notification of movement ............................................................................................................................................... 71
Moment of emigration, tax declaration, and tax assessment ..................................................................................... 72
The influence of the incorporation system ................................................................................................................... 73
Opting-in for deferred payment ..................................................................................................................................... 73
Tax treatment of business emigration benchmarked against the normative framework... 73
2.12.1
The Dutch tax treatment upon business emigration: synopsis ...................................................... 73
2.12.2
Dutch exit taxes and European and global mobility ...................................................................... 74
2.12.3
Dutch exit taxes and fiscal sovereignty........................................................................................... 76
2.12.4
Dutch exit taxes and capital import neutrality ............................................................................... 76
2.12.4.1
2.12.4.2
2.12.4.3
2.12.5
2.13
3.
Can the Netherlands impose an exit tax? ...................................................................................................................... 76
Immediate or deferred payment? .................................................................................................................................... 77
Conditions of deferral ....................................................................................................................................................... 77
Conclusion ...................................................................................................................................... 78
Summary and conclusion .................................................................................................... 79
IMMIGRATION OF A BUSINESS ....................................................................................... 83
3.1
Introduction ......................................................................................................................... 83
3.2
How does a business become a tax-resident ...................................................................... 84
A.
Dutch tax system .................................................................................................................................... 84
3.2.1
Natural persons................................................................................................................................... 84
3.2.2
Legal entities....................................................................................................................................... 84
B.
5
3.3
Business-immigration: meaning and how to ...................................................................... 85
A.
Dutch tax system .................................................................................................................................... 85
3.3.1.1
3.3.1.2
B.
Natural persons .................................................................................................................................................................. 86
Legal entities ....................................................................................................................................................................... 87
3.4
Specific tax provisions and treatment of assets upon arrival .............................................. 90
A.
Dutch tax system .................................................................................................................................... 90
3.4.1
Tax base step-up ................................................................................................................................. 91
3.4.2
Immigration versus foundation of a business in the Netherlands ..................................................... 92
3.4.3
Cost base used for depreciable property ............................................................................................. 92
3.4.4
Deemed acquisition of assets ............................................................................................................. 93
3.4.5
Evaluation of assets by the tax administration ................................................................................... 93
B.
3.5
Procedural obligations ......................................................................................................... 96
3.6
Tax treatment of business immigration benchmarked against the normative framework 96
3.6.1
Immigration and European and global mobility ................................................................................ 97
3.6.2
Fiscal sovereignty and capital import neutrality................................................................................. 97
3.6.3
Conclusion .......................................................................................................................................... 97
3.7
Summary and conclusion .................................................................................................... 98
4. CROSS-BORDER TRANSFERS OF ASSETS TO AND FROM A PERMANENT
ESTABLISHMENT .................................................................................................................... 100
4.1
Introduction ....................................................................................................................... 100
4.2
Permanent establishment under national law ................................................................... 100
A.
Dutch tax system ...................................................................................................................................100
4.2.1
Definition ...........................................................................................................................................100
4.2.2
Starting up a PE in the Netherlands ..................................................................................................103
B.
EUCOTAX comparative law .................................................................................................................103
4.3
Permanent establishment in DTCs ................................................................................... 105
4.4
PE-profit allocation ........................................................................................................... 106
4.4.1
Article 7 OECD model tax convention ..............................................................................................106
4.4.2
Avoidance of double taxation ............................................................................................................106
3.4.4.1 OECD model tax convention and Dutch Standard Treaty ............................................................................................106
3.4.4.2 Dutch method of exempting profits from a foreign PE.................................................................................................. 106
4.4.3
Method of profit allocation to a PE ...................................................................................................107
6
4.4.4
4.5
Profit of the PE and profit of the general enterprise ..........................................................................107
Transfer of assets from a national head office to a PE abroad ......................................... 108
A.
Dutch tax system ...................................................................................................................................108
4.5.1
Asset transfer from the Dutch head office to a PE abroad ................................................................108
4.5.1.1
4.5.1.2
B.
Temporary transfer of assets ......................................................................................................................................... 109
Permanent transfer of assets.......................................................................................................................................... 110
EUCOTAX comparative law ................................................................................................................. 111
4.6
Transfer of assets from a national PE to a head office or PE abroad ................................ 113
A.
Dutch tax system ................................................................................................................................... 113
4.6.1
Asset transfer from a Dutch PE to the head office of a limited resident taxpayer............................. 113
4.6.1.1
4.6.1.2
4.6.1.3
4.6.2
Asset transfer from a Dutch PE to the head office of a non-resident abroad .................................... 117
4.6.2.1
4.6.2.2
4.6.3
Temporary transfer of assets ......................................................................................................................................... 118
Permanent transfer of assets.......................................................................................................................................... 118
Asset transfer from a Dutch PE to a PE abroad ................................................................................122
4.6.3.1
4.6.3.2
4.6.3.3
B.
Partial settlement under the final settlement provision? .......................................................................................... 114
Consequences for the interim transfer of asset components .................................................................................. 115
Alternative: compartmentalization ............................................................................................................................... 116
Where the company is a resident taxpayer .................................................................................................................. 123
Where the company is a limited resident taxpayer .................................................................................................... 124
Where the company is a non-resident taxpayer ......................................................................................................... 125
EUCOTAX comparative law .................................................................................................................125
4.7 Tax treatment of transfers of assets to and from a PE benchmarked against the normative
framework ..................................................................................................................................... 126
4.7.1
Asset transfers to and from a PE in the light of European and global mobility ................................127
4.7.2
Fiscal sovereignty and capital import neutrality................................................................................127
4.7.3
Conclusion .........................................................................................................................................128
4.8
Summary and conclusion .................................................................................................. 129
5. ALTERNATIVE METHODS OF BUSINESS MIGRATION (OTHER THAN SEAT
TRANSFERS) .............................................................................................................................. 132
5.1
Introduction ....................................................................................................................... 132
5.2
Cross-border mergers and divisions .................................................................................. 132
5.2.1
Introduction .......................................................................................................................................132
5.2.2
Tax merger directive ..........................................................................................................................132
5.2.3
Mergers and divisions in the Netherlands .........................................................................................133
5.2.3.1
5.2.3.2
5.3
Company law aspects ...................................................................................................................................................... 133
Tax law aspects ................................................................................................................................................................ 134
Cross-border conversions .................................................................................................. 135
7
5.3.1
Introduction .......................................................................................................................................135
5.3.2
Cross-border conversions in the Netherlands....................................................................................136
5.3.2.1
5.3.2.2
5.4
Company law aspects ...................................................................................................................................................... 136
Tax law aspects ................................................................................................................................................................ 137
6. THE RELATIONSHIP BETWEEN EXIT TAXATION AND TAX CONVENTIONS:
FROM A DUTCH PERSPECTIVE............................................................................................ 140
6.1
Introduction ....................................................................................................................... 140
6.2
Allocation of taxing rights ................................................................................................. 140
6.2.1
National law, tax treaties and taxing rights ....................................................................................... 141
6.2.2
Tax treaties and Dutch policy ............................................................................................................ 141
6.2.3
Allocation of taxing rights under art. 7 of the OECD model tax convention .................................... 141
6.2.4
Allocation of taxing rights under art. 13 of the OECD model tax convention ...................................142
6.3
Treaty override ................................................................................................................... 143
6.3.1
Case law .............................................................................................................................................144
6.3.2
Literary review ...................................................................................................................................146
6.4
7.
EUROPEAN UNION LAW ................................................................................................. 151
7.1
Introduction ........................................................................................................................ 151
7.2
Article 49 TFEU: freedom of establishment ...................................................................... 151
7.3
Court of Justice of the European Union cases on business migration ............................. 152
7.3.1
Case law on individuals (natural persons) .........................................................................................152
7.3.1.1
7.3.1.2
7.3.1.3
7.3.2
Case law on companies (legal entities) ..............................................................................................156
7.3.2.1
7.3.2.2
7.3.2.3
7.3.2.4
7.3.2.5
7.3.2.6
7.3.2.7
7.3.2.8
7.3.2.9
7.3.2.10
7.3.3
Hughes de Lasteyrie du Saillant .................................................................................................................................... 152
N. v. Inspecteur ............................................................................................................................................................... 153
Commission v. Spain ...................................................................................................................................................... 155
Daily Mail .......................................................................................................................................................................... 156
Überseering ....................................................................................................................................................................... 158
SEVIC System.................................................................................................................................................................. 159
Cartesio .............................................................................................................................................................................. 160
National Grid Indus ........................................................................................................................................................ 161
VALE ................................................................................................................................................................................ 163
Commission v. Portugal ................................................................................................................................................. 164
EFTA Court – Arcade Drilling AS .............................................................................................................................. 166
Commission v. Kingdom of the Netherlands ............................................................................................................ 168
Commission v. Spain ...................................................................................................................................................... 169
Is there a general line in CJEU rulings on business migration cases? ..............................................169
7.3.3.1
The broad general line .................................................................................................................................................... 169
8
7.3.3.2
7.3.3.3
7.4
The accessibility of the freedom of establishment .................................................................................................... 170
Taxation upon the emigration of a business ............................................................................................................... 171
Dutch tax treatment of emigrating businesses in the light of EU law .............................. 171
7.4.1
The Dutch business-emigration provisions in the light of case law on emigrating individuals .......172
7.4.1.1
7.4.1.2
7.4.1.3
Can substantial shareholders be compared to entrepreneurs? ................................................................................ 172
Court’s rulings on individuals applied to individual businesses .............................................................................. 173
Should individual businesses be treated as individuals or as businesses? .............................................................. 174
7.4.2
The Dutch business-emigration provisions in the light of case law on emigrating companies........175
7.4.3
Comments on the amended Recovery Act .........................................................................................176
7.4.3.1
7.4.3.2
7.4.3.3
7.4.3.4
7.4.3.5
7.4.3.6
7.4.4
7.5
Provision of sufficient securities ................................................................................................................................... 176
Administrative requirements ......................................................................................................................................... 178
Calculation of recovery interest .................................................................................................................................... 179
Scope of the Law on deferral of exit taxation ............................................................................................................ 181
Termination of the deferral of payment ...................................................................................................................... 182
Payment in ten annual installments .............................................................................................................................. 182
Conclusion: compatibility of Dutch exit tax regime with EU law .....................................................183
EUCOTAX Comparative law ............................................................................................ 183
7.5.1
Option between immediate and deferred payment ...........................................................................184
7.5.2
Option between immediate payment and payment in 5 annual installments ...................................185
7.5.3
No option ...........................................................................................................................................185
7.5.4
Recovery of tax is irrelevant ...............................................................................................................185
7.5.5
Summary ............................................................................................................................................185
7.6
Dutch tax treatment of immigrating businesses in the light of EU law ........................... 186
7.6.1
Not providing a step-up incompatible with EU law? ........................................................................187
7.6.2
Tax base step-down ...........................................................................................................................190
7.7
8.
Summary and conclusion ................................................................................................... 191
THE DUTCH ‘EXIT TAX SYSTEM’ 2.0 ............................................................................ 195
8.1
Synopsis: current Netherlands tax system ........................................................................ 195
8.1.1
European and global mobility and capital import neutrality ............................................................195
8.1.2
DTCs ..................................................................................................................................................196
8.1.3
EU law ...............................................................................................................................................196
8.2
Alternatives and possible solutions for exit taxes ............................................................. 197
8.2.1
Compartmentalization systems .........................................................................................................197
8.2.1.1
8.2.1.2
8.2.1.3
8.2.2
Residence-based compartmentalization ...................................................................................................................... 197
Succeeding-residency compartmentalization ..............................................................................................................198
Compartmentalization system Bundesfinanzhof ....................................................................................................... 198
A trade system for exit claims ............................................................................................................199
9
8.2.3
Matching tax payment to tax advantage (step up and depreciation) ............................................... 200
8.2.4
Coordinated solutions proposed by the European Commission .......................................................201
8.3
The Dutch exit tax system 2.0 ........................................................................................... 202
8.3.1
Improving the current system ........................................................................................................... 202
8.3.1.1
8.3.1.2
8.3.1.3
8.3.1.4
8.3.2
8.4
Deferral of payment? ...................................................................................................................................................... 202
Conditions of deferral ..................................................................................................................................................... 203
Settlement provisions...................................................................................................................................................... 204
Conclusion ........................................................................................................................................................................ 204
Introducing a new system ................................................................................................................. 205
SUMMARY AND CONCLUSIONS ........................................................................................... 209
BIBLIOGRAPHY ........................................................................................................................ 215
Books and articles ..........................................................................................................................................215
Parliamentary documents and legislation .....................................................................................................221
Case law ........................................................................................................................................................ 222
European Commission documents and web pages...................................................................................... 227
Other secondary sources ............................................................................................................................... 228
EUCOTAX papers .........................................................................................................................................231
10
LIST OF ABBREVIATIONS
A-G
AOA
BFH
BNB
B.V.
CCCTB
CEN
CFE
CIN
CJEU
DTC
DTCs
EC
EEA
EU
EUCOTAX
IB / PITA
IW / RA
LB / WTA
LJN
MBB
MN
MS
MSs
NGI
NL
NN
NOB
NON
NTFR
N.V.
PE
PEs
TFEU
TFO
Vpb / CITA
UK
WFR
Advocate General
Authorized OECD Approach
Bundesfinanzhof (German Federal Finance Court)
Beslissing Nederlandse Belastingrechtspraak
Besloten Vennootschap (private limited company)
Common Consolidated Corporate Tax Base
Capital export neutrality
Confederation Fiscale Europeenne
Capital import neutrality
Court of Justice of the European Union
Double tax convention
Double tax conventions
European commission
European Economic Area
European Union
European University Cooperating on Taxation
Wet Inkomstenbelasting 2001 (Personal Income Tax Act 2001)
Invorderingswet 1990 (Recovery Act 1990)
Wet Loonbelasting 1964 (Wage Tax Act 1964)
Landelijk Jurisprudentienummer (national case law number)
Maandblad Belasting Beschouwingen
Market neutrality
Member state
Member states
National Grid Indus
Netherlands
National neutrality
Nederlandse Orde van Belastingadviseurs (Netherlands Order of Tax advisors)
National ownership neutrality
Nederlands Tijdschrift voor Fiscaal Recht
Naamloze Vennootschap (public company)
Permanent establishment
Permanent establishments
Treaty of Functioning of the European Union
Tijdschrift Fiscaal Ondernemingsrecht
Wet Vennootschapsbelasting 1969 (Corporate Income Tax Act 1969)
United Kingdom
Weekblad Fiscaal Recht
11
INTRODUCTION
‘Although we now take it for granted, the ‘single market’ (sometimes also called the ‘internal market’) is one of the EU’s greatest
achievements. Instead of being obstructed by national borders and barriers, people, goods, services and money move around the EU as
freely as they do within a single country’.1 This citation does not seem to hold for the area of taxation. Ultimately, the ‘dream’
of the European Union is the achievement of a genuinely border-free internal market. When it comes to taxation,
however, Member States are largely free to design their direct tax systems in a way that meets their domestic policy
objectives and requirements.2 The outcome is contradictory: multiple tax systems within one ‘internal market’.
Interaction of these multiple tax systems only results in obstacles and restrictions to cross-border movement of people,
goods, services and money. This is no different on the global market. It follows that taxation has a certain (distorting)
impact on European and global mobility, both of persons and of capital.
Background
This thesis has been written in the context of the EUCOTAX Wintercourse 2012-2013.3 The theme of this year’s
Wintercourse was the impact of taxation on European and global mobility of persons and capital. The current thesis
deals with the subject area of the influence of taxation of business migration on European and global mobility.
In the world we live in nowadays, characterized by globalization, ‘Europeanization’, a well-developed international
infrastructure and extensive information and communication technology, taxation is no longer a ‘national’ affair.
Differences in treatment of residents and non-residents in addition to mismatches and disparities in national tax policies
can have a serious dissuasive effect on taxpayers wishing to move their tax residence cross-borders. Therefore,
international coordination and harmonization of tax is a prerequisite for enabling growth of the economy, not only
regarding the internal European market but also the global market. When it comes to European and global mobility,
one very important issue is the emigration and immigration of a business. Many Member States of the European Union
still impose what are called exit taxes. These exit taxes can cause restrictions or obstructions to the ideal of the single
European market with unhindered mobility. Merely due to the fact that a taxpayer transfers its tax residence to another
country, the taxpayer is confronted with a tax on a form of income that has not yet been realized. Thus, departing
residents are taxed on an accruals basis whereas in a purely domestic situation transferring residents are taxed on a
realization basis. This poses a difference in treatment constituting an obstacle to free movement.4 The Court of Justice
of the European Union has already given its verdict in several cases on the extent to which specific exit tax provisions
of different Member States are (in)compatible with the Treaty freedoms5.6 In this respect, the Netherlands is probably
best known for the CJEU’s recent ruling in National Grid Indus7. In this case, the Dutch exit tax rules concerning the
transfer of a Dutch incorporated company’s place of effective management to another Member State were scrutinized.
The Court’s ruling in this case is also highly relevant for other Member States8, since it unveiled possible restrictive
provisions of other national tax systems as well. In my opinion this highlights the importance of analyzing and
1
European Union, ‘Border-free Europe (single market)’.
See also: COM(2006) 823 final, para 1.
3 The EUCOTAX Wintercourse is an intensive collaboration program between seventeen international Universities. The subject area of the
Wintercourse has always been "The European Harmonization of Tax Law". Every single year however, the program has a different theme.
4 See also COM(2006) 825 final, par 2.1.
5 More specifically: article 49 of the Treaty of Functioning of the European Union (TFEU); freedom of establishment.
6 For business-emigration of individuals or natural persons see amongst others: CJEU N. (Case C-407/04) and CJEU Hughes de Lasteyrie du
Saillant (Case C-9/02), and for business-emigration of companies or legal entities see amongst others CJEU Daily mail (Case-81/87), CJEU
Überseering (Case C-208/00), CJEU Cartesio (Case C-210/06) and CJEU National Grid Indus (Case C-371/10).
7 CJEU National Grid Indus (Case C-371/10).
8 See also Kemmeren 2012, p. 183-212.
2
12
evaluating national law systems. For this reason this thesis includes an analysis of different national tax law systems with
respect to the emigration and immigration of a business.9
Research question
It is clear that exit taxes can be problematic in the context of mobility or free movement. In the light of the overall
theme of the EUCOTAX Wintercourse I strive for the enhancement of European and global mobility. The following
research question will be guiding throughout this thesis:
How does the Netherlands tax system with respect to business migration impact on European and global
mobility, and what should be the impact in the light of tax conventions, EU law, and international tax
neutrality?
This question contains a descriptive and a normative element, a ‘what is’ and a ‘what should be’. Regarding the
descriptive element, the current Netherlands tax system with respect to the emigration and immigration of a business
and immigration of a business will be analyzed in detail. Moreover, the transfer of assets in ‘permanent establishment
(PE) situations’10 as well as mergers and divisions of corporations are included in the discussion. Attention will also be
paid to how this Netherlands system with regard to business migration relates to tax conventions and EU law, and
whether it can pass the benchmark of international tax neutrality. Having completed the descriptive part, the question
then is: how can the system be improved. Taking into account the implications and problematic issues found during the
analysis, a new system will be proposed which is capable of enhancing European and global mobility.
Normative framework
If European and global mobility would be the only parameter of the search for a better system, the outcome would be
easy; abolishment of exit taxation. There would then be no obstruction to mobility as businesses can move as freely
cross-borders as within a single country. However, in my opinion, this is realistic nor desirable. Attention has to be paid
to the counterbalance, which is the fiscal sovereignty of States. Every Member State has the right to set its own tax
policy and to levy and collect these taxes. Member States have to take care of themselves, and see to an adequate level of
revenue to finance public expenditure.
Within the internal European market mobility should be unobstructed, while at the same time respecting the fact that
Member States have the right to set and collect their own taxes. It is clear that fiscal sovereignty conflicts with the ideal
of unobstructed European and global mobility. Somewhere along the way, an improvement in the mobility will go at the
cost of the sovereignty of Member States, and the other way round. By conjoining the two in a model, I will try to reach
a compromise aimed at serving the best of both worlds. This is my normative framework, where the benchmark of
international tax neutrality, or more specifically capital import neutrality, will be used to find the ‘optimal’ outcome
regarding the interaction between the two pillars.
EUCOTAX comparative law
In this thesis a comparative law will be made. The basis for this comparative law are both papers describing other
national tax law systems and the EUCOTAX Wintercourse intensive workweek, where these different national systems
were further discussed and analyzed. The participating countries include the following (in alphabetical order): Austria,
Belgium, France, Germany, Hungary, Italy, the Netherlands, Poland, Sweden, and the US. As a preliminary remark, it
9
By business, any business is meant, including an individual, a company or a deemed company.
Transfer of assets from head office to a PE in another state, transfer of assets from a PE to head office in another state, or transfer of
assets from a PE to a PE in another state.
10
13
should be noted that the input from some countries was insufficient for further analysis and comparison. As a
consequence, not all national systems will be discussed in detail on some aspects. Nonetheless, the goal is to make the
comparative law as complete as possible.
Research design
The design of this research is as follows. In the next chapter, I will start with describing the normative framework,
which is equipped to achieve the goal of enhancing European and global mobility while at the same time respecting
States’ fiscal sovereignty. The concept of capital import neutrality will be introduced as a benchmark. In the second
chapter, the current Netherlands tax system with regard to the emigration of a business will be discussed and analyzed.
Attention will also be paid to the tax systems of the other EUCOTAX countries, although the focus lies on the
Netherlands tax treatment. Topics which will be discussed include the distinction between individual businesses and
companies, the incorporation system vs. the real seat system, the concept of residency in the Netherlands and the
influence of double tax conventions, emigration and the relating tax provisions, the recovery of taxation, and procedural
issues. Finally, the Netherlands tax treatment of emigrating businesses will be assessed in the light of the normative
framework. In the third chapter, the Netherlands tax treatment of immigrating businesses will be discussed, where most
of the aforementioned topics will be analyzed from an inbound perspective. Similarly, the chapter will end with an
assessment of the Netherlands tax system regarding business immigration in the light of the normative framework. In
the fourth chapter, the focus is on the Netherlands tax treatment of cross-border asset transfers to and from a
permanent establishment (PE). The chapter will start with the definition or meaning of the PE, where this will be
discussed with regard to both the Netherlands and the other EUCOTAX countries, and in the light DTCs. Also, the
method of PE profit allocation will be assessed. After this, the Netherlands tax treatment of cross-border asset transfers
will be discussed with respect to several ‘PE situations’. The chapter will again end by placing this tax treatment against
the background of the normative framework. Chapter five will pivot around ‘alternative’ methods of business migration,
where attention will be paid to both the civil and tax law issues regarding the cross-border merger and the cross-border
conversion. In the sixth chapter, the current Netherlands exit tax system will be assessed in the light of double tax
conventions. Both case law and literature will be employed to ascertain whether or not the imposition of an exit tax
amounts to treaty override. In the seventh chapter, the current Netherlands tax system regarding business migration will
be assessed in the light of EU law. Starting with a discussion of the freedom of establishment and important case law of
the CJEU on the topic of business migration, a broad framework will be set up in order to establish the compatibility of
restrictions to business migration in general. After this, the Netherlands exit tax system will be analyzed in the light of
this framework, followed by a brief analysis of the other EUCOTAX countries’ systems. Finally, the Netherlands tax
treatment upon the immigration of a business will be assessed in the light of EU law. Having completed the entire
analysis regarding the ‘what is’ element of the research question, the eighth chapter will focus on what improvements
can be made or the ‘what should be’. After briefly summarizing the findings, two alternatives will be proposed. Under
the first alternative, the current system of exit taxation will be taken as the starting point, building on this by proposing
several improvements aimed at enhancing European and global mobility. Under the second alternative, a ‘new’ system
will be proposed which is less restrictive to European and global mobility than a system of exit taxation. This thesis will
be closed with a final summary and conclusion, in which an answer will be formulated to the main research question.
14
1.
NORMATIVE FRAMEWORK
1.1 Introduction
In the modern world mobility is essential. Mobility, however, also increases the need for cooperation, coordination, and
harmonization. In the area of direct taxation Member States of the European Union enjoy a high level of fiscal sovereignty
in the area of direct taxation, which has resulted in the co-existence of 27 different tax systems. The resulting
distortions, which can take the form of differences in treatment of residents and non-residents or mismatches and
disparities in national tax policies, can have a serious dissuasive effect on taxpayers wishing to move their tax residence
cross-borders. In particular, tax obstacles in the form of exit taxation on businesses can impel taxpayers to stay in their
home State. The fact that decisions and behavior are influenced by taxation is rather problematic, as it can lead to a suboptimal allocation of production factors, resulting in welfare losses or excess burdens. And especially in the context of
the ideal internal European market, where the level of mobility within the single market should be equivalent to the level
of mobility within one single nation, a distorted allocation of production factors is highly undesirable. This is where the
notion of tax neutrality comes in. In a single market, taxes should not affect decisions in terms of trade, investment and
localization of firms.11 It is clear that nowadays there are still a number of tax distortions and obstructions in the
international ‘playing field’ which have not been eliminated. One of them can be found in the form of exit taxation on
businesses. Therefore, only a limited degree of tax neutrality has been achieved. Ideally, taxation should not influence
the efficient allocation of production factors.12
The normative framework is thus delimited by two important concepts, namely European and global mobility on the
one hand, and fiscal sovereignty on the other. In practice, these two concepts are somewhat discordant. The aim is to
achieve the highest possible level of European and global mobility, without harming the fiscal sovereignty of Member
States.
Figure 1
The two concepts, European and global mobility and fiscal sovereignty, will be discussed in paragraph 1.2, respectively,
paragraph 1.3. In paragraph 1.4 the concept of international tax neutrality will be analyzed and operationalized for the
purpose of serving as a benchmark.
11
12
Radaelli 2002, p. 33.
Ruding Committee report, 1992.
15
1.2 European and global mobility
Ultimately, the European Union aspires to achieve the following: ‘Instead of being obstructed by national borders and barriers,
people, goods, services and money move around the EU as freely as they do within a single country’.13 This is reflected in the concept of
the internal European market. The internal European market should, ideally, have the exact same characteristics as a
national market. These ‘ideal’ characteristics have been laid down in the Treaty of Functioning of the European Union
(TFEU). Article 26(2) TFEU states the following: ‘the internal market shall comprise an area without internal frontiers in which the
free movement of goods, persons, services and capital is ensured in accordance with the provisions of the Treaties’. Put briefly, this means
free movement irrespective of national borders. According to Title VII, chapter 1, the conditions of competition should be
undistorted, implying, amongst others, that state aid or artificial constructions aimed at tax avoidance are unacceptable.
Finally, according to article 114, the TFEU aims at harmonization of national laws; visualizing the European internal
market as a national market also implies that there should be no disparities between national law systems. Reflecting on
the current state of the European Union, it is safe to say that these ideal characteristics for the internal European market
are rather, perhaps too ambitious. European mobility is still not at the same level as mobility within one single Member
State. This is partially caused by national taxation.
When leaving the sphere of the European market, it could be argued that, ideally, global mobility should be unlimited as
well. However, due to the fact that the level of coordination within the European Union is higher than within the rest of
the world, a discrimination between the two situations might be justified. For example, information exchange on a
global level may be more problematic than within the European Union. Such a lack of coordination on the worldwide
market can justify a relatively lower level of global mobility (i.e. more obstructions in third-country contexts), when
compared to mobility on the European internal market.
1.3 Fiscal sovereignty
Fiscal sovereignty cannot simply be put aside in order to achieve a higher level of mobility. Fiscal sovereignty has to be
respected, at least to the extent that States have not intentionally given up their taxing rights.14 Traditionally, tax systems
were viewed largely in the context of single and sovereign jurisdictions, unaffected by the tax systems outside their
borders.15 Sovereignty can be defined as “a State’s inviolable right of self-determination within a specific territory and political
community”.16
The expansion of the European Union has eroded the sovereignty of States to some degree. Nonetheless, Member
States still enjoy a high level of fiscal sovereignty in the area of direct taxation, meaning that states are largely free to
design their direct tax systems in a way that meets their domestic policy objectives and requirements.17 Member States
have to take care of themselves, and see to an adequate level of revenue to finance public expenditure. This does not
mean that Member States are completely autonomous. The CJEU requires that MSs exercise their sovereignty
consistently with higher Community law.18 Nonetheless, Member States’ reluctance to give up their autonomy in the
area of taxation is reflected in the requirement of unanimity in articles 114 and 115 TFEU.19
13
European Union, ‘Border-free Europe (single market)’.
An example of the importance of fiscal sovereignty can be seen in the current developments of the Common Consolidated Corporate Tax
Base (CCCTB), which aims at harmonizing the tax base of the corporation taxes of the different EU Member States. It goes beyond the
scope of this thesis to discuss all the details, but shortly put: due to the fact that the proposed CCCTB has a large impact on the fiscal
sovereignty of Member States and on their tax revenues (through the consolidation element and the formulary apportionment), it will
probably not come to the actual introduction of the CCCTB (maybe a CCTB, without consolidation). Thus, in aspiring to enhance the
internal European market, fiscal sovereignty has to be respected!
15 See Musgrave 2006, p. 167.
16 See Jansen 2011, p. 233. For a detailed discussion of the concept of fiscal sovereignty I refer to Isenbaert 2010 and Douma 2011.
17 See also: COM(2006) 823 final, para 1.
18 See also Jansen 2011, p. 235.
19 See also Jansen 2011, p. 99.
14
16
1.4 The benchmark: international tax neutrality
Exit taxes obstruct European and global mobility. Merely due to the fact that a taxpayer transfers its tax residence to
another country, the taxpayer is confronted with a tax on a form of income that has not yet been realized. Thus,
departing residents are taxed on an accruals basis whereas in a purely domestic situation, transferring residents are taxed
on a realization basis. This difference in treatment poses an obstacle to free movement, as it can impel taxpayers to stay
in their home State. The question then is: how can the obstructing effect of exit taxation be reduced? Taking this as a
starting point, achieving the highest level of European and global mobility is the aim. In order for mobility to flourish
on a European and global level, economic considerations, rather than fiscal considerations, should be decisive with
respect to the economic behavior of taxpayers. Efficiency and productivity are best served when there are no distortions
or disturbances to the market mechanism.20 An efficient allocation implies that production factors should be located
there where they can earn the highest return. Unlimited mobility is a prerequisite for this. When mobility is obstructed
through the imposition of an exit tax, this could result in an inefficient allocation of production factors, harming the
European single market. And therefore the criterion of international tax neutrality is needed; taxation should not
influence the efficient allocation of production factors. This being said, it is again emphasized that fiscal sovereignty has
to be respected, where great value is attached to the principle of territoriality. I will therefore look for a theory on
international tax neutrality which respects the fiscal sovereignty of Member States.
1.4.1
Theories on international tax neutrality
Several theories or views on international tax neutrality can be found in academic literature. The concept dates back to
the late sixties and early seventies,21 and initially focused on capital import neutrality (CIN) and capital export neutrality
(CEN). Later on, the discussion expanded to other “forms” of international tax neutrality, such as capital ownership
neutrality22, market neutrality23, national neutrality and national ownership neutrality24, and inter-nations neutrality25. All
these different theories on international tax neutrality take a ‘comparative’ approach: investment and business decisions
should be unaffected and undistorted, compared to a world in which there would be no taxation. The ‘non-tax world’26
is thus the starting point of analysis in all tax neutrality theories. As for the purpose of this research, I will not discuss
national neutrality and national ownership neutrality, as these theories only seek to maximize national efficiency.27 Taking
into account the overall normative framework set out above, the focus should be on efficiency of the European internal
market in the first place, and sequentially the global market. Discussing a theory aimed at maximizing national efficiency
is therefore irrelevant. I will also leave the concepts of market neutrality and capital ownership neutrality out of the
discussion, as I wish to narrow my focus on the two ‘classical’ theories on international tax neutrality, CIN and CEN,
which specifically focus on direct investments. ‘When CEN is achieved, there is no tax incentive to locate investment in one country
rather than another; CIN instead ensures that in a given country there is no tax-induced competitive advantage of a domestic company over a
foreign company.’28 CEN and CIN are two important principles which states use to justify their right to tax residence and
source,29 and these principles can be employed as a benchmark for assessing the efficiency of taxes affecting crossborder company activity (and thus mobility) in the single market.30 I will also discuss the theory on inter-nations
neutrality (INN), as this theory has a slightly different focus. It looks at the combined effect of different national tax
systems and consequently at the conditions which must exist in each country in order to prevent that investments are
20
See also Kemmeren 2001, p. 69.
See also Musgrave 1959 and Richman 1963.
22 As introduced by Desai and Hines Jr. 2003.
23 As discussed by Devereux and Lorentz 2010.
24 As discussed by Shaheen 2007.
25 As discussed by Vogel 1988.
26 See also Shaheen 2007, p. 207.
27 See Shaheen 2007, p. 209.
28 See also Radaelli 1999, p. 6.
29 See Ajinkya 2010, par. 1.
30 See also Radaelli 1999, p. 6.
21
17
favored in one country over the other.31 In the context of European and global mobility, a theory which considers the
effects resulting from the interaction of MSs might be useful.
1.4.1.1 Capital export neutrality (CEN)
Starting from a point of no taxation, the theory of capital export neutrality seeks a tax system that does not distort the
locational allocation of investment capital. Capital export neutrality has therefore also been called locational neutrality32 or
‘home neutrality’33 since it takes the perspective of the country of residency. The notion of capital export neutrality
holds that an investor should pay the same total tax,34 irrespective of whether he receives a given investment income
from foreign or from domestic sources.35 It is often argued that when satisfied, capital export neutrality is efficiency
enhancing, because it produces a more efficient allocation of capital on a global level.36 As a result, global welfare will be
enhanced as well.37 Capital should be invested in the same locations where such capital would have been invested had
there been no taxes. The investment decision is then tax neutral.38
In the context of investments in a business, the concept of capital export neutrality can be displayed the following:39
Figure 2
Figure 3
The following example illustrates the notion of capital export neutrality from a Dutch perspective:
31
See Vogel, 1988, p. 313.
See Knoll 2009, p. 31.
33 See A.C.G.A.C. de Graaf 2004, p. 130.
34 Total tax, meaning domestic plus foreign tax.
35 See amongst others: Musgrave 1959; Vogel 1988, p. 311; and Kemmeren 2001, p. 71.
36 See amongst others: Knoll 2009, p. 3; Bond et al. 2000, par. 4.2; Radaelli 1999, p. 667; and Desai and Hines Jr. 2003, par. 3.1. However,
some authors have a different opinion. See for example Weber and Kemmeren, who believe that taxation based on the universality principle
creates a non-neutral and therefore inefficient tax system (Weber 2005, p. 116 and Kemmeren 2001, p. 75).
37 See Desai and Hines Jr. 2003, par. 3.1.
38 See also Musgrave 1959 and Shaheen 2007, p. 207.
39 Note that there are many more options imaginable.
32
18
Example: Assume that the Dutch business in figure 2 is a computer manufacturer. The company wants to expand, and
has two options: 1) expand to a low-tax country where production costs are high (e.g. the home country), or 2) expand
to a higher-tax country where production costs are low. Companies are likely to locate in the country with the highest
after-tax return on their investment. If the lower tax payment of the first option offsets the higher costs of producing
each computer, ultimately resulting in a higher after-tax return on the investment than option 2, differences in the
amount of tax payable change a company’s decision about where to locate. This means that CEN does not hold. CEN is
only satisfied when it makes no difference whether a taxpayer (either natural person or a legal entity) invests in a
business in the home country or in a foreign country. More specifically, the total tax burden should be equal in both
option 1 and 2. Only then, tax considerations do not influence whether the Dutch entrepreneur invests its capital at
home or abroad, satisfying the normative goal behind CEN.
Under the theory of capital export neutrality, source-based taxation is considered inefficient.40 Think about the
aforementioned example of the Dutch computer company. If the countries, represented by option 1 and 2, both use a
source-based system for the taxation of business profits, and we assume that companies base their investment decisions
on the after-tax rate of return, this would lead to an allocation of business investments which is inefficient from a global
perspective. Indeed, starting from the point of a ‘non-tax world’, the pre-tax rate of return should be decisive in where to
invest, not the after-tax rate of return since under source-based tax systems this will lead to a notably different allocation
of capital.41 From a classical point of view on tax neutrality, only a pure residence-based tax system would satisfy
CEN.42 Such a system is based on the universality principle, as it concerns taxation on the worldwide income of the
resident.43 However, we do not live in a world where all countries employ a residence-based system of taxation. Many
countries also use source-based tax systems leading to distorted outcomes. CEN then requires that these distortions are
neutralized, which means that residence-based taxes should be designed to offset any source-based taxes exactly.44 This
might be achieved when residence countries tax the worldwide income of their residents under the provision of
unlimited foreign tax credits.45 Such a tax system would satisfy CEN.46 However, even when CEN is satisfied from a
national perspective, investors who reside in different countries will still obtain a different after-tax return when
compared to one another.47 This is caused by the fact that each country has a different tax system (with respect to for
example tax base, rates, and implementation).
1.4.1.2 Capital import neutrality (CIN)
Starting from a point of no taxation, the theory of capital import neutrality seeks a tax system that does not distort the
location of the investors (i.e. where capital comes from). Whereas CEN takes the perspective of the country where the
40
See Shaheen 2007, p. 207.
See also Horst 1980, p. 795.
42 See amongst others: Musgrave 1959 and Green 1993, p. 29.
43 See Weber 2004, par. 3.2.1.
44 See Bond et al. 2000, par. 3.2.
45 See also Desai and Hines Jr. 2003, par. 3.1; Bond et al. 2000, par. 3.2; Knoll 2009, p. 4; Horst 1980, p. 796; Ajinkya 2010, par. 2.1.1; and
Graetz and Warren Jr. 2006, p. 1197.
46 Assume that the computer company, who resides in the Netherlands, has decided to set up a production facility in Spain. Reason for this
is that, due to the current economic crisis, many people are facing unemployment in Spain. Following the normal rules of supply-anddemand, labor has become relatively cheap in Spain. Since this particular Dutch computer company is labor intensive, production is
consequently cheapest to pursue in Spain. Further assume that the Netherlands impose a 25 percent income tax and that Spain imposes a 15
percent income tax. For the Netherlands to satisfy CEN, Dutch investors must pay the same 25 percent tax on income earned in Spain as
they pay on income earned in the Netherlands. This requires that the Netherlands tax its residents on their worldwide income and provide a
foreign tax credit for the full amount of tax paid in Spain. Under this tax system, the computer company based in the Netherlands and
investing in Spain will pay tax in Spain on the income derived from that country at a rate of 15 percent. The company will also be taxed at a
25 percent rate in the Netherlands on that particular income, since residence-based taxation involves, by means of the universality principle,
the worldwide income. However, in the Netherlands, the computer company will receive a credit for the 15 percent paid in Spain. It will,
thus, have to pay 10 percent of its Spain earning to the Netherlands in taxes, which leaves the company with a total fixed tax payment equal
to 25 percent of its income. Hence, for the Dutch taxpayer, CEN is satisfied.
47 See also Smit 2011, par. 3.3.3.
41
19
investor resides, CIN takes the perspective of the location of the investment, i.e. the taxing jurisdiction.48 Tax
considerations should not influence whether a particular investment is made by domestic investors or foreign
investors.49 CIN is thus satisfied by a tax system in which business considerations, and not tax considerations, determine
who makes which investments. The notion of capital import neutrality holds that investments originating in various
states should compete on equal terms in the capital market of any state, irrespective of where the investor resides.50
Thus, investors who invest in one particular country are subject to the same treatment, namely that of the country of the
source of the income generated by the investment.51 This enables a level playing field for investors and their foreign
competitors,52 since CIN ensures that in a given country there is no tax-induced competitive advantage of a domestic
company over a foreign company.53 Whereas CEN is believed to promote efficient production, it is argued that CIN
fosters competitiveness54 and efficient saving55. The condition for the absence of any distortion in the market and thus
for there to be no tax-induced advantage is that all firms in a given jurisdiction should face the same effective tax rate.56
In the context of investments in a business, the concept of capital import neutrality can be displayed as follows:57
Figure 5
Figure 6
The following example illustrates the notion of capital import neutrality from a Dutch perspective:
Example: Assume that within the Dutch market, there are two competing firms; one owned by a Dutch investor and
one owned by a French (EU) investor. In this situation, CIN is only satisfied when both investors are taxed at the same
rate. If they are taxed differently, CIN will not hold as this would mean that they are competing on unequal terms,
resulting in a distortion of international tax neutrality as it is to be understood under CIN. Assume that the company,
residing in France, invests in a PE in the Netherlands. CIN requires that the French investor pays tax at the same rate as
Dutch investors in the Dutch market. Assume that the Dutch investors in the Netherlands pay tax at 25 percent. On the
merits of non-discrimination, all investors in the Netherlands, whether Dutch residents or not, pay 25 percent tax to the
Dutch treasury. Hence, if France does not tax the Dutch income of the French investor, then both groups of investors
(Dutch and French) will pay tax at the same rate, satisfying CIN.
48
See also Shaheen 2007, p. 208.
See Knoll 2009, p. 3.
50 See also: Musgrave 1959 and Kemmeren 2001, p. 72.
51 Richman (Musgrave) 1963 and Vogel 1988, p. 311.
52 See also Kemmeren 2001, p. 72.
53 See C.M. Radaeilli 1999, note 5.
54 See amongst others: Kemmeren 2001, p. 75; Richman 1963, p. 8; and Knoll 2009, p. 18;
55 See Desai and Hines Jr. 2003, par. 3.1.
56 See amongst others: Richman 1963; Horst 1980, p. 794; Bond et al. 2000, p. 32; Graetz and Warren Jr. 2006, p. 1197; and Desai and
Hines Jr. 2003, par. 3.1.
57 Note that there are many more options imaginable.
49
20
It follows from the aforementioned example that only a territorial tax system, or source-based tax system, would satisfy
CIN.58 In such a system, the home country does not tax its residents on the income they earn abroad. Income is taxed
only at its source. In the country where the investor resides foreign income and capital is exempt from tax.59 It should
be noted that capital can only come into existence by labor and saving.60
1.4.1.3 Inter-nations neutrality
Complete neutrality is not possible; taxation is, especially in an international context, non-neutral in its nature. 61 Indeed,
we have to deal with many different tax systems with diverging tax bases and rates. Complete tax harmonization is not
realistic (yet). Inter-nations neutrality represents a ‘second best’ theory on neutrality. It accepts that complete neutrality
can’t be achieved. It is argued that ‘second best’ neutrality can then be achieved if and when every state respects the
degree and shape of non-neutrality which has been caused by another States’ tax system.62 This implies that neither State
will try to use its taxing power to influence the relative prices of goods, services, activities, production inputs, etc. and
thus, ultimately, influence the allocation of production factors.63 Inter-nations neutrality focuses on the relation between
the level of taxation, on the one hand, and the level of state-provided services or benefits, on the other.64 The reason for
taking such an approach is that the level of such benefits is as important as the level of taxation for an investor.65 Internations neutrality is then satisfied when a taxpayer carrying out an income producing activity in another state and using
the states facilities (e.g. infrastructure, security, economic stability, education, and so on) is taxed no more than any
other taxpayer who, under the same circumstances, uses these facilities to the same extent.66 This can be achieved only
by restricting each country to tax income from domestic sources.67 This implies that, as with CIN, inter-nations
neutrality can only be satisfied by a territorial or source-based tax system. Residence-based taxation would distort the
relationship between taxation and state-provided services and benefits, where the foreign investor would be at a
disadvantage.
1.4.2
Critical analysis
True neutrality will only be possible if and when national tax systems are unified, implying that there are absolutely no
distortions due to the imposition of taxes. Without any distortions, there will be an optimal allocation of production
factors. Optimal in this sense means that production factors should be allocated there where they can earn the highest
return,68 leading to a high level of efficiency. Economic considerations should be decisive in this respect, not fiscal
motives.
As tax systems have not been harmonized or unified complete neutrality is not possible. In this respect, the three
theories discussed – CIN, CEN, and INN – look for achieving a more limited form of international tax neutrality. They
all limit their scope to some aspect of international investments.69 CEN focuses on the supply of capital investments70
58
See also: Knoll 2009, p. 6 and p. 14; Vogel 1988, p. 311; and Weber 2004, par. 3.2.1;
See amongst others: Knoll 2009, p. 7; Kemmeren 2001, p. 73; Graetz and Warren Jr. 2006, p. 1197; Vogel 1988, p. 311; and Horst 1980,
note 3.
60 See Gunnison Brown 1936, p. 63.
61 See amongst others: Richman (Musgrave) 1963; Vogel 1988, p. 313; and Kemmeren 2001, p. 70.
62 N. Ture, ‘Taxing Foreign Source Income’, via Vogel 1988, p. 313; and Kemmeren 2001, p. 74.
63 Ibid.
64 See Vogel 1988, p. 313.
65 Ibid; ‘If the tax burdens in countries A and B are identical, but the investment in country B may benefit more from public goods, the
investor, all other things being equal, will make his investment in B.’
66 Compare Vogel 1988, p. 313-314 and Kemmeren 2001, p. 74.
67 See Vogel 1988, p. 314.
68 See also: Kemmeren 2001, p. 70;
69 See also: Vogel 1988, p. 312 and Smit 2012, par. 2.1
70 As discussed by Horst 1980, p. 797: in the capital exporting country, demand for capital is fixed and supply should be taken as a variable.
59
21
and CIN focuses on the demand of capital investments.71 Vogel argues that CIN and CEN cannot be satisfied at the
same time without, as stated before, harmonizing tax rates.72 Inter-nations neutrality has a slightly different focus than
CIN and CEN. It looks at the combined effect of the tax systems and consequently at the conditions which must exist
in each country in order to prevent that investments are favored in one country over the other.73 Thus, basically, the
focus of INN is on the benefit principle. In reality, when striving for true neutrality, all relevant factors have to be
considered; focusing on only one aspect out of the totality is, in itself, non-neutral.74
One might wonder at this point whether it is even feasible to use on of the theories as a benchmark in this thesis, since
they all are focused on a single aspect. Fundamentally, international tax neutrality implies that taxation should not
influence the efficient allocation of production factors. Economic rational behavior should not be obstructed through
taxation. However, (at least) one particular theory is needed in order to give some grip and specific substance to the
general and somewhat abstract notion of international tax neutrality. Striving for a perfect benchmark will not serve the
overall framework set out in this chapter. The overall goal of this normative framework is to achieve the highest level of
European and global mobility, whilst at the same time respecting the fiscal sovereignty of MSs. Thus, the aim is not
perfect neutrality. True neutrality in the real world is not possible, so I do not wish to achieve true neutrality in this
thesis. Additionally, the aspiration level of the theories themselves is not the achievement of perfect neutrality either.75
All theories are unsatisfactory if one strives for complete and perfect neutrality. Therefore, the focus of the theories is
always on a second best form of neutrality. In order to find a proper second best neutrality for the purpose of serving as
a benchmark for this research, I will critically analyze these different theories on international tax neutrality and discuss
their particular benefits and shortcomings.
CEN implies residence-based taxation. Residence-based tax rules are generally easier to apply and the trigger point for
tax liability is more certain; it is simpler to determine the state of residence than to conclude the source of a specific
income stream.76 However, residence-based taxation in an international context can lead to implementation problems,
as income and capital flows have to be monitored; exercising full-residence based taxation can be practically
unfeasible.77 It can moreover lead to manipulation problems, as it is beneficial for a taxpayer to move its residence to a
low-tax jurisdiction.78 CEN is also intrinsically connected to the credit system, a system which is difficult from an
administrative perspective.79 In addition, CEN harms company efficiency; companies in a lower-tax jurisdiction who
run their business less efficient can still yield a higher after-tax rate of return than the foreign owner of an efficient
company.80 It has also been argued that a disadvantage of a CEN-based system is that it neutralizes the effects of tax
incentives provided by the host country, aimed at promoting local economic development and investment.81 On the
plus side, exclusive residence based taxation can ensure vertical equity; considering worldwide income (universality)
allows applying progressive tax rates, as dictated by the ability to pay principle.82
71
As discussed by Horst 1980, p. 797: in the capital importing country, supply for capital is fixed and demand should be taken as a variable.
In literature this is widely accepted, see for example Knoll 2009, p. 4-7 and Horst 1980, p. 796-797.
73 See also Vogel, 1988, p. 313.
74 See Vogel, 1988, p. 313
75 Indeed, as discussed the theories all take a certain perspective, a limited scope, in which a certain level of neutrality can be achieved.
76 See Ajinkya 2010, par. 2.1.1.
77 See also Shaheen 2007, p. 225.
78 However, it should be emphasized that taxation is only one of the elements which might influence the location of the place of residency.
79 See Smit 2012(II), p. 90.
80 Ibid, p. 89.
81 Ibid., p. 90. However, I personally would not label this as a disadvantage (or advantage) of a theory which strives for international tax
neutrality; an instrumental tax measure is actually aimed at influencing taxpayer’s decisions and behavior, and is thus non-neutral by
definition. It is unfortunate that development and investment efforts do not result in what they aim to achieve, but this is not a disadvantage
of a system aimed at international tax neutrality.
82 See Green 1993, p. 29.
72
22
CIN implies source-based taxation. An important disadvantage of a CIN-based system is that higher taxes in the host
country (source State) can be circumvented more easily by moving capital to a lower tax jurisdiction.83 In principle, CIN
disregards the ability to pay principle, since the source country taxes only a fraction of a taxpayer’s total worldwide
income.84 Progressivity is subsequently violated as well, due to the fact that the rate of tax is not based on the total
income of the taxpayer.85 Nevertheless, source-based taxation can be very well justified by virtue of the benefits
principle.86 It follows that the host country is entitled to impose a tax on non-resident taxpayers in order to cover the
costs they impose on the public sector87 or in order to tax location-specific rents88.
INN is strongly focused on the above mentioned benefit principle. As such, the theory has a slightly different focus
than CIN and CEN. It looks at the combined effect of the tax systems and consequently at the conditions which must
exist in each country in order to prevent that investments are favored in one country over the other.89 As for the theory
on inter-nations neutrality, it is obviously true that taxation is not an isolated element of an economy. Vogel argued that
‘If the tax burdens in countries A and B are identical, but the investment in country B may benefit more from public goods, the investor, all
other things being equal, will make his investment in B’.90 Thus, the level of taxation is not the only reference base for
establishing neutrality, since the level of state-provided benefits is of important influence as well. More specifically, the
focus is on benefits for investors, not general public expenditures. The most important benefits include security,
economic stability, infrastructure and direct securities.91 It is subsequently assumed that the relation of taxes and these
public goods is equal for all countries.92 Vogel bases his argument on Gandenberger who points out that the level of
taxation in any country is likely to correspond to the degree to which public goods are provided. 93 Gandenberger thus
refers to general public expenditures, whereas Vogel’s reference point only concerns public expenditures benefiting
investors. ‘Neutrality applied only to certain economic processes, to a selection out of totality, like capital export or import, would always be
less than full neutrality; it would be non-neutral’, said Vogel. However, he essentially also makes a selection out of totality by
only focusing on state-provided benefits for investors. I believe the level of taxation is not merely related to the
provision of these kinds of benefits for investors, as Vogel’s methodology suggests (‘all other things being equal’). I’d like to
refer to the general interaction of public expenditures and revenues (government finances). Green states: ‘the income tax
in general, and the corporate income tax in particular, cannot plausible be viewed as a form of benefit fee or effluent charge. There is no
definite relationship between corporation’s taxable income and the costs that the corporation imposes on the public sector.’, and he
continues: ‘Moreover, foreign direct investment often provides substantial benefits to the host country, independently of any tax revenue. It is
likely that these benefits sometimes exceed the costs that the corporate taxpayer imposes on host governments’. Translating this to Vogel’s
inter-nations neutrality, the relationship between state-provided benefits and taxation becomes problematic for me. If
there is, for example, a high level of unemployment or a highly aging population, public expenditures will rise, which,
from the perspective of an investor, cannot be seen as state-provided benefits. However, the level of taxation will most
likely have to rise as well; the higher public expenditures have to be covered to keep the government finances ‘in order’.
In my opinion, there is a stronger relation between taxation and public expenditures in general (together they are
dictated by the state of government finances). Additionally, in a given period, the level of taxation does not necessarily
coincide with the level of state provided benefits, due to for example a stagnating economy. Infrastructure serves as a
good example. The level of infrastructure in a certain country can be high, due to government investments which have
See Smit 2012(II), p. 90, with reference to OECD (1991), p. 40.
Ibid.
85 Ibid.
86 See Green 1993, p. 29-30.
87 Such as publicly provided goods and services that non-residents benefit from directly, or costs which are made to cover for external costs
such as pollution.
88 See also Green 1993, p. 30; Companies are able to earn pure economic profits (rents) by taking advantage of some specific feature of a
country. The host country should be entitled to tax these location-specific rents.
89 See also Vogel, 1988, p. 313.
90 Ibid, p. 313-314.
91 Ibid, p. 313.
92 Ibid, p. 314.
93 O. Gandenberger via K. Vogel 1988, p. 313.
83
84
23
been made in the past, when the budget allowed these kinds of investments. If the economy stagnates or gets into a
recession and the government finances are consequently under pressure, the level of taxation may very well rise without
this directly being reflected in certain state-provided benefits and facilities. Put shortly, I do not support the assumption
that the relation of taxes and state-provided benefits is equal for all countries. In my perception, it is not even equal
within a single country over different periods of time. In addition, I feel that it is artificial to only take state-provided
benefits and facilities out of the entire arsenal of government finances. I also wonder how the relation between stateprovided benefits and taxation would hold in times of economic crisis.94 There is thus, no full correspondence between
the level of public goods and services offered and the level of taxation. It might, however, be argued that this is not
relevant; what is crucial is that there is a certain link between taxes and the level of public goods and services offered,
and that in order to satisfy INN, this link cannot be disturbed by taxation to the disadvantage of transnational
investments.95
1.4.3
Synthesis: international tax neutrality serving as a benchmark
In the previous subparagraph, I have provided a critical analysis of the different theories on international tax neutrality.
In this section, I will discuss which of the theories is to be preferred in the light of the overall normative framework, i.e.
in the light of the European internal market and fiscal sovereignty. I will focus on CEN and CIN. INN focuses not
merely on taxation but on the relation between taxes and public goods. Moreover, by virtue of source based taxation,
INN can also be satisfied under CIN. Consequently, INN can, to some extent, be seen as an alternative for CIN (and
vice versa). I have put some question marks with the validity of the theory of INN, and considering these issues I prefer
to focus on the conservative and generally accepted theories of CIN and CEN. In my opinion, these theories are also
better applicable to the issue of exit taxation (i.e. a clear focus on taxation) and more compatible with the overall
normative framework. But which of the two theories is most compatible with the internal European market, on the one
hand, and fiscal sovereignty, on the other?
1.4.3.1 International tax neutrality and the internal European market
Competition is one of the pivot points of the internal European market.96 Competition amongst enterprises is one of
the driving forces of modern economies: competition ‘gives consumers choice, puts downward pressure on prices, rewards
innovation, attacks inefficient use of resources and helps to create jobs’.97 As laid down in the TFEU, the focus is, however, not
simply on competition, but rather on fair competition. Only when competition is fair, the single market can truly
become a level playing field. Distortions caused by taxation will not contribute to the achievement of this level playing
field. Competition is also needed to achieve the highest possible level of efficiency within the EU, which is another
important element of the internal European market.98 “Only an efficient Internal Market will foster Europe’s competitiveness”.99
The greatest efficiency is achieved when production factors yield the highest possible return.100 A high return is, in turn,
achieved by a market mechanism with as little government intervention as possible.101 In line with this reasoning, tax
legislation may not influence, or at least influence as little as possible, the allocation of production factors. This is exactly
where tax neutrality comes in. But which theory on international tax neutrality yields the highest level of efficiency,
fosters competition, and thus is most beneficial for the internal European market?
For example, looking at the current situation in Greece, taxes keep on rising whereas no particular state benefits are provided. Taxes only
rise to get the budget in order (very shortly put).
95 See also Smit 2012(II), p. 91-92.
96 See for example article 3 TFEU.
97 Euromove, ‘EU competition policy’.
98 European Union, ‘Border-free Europe (single market)’.
99 See Frits Bolkestein, Commissioner for the Internal Market, in: The Internal Market – ten years.
100 See Weber 2005, p. 116.
101 Compare Vogel 1988, p. 313 and Kemmeren 2001, p. 69.
94
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Traditionally it was believed that CEN would lead to an efficient allocation of production factors, whereas CIN is
considered to be inefficient. According to Peggy Musgrave, for example, CEN ensures that each national supply of
capital available at that tax level will be allocated internationally in its most efficient manner.102 The fact that this leads to
disparities between enterprises competing in the same foreign country is not considered important on efficiency
grounds. CIN on the other hand is seen as inefficient, because tax motives can play an important role in the allocation
of production factors, resulting in tax competition between Member States.103 More recently it has however been coined
that CIN, not CEN leads to more efficient outcomes.104 Indeed, the greatest possible efficiency is achieved when
production factors yield the highest possible return. Weber argues that this can only be achieved under CIN.105
Additionally, Kemmeren argues that taxation based on the universality principle creates a non-neutral and therefore
inefficient tax system, due to the differences in residence taxation of the competitors on the relevant market.106 Finally,
Horst came, after a mathematical analysis, to the conclusion that in reality export neutrality restrains international
investment, while capital import neutrality promotes it more than is compatible with world efficiency.107 My conclusion
would be that, if efficiency is to be promoted, preference should be given to CIN.
Additionally, CIN fosters competition.108 CEN on the other hand, leads to unfair competition, due to the fact that
residents of states with a relatively low level of taxation will have a higher after-tax return, and thus a competitive
advantage.109 This will defer residents of states with a relatively high tax level from investing in states with a low tax
level. CEN thus distorts international competition.110 Moreover, ‘CIN is essentially supposed to be far superior to CEN in the
sense that it minimizes distortions in cross-border capital flows by not giving any special incentive for businesses to relocate towards low tax
jurisdictions’.111 Thus, under CIN the conditions of competition in the State in which the origin of the income lies are not
distorted which fosters efficiency within the internal European market. CEN requires that the competitive advantage
achieved by investing in a certain state is neutralized by the home state.112 It fosters fair competition within the home
market but not in the international playing field, as there are differences between national tax systems. CEN can only be
truly satisfied with worldwide harmonized tax systems and rates. Taking this into account, CEN would then also be
satisfied by source-based taxation (thus under CIN), because capital would then be subject to the same tax rate
wherever invested.113 When viewed from this perspective, CIN, by virtue of its feature of source-based taxation, would
be superior because of the practical unfeasibility of exercising full residence-based taxation under CEN.114
1.4.3.2 International tax neutrality and fiscal sovereignty
The second pillar of this normative framework is fiscal sovereignty. It was made clear that fiscal sovereignty of MSs is of
key importance. In an open economy, there are two widely recognized and accepted national entitlements to tax income:
one to the country of residence of the income receiver and one to the country of the source of the income.115 With
respect to the first, i.e. residence based taxation, which is, in principle, required in order to satisfy CEN, sovereignty implies
that countries will wish to control the tax treatment and total tax burden on the foreign-source income of its resident
102
See Richman (Musgrave) 1963.
See Weber 2005, p. 116-118.
104 Compare for example Weber 2005, p. 116 and Kemmeren 2001, p. 75.
105 See Weber 2005, p. 117.
106 See Kemmeren 2001, p. 75.
107 See also Horst 1980, p. 796-798.
108 See amongst others: Kemmeren 2001, p. 75; Richman 1963, p. 8; and Knoll 2009, p. 18.
110 This would only not be the case if all tax rates where harmonized.
111 See Ajinkya 2010, par. 2.1.2.
112 See also Weber 2004, par. 3.2.1.
113 See Shaheen 2007, p. 225.
114 Ibid.
103
25
taxpayer.116 In the context of source based taxation, which satisfies CIN, fiscal sovereignty implies that countries will claim
their entitlement to tax income arising within their borders, including that repatriated by foreign investors.117 Member
States’ sovereign right to tax residents on their worldwide income and non-residents only on their source income, and
no more than that is reflected by the principle of fiscal territoriality.118 Musgrave argues that: ‘this entitlement to tax at source
is the bedrock of most international tax treaties, which recognize as a fundamental entitlement the right of a jurisdiction to tax all income
arising within its borders’.119 Moreover, Jansen has put forward the following: “tax sovereignty reflects the inseparable relation
between the sovereign state and its inherent prerogative to levy taxes within its territorial jurisdiction, as recognized by international law”.120
It follows that fiscal sovereignty is closely related to the principle of fiscal territoriality; in order to justify taxation, there
should be a nexus between the item of income and the territory of the particular State.121 Thus, the ‘type’ of sovereignty
applied in this thesis is territorial sovereignty.122 As the principle of fiscal territoriality reflects fiscal sovereignty, a theory
which takes source-based taxation as a starting point would seem appropriate as a benchmark. Income should be taxed
in the tax jurisdiction where the economic income generating activities take (or took) place. It can be argued that this is
also logical based on the benefit principle; the state that enabled the income generating activities should also have the
right to tax the income that was generated.123 It follows that when source-based taxation is taken as a requirement, CEN
has to be disregarded as a benchmark. CIN and the concept of fiscal sovereignty go together perfectly. It implies that
MSs are entitled to tax income arising within their territory.
1.4.4
Conclusion: CIN as a benchmark
It follows from the synthesis that CIN is the most appropriate benchmark for the purpose of this research. Taking CIN
as a benchmark will best serve the overall goal of this normative framework, which is to enhance European and global
mobility (a liberal goal) whilst at the same time respecting the fiscal sovereignty of MSs. I again want to emphasize that I
am not striving for perfect neutrality but for a second best approach. And for the reasons set out in the previous
sections, I believe that CIN is the best approximation of international tax neutrality in the light of the overall
framework.
Moreover, the application of CIN in the area of direct taxation on active business investments seems to be in line with
current practice.124 The Dutch legislator takes CIN as the starting point in the context of cross-border active investments.
This is explicitly mentioned in the Memorandum of the Dutch tax treaty policy 2011 and can be derived from other
sources as well.125 Reason for taking CIN as the starting point is that the Netherlands has an open economy with a
relatively small domestic market. It is dependent on the foreign market which makes the elimination of obstacles (such
as double taxation) and barriers to international trade crucial. Consequently, the Dutch government considers it to be
important that Dutch investors in foreign markets can invest under the same conditions as other investors, and that
foreign investors can invest under the same conditions as other investors in the Netherlands. To achieve this, it is
argued that a tax should be levied in the jurisdiction where the activities are carried out.126 This is in line with the notion
of CIN.
116
Ibid,
Ibid., p. 172.
118 See paragraph 1.3 and Kiekebeld and Smit, in: Jansen 2011, p. 132.
120 See Barents 2011, p. 58.
121 For a detailed analysis and discussion of the concept of fiscal sovereignty, see also Isenbaert 2010 and Douma 2011.
122 See also Isenbaert 2010, par. 3.5.
123 See Green 1993, p. 29-30. Moreover, it concerns active business incomes, see Avi-Yonah 2009, p. 16.
124 For example, residents are taxed in the Netherlands for their worldwide income, but foreign profits and losses are exempt (territoriality).
Non-residents are only taxed for profits derived in the Netherlands (territoriality). The fact that this is current practice does not mean
however that this should be the benchmark for the normative framework. It is however in my opinion more feasible to choose a criterion
which matches current practice, since this will also improve the usability of the advice that will be given in this research.
125 See Memorandum Dutch tax treaty policy 2011, paras. 1.2.3 and 1.3.2, and Rijksoverheid – Belastingverdragen.
126 See also Rijksoverheid – Belastingverdragen.
117
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In the context of exit taxation, CIN and fiscal sovereignty go together perfectly. CIN ultimately implies source based
taxation. When CIN is applied to exit taxation, it is required that MSs will not lose their fiscal sovereignty, i.e. their
source country entitlement. I will, however, not only benchmark the exit tax provisions as such against CIN, but I will
also analyze the conditions under which an exit tax can be imposed, i.e. the conditions which can be applied under CIN
in order to secure the source country entitlement. Similarly, I will also analyze the tax treatment and conditions which
the Netherlands applies to immigrating businesses and to cross-border transfers of assets in the light of CIN, in order to
achieve the highest level of European and global mobility whilst safeguarding MSs fiscal sovereignty.
27
2.
EMIGRATION OF A BUSINESS
2.1 Introduction
2.1.1
The purpose and justification of exit taxes
The tax which is levied upon the emigration of a business is commonly called an ‘exit tax’. Exit taxes serve to secure
certain tax claims with respect to unrealized income accrual (tax deferrals). It is generally assumed that without exit
taxation these tax deferrals may escape taxation in the accrual jurisdiction as a result of the taxpayer (and all other
connecting factors, especially the source of income) leaving that jurisdiction.127 However, this assumption is not
universally shared. It might, for example, be argued that tax deferrals will not necessarily escape the jurisdiction of the
emigration state if a system of some sort of compartmentalization were to be applied.128 Under such a system, the
emigration jurisdiction retains its taxing right with respect to tax deferrals; in case of realization in a foreign jurisdiction,
the emigration State will have the right to tax those value increases and gains which came to existence during the period
in which the taxpayer was a resident of the emigration state.
Exit taxes are imposed on ‘departing’ residents. As ruled by the Court of Justice of the European Union (CJEU), exit
taxes are in general justified by virtue of fiscal coherence, the principle of fiscal territoriality combined with a temporal
component, and the balanced allocation of taxing powers.129 In Dutch tax law, such provisions can also be found.130
Articles 3.60 and 3.61 of the Personal Income Tax Act 2001 as well as articles 15c and 15d of the Corporate Income
Tax Act 1969 are called settlement provisions.131 They serve to secure taxation on 1) unrealized capital gains and hidden
reserves, fiscal reserves, goodwill and other value increases which normally would not be expressed (and taxed) in the
annual profit, and 2) unrealized gains in respect to single assets transferred abroad. In a purely domestic situation,
taxation on these items of income would be postponed until consumption (i.e. actual realization). However, since the
realization will take place in the future and outside the Dutch taxing jurisdiction, there is no guarantee for the
Netherlands of recovery of the tax claim. For the legislator this is the perceived rationale behind exit provisions; it is
argued that without these rules it would not be possible to tax gains upon realization, resulting in tax base erosion.132 As
previously mentioned, this view is not shared by all since there are alternatives such as a system of
compartmentalization.
127
See also Terra and Wattel 2012, p. 505.
In his conclusion to the case HR BNB 2013/94, Advocate General Wattel has discussed such a system in the form of ‘succeedingresidency-compartmentalization’ (in Dutch: opvolgend-inwonerschap-compartimentering). See Conclusion A-G Wattel 28 August 2012.
Moreover, Kemmeren has also introduced a system of compartmentalization (i.e. a system of residence-based compartmentalization), by
virtue of which the exit country will not lose its tax claim upon emigration. See Kemmeren 2012. Finally, a compartmentalization-system has
been proposed by the German Bundesfinanzhof as well. See Bundesfinanzhof of 28 October 2009, I R 99/08. In chapter 8, I will discuss
these systems in more detail, and analyze whether these might be an alternative for the current system of exit taxation.
129 See for example CJEU National Grid Indus (Case C-371/10), par. 18.
130 These provisions are legal fictions, aimed at creating a taxable moment. According to article 3.8 PITA 2001130, all benefits obtained from
a business belong to the taxable profit. This total profit concept implies that all benefits obtained during the entire fiscal life of the business
have to be taken into account. There are, however, situations in which there is no direct detectable benefit when applying the regular rules
for determining the annual profit. Obviously, the Netherlands does not want to lose its rightful claim to tax latent benefits. Therefore,
several provisions which are aimed at creating a taxable moment are included in the Dutch tax law. See paragraph 2.6.2.
131 See paragraph 2.6.3.
132 See Kamerstukken II 1998/99, 26 727, no. 3, p 116-118.
128
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2.1.2
Why are exit taxes problematic?
The problems surrounding exit taxation are caused by two main issues. The first issue stems from the fact that taxing
rights may not be exercised contrary to the EC treaty freedoms. The most important freedom in this context is the
freedom of establishment (article 49 TFEU). The second issue concerns mismatches and disparities between Member
States’ tax systems, which can give rise to double taxation in case a taxpayer transfers its tax residence to another MS.
With respect to the first issue, Article 49 of the TFEU133 reads as follows: ‘Within the framework of the provisions set out below,
restrictions on the freedom of establishment of nationals of a Member State in the territory of another Member State shall be prohibited. Such
prohibition shall also apply to restrictions on the setting-up of agencies, branches or subsidiaries by nationals of any Member State established
in the territory of any Member State. Freedom of establishment shall include the right to take up and pursue activities as self-employed
persons and to set up and manage undertakings, in particular companies or firms within the meaning of the second paragraph of Article 54,
under the conditions laid down for its own nationals by the law of the country where such establishment is effected, subject to the provisions of
the Chapter relating to capital.’ The freedom of establishment thus encompasses both market access (the right to take up and
carry on activities as a self-employed person and to set up and manage enterprises) and market equality (the right to
treatment as a domestic entrepreneur in the Member State (MS) of establishment).134 Additionally, it covers both
primary and secondary establishments. The right of establishment is only applicable to individuals having an EU
nationality and legal entities having their principal place of business within the Union.135
Obviously, exit taxes can pose an obstacle to free movement, i.e. the freedom of establishment. Exit taxes only apply to
persons moving their tax residence abroad; in a purely domestic context, tax latencies which represent unrealized
income are, in general, only taxed upon realization. In case of the transfer of a taxpayer carrying out an enterprise or in
case of the transfer of asset components abroad, the exit State will try to tax the unrealized income before actual
realization. This difference in treatment can be an obstacle to free movement, since these taxes can seriously hinder an
individual’s or company’s ability to move to another state. A tax is imposed on something which is not there yet and as
a result, the taxpayer has to pay cash which he or she may not have.
For legislators, matters aren’t made any easier either.136 There are no specific unilateral (European) rules in, for example,
guidelines or in the OECD model tax convention and commentary on how to treat individuals or legal entities who
change their tax residence. Most MSs will try to obtain as much taxing powers as possible and they will use their
national tax system in order to do so. For example, MSs can introduce a fiction into their national law by which assets
are deemed to be alienated instantaneously upon the moment of emigration. Another example includes the elongated
liability to tax.137 In both cases, other MSs can apply a different tax treatment to the emigration and subsequent
immigration of a taxpayer, which can possibly result in double taxation. Additionally, in case of asset transfers, double
taxation might result from mismatches in valuation methods. The point made is that, as a result of the lack of European
coordination, mismatches and disparities between national tax systems are likely to result in the area of exit taxation.
This, again, can hinder an individual’s or company’s ability to move to another state.
133
Ex. article 43 TEC.
134
See also Terra and Wattel 2012.
135
Articles 49-54 TFEU.
136 See also Smit and Peters 2011, p. 227, who report that dr. Reimer put forward that legislators are deadlocked between EU law and tax
treaty law.
137 See also Hji Panayi 2011, p. 247, who argues that exit taxes can be imposed in different ways: ‘They can be included in specific tax treaty
provision between countries or they can be treated as a domestic transaction to which tax treaties do not apply, as the deemed disposal
‘occurs’ immediately before emigration’.
29
2.2 Distinction between ‘types’ of businesses
A. Dutch tax system
In the Dutch system of tax law there is a distinction between businesses carried on by individuals (natural persons) and
businesses carried on by companies (legal entities). The first category of businesses is liable to tax under the Wet
Inkomstenbelasting 2001 (Dutch Personal Income Tax Act 2001, from here on PITA 2001). The second category of
businesses is liable to tax under the Wet op de vennootschapsbelasting 1969 (Dutch Corporate Income Tax Act 1969, from
here on CITA 1969). For both natural persons and legal entities the general meaning of business emigration is the same
(as will be discussed in paragraph 2.6).138 There are, however, also important differences between a business in the
personal sphere and a business in the corporate sphere. The most important feature which separates legal forms falling
under the personal income tax from legal forms falling under the corporate income tax, is whether or not the entity
possesses a legal personality. If the legal form is considered to possess a legal personality, then the entity will be liable to
tax itself and, as such, will fall under the corporate income tax. If the legal form is not considered to possess a legal
entity, then the entrepreneur(s) carrying on the enterprise will be liable to personal income tax. This follows from the
fact that in the absence of a legal personality, profits can only be appointed directly to the individual participants of an
enterprise. There is, however, an additional rule with respect to partnerships. In the Netherlands we distinguish between
transparent partnerships (falling under the personal income tax) and non-transparent partnerships (falling under the
Corporate Income Tax). In this respect, another criterion is used in addition to the legal personality, i.e. the criterion of
free transferability of the partnership interests.139 In general, partnerships do not possess a legal personality. It is,
however, possible for these types of legal forms to be liable to tax under the corporate income tax by virtue of the
criterion of free transferability. If it is not required to have the permission of all partners for the accession or replacement
of other partners, the partnership will be liable to tax under the corporate income tax.
In short, in the Netherlands the presence or absence of a legal personality, combined with the criterion of free
transferability of the partnership interests, is directly related to the legal form of a company and consequently to the
question whether the entity is liable to tax either under the personal or corporate income tax.
The following legal forms are the most important: sole proprietorship or freelancer (eenmanszaak), partnership for
certain professions (maatschap), partnership under common firm (vennootschap onder firma), closed limited partnership
(besloten commanditaire vennootschap), open commanditaire vennootschap (open limited partnership), private limited company
(besloten vennootschap), public company (naamloze vennootschap), cooperative (cooperatie), association (vereniging), and
foundation (stichting). In general, the first five legal forms mentioned before don’t possess a legal personality.
Entrepreneurs carrying on a business through such a form will thus be taxed as individuals under the personal income
tax, for all benefits derived from their enterprise.140 By contrast, the last five legal forms mentioned before are
considered to have a legal personality. The open limited partnership is a ‘special’ kind of legal form which is liable to tax
under the corporate income tax; this form is not considered to possess a legal personality, but it does meet the
aforementioned criterion of free transferability.141 The closed limited partnership, on the other hand, does not meet the
criterion of free transferability. This implies that only with the permission of all other partners it is possible for another
partner to join or be replaced. A closed limited partnership is qualified as fiscally transparent, and, consequently, is liable
to tax under the income tax. Moreover, the legal forms which are considered to be liable to tax under the corporate
138Article 15c CITA 1969 deals with the cessation of residency due to transfer of effective management, but effectuates essentially the same
for legal entities as article 3.60 PITA 2001 does for individuals.
139 It has however been put forward by Zwemmer that the criterion of legal personality and the criterion of free transferability do not fit
together well (see Zwemmer 1978). Moreover, it has also been argued in literature that there is no proper legal foundation for the
differentiated treatment of partnerships (see Geschriften voor de Belastingwetenschap no. 223, p.17-20).
140 This follows from the total profit concept, see article 3.8 PITA 2001.
141 Which means that the accession or replacement of partners is possible without the permission of all other partners. See also article 3(c)
of the State Tax Law Act.
30
income tax (with or without legal personality) are listed in article 2(1) of the CITA 1969. Thus, an enterprise established
according to one of these legal forms is liable to tax itself under the corporate income tax for all benefits derived from
the enterprise.142
Businesses in the personal income tax are carried on by an entrepreneur, who is a natural person. Due to the absence of
a legal personality of the business itself it is not the business but it is the entrepreneur (natural person) who is liable to
tax. This also follows from article 1.1 of the PITA 2001, which states that the personal income tax is levied from natural
persons. The profits derived from a ‘personal’ enterprise are considered to flow directly to the natural person of the
entrepreneur. Strictly, a distinction can be made in the personal income tax between the so-called ‘objective enterprise’
and the ‘subjective enterprise’.143 The objective enterprise is the technical or organizational unit, in the parlance
commonly denoted as the enterprise, undertaking or business. The subjective enterprise essentially refers to the natural
person in his capacity as an entrepreneur. One objective enterprise can be carried on by more than one subjective
enterprise.144 In the PITA 2001, the subjective enterprise is liable to tax; not the objective enterprise. However, without
an objective enterprise there can be no subjective enterprise.145 Article 3.4 of the PITA 2001 provides the following
definition of the entrepreneur: ‘the taxpayer on behalf of whom an enterprise is carried on and who is directly connected to the
obligations of the company’. In article 3.5 PITA 2001, taxpayers who independently exercise a profession are considered to
be entrepreneurs.
At first sight, the distinction between enterprises falling under the PITA, respectively, CITA may seem irrelevant since
the profit for both types of enterprises is calculated according to largely the same set of rules by virtue of the connecting
provision of article 8(1) CITA 1969. This provision states, briefly put, that the profit for enterprises falling under the
CITA 1969 shall be calculated in accordance with the most important provisions of the PITA 2001. There are however
important differences, such as the entrepreneurial facilities in the personal income tax (e.g. the entrepreneurial
deduction and the profit exemption), and the fact that losses from a ‘personal enterprise’ can be settled with positive
results from other sources of income.146 For businesses operating in the corporate sphere, however, there are also
differentiating factors, such as the participation exemption of article 13 CITA 1969, and the fiscal unity regime of
section 2.9 CITA 1969. Another important reason for distinguishing between businesses in the personal sphere and in
the corporate sphere is that the tax rate in the PITA 2001 differs from the tax rate in the CITA 1969.
B. EUCOTAX comparative law
Most countries make a similar distinction in their national tax law systems as the Netherlands does with respect to
individual businesses and legal entities.
142 The total profit concept of article 3.8 PITA 2001 also applies to the CITA 1969, through the connecting provision of article 8 CITA
1969.
143 See amongst others: van Dijck 1967 en Rijkers 1985.
144 Imagine for example a partnership between three lawyers. There is only one objective enterprise (the partnership) but there are three
subjective enterprises (the three lawyers).
145 This has also been put forward by van Kempen and Essers 2011, par. 1.3.2.3.A.a.
146 It goes beyond the scope of this thesis to discuss the entire Dutch tax system in detail. For a general understanding it is, however,
important to realize that the Dutch Personal Income Tax system consists out of three income ‘boxes’. The first box sees to income from
employment, business profits, and income from a primary residence. This income is taxed at a progressive rate, amounting up to 52%. The
second box includes income with respect to profits (both capital gains and regular income, i.e. dividends) from a substantial shareholding.
This income category is taxed at a fixed rate of 25%.146 The third box includes income from savings and investments. With respect to the
rate, the taxpayer is deemed to yield income at 4%, which is taxed at a fixed rate of 30% (resulting in a tax burden of 1,2%). Profit derived
by carrying on an enterprise without legal personality, thus an enterprise falling under the PITA 2001, is seen as a source of income in the
first box. Possible losses from the enterprise can only be settled with other positive results from sources in the first box, such as income
from employment or from a home.
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Firstly, the Austrian income tax system distinguishes between two types of taxpayers, namely natural persons and legal
persons (called “Körpenschaften”).147 The first type is taxed according to the rules of the “Einkommensteuergesetz”, which is
the Austrian Income Tax Act.148 The second type is taxed in accordance with the “Körperschaftssteuergesetz”, which is the
Austrian Corporate Income Tax Act.149 Characteristics which separate the two types are the presence or absence of a
legal personality, the tradability of shares, and the presence or absence of a legal separation between the company and its
owners. Partnerships are treated as transparent, which means that the partners are taxed as natural persons.150 In some
cases, a comparability “test” will be conducted in order to classify foreign legal entities into corporations or
partnerships.151
Under Belgian law, the following business types can roughly be distinguished: individuals exercising a business activity
as self-employed (individual businesses), corporations (legal entities), and other entities such as partnerships and
trusts.152 All types are, however, taxable under the Belgian Income Tax Code 1992 (ITC 1992).153 This Income Tax
Code subsequently distinguishes between, on the one hand, individuals and self-employed persons and, on the other
hand, companies.154 With respect to partnerships, it is noted that these can be qualified as both transparent and nontransparent. The determination of a partnership’s character will be done on the basis of criteria which have been
established in Belgian tax law (thus, independent from the tax treatment which the partnership might be subject to in
another State).155 Similar to the Austrian system, a comparability “test” will be conducted; when a partnership is
comparable to a Belgian transparent entity, the income earned by that partnership will be directly allocated to the
partners156; when the form of the partnership can be compared to that of a Belgian corporate entity, the partnership will
be treated as a company for tax purposes. Central criteria in this test include the presence or absence of a legal
personality157; whether or not the partnership has limited liability for its partners and whether the partnership owns its
own assets or whether the partners own the partnership’s assets directly.158 Other relevant criteria include the presence
or absence of a separation between the partnership assets and the private assets of the partners; the extent to which the
shares in the partnership are transferable; and the automatic dissolution of the partnership in case of a partner’s death or
insolvency.159
147
See Pinetz 2013 (Austria), par. 3.3.
See Pinetz 2013 (Austria), with reference to Austrian Einkommensteuergesetz in the present form: BGBI Nr. 400/1988 as amended by
BGBI I Nr. 22/2012.
149 See Pinetz 2013 (Austria), with reference to Austrian Körperschaftssteuergesetz in the present form: BGBI Nr. 401/1988 as amended by
BGBI I Nr. 22/2012.
150 See Pinetz 2013 (Austria), par. 3.3.
151 See Pinetz 2013 (Austria), par. 3.3.3 with reference to the “Venezuele decision” of the German “Reichsfinanzhof”: See RFH 12.2.1930,
VI A 899/27, RStBl 1930, 444. In this case, the German Court held that tax treatment of a foreign legal entity is determined by the
similarities of the foreign entity with national partnerships or corporations. This means that Austrian private law provisions are decisive with
respect to the tax treatment.
152 See Bruyère 2013 (Belgium), par. 1.1.
153 See Bruyère 2013 (Belgium), with reference to article 2, paragraph 1, sub 1 ITC 1992 for individuals, and to article 2, paragraph 1 sub 5b
ITC 1992 for companies.
154 This was not further discussed in the paper, but was retrieved from the Belgian governmental information web-page:
http://www.belgium.be/nl/belastingen/inkomstenbelastingen/.
155 See Bruyère 2013 (Belgium), par. 1.4.a with reference to T. WUSTENBERGHS, Heffingsbevoegdheid bij grensoverschrijdende
ondernemingswinsten – De vaste inrichting op de helling, De Boek & Larcier, Ghent, (2005), p. 591. See also Commentary on ITC, nr.
179/7 Comm.IB 92, al. 2, 4°.
156 See Bruyère 2013 (Belgium), par. 1.4.a with reference to article 29 ITC 1992.
157 See Bruyère 2013 (Belgium), par. 1.4.a with reference to T. WUSTENBERGHS, Heffingsbevoegdheid bij grensoverschrijdende
ondernemingswinsten – De vaste inrichting op de helling, De Boek & Larcier, Ghent, (2005), p. 591.
158 See Bruyère 2013 (Belgium), par. 1.4.a with reference to K. DE HAEN, ‘Fiscale transparentie’, Internationale Fiscale Actualiteit, nr.
2012/207, p. 3. See also P. HINNEKES, ‘Rulingcommissie past OESO-rapport inzake partnerships toe’, Fiscoloog Internationaal, Editie
265, pp. 2-3.
159 See Bruyère 2013 (Belgium), par. 1.4.a with reference to P. HINNEKES, ‘Rulingcommissie past OESO-rapport inzake partnerships toe’,
Fiscoloog Internationaal, Editie 265, p. 4.
148
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In France, a distinction can be made between individuals and companies as well. Individual businesses, such as the sole
proprietorship, are liable to “impôt sur le revenue”, which is the French Income Tax. Companies and other legal entities are
liable to “impôt sur les sociétés”, which is the French corporation tax.160 These companies or legal entities can either be
liable to tax on account of their legal form161 or according to their type of business162. In some cases, certain
corporations (sociétés de capitaux) may choose for subjection to the regime for partnerships.163 This regime for
partnerships is very similar to individual businesses; the partners are taxed on their income in proportion to their rights
in the partnership, and thus liable under the Income Tax.164 However, partnerships and similar groups may in certain
cases also opt for liability to corporation tax.165 Finally, limited liability sole proprietorships may opt to pay corporation
tax, provided that they are subject to an actual assessment regime.166 It can be concluded that in the French tax system,
the distinction between individual businesses and companies is less strict with respect to the tax regime to which these
different types of businesses are subject.
Germany also distinguishes between businesses carried on by an individual and businesses carried on by a legal
entity.167 Firstly, companies - such as the limited liability company (Gesellschaft mit beschränkter Haftung, GmbH) or the
stock corporation (Aktiengesellschaft, AG) - are subject to “Körperschaftssteuer”, which is the German corporate income tax.
Self-employed persons, thus individual businesses, are subject “Einkommenssteuer”, which is the German personal income
tax.168 Partnerships are also subject to the personal income tax, which means that these business forms are considered
transparent in Germany.169
The Hungarian system, however, is slightly different. Again, the corporate sphere can be distinguished from the
personal sphere. As a starting point, unincorporated businesses170 and private entrepreneurs fall under the scope of the
Personal Income Tax Act (CXVII of 1995).171 Companies and other legal entities172 fall under the scope of the
Corporate Income Tax Act (LXXXI of 1996).173 The basis is thus the same as in the other countries. However, in
Hungary, there are other business taxes which can only be chosen by a limited number and certain types of taxpayers.
160 See Depaix 2013 (France), who only distinguishes between the two but does not elaborate on the liability to different types of tax.
Additional information was derived from the following French government publication: Ministère de l’économie des finances et de
l’industrie – The French Tax system.
161 More specifically, the following legal entities are liable to corporation tax on account of their legal form, irrespective of their corporate
purpose: joint-stock (sociétés anonymes, SA) and simplified joint-stock companies (sociétés par actions simplifiées, SAS), limited liability
companies (sociétés à responsabilité limitée, SARL), partnerships limited by shares (sociétés en commandite par actions, SCA) and, in
certain cases, cooperative societies. See Ministère de l’économie des finances et de l’industrie – The French Tax system, p. 12.
162 The following legal entities are liable to corporation tax according to their type of business: civil-law or non-trading companies that carry
on industrial or commercial activities and more generally legal entities that operate a business or carry out operations for profit. See
Ministère de l’économie des finances et de l’industrie – The French Tax system, p. 12.
163 Such as family-owned SARL and small SA, SARL or SAS, formed less than five years ago. See Ministère de l’économie des finances et de
l’industrie – The French Tax system, p. 12.
164 See Depaix 2013 (France), p. 15.
165 See Depaix 2013 (France), p. 15 and Ministère de l’économie des finances et de l’industrie – The French Tax system, p. 12.
166 See Ministère de l’économie des finances et de l’industrie – The French Tax system, p. 12.
167 It should be noted that in the EUCOTAX paper of concerning the German tax system (Mehlhaf 2013), this information was very
unclear. Additional sources were consulted in order to collect this information, including Germany Trade & Invest – Company taxation.
168 See Germany Trade & Invest – Company taxation.
169 See Germany Trade & Invest – Company taxation and Mehlhaf 2013 (Germany), p. 13.
170 As Hungary follows a real seat doctrine, unincorporated businesses are liable to tax as private persons, where the place of residence is
decisive.
171 See Varga 2013 (Hungary), p. 9.
172 The following are listed in par. 2(2) of Act LXXXI of 1996 on Corporation Tax: a) corporate entities (including the non-profit
companies, the regulated property investment company), the association, the Societas Europea and the European cooperative; b) the
cooperative; c) state-owned companies, other state-owned economic organisation, or the subsidiary; d) the law office, the bailiff’s office, the
patent attorney office, the notary’s office, the forest management association; e) the Employee Stock Ownership Plan (ESOP); f) the water
association; g) the fund, the public foundation, the public corporation (including the business association with legal personality according to
articles of association or to deed of foundation), furthermore the church, the housing cooperative and the voluntary mutual insurance fund;
h) the high education institution (including its established institutions) and the student hostel; i) the European regional cooperating group; j)
the private company; and k) the European research infrastructure consortium (ERIC).
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These other business taxes include the simplified entrepreneurial tax (EVA), the tax on small corporations (KIVA), and
the small taxpayers’ business tax (KATA).174 These special taxation regimes for businesses and private persons are a
technical and administrative simplification. If a taxpayer chooses one of these types it will not be liable to tax under the
corporate or personal income tax act.175
In Italy, individual persons are distinguished from persons other than individuals. The tax laws for both categories are
laid down in the Unified body of laws on income tax on individuals and on corporate income tax, the “T.u.i.r.”.176 Selfemployed and individual businesses, then, are taxable under the Irpef, which is the Italian Income Tax for personal
income. Persons other than individuals, such as companies and other entities177 are subject to tax under the Ires, which
is the Italian Income Tax for corporate income. It seems that there is only one criterion in Italy distinguishing between
personal and corporate income, which can be concluded from the fact that in Italy, partnerships are considered to be
non-transparent when they possess a legal personality.178 In this case, they will be liable to tax under the Ires.
Polish law distinguishes between the following types of businesses: sole proprietorship, civil law partnership,
commercial partnerships (general partnership, professional partnership, limited partnership, and limited joint-stock
partnership), and companies (limited liability company and joint-stock company).179 In case of a sole-proprietorship, the
entrepreneur is liable under the Polish Personal Income Tax Act180. In addition, partnerships are considered transparent
for income tax purposes.181 This means that the partners are subject to taxation as individuals under the Personal
Income Tax Act as well. In some cross-border situations, however, partnerships can be treated as non-transparent182
and consequently the entity is subject to tax under the Polish Corporate Income Tax Act, equal to Polish companies.
In Sweden, the distinction between individual businesses and companies is not that explicitly present as in the other
States. More specifically, income from businesses is generally captured under the Swedish Income Tax Act. The tax
legislation is aimed to be as neutral as possible between different business forms; taxation should not affect the
individual’s choice of a certain form of business.183 Nonetheless, there are different types of business entities in Sweden
which are subject to tax in a different manner. Sole proprietorships are not considered to be a legal entity, as in all other
countries. In Sweden, this implies that the entrepreneur is liable to tax on business income (which is added to the
employment income for individuals) under the Income Tax Act.184 Partnerships are for Swedish corporate law treated as
legal entities. For tax law purposes, however, partnerships are treated as transparent, implying that the partners are liable
174
For further details with respect to these tax regimes I refer to Varga 2013 (Hungary), p. 11-13.
See Varga 2013 (Hungary), p. 11.
176 See Trabattoni 2013 (Italy), with reference to D.P.R.n.917/1986 (Unified body of laws on income tax on individuals and on corporate
income tax, abbreviated T.u.i.r.).
177 See Trabattoni 2013 (Italy): the following companies and entities are listed in the Irs.: T.u.i.r. , 73 Co. 1- lett. a) companies, limited
partnerships limited by shares, limited liability companies, cooperative companies, mutual insurance companies, Societas Europaea Reg (CE)
no. 2157/2001, Cooperative Societas Europaea Reg. (CE) no. 1435/2003 that are resident in the State’s Territory. lett. b) public and private
legal entities other than lett.a, trusts that are resident in the State’s territory which carry on a business, exclusively or prevalently. lett. c)
public and private legal entities other than lett.a, trusts that are resident in the State’s territory which do not carry on a business, exclusively
or prevalently. lett. d) nonresident entities, including trusts, with or without legal personality. Co.2 Public and private legal entities other
than lett.a, including all entities with legal personality, clubs, consortia.
178 This follows from the following: “Co.2 also includes organized combinations of persons and other resources, pursuing their aim
individually and not belonging to other persons explicitly liable to Ires so that the consequences of their actions (with respect also to
income) are directly ascribable to them, as they realize the taxable premises in an autonomous and unitary way. Letter d includes also
nonresident partnerships, professional partnerships, società semplice (civil partnership).” See Trabattoni 2013 (Italy), note 7.
179 See Majda 2013 (Poland), p. 10.
180 Act of 26 July 1991, Journal of Laws 2010, No.51, heading 307, amended, hereinafter PITA. See Majda 2013 (Poland), note 19.
182 See Majda 2013 (Poland), p. 14: “partnerships are non-transparent if in the state of their legal seat or management seat they are treated as legal persons and
are taxed on their worldwide income tax.” Art. 1 par. 3 of the CITA.
183 See Lim 2013 (Sweden), p. 8 with reference to Lodin et al. Inkomstskatt, Studentliteratur AB, Lund 2011, 13th edition, p. 45.
184 See Lim 2013 (Sweden), p. 10, with reference to chapter 1 section 3 paragraph 1 of the ITA.
175
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to tax on profits from the partnership.185 With respect to legal entities, Swedish law does not provide an exhaustive list
of taxable entities.186 It is noted that the most common type of business is the limited liability company. This is a
corporate entity which is taxed under the Income Tax Act for the income from the business.187
In the U.S. tax system, business income is captured under the Internal Revenue Code. In a broad sense, the “Code”
imposes a tax on taxable income of every individual188 and every corporation189. The most common forms of business
are the sole proprietorship, partnership, corporation, and S corporation.190 All these types of businesses are subject to
U.S. Income Tax. However, in case of the sole proprietorship and the partnership, the individuals behind these business
forms (entrepreneur respectively partners) are considered to be the taxable persons, where in case of corporations, the
entity itself is considered as the taxable entity.
2.3 The concept of residency
A. Dutch tax system
The meaning of the concept of residency in Dutch tax law can be deducted from several provisions in the PITA 2001,
the CITA 1969 and the Algemene wet inzake rijksbelastingen (State Tax Law Act). Additionally, taxpayers can also be
qualified as a resident (or non-resident) based on provisions following from treaties and double tax conventions
(DTCs).191 The qualification as either a resident or non-resident is very important, as residents are fully liable to tax in
the Netherlands and taxed on their worldwide income, whereas non-residents are taxed only on income derived from
the Netherlands and, therefore, have a limited tax liability.
For both natural persons and legal entities, the starting point of the qualification as a resident taxpayer lies in the general
provision of article 4(1) of the State Tax Law Act, which applies to all tax laws. It reads: where a person lives or where a legal
entity is established will be judged according to the circumstances’.192 The determination of the place of residence of a taxpayer is
thus a very factual matter in the Netherlands. The intention of the taxpayer is rather irrelevant.193 Subsequently, the
terms ‘living in’ and ‘establishment’ are used in the personal income tax respectively the corporate income tax.
Following the distinction previously made between businesses falling under the PITA 2001 and those falling under the
CITA 1969, the concept of residency will be discussed separately for both categories.
2.3.1
Natural persons
For the purpose of the personal income tax, taxpayers are natural persons who (a) live in the Netherlands (residents), or
(b) live outside the Netherlands but derive income from the Netherlands (non-residents). This follows from article 2.1
PITA 2001. The main criterion for residency is thus living in the Netherlands. The exact meaning of this criterion and
additional considerations for determining whether or not a taxpayer is to be qualified as a resident of the Netherlands
for tax purposes have further been developed in case law and literature. It is, for example, argued that with respect to
the place of residency it comes down the determination of the center point of vital interests.194 The Dutch Supreme
185
See Lim 2013 (Sweden), p. 10, with reference to chapter 5 section 1 of the ITA.
See Lim 2013 (Sweden), p. 11.
187 See Lim 2013 (Sweden), p. 10, with reference to chapter 1 section 3 paragraph 2 of the ITA.
188 See Stępień 2013 (U.S.), p. 4, with reference to 26 U.S.C. § 1.
189 See Stępień 2013 (U.S.), p. 4, with reference to 26 U.S.C. § 11.
190 See Internal Revenue Service (IRS) – Business structures.
191 The term residence, as it is to be understood under national law, does not necessarily coincide with the meaning of that same term for
treaty purposes. This was explicitly ruled in Hof Arnhem LJN : BO7635.
192 Unofficial translation.
193 See for example HR BNB 1955/48.
194 See Burgers 2007, par. 4.2.4.2.1.
186
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Court considered the place of residence to depend on all circumstances determining whether or not there is a
sustainable personal bond between the taxpayer and the Netherlands.195 Subsequently, a trade-off between the following
elements, which have all been mentioned in Dutch Court rulings196, should lead to the determination of the place of
residence: maintaining a home in the Netherlands, frequency and duration of a stay in the Netherlands, the place where
family resides, the place where labor is performed, the place where the capital is located, other financial and economic
relations, social contacts, subscription in the population registry, nationality, and finally the nationality of the person in
question.197
In addition to the general residence-provision of article 4 State Law Tax Act, which applies directly to the personal
income tax act, there are also several legal fictions in the PITA 2001 on the basis of which a person will be qualified and
treated as a resident of the Netherlands for tax purposes.198
2.3.2
Legal entities
For the purpose of the corporate income tax, article 2.1 and article 3.1 CITA 1969 set forth that taxpayers are legal
entities who (a) are established in the Netherlands (residents) or (b) are established outside the Netherlands but derive
income from the Netherlands (non-residents).199 Establishment in the Netherlands is thus the credo for residency. In case
law, establishment or the place of residence, has been paraphrased as being the place where the management of the
company carries out its managerial activities200, i.e. the place of effective management201, unless the management is a jackstraw
for another (in that case, the place of residence is the place where that other exercises the leadership).202 This is called
‘harlequin management’. An example includes the case HR BNB 2013/54:203 a Dutch private limited company claimed
that it had transferred its place of effective management to the Netherlands Antilles in 2001. As of this moment, the
managing board of the company was thus located in the Netherlands Antilles. Nonetheless, the shareholders and the tax
advisor, who remained located in the Netherlands, played an important role in the actual management of the company;
the Court noted that these parties provided significant instructions and permissions to the company’s board, and that
the board itself was not aware of important issues.204 According to the Court, the place of effective management was
therefore located in the Netherlands and not, as claimed by the taxpayer, in the Netherlands Antilles. It is noted that it is
normally up to the tax inspector to prove that the place of effective management is actually another place than the place
where the direction of the legal entity is seated.205
The place of residence is, as follows from the previously discussed case, based on a formal criterion; the place where the
management of the company meets and takes decisions is decisive (i.e. the place of effective management). Only when
the tax inspector can prove that management decisions are actually taken by another person, the place of residence will
195
See HR BNB 1996/161 and HR BNB 2011/98.
See for example Hof 's-Gravenhage LJN: AH9812 and HR BNB 1998/71.
197 See also Burgers 2007, par. 4.2.4.2.1
198 A detailed discussion is irrelevant for the purpose of this thesis, but I will mention them briefly: the first of these fictions is part of the
‘residence-fiction’, laid down in article 2.2 PITA 2001. Paragraph 1 of this provision regulates that a resident who ceases to live in the
Netherlands but who returns within one year, will, under conditions, be treated as if he or she has been a resident of the Netherlands for the
entire time. A second fiction is the ‘diplomat fiction’, which can be found in article 2.2 PITA 2001. Put shortly, a Dutchmen who is
employed by the Dutch state as a diplomat or government official while working and living abroad, is treated as a resident of the
Netherlands. A final ‘fiction’ is the optional treatment as a Dutch resident on the basis of article 2.5(1) PITA 2001. In case a taxpayer is only
officially a resident of the Netherlands for part of the year, he or she can choose to be treated as a resident taxpayer for that entire year.
199 For both residents and non-residents, a Dutch legal form is required.
200 I.e. the place where the formal direction is located and where board meetings take place, and where decisions are made.
201 Which is the place where managerial activities are carried out. See amongst others: HR BNB 1988/181; HR BNB 1998/50; HR BNB
1992/379; HR BNB 1993/193.
202 See HR BNB 1993/193.
203 See HR BNB 2013/54, in particular the verdict Court of appeal Arnhem.
204 See HR BNB 2013/54, verdict Court of appeal Arnhem, section 4.16-4.18.
205 See HR BNB 2013/54, verdicht Court of appeal Arnhem, section 4.12. This is however different in the context of the belastingregeling voor
het koninkrijk (Tax regulation for the Kingdom), as artikel 35b, paragraph 7 of this regulation shifts the onus to the taxpayer.
196
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be the place where this other person is located. In case of doubt, additional criteria can be used in order to determine
the actual place of residence. These additional criteria have been developed in case law. They include: the place of
general or special board meetings, the statutory seat, specific knowledge of personnel, actual power to take decisions,
size of office staffing, size and independency of local activities, place of residence of board members and
commissioners, place of residence of shareholders, place where the enterprise is carried on, location of the main office
building, place where the main records are kept, currency in which the records are kept, local bank accounts, place of
specific or general shareholder meetings, the national law to which the legal entity has been established, and the
registered office.206
It should be noted that both companies incorporated under Dutch corporate law207 as well as companies incorporated
under the law of another country (from now on called foreign companies) can be qualified as a resident of the
Netherlands.208
Equal to rules governing the residency of natural persons, there are also legal fictions in the corporate income tax, the
most important of which can be found in article 2(4) CITA 1969. On the basis of this provision, legal entities which
have been incorporated under Dutch corporate law are deemed to be established in the Netherlands.209
In this section, the criteria which are used by the different EUCOTAX countries for determining whether or not a
person (either individual or legal) is a resident of that State will be discussed. It should be noted that all these States tax
their residents on their worldwide income; residency thus gives rise to unlimited tax liability for taxpayers. In most cases,
residency for tax purposes is not only based on formal requirements, such as registration in the civil register of the State
for individuals or the place of the Statutory seat for companies, but on more substantial criteria, such as the center of
economic and vital interests or the place of effective management. Given the fact that not all States use the same criteria
with respect to residency, dual residence issues are likely to arise. The OECD MC provides tiebreaker rules for cases
such as these. This will be further analyzed in paragraph 2.4.
2.3.3
Natural persons
Member States follow different approaches in regards to the qualification of residency for tax purposes. Firstly, when a
natural person has its domicile or residence in Austria, this person is considered a resident taxpayer of that country,
which gives rise to unlimited tax liability.210 Merely conducting an individual business on Austrian territory will,
therefore, not lead to the qualification as a resident. Either one of the two requirements (domicile or residence) are to be
fulfilled by the individual entrepreneur.211 Under Belgian tax law, individuals are considered to be a resident of Belgium
when they have established their domicile or the seat of their fortune in that State.212 The first criterion, domicile, is
similar to the notion of the center of vital interests; the place where a person has a permanent dwelling, his family
206
See amongst others: HR BNB 1987/306; HR BNB 1991/126 and HR BNB 1997/222.
See also paragraph 1.3.3.
208 Decisive is the place of effective management, which has to be located in the Netherlands, see also van de Streek et al. 2011, par.
2.0.7.D.h. It is argued that it is irrelevant whether or not the actual business activities are carried on in the Netherlands or abroad (through a
PE). In both cases, it is argued that the company incorporated under the law of another country (foreign company) but with its place of
effective management in the Netherlands, is to be qualified as a resident taxpayer for Dutch tax purposes.
209 This also means that the Netherlands uses the incorporation system instead of the real seat system. Indeed, when the effective
management of a Dutch corporate entity (e.g. a Besloten Vennootschap, a Dutch limited corporation) is transferred abroad, the entity does not
cease to exist. See also paragraph 1.3.3.
210 See Pinetz 2013 (Austria). In Austria, unlimited tax liability for natural persons is provided for in § 1 Income Tax Act in connection with
§ 26 Federal Fiscal Code.
211 See Pinetz 2013 (Austria), p. 27, with reference to Doralt in Doralt, Kommentar EStG, § 1, m.no. 6.
212 See Bruyère 2013 (Belgium). This follows from article 2 § 1, sub 1 of the Belgian Income Tax Code 1992.
207
37
household, and most of his social relations.213 The second criterion, the seat of a person’s fortune, is a substantial
criterion, based on the center of economic and patrimonial interests or estate, i.e. the place where a taxpayer’s wealth is
managed.214 Only one of these two criteria has to be met in order to be qualified as a resident for tax purposes.215
Whether these criteria are met, has to be determined according to the factual circumstances of the case.216 In the
French tax system, the concept of residency for tax purposes is defined independent from civil residence or nationality.
The following resident criteria, which are alternative and hierarchically classified., are put forward in French tax law: 217
- The home or main place of residence in France. The home is the place where the taxpayer or his family normally
reside. This criterion is associated with a minimum period of stay in France of six months.218
- The exercitation of a non-incidental professional activity in France. For employees, the residence is based where
they practice their profession. Non-employees are required to have some fixed attachment point in France.219
Persons who exercise one or more professions in several States are considered a resident of France when they
effectively spend most time in that country.220
- The center of economic interests in France. With this notion, the French tax Administration aimed at the place
where major investments are made, where the headquarters of the business is located, and where assets are
managed.221
In Germany, unlimited tax liability arises for individuals who have their residence or habitual abode in that State.222
Residence is further defined as the place at which a dwelling is maintained.223 Habitual abode is the place at which a
person is not merely temporary present, which is linked to a six month’s duration of stay.224 Under Hungarian law,
then, persons must have Hungarian citizenship in order to be considered a resident for tax purposes.225 Persons who are
not officially a citizen of Hungary, are still deemed to be a resident when they reside on Hungarian territory for at least
183 days in the calendar year. The residence criteria in Hungary are thus very formal. Italy defines as a resident for tax
purposes individuals who are registered in the civil registry of the State, and who have their domicile or the residence as
ascertained in the civil code in Italy.226 Thus, the Italian legislator chose a formal criterion (registration in the civil
registry), which is simple to apply. In addition, one of two substantive criterions is also to be met, as ascertained at any
time in the civil code.227 The concept of domicile is closely related to the notion of the center of vital interests. In
Poland, individuals are considered to be a resident when they stay in Poland for 183 days or more in a calendar year, or
when they have their center of personal and economic interests there. The latter criterion is a more substantive
criterion.228 Sweden considers individuals who have essential ties with Sweden to be residents of that country, in
connection with having been a resident at a previous date.229 Important factors in determining whether an individual
213
See Bruyère 2013 (Belgium), with reference to Commentary on the Income Tax Code 1992, No. 3/7.
See Bruyère 2013 (Belgium), with reference to Court of Appeal of Liège 14 December 2001, RG 1997/FI/90. See also S. CAN
COMBRUGGE, ‘Fiscale woonplaats’, Fiscoloog, Edition 568, p. 9; T. AFSCHRIFT, Impôts des personnes physiques – chronique de
jurisprudence 2000-2008, Larcier, (2009), p. 31.
215 See Bruyère 2013 (Belgium), with reference to Commentary on the Income Tax Code 1992, para. 3/4.
216 See Bruyère 2013 (Belgium), with reference to S. VAN COMBRUGGE, ‘Fiscale Woonplaats’, Fiscoloog, Edition 810, (2001), p. 9. See
also Rechtbank Ghent 7 June 2001. A. LETTENS, ‘Het begrip “fiscale woonplaats” blijft een feittenkwestie’, Fiscoloog internationaal,
Editie 335, (2011), p. 5. See also T. AFSCHRIFT, Impôts des personnes physiques – chronique de jurisprudence 2000-2008, Larcier, (2009),
p. 15.
217 See Depaix 2013 (France), with reference to article 4B of CGI.
218 See Depaix 2013 (France), with reference to CE, 1995, Larcher.
219 See Depaix 2013 (France), with reference to Instruction of 26 July 2007.
222 This follows from section 1 of the German Income Tax Code. In the paper of Mehlhaf 2013 (Germany), this information was not
included.
223 See section 8 of the fiscal code of Germany.
224 See section 9 of the fiscal code of Germany.
225 See Varga 2013 (Hungary), with reference to Act CXVII of 1995 on Personal Income Tax, para. 3. (2) and (3).
226 See Trabattoni 2013 (Italy), p. 4, with reference to article 2 co. 2 T.u.i.r.
227 See Trabattoni 2013 (Italy), p. 4.
228 See Majda 2013 (Poland), p. 29, with reference to R.Garbarz, M.Jarocki, Poland-individual taxation, Ernst&Young Poland, IBFD,
Amsterdam 2012, p. 11.
229 See Lim 2013 (Sweden), with reference to Chapter 3, section 3 of the ITA.
214
38
does or does not have essential ties with Sweden include the habitual abode, family, and business. For example, an
individual who has lived in Sweden before may have essential ties with Sweden if he or she is economically engaged by
owning assets that give essential influence over a Swedish business.230 With respect to the U.S. it has been argued that
in the context of individual businesses, residence criteria for natural persons are irrelevant. An individual has to set up a
business by buying a shelf-corporation.231 The only relevant criterion then is the incorporation of this business in the
United States.
2.3.4
Legal entities
Only a few States consider a single criterion to determine a company's tax residence. Most States apply several tests, on
either an alternative or cumulative basis. In Austria, a company which has its statutory seat or place of effective
management in Austria is considered a resident of that State, and subsequently subject to unlimited tax liability.232 Only
one of the two requirements needs to be fulfilled. With respect to the first requirement, the statutory seat, it should be
noted that on the basis of Austrian private law, only a domestic seat can be chosen when registering in the national
commercial register.233 The second criterion then, the place of effective management, is where the center of the
management of the company is located, i.e. the place where the crucial operating business decisions are taken.234 Under
Belgian tax law, a company will be considered a resident for tax purposes if it has its head office, its main place of
business, or its place of effective management and control in Belgium.235 The determination of residency in Belgium is
thus a factual question. The statutory seat is in no sense decisive, but does constitute a presumption of residence. In
France, the place of effective management is taken as the criterion for residency. 236 More specifically, a company is
considered to be a resident for tax purposes when it has a qualifying legal form and is subject to tax.237 According to
German law, a company is deemed a resident of that country, if it has its business management or its registered office
in German territory. Business management is the centre of commercial executive management, where substance prevails
over form. The registered office is a more formal criterion. This is determined by law, articles of partnership, statutes,
acts of foundation, or similar provisions.238 In Hungary, the Corporate Tax Law provides a list of entities that are
considered as a Hungarian resident if the place of effective management is located in Hungary.239 The place of effective
management is thus combined with a formal criterion, in that only the listed legal forms can be considered a resident.
There are also certain legal forms, such as national banks, which are explicitly excluded from residency for tax
purposes.240 Italy considers persons other than individuals to be a resident for tax purposes when they have their legal
seat, their place of management, or their main object located within Italian territory.241 The Italian legislator thus chose
one formal criterion (the legal seat) and two more substantial criteria (place of management and place of main object).
In addition, a time requirement is added to the resident criteria; for a person to be a resident in Italy, it is required that
the constitutive element (legal seat, place of management, of main object) exists in the State’s territory for the most part
230
See Lim 2013 (Sweden), with reference to Chapter 3, section 7 of the ITA.
See Stepien 2013 (U.S.), as discussed during the Wintercourse Week in Osnabruck.
232 See Pinetz 2013 (Austria), p. 22, with reference to § 1 (2) N 1 Corporate Income Tax Act in connection with § 27 Federal Fiscal Code.
233 See Pinetz 2013 (Austria), p. 22, with reference to Reichel/Fuchs in Hofstätter/Reichel, Kommentar EStG, § 1, m.no 5; Doralt in
Doralt, Kommentar EStG, § 1, m.no. 28.
234 See Pinetz 2013 (Austria), p. 23, with reference to Lechner in FS Stoll, Steuern im Rechtsstaat (1990), p. 401.
235 See Bruyère 2013 (Belgium), p. 14, with reference to Article 2, §1, 5° b) ITC 1992.
236 It should be noted that the French tax system is strongly based on the principle of territoriality, which means that only with respect to
income derived from sources within French territory, resident and non-resident tax payers are subject to tax. See Betten 1998, p. 1.
237 This information was missing in the paper of Depaix 2013 (France). Additional sources consulted include Taxand – remedies for dual
residence issues.
238 See Mehlhaf 2013 (Germany), p. 12. These terms are further defined in sec 10 and 11 AO.
239 See Varga 2013 (Hungary), p. 8, with reference to art LXXXI of 1996 on Corporation Tax, par. 2 (3).
240 See Varga 2013 (Hungary), p. 8, with reference to art LXXXI of 1996 on Corporation Tax, par. 2 (5).
241 See Trabattoni 2013 (Italy), p. 4-5, with reference to article 73 co. 3 Ires.
231
39
of the taxable period.242 In Poland then, legal entities who have their registered office or management within the
territory of the Republic of Poland are considered as residents, and shall be subject to tax in respect of their worldwide
income.243 Thus, both the formal criterion of statutory seat and the more substantial criterion of the place of effective
management are used to establish residency for tax purposes in Poland. Sweden follows a similar approach. A legal
entity is firstly considered a resident if it has registered itself at the Swedish Companies Registration Office (formal
criterion). Alternatively, if the residence of the board of the entity is located in Sweden or if there are any other
circumstances of such a nature, the entity will also be regarded as a Swedish resident (substantive criterion).244 It should
be noted that in most cases, the formal criterion of the place of registration is decisive.245 Finally, the U.S. uses a system
which, from a European perspective, is quite uncommon. Rather than distinguishing between residents and nonresidents, the U.S. makes a discrimination between domestic and foreign companies, where incorporation in the U.S. is
the criterion used.246 This incorporation criterion is very strictly applied. It is defined in the Internal Revenue Code as:
“any corporation created or organized in the United States or under the law of the United States or of any State”. The place of
incorporation then is the place where the articles of incorporation are filed. This determines the nationality of the
company and thereby its worldwide tax liability.247
2.4 The concept of residency under tax treaties
The framework for determining the place of residence from a national perspective has been outlined, for both the
Netherlands and for other EUCOTAX countries. From the perspective of the Netherlands, the qualification as a
resident or non-resident taxpayer of the Netherlands (for the application of national law), is determined on the basis of
Dutch standards. Provisions in the national laws of other states and in tax treaties do not influence the qualification of
resident or non-resident according to and for the application of Dutch law.248 Other States follow a similar approach
(i.e. the predominance of national law), and they all have their own criteria with respect to the concept of residency for
tax purposes. In a cross-border context, it is therefore insufficient to only take into account the perspective of one
nation.249 When different national tax systems interact, problems can arise. In this paragraph, I will therefore discuss
some residency issues in the context of this interaction and the influence of tax treaties, starting with a discussion of the
determination of residency under tax treaties.
Taking the OECD model convention (from here on: OECD MC)250 as the guideline, article 1 reads as follows: ’this
Convention shall apply to residents of one or both of the Contracting States.’251 The term resident is subsequently defined in article
4, paragraph 1 of the OECD MC: “For the purposes of this Convention, the term "resident of a Contracting State" means any person
who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a
similar nature, and also includes that State and any political subdivision or local authority thereof. This term, however, does not include any
person who is liable to tax in that State in respect only of income from sources in that State or capital situated therein.” This provision
242 See Trabattoni 2013 (Italy), p. 5, with reference to article 73 co. 3 Ires and T.u.i.r, Art. 7 (Irpef) – solar year; Art 76 (Ires) accounting
period, as determined by the law or by the articles of incorporation; if it is not determined by the law or by the article of incorporation, or it
is determined but refers to two or more solar year, the taxable period is the solar year.
243 See Majda 2013 (Poland), p. 27 with reference to Art. 3 par.1 of the Polish CITA.
244 See Lim 2013 (Sweden), p. 11, with reference to Chapter 6, section 3 of the ITA.
245 See Lim 2013 (Sweden), p. 11.
246 See Stepien 2013 (U.S.), p. 29 and further.
247 See Taxand – remedies for dual residence issues.
248 Burgers argues that, in case a certain taxpayer is qualified as a resident of country X based on that countries national law, and in addition
the bilaterial treaty also qualifies that taxpayer as a resident of country X, this does not mean that the taxpayer in question automatically
becomes a non-resident in the Netherlands for the application of for example the PITA 2001 or the CITA 1969. See Burgers 2007, par.
4.2.1.
249 See also: Hof Arnhem 30 November 2010, nrs. 09/00271, 09/00272, and 09/00273, LJN : BO7635.
250 OECD, OECD Model Convention on the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on
income and on capital 2010, Paris: OECD 2010.
251 Underlining added by author.
40
thus refers to the national law of the States involved. It is required that a person is liable to tax under the law of one or
both of the States (where tax liability in respect to source income is ‘disqualified’). Persons who are not liable to tax in
their home State, are denied from access to the treaty.
As states all have their own criteria with respect to the concept of residency, it is possible that a natural person or legal
entity is qualified as a resident for tax purposes in more than one state, based on the applicable national tax law
systems.252 Such a case is labeled as ‘dual residence’.253 A very common example includes that of a legal entity which is
incorporated under the law of one country but has its place of effective management in another. 254 In such a situation,
it is regular practice to consult the applicable DTC255 between the nations involved (assuming those nations concluded
such a treaty), in order to determine the place of residence. Even though the first article of the OECD MC leaves the
option of dual residency open (‘… residents of one or both of the Contracting States’), there can eventually only be one
residence state for the purpose of allocating taxing rights. Therefore, articles 4(2) and 4(3) of the Convention provide
tiebreaker rules for natural persons respectively legal entities confronted with a dual residence. For natural persons then,
the place of residence is to be determined on the basis of a list of criteria.256 For legal entities, the tiebreaker rule
encompasses that the entity is ‘deemed a resident only of the State in which its place of effective management is situated’.257 It should,
however, be emphasized that it is possible that particular treaties include tiebreaker rules which differ from that of the
OECD MC.258
The tiebreaker rule will lead to a decisive conclusion with respect to the state of residence. This place of residence will
only hold for the DTC (i.e. for the purpose of allocating taxing rights between countries). It is again emphasized that for
the determination of residency from a purely Dutch perspective, the treaty-based residency qualification is more or less
irrelevant. Only in the context of the treaty, the Netherlands will follow the treaty qualification. As for the rest, the
Dutch qualification is leading.259 In other words, the tiebreaker rule will not lead to the taxpayer no longer being liable
to tax as a resident taxpayer in the Netherlands. The only effect of the treaty is that there will be a limitation with
respect to the object of taxation.260 This has also been called the ‘limited resident taxpayer’.261
2.5 Incorporation versus real seat jurisdictions
Although the focus in this thesis is on the impact of taxation on business migration, I briefly want to point out that
there are also important non-tax obstacles which can be problematic in the context of business mobility.262 More
252
This is also recognized by the Dutch Supreme Court, see for example BNB 2004/264.
A dual residence is highly problematic, since in such a case, two states will wish to tax the worldwide income of one taxpayer. See also
Bellingwout 2001(I) and Bellingwout 2001(III) for a detailed discussion of dual residence issues in relation to seat transfers of companies.
254 According to the Dutch national tax law, the fiction of article 2(4) CITA 1969 would apply, which encompasses that all legal entities
which have been established according to Dutch law are qualified as residents of the Netherlands for tax purposes.
255 Here, the OECD MC will be continuously taken as the starting point.
256 Article 4(2) provides the following criteria for determining the status of an individual who is qualified as a dual resident:
‘a) he shall be deemed to be a resident only of the State in which he has a permanent home available to him; if he has a permanent home
available to him in both States, he shall be deemed to be a resident only of the State with which his personal and economic relations are
closer (centre of vital interests); b) if the State in which he has his centre of vital interests cannot be determined, or if he has not a
permanent home available to him in either State, he shall be deemed to be a resident only of the State in which he has an habitual abode; c)
if he has an habitual abode in both States or in neither of them, he shall be deemed to be a resident only of the State of which he is a
national; d) if he is a national of both States or of neither of them, the competent authorities of the Contracting States shall settle the
question by mutual agreement.’
257 Article 4(3) OECD MC.
258 See for example the tiebreaker rule in the DTC Netherlands – United Kingdom 2010. Moreover, this rule will be discussed this in more
detail in paragraph 2.6.3.2.
259 See amongst others: Burgers 2007, paras 4.2.1 and 4.4.2.1, and Bellingwout 2001(1), paras 3 and 4,
260 As was ruled in HR BNB 1994/163.
261 See amongst others: BNB 1980/170 (‘grensambtenarenarrest’, with annotation of M. Romyn); Bellingwout 2001(I), par. 3; Burgers 2007, par.
4.2.1; and Ellis 1985, p.19-39.
262 See also Hji Panayi 2011, p. 259.
253
41
specifically, from a corporate law perspective, the co-existence of both the real seat and the incorporation doctrine can
result in a limitation of free and unobstructed company migration. In 2007, the European Commission has analyzed the
problems which may arise in this context.263 It became clear that the incongruence between real seat and incorporation
jurisdictions has an hindering effect on business migration.264 It is for example not possible to move from an
incorporation state to a real seat state (since the company then needs to be re-incorporated in accordance with the law
of the host MS) or from a real seat state to an incorporation state (since the company then has to be winded-up in the
home MS and re-incorporated in the host MS). The European Union has not yet intervened in the co-existence of both
incorporation law systems and real sat law systems within the Union.
Under an incorporation system, companies exist by virtue of their statutory seat and not by virtue of their real seat. This
means that for as long as the statutory seat is situated in the specific state, companies continue to exist under company
law rules of that state, even if the real seat is transferred abroad. Thus, in an incorporation jurisdiction, it is possible to
transfer the place of effective management of a company without this resulting in the liquidation of that company. The
same cannot be said for a real seat system. In such a system, the transfer of the real seat (i.e. a transfer of the place of
effective management) will result in the company’s liquidation. Subsequently, the exit tax in a real seat state really is a
final settlement tax, since it is followed by the dissolution of the company.265
With respect to the European Union, the incorporation theory is more internal market friendly. Indeed, emigration
from a real seat jurisdiction commonly requires the liquidation of a company, a process which strongly deters a person
from transferring the administrative centre to another Member State.266
A. Dutch tax system
The Netherlands applies an incorporation system of company law, as opposed to a real seat system. This is explicitly
regulated for in book 10, article 118, of the Dutch Civil Code. Under an incorporation system, companies exist by virtue
of their statutory seat and not by virtue of their real seat. This means that for as long as the statutory seat is situated in
the specific state companies continue to exist under company law rules of that state, even if the real seat is transferred
abroad. Thus, it is possible in the Netherlands to transfer the place of effective management of a company without this
resulting in the liquidation of that company. The consequence of the Netherlands applying an incorporation system for
the area of taxation also follows from the residence fiction of article 2(4) CITA 1969, which encompasses that all legal
entities which have been established according to Dutch law are qualified as residents of the Netherlands for tax
purposes (irrespective of where there real seat is located).
As discussed, the real seat and the incorporation doctrine co-exist on both a European and global level, also amongst
the participating EUCOTAX countries. Having discussed the characteristics of these systems, I suffice with providing a
short analysis of the different jurisdictions.
The analysis shows that the majority of the participating EUCOTAX countries applies the incorporation system of
company law, including France, Italy, (the Netherlands), Sweden, and the U.S. However, there are also countries
amongst the participants, who follow the less internal market friendly real seat system. Austria and Poland, for example,
still apply the real seat doctrine rather strictly. There are, however, also States which originally know a real seat doctrine,
EC SEC(2007) 1707
Ibid., table 1, p. 9-10.
266
See Vilagi 2012, p. 346.
263
264
42
but are applying this more and more in a flexible manner, such as Belgium267 and Hungary. This is in response to several
cases of the CJEU, including Daily Mail268, Überseering269, Cartesio270, and VALE271 in which the Court limited the strict
application of the real seat theory. Germany now uses a truly hybrid form.272
2.6 How does a business lose its status as a resident?
A. Dutch tax system
How do businesses lose their status as a resident in the Netherlands? In this section, the distinction made between
businesses in the personal sphere and businesses in the corporate sphere will again be followed, focusing on the
qualification as a resident for the purpose of national law. As the qualification as a resident on the basis of national law
can be influenced by the qualification of residency under tax treaties, I will discuss some treaty-related issues
separately.273
2.6.1
Natural persons
For the purpose of the PITA 2001, the subjective enterprise274 is liable to tax, i.e. the entrepreneur. The objective
enterprise has no legal personality and cannot be a resident for that matter, let alone that it can lose its status as a
resident. The relevant question here is thus: how can an entrepreneur275 lose its resident status for tax purposes? Even
though this is not explicitly regulated in the PITA 2001, I believe the answer to this question follows implicitly from the
settlement provisions laid down in the personal income tax and from legislative history. These provisions are aimed at
‘closing’ the tax system.276 For example, article 3.60 contains the following phrase ‘.. the taxpayer ceases to be a resident
taxpayer..’ The legislator thus uses the broader formulation of cessation of residency as opposed to emigration. This
implies that not only emigration277 can lead to the entrepreneur losing his or her status as a resident taxpayer, but that,
for example, death of the entrepreneur will sort the same effect.278
Cessation or liquidation of a business in the sphere of the personal income tax will not lead to termination of residency,
since the business itself has no legal personality. The entrepreneur is liable to tax, not the business itself. Cessation or
liquidation of the subjective enterprise will therefore not lead to termination of residency of the taxpayer; it will,
267
See Bruyère 2013 (Belgium), p. 20, who provides that although Belgium applies the real seat theory, it does so in a rather flexible manner
in the context of the transfer of real seats cross-border and the recognition of foreign companies. “In fact, a company may move its seat in Belgium
without necessarily having to wind up, so long as certain conditions are fulfilled. Firstly, the legislations of the State of origin involved must permit the transfer of a
company’s seat without automatic loss of the company’s legal personality. Furthermore, the company will have to take the form of a company under Belgian law and
thereby adapt its statutes so that the latter are conform to Belgian legislation.”
268 CJEU Daily mail (Case-81/87).
269 CJEU Überseering (Case C-208/00).
270 CJEU Cartesio (Case C-210/06).
271 CJEU VALE (Case C-378/10).
272 See Mehlhaf 2013 (Germany). In Germany, immigration while maintaining the original legal personality of the company is only possible
for those companies who immigrate from an EU/EEA State. Immigration can then be done by the relocation of the place of effective
management. Of course, in case of the immigration of an European Company (Societas Europaea) immigration is also possible in Germany.
Emigrations out of Germany are possible under company law, provided that the place of effective management remains within the
European Union, or that the company is an European Company (SE). In conclusion, Germany applies the incorporation doctrine on
migrations within the European Union and the real seat doctrine on migrations involving third countries.
273 See also paragraph 2.4. For example, by applying a DTC in a cross-border situation, a resident taxpayer can be transformed to a limited
resident taxpayer. This will influence the object of taxation in the Netherlands.
274 See also paragraph 2.2.A.
275 Rather than a business.
276 The provisions will be discussed in detail in paragraph 2.8.2.
277 In case the entrepreneur emigrates but continues to derive profits from the Netherlands, he or she will then be a non-resident for tax
purposes.
278 Kamerstukken II 1998/99, 26 727, no. 3, p 116-118. See also Fiscal Encyclopedia personal income tax, article 3.60, annotation 3.1.
43
however, lead to a change in the taxable income of the resident taxpayer, thus in the object of taxation.279 In line with
cessation and liquidation, it is possible that a business carried on by a natural person is transformed from an individual
business to a business carrying a legal personality (e.g. the transformation of a sole proprietorship to a private limited
company).280 In this situation, the taxpayer’s residency will, again, not be terminated. Rather, there will be a change in
the taxable income of the resident taxpayer (i.e. the object of taxation will disappear). For the entrepreneur the
consequences of such a transformation will be the same as those described in case of cessation or liquidation.281 The
conclusion up until this point is that emigration or death of the entrepreneur will lead to that person losing his or her
status of a resident for tax purposes.282 Moreover, it was argued in paragraph 2.3.1 that the question of whether a
natural person is a resident of the Netherlands or not has to be determined on the basis of the relevant facts and
circumstances. In my opinion, it follows that a change in the facts and circumstances could lead to a taxpayer no longer
being qualified as a resident. Such a change in facts and circumstances will most likely fall under the heading of
‘emigration’, which will be discussed in paragraph 2.7.
2.6.2
Legal entities
A company283 in the corporate sphere is considered to be non-transparent for tax purposes. This means that the company
is the entity which is liable to tax, rather than the natural persons who are responsible for managing the company’s daily
operations (like directors, commissioners, substantial shareholders, and so on). Obviously, the emigration or death of
one of these persons has no influence whatsoever on the business’ status as a resident in the Netherlands. This being
said, a company will first of all no longer be considered a resident when it is liquidated. In that case, the company simply
ceases to exist (which might be compared to the death of a natural person). Secondly, in the previous section the
transformation of a business carried on by a natural person into a business with a legal personality was discussed. A
transformation in the opposite direction is possible as well, which implies that the company will have to be liquidated.284
This will, therefore, result in termination of residency of the company. Thirdly, a company can transfer its statutory seat
to another country. This will effectively sort the same result as liquidation, since the company first has to be dissolved
under Dutch corporate law.285 Fourthly, it was argued in paragraph 2.3.2 that the question of whether a company is a
resident of the Netherlands or not, has to be determined on the basis of the formal criterion of the place of effective
management. However, in some cases where this criterion will not lead to a decisive conclusion with respect to the
place of residence, additional relevant facts and circumstances have to be considered. It follows that (in very rare
situations) a change in the facts and circumstances might also lead to a taxpayer no longer being qualified as a resident.
279 Since he or she will no longer receive income from the business operations. Cessation or liquidation of a subjective enterprise will,
however, trigger a tax settlement.
280 In the Netherlands, there are tax facilities in order to make this transformation possible without taxation, of which further explanation
falls beyond the scope of this thesis.
281 I.e., no termination of residency for the taxpayer, only a change in the taxable income. Additionally, there will be a new resident taxpayer
after this transformation, namely the company with a legal personality.
282 There are ,however, exceptions. The first is part of the residence-fiction in the Dutch personal income tax. As a consequence of article
2.2(1) PITA 2001, a resident who ceases to live in the Netherlands but within one year returns to live in the Netherlands, and in the period
in between has not lived in a MS of the European Union or other country with which the Netherlands has concluded a DTC, will be treated
as never having left the Netherlands. In other words, the taxpayer will not lose his status as a resident for tax purposes. A second exception
can be found in article 2.5(1) PITA 2001, which contains an option for treatment as a resident taxpayer in case the taxpayer is only officially
a resident of the Netherlands for part of the year. By opting in for this provision, a taxpayer will be treated as a resident taxpayer for that
entire year.
283 I will denote legal forms which are subject to tax under the corporate income tax as companies.
284 This transformation will imply liquidation of the company after which it is possible to transfer the tax claim to the entrepreneur carrying
on the enterprise in the personal sphere. The legal entity, i.e. the subject of taxation, will disappear, but there will be no ‘new’ resident
taxpayer, since the entrepreneur continuing the enterprise in the personal sphere was already an existing resident taxpayer. The composition
and size of his income will be changed due to the transformation. It could be concluded that the object of taxation is transferred from the
corporate to the personal sphere.
285 The transfer of the statutory seat without dissolution and liquidation is only possible under extraordinary circumstances, such as war,
revolution, and so on (see van de Streek et al. 2011, par. 1.0.2.d).
44
2.6.3
The influence of tax treaties on the status as a resident
2.6.3.1 Transfer of the place of effective management
Does the application of the DTC result in a company, which has transferred its place of effective management from the
Netherlands to another country, losing its status as a resident in the Netherlands? This question must be answered
negatively if it pertains to a company incorporated under Dutch law, and positively if it relates to a company
incorporated under foreign law.
A Dutch incorporated company which transfers its place of effective management from the Netherlands to another
country will continue to exist under Dutch corporate law. By virtue of the incorporation system it will not be liquidated.
Additionally, for tax purposes the company will still be considered a resident of the Netherlands on the basis of the
fiction of article 2(4) CITA 1969.286 As discussed in paragraph 2.3.2, application of the DTC will most likely lead to the
company no longer being qualified as a resident of the Netherlands for the purpose of the treaty, but this qualification does
not mean that the taxpayer in question automatically loses its status as a resident in the Netherlands for the application of
Dutch tax laws.287
When a company incorporated under the law of another country (a foreign company) and qualified as a resident of the
Netherlands (based on the formal criterion of the place of effective management or, alternatively, the relevant facts and
circumstances)288 transfers its place of effective management from the Netherlands to another country, the company
will, unlike the Dutch incorporated company, be a non-resident for the application of Dutch tax law289 after having
transferred its place of effective management. The resident status is also lost when the company transfers its place of
effective management abroad, but continues to derive profits from the Netherlands (i.e. from a PE in the Netherlands).
The company will then be a non-resident for tax purposes.290
2.6.3.2 Revised DTCs
Existing treaties are renewed and adapted from time to time. In the context of residency, it is possible that when a
renewed treaty enters into force, the place of residence will change, due to the fact that the criteria in the treaty have
been amended. An example includes the recently renewed treaty between the Netherlands and the United Kingdom.291
More specifically, in this treaty the tiebreaker rule with regard to dual resident companies was amended.
Under the old treaty292, the place of effective management was decisive for determining the place of residence of a dual
resident company.293 As such, a company incorporated under Dutch law with its place of effective management situated
in the UK was qualified as a resident of the UK for the application of the 1980 DTC Netherlands – United Kingdom.
As previously discussed, the object of taxation in the Netherlands is limited due to the application of the treaty
tiebreaker rule and, consequently, this company would be a limited resident taxpayer for the application of Dutch
national law. Under the renewed treaty the tiebreaker rule is different. On the basis of article 4(4) of the 2010 DTC
Netherlands – United Kingdom, the competent authorities of the Contracting States will have to determine the place of
residence of a dual resident by mutual agreement. In the process of reaching mutual agreement, the competent
286 This fiction has been discussed in paragraph 1.3.1.2. It has however been argued by Bellingwout that after the transfer of the place of
effective management from the Netherlands to another state, there is no room for the Netherlands to apply the establishment fiction of
article 2(4) CITA 1969. He argues that, for fiscal purposes, the company has been adopted by the other state. See Bellingwout 2009, par. 8.
287 See paragraph 2.4.
288 I.e. a foreign company with its place of effective management located in the Netherlands, see also van de Streek et al. 2011, par.
2.0.7.D.h. and paragraph 2.3.2.
289 The fiction of article 2(4) CITA 1969 does not apply, since the company has not been incorporated under Dutch corporate law.
290 See also Kemmeren 2012.
291 DTC and protocol Netherlands – United Kingdom 2010.
292 DTC Netherlands – United Kingdom 1980.
293 DTC Netherlands – United Kingdom 1980, article 4(3).
45
authorities must consider the following elements:294 where the senior management of the person is carried on; where the
meetings of the board of directs or equivalent body are held; where the person’s headquarters is located, the extent and
nature of the economic nexus of the person to each State; and whether determining that the person is a resident of one
of the contracting States but not of the other State for the purpose of the convention would carry the risk of an
improper use of the convention or inappropriate application of the domestic law of either State. It can be concluded
that the new tiebreaker rule, which essentially focuses on the place of central management and control, encompasses a
more material test than the previous criterion of the place of effective management, which was more juridical. If
authorities do not succeed in reaching a mutual agreement, the company will not be considered a resident of either of
the States for the purpose of claiming any benefits provided by the DTC, except for the provisions pertaining to the
avoidance of double taxation (art. 21), non-discrimination (art. 24), and mutual agreement (art. 25). Concretely, this new
tiebreaker rule implies that the Dutch incorporated company with its place of effective management in the UK, in
principle, will no longer have access to the gross amount of treaty provisions, until the competent authorities of the
Netherlands and the UK agreed on the place of residence of the company. This also implies that the company will no
longer be a limited resident taxpayer but that the limitless liability to tax in the Netherlands will ‘revive’.295 From a
factual perspective the situation remains unchanged, but from a legal perspective this situation can be seen as a business
immigration (or, depending on the particular case, emigration).
To summarize, when the Netherlands concludes a subsequent revised DTC this can influence the place of residence of
a company296 for the purpose of the treaty. For example, in the new DTC which the Netherlands concluded with the
United Kingdom a different criterion is applied for the tiebreaker rule. Previously, the place of effective management
was decisive. Currently, this criterion is replaced with a more material benchmark.297
Having discussed the criteria for residency in paragraph 2.3 it is sufficient to note that, generally, the residency status is
lost when these criteria are no longer met. This general rule applies to all countries and with respect to both natural
persons and legal entities. The following table provides an overview of the resident status.298 One can conclude that
when the connecting factor or criterion is no longer met the resident status will be lost.
Residence criteria for individuals
Residence criteria for companies
Austria
- Domicile or
- Statutory seat or
- Residence
- Place of effective management
Belgium
- Domicile or
- Head office,
- Seat of fortune
- Main place of business, or
- Place of effective management or control
France
- Home or main place of residence,
- Place of effective management
- Non-incidental professional activity, or
- Centre of economic interests
Germany
- Residence or
- Place of business management
- Habitual abode linked to permanency test - Registered office
≥ 183 days
Hungary
- Citizenship
- Place of effective management of listed
See explanatory memorandum to article 4(4) of the DTC NL – UK. This list of factors is not exhaustive.
See also: Engelen 2011.
296 And possibly also the place of residence individuals, although, up until now, there are no examples of such a change.
297 It should however be noted that the two countries provided in transitional law. See Kamerstukken II, 2010/2011, 32 145, nr. 7. For the
purpose of the tax treaty, the ‘old’ residence qualification of dual residents will be respected, provided that there is no material change in the
facts and circumstances. A Dutch incorporated company with its place of effective management in the UK, which, for the purpose of the
old treaty, was considered to be a resident of the UK, will therefore also be considered a resident of the UK under the new treaty for as long
as facts and circumstances remain unchanged.
298 For the purpose of completeness, the Netherlands is included in this table.
294
295
46
Italy
Netherlands
Poland
Sweden
USA
- Habitual abode linked to permanency test
≥ 183 days
- Registration in civil register, and
a. Domicile or
b. Residence
- Living in (based on all relevant facts and
circumstances)
- Stay on Polish territory ≥ 183 days or
- Centre personal and economic interest
- Essential ties, and
- Having been resident at a previous date
- Residence of an individual is not relevant
(incorporate a business)
companies
-
Legal seat, place of management,
Main place of business, or
Main object
Establishment (place of effective management)
-
Registered office or
Place of management
Registration in the SCRO,
Residence of the board, or
Any other relevant circumstances
Incorporation
2.7 Business-emigration (for tax purposes)
A. Dutch tax system
2.7.1
Dutch meaning of business emigration
In Dutch tax law there is no explicit definition on what constitutes the emigration of a business. Business emigration is
not even an actual concept in Dutch tax law. There are, however, several ‘exit’ provisions299 which deal with business
emigration. That is, if one wants to give it a name. For the purpose of this thesis I will assume that these provisions
implicitly give meaning to the concept of business emigration in the Netherlands.
Before looking further into the exact meaning of business emigration for tax purposes emigration is to be distinguished
from the transfer of assets or asset components abroad. Some might argue that this also constitutes an ‘emigration’, since
there is a transition from Dutch territory to a foreign territory. I, however, believe that emigration is not as broad as
such a view makes believe. In literature, parliamentary history, and the exit provisions themselves, emigration is always
distinguished from the transfer of assets or asset components. My conclusion then is that only the subject of taxation
can be said to ‘emigrate’; not the object of taxation. The object of taxation does not emigrate but is said to be
transferred abroad. Following the distinction between emigration and the transfer of asset components abroad I will
discuss the transfer of assets in ‘PE-situations’ separately in the fourth chapter of this thesis.
Since I came to the conclusion that only the subject of taxation can emigrate, i.e. natural persons or legal entities, it
follows that emigration is also closely related to the concept of residency. Only the subject of taxation can be a resident
of the Netherlands. The concept of residency is, however, broader than emigration. The mere liquidation of a company
or death of a natural person cannot be qualified as business emigration but will nonetheless lead to termination of
residency (as previously discussed). Analyzing literature and legislative history300, therefore, led me to further conclude
that business emigration always occurs when a business (carried on by either a natural person a legal entity) is
transformed from a resident taxpayer to a non-resident taxpayer or to a non-taxpayer301, other than by liquidation, cessation or
death. Additionally, it is required that there is a business both before and after this transformation.302
299
Articles 3.60 and 3.61 of the PITA 2001, and articles 15c and 15 d of the CITA 1969, see also paragraphs 2.8.2 and 2.8.3.
See, for example, Kamerstukken II 1998/99, 26 727, no. 3, p 116-118 and Kamerstukken II 1999/2000, 26 727, no. 7, p. 463-464. The
concept of emigration has been introduced into Dutch tax law in order to create a taxable moment. Upon emigration, a taxpayer is namely
transformed from a taxpayer who is fully liable to tax in the Netherlands for its world income, to a taxpayer who is limited or not at all liable
to tax in the Netherlands.
301 Which implies that there is no longer a connection with the Netherlands whatsoever.
302 Otherwise it might be ‘an’ emigration, but then it is not a business emigration.
300
47
In short, in the Netherlands we have no definition of the concept of emigration of a business. However, when analyzing
the different provisions and the parliamentary history303 it becomes clear that business emigration has the following
meaning under Dutch tax law: the situation in which a business carried on in the Netherlands, either by a natural person
or by a legal entity, ceases to be a resident taxpayer due to the fact that the tax residence is transferred abroad. In the
next paragraph this broad definition will be given more substance for both natural persons and legal entities.
2.7.2
How to emigrate from the Netherlands
Having defined the concept of emigration for tax purposes, the next step is to analyze how this can be done, i.e. how can
a resident taxpayer, other than by liquidation or death, be transformed to a non-resident taxpayer or non-taxpayer? I will
follow the distinction previously made between natural persons and legal entities. It should be noted at this point that,
in the Netherlands, there is no special regime for any business taxpayers in particular, such as partnerships or trusts. The
same can be said with respect to the settlement provisions, which will be discussed in paragraphs 2.8.2 and 2.8.3. All
businesses are treated according to the same regime, apart from the distinction made between businesses operating in
the personal sphere and those operating in the corporate sphere.
2.7.2.1 Natural persons
As the provided definition of the concept of emigration implies, only a resident can emigrate. The starting point for
emigration of businesses carried on in the personal sphere is then that only the entrepreneur, i.e. the subjective
enterprise, can emigrate. The entrepreneur is the resident for tax purposes, rather than the objective enterprise. The
objective enterprise has no legal personality. As a result, the transfer of the place of residence of the entrepreneur from the
Netherlands to another country (i.e. moving abroad) is to be labeled as a business emigration in the personal income
tax.
The qualification of whether or not the place of residence has been transferred is, as already emphasized, a very factual
matter. It has to be judged on the basis of all relevant facts and circumstances.304 In literature it has been put forward
that, in practice, the Dutch Tax Authority attaches great value to the formal criterion of subscription in the official
population register in the context of emigration cases.305 However, I emphasize that this is in no respect decisive. If
subscription in the population register were to be decisive it would become very easy to ‘emigrate’ for tax purposes. The
final qualification of residency is based on all relevant facts and circumstances.
In literature, some examples can be found on what does and what doesn’t constitute the emigration of a business.306
They include the following:
a. On the eve of his emigration the entrepreneur ceases his enterprise. In this situation there will be a ‘regular’ tax
settlement by virtue of cessation. This settlement should be distinguished from the exit settlements (which will be
discussed shortly). Obviously, in case the enterprise is liquidated or ceased before emigration, the entrepreneur will
subsequently not be confronted with exit taxes related to business emigration. There is no longer a business which
emigrates.307
303
Kamerstukken II 1999/2000, 26 727, no. 7, p. 463-464 (unofficial translation): parliamentary discussion of article 3.60 PITA 2001 ‘…the
situation that a taxpayer transfers asset components abroad and subsequently ceases to be a Dutch tax resident’. Article 3.61 PITA 2001
then sees on the situation that the entire business is transferred abroad. Article 15c and 15d CITA have a similar effect.
304 See paragraph 2.3.1 for the most important elements which are relevant for the determination of residency.
305 See Burgers, par. 4.2.4.2.3. Compare HR LJN: AA1788, and HR BNB 1998/71.
306 See for example Sillevis and Lugt 2004, par. 3.2.31 and Fiscal Encyclopedia personal income tax, article 3.8 PITA 2001, annotation
31.1.3.
307 See Fiscal Encyclopedia personal income tax, article 3.61 PITA 2001, annotation 2.2.1.
48
b. The entrepreneur moves abroad and takes his (objective) enterprise with him, in order to continue his business
operations abroad. This is not qualified as a ‘regular’ cessation, but as emigration of both the objective and
subjective enterprise, which triggers a tax settlement in the form of and exit taxation.308
c. The entrepreneur, who lives in the Netherlands but carries on his entire enterprise outside the Netherlands,
emigrates (thus moves abroad).309 The exit provisions will not apply. No profits have been derived in the
Netherlands, implying that the Netherlands does not risk losing a tax claim with respect to a business upon
emigration of the entrepreneur. If, however, the entrepreneur carried on business activities both in the Netherlands
and abroad before emigration, the actual emigration of the entrepreneur will sort the same effect as described under
(b), assuming that the entrepreneur takes his (objective) enterprise with him. I.e. an exit tax will be triggered to the
extent that business activities were carried on in the Netherlands before emigration.
d. The entrepreneur moves abroad, leaving his enterprise behind in the Netherlands. From that moment forward, the
business operations will be carried on from outside the Netherlands. The entrepreneur is thus transformed from a
resident into a non-resident, which is to be qualified as an emigration. In this situation there will, however, be no
tax settlement. Since the enterprise is not liquidated or ceased there will be no ‘regular’ cessation settlement.
Additionally, there will neither be an exit tax settlement, since the entrepreneur continues to derive income from
the Netherlands-driven enterprise.
e. A non-resident taxpayer carrying on an enterprise in the Netherlands and subsequently transferring this enterprise
abroad, is not to be labeled as an emigration. There is no taxpayer moving away his or her tax residence from the
Netherlands. Nonetheless, as will be discussed in paragraph 2.8.2, such a transfer might trigger a tax settlement in
the form of an exit tax in the Netherlands.
2.7.2.2 Legal entities
It should (again) be noted that only a resident can emigrate. As a result, the transfer of the place of residence of
company from the Netherlands to another country is to be labeled as a business emigration in the corporate income tax.
The qualification of whether or not the place of residence has been transferred is, as already brought forward, initially
based on the formal criterion of the transfer of the place of effective management. If necessary, an additional judgment
can be made on the basis of all relevant facts and circumstances.310
It was argued in paragraph 2.4, that for the application of Dutch tax law essentially only national law is of importance in
determining whether or not a taxpayer is a resident or non-resident of the Netherlands.311 However, for application of
the specific emigration provision in the CITA 1969 it has been explicitly stated by the legislator that both national and
treaty provisions are of importance in determining the location or place of residence of the business.312 In line with this,
the Dutch State Secretary of Finance has expressed his view in a Resolution in 2001.313 He argued that the transfer of
the real seat (i.e. the place of effective management) of a company, which has been incorporated under Dutch corporate
law, can possibly trigger the exit provisions with respect to business emigrations. It follows that a legal entity can lose its
status as a resident on the basis of both national tax law and tax treaties, for the application of the business emigration
provisions in the CITA 1969. The discussion provided in paragraph 2.6.2, which dealt with the question how companies
can lose their resident status, thus slightly differs when it comes to emigration. More precisely, the transfer of the place
of effective management from the Netherlands to another country means that the transferring company will lose its
308 I.e. article 3.61 PITA 2001, see amongst others Sillevis and Lugt 2004, par. 3.2.31 and Fiscal Encyclopedia personal income tax, article
3.61 PITA 2001, annotation 2.2.1. The tax assessment is not actually imposed before emigration. Rather, the entrepreneur will have to file a
tax declaration at to the Dutch Tax Authority, which will lead to the imposition of a tax assessment.
309 Sillevis and Lugt 2004, par. 3.2.31.
310 See paragraph 2.3.2 for the most important elements which are relevant for the determination of residency.
311 See also Burgers 2007, argues in paragraph 4.2.1
312 See also Kamerstukken II 2001/02, 28 034, nr. 3, p. 32 and Fiscal Encyclopedia personal income tax, article 3.60 PITA 2001, annotation
1.6.3 and 3.1.
313 Resolution State Secretary of Finance BNB 2001/230.
49
status as a resident in the Netherlands for the purpose of the emigration provisions in the corporate income tax. The
company will continue to exist under Dutch corporate law and, by virtue of the incorporation system, will not be
liquidated (fiction of article 2(4) CITA 1969). But the company will most likely become a dual resident, and after
application of the DTC, will no longer be qualified as a resident of the Netherlands (possibly as a limited resident
taxpayer). As noted before, the emigration provisions in the CITA 1969, i.e. articles 15c and 15d, follow this
qualification. Therefore, in addition to ‘regular’ loss of the status as a resident (other than liquidation of the company),
the transfer of the place of effective management should also be qualified as a business emigration.
Finally, in paragraph 2.6.3.2 I argued that when the Netherlands concludes a subsequent, renewed DTC, this can
influence the place of residence of a company for the purpose of the treaty, due to the fact that a different criterion is
applied for the tiebreaker rule. When, for example, the criterion is changed from the place of effective management to
the more material benchmark of the place of central management and control314,315 there might be a change of the place
of residence for the purpose of the treaty when the renewed DTC enters into force. For example, after such a renewal
enters into force, a company which carries on its place of effective management in the Netherlands, whereas its place of
central management and control is materially located in another country, will be considered a resident of the other
country. There is no factual change in the situation before and after the renewal/revision of the DTC, but from a fiscallegal perspective there will be an emigration for the purpose of the treaty (disregarding transitional law)316.
Some examples of what does and what does not constitute the emigration of a legal entity from the Netherlands include
the following:317
a. A Dutch company starts business operations outside the Netherlands through a foreign PE. The company will
remain a resident of the Netherland for tax purposes. This situation can therefore not be labeled as a business
emigration.
b. A Dutch company starts business operations outside the Netherlands by establishing a subsidiary abroad. This is no
business emigration, but the establishment of a new business with a separate legal personality abroad.
c. A Dutch company transfers its place of effective management abroad. As discussed, the company will continue to
exist under Dutch corporate law, but, for the purpose of the exit provisions, is deemed to have been emigrated.
d. A foreign company, i.e. a company incorporated under the law of another country, with its place of effective
management in the Netherlands, transfers its place of effective management abroad. This is also to be labeled a
business emigration, since the foreign company will no longer be a resident in the Netherlands. It is irrelevant
whether the foreign resident company carried on the business activities in the Netherlands (by means of a PE) or
outside the Netherlands before the transfer of the place of effective management; in both cases, the transfer of the
real seat is a business emigration.318
e. A foreign company with both its statutory and real seat outside the Netherlands, carrying on business activities in
the Netherlands through a PE, transfers assets from this PE to the foreign head office. This is not to be qualified
as a business emigration, since the company is not transformed from a resident to a non-resident taxpayer.
However, for the final settlement provisions (art. 3.61 PITA 2001 and art. 15d CITA 1969) such an emigration is
not strictly required. I will elaborate on this in4.6.2. For now, it is noted that it might be possible that there is a tax
settlement, even though this situation does not constitute an emigration.319
314 See the criteria which Contracting States have to take into consideration in determining the place of residence, which are mentioned in
paragraph 1.4.2. These criteria essential come down to the material criterion of the place of central management and control.
315 As was the case in the renewed DTC between the Netherlands and the UK.
316 The transitional law encompasses that for the purpose of the tax treaty, the ‘old’ residence qualification of dual residents will be
respected, provided that there is no material change in the facts and circumstances. See also Kamerstukken II, 2010/2011, 32 145, nr. 7, and
paragraph 1.4.2.
317 See amongs others: van de Streek et al. 2012, par. 2.0.7.C.d and par. 2.0.7.D.h.
318 See also van de Streek et al. 2012, par. 2.0.7.D.h.
319 See also HR BNB 2013/94..
50
With respect to options (c) and (d), there are two possibilities: after the seat transfer, 1) the company continues carrying
on business activities in the Netherlands through a PE, or 2) the company ceases all business activities in the
Netherlands. In the first situation, the company will be transformed from a resident taxpayer into a non-resident
taxpayer. In the second situation, the company will become a non-taxpayer. The options will have different
consequences with respect to the exit tax provisions, as will be explained in paragraph 2.8.
It should first of all be noted that in most states the concept of emigration as such does not exist. In Austria,
emigration is strictly taken not possible from a company law perspective, as the State employs a real seat jurisdiction.
However, as a consequence of the CJEU ruling in the Cartesio case320, companies which are incorporated under Austrian
law are allowed to change their legal form into a legal form of another MS with retention of their identity, provided that
there is an actual transfer of the seat of the company to that other MS.321 As a consequence, the transfer of the place of
effective management does not lead to the liquidation of the company (which is the case in several other real seat
jurisdictions).322 For tax law purposes, then, emigration means the ending of unlimited or limited tax liability in that
country. Even when a resident taxpayer transfers from Austria while leaving behind a PE in that country, this still
constitutes emigration. The emigration provisions in Austrian tax law (which will be discussed in the next paragraph),
however, only apply to assets which are moved instantly upon an emigration.323
Similar to Austria, Belgium also applies the real seat theory of company law.324 As a consequence, emigration as such is
not possible for Belgian resident companies. Rather, the transfer of a company’s place of effective management will lead
to a deemed liquidation under Belgian tax law.325 With respect to individuals, the application of the real seat doctrine is
quite irrelevant. For individuals, emigration is a factual question in Belgium; when, based on the facts and
circumstances, an individual can no longer be considered as a resident for tax purposes, this person will have
emigrated.326
In France, the concept of emigration is not defined as such but it is linked to individuals who transfer their domicile
outside France or companies transferring their registered office outside that country, where it should be noted that
France employs an incorporation system.327
German law does not contain a common definition of emigration for tax purposes either. Corporations can said to
have emigrated from Germany when they leave the German tax jurisdiction and lose their status as a resident for tax
purposes. This means that in order to emigrate, companies have to relocate their business management and/or
registered office abroad.328 For individual business, the residency status of the entrepreneur is decisive with respect to
the notion of emigration. More specifically, if the entrepreneur, being a natural person, leaves the country by
320
See CJEU Cartesio (Case C-210/06). For the details of this ruling I refer to paragraph 7.3.2.
See Pinetz 2013 (Austria), p. 37. It is also noted that Austria itself does not offer the options of cross-border conversion or cross-border
reorganisations (with the exception of the implementation of the Merger Directive).
322 See Pinetz 2013 (Austria), p. 38, who argues that this is the prevailing opinion in Austria. As a consequence, migrations are not subject to
liquidation provisions in the Austrian Corporate Income Tax Act but to provisions regulating the taxation on assets which are transferred
outside the Austrian taxing jurisdiction.
323 See Pinetz 2013 (Austria), p. 38, with reference to § 6 N 6 letters a and b Income Tax Act.
324 These provisions will be discussed in the next paragraph.
325 See Bruyère 2013 (Belgium), p. 41, with reference to Article 210, §1, 4° jo. Article 208 and Article209. See also M. VAN GILS et al.,
‘Zetelverplaatsing voor en na de wet van 11 december 2008 – Deel II. Emigratie’, T.F.R. 369, (2009), pp. 841-842; H. LAMON, ‘Emigration
ou immigration de sociétés sous l’ingle comptable et fiscal : où en sommes-nous?’, Revue Générale de Fiscalité, Edition 6-7, (2005), p. 6.
326 See Bruyère 2013 (Belgium), p. 35, with reference to T. AFSCHRIFT, Impôt des personnes physiques – chronique de jurisprudence
2000-2008, Larcier, (2009), p. 30.
327 This is implicitly derived from Depaix 2013 (France), p. 34-35.
328 See Mehlhaf 2013 (Germany), p. 16-17, where the transfer of the place of business management is decisive.
321
51
abandonment of residence and habitual abode, the individual business will have emigrated from Germany as the
entrepreneur is no longer considered a resident for tax purposes.329
In Hungary, the emigration of a business is not a ‘real’ concept in tax law either. There are, however, some transfers
which can be denoted as the emigration of a business.330 Firstly, the transfer of business activities in the form of goods
and services cannot be seen as the emigration of a business. Secondly, businesses can transfer a branch to another
country. Two cases are to be distinguished here: 1) a purely resident company sets up or transfers a branch abroad, or 2)
a non-resident taxpayer takes its branch out of Hungary. The latter case can, under circumstances, be seen as an
emigration. Finally, a total and real emigration will only occur when an entity takes its total business out of Hungary (i.e.
transfers its place of effective management).331 However, I believe that this cannot really be seen as a ‘clean’ emigration,
as under the real seat system of Hungarian company law, a company wishing to the transfer of the place of effective
management outside that country’s territory is required to wind up and liquidate, and reincorporate under the law of the
other State.
Italian law implicitly establishes that the transfer of a legal seat abroad is considered as the emigration of a company.332
Such a transfer, and thus emigration of a company333, is only possible when this is implemented in compliance with the
law of the other State(s) involved. From an Italian perspective, the transfer of the legal seat abroad should not give rise
to any legal problems, as Italy applies the incorporation theory of company law, by virtue of which companies are free
to move their seat without having to wind-up.334
In Poland, then, emigration is not possible. Taking into account that Poland applies the real seat theory of company law
in a strict manner, businesses wishing to leave the Polish territory cannot continue their existence under the law of that
State. Termination is thus a more appropriate term than emigration. In order to terminate, it is necessary to complete
the formal obligations concerning the discontinuation of activities. In case of an individual business, termination can
only result in removal from the register of economic activities or the settlement of the business remaining assets. On the
other hand, termination of a legal entities’ activity can involve various operations, such as dissolution, winding up, and
cancellation of the registration in the Polish Court Register.335
In Sweden, emigration sees to the situation in which a business, which has been subject to taxation in Sweden, leaves
the Swedish tax jurisdiction.336 The transfer of residency abroad will thus lead to emigration for tax purposes, with
respect to both individual businesses and legal entities. Strictly taken, however, Swedish legal entities (i.e. Swedish
incorporated companies) cannot leave the Swedish jurisdiction for national law purposes, as a consequence of which
emigration is not possible.337 Foreign legal entities can leave the Swedish jurisdiction by disposing of the income source
that is liable to tax in Sweden. This is then also to be understood under the notion of emigration.
Finally, in the U.S. emigration for tax purposes as such does not exist. Companies can only “emigrate” if they reincorporate in a foreign country and thus lose the U.S. resident status.338
See Mehlhaf 2013 (Germany), p. 17, with reference to sec. 8 and 9 AO.
It should be noted that the Hungarian paper only focused on legal entities, not on individual businesses.
331 This is argued by Varga 2013 (Hungary), p. 27-28.
332 See Trabattoni 2013 (Italy), p. 26, with reference to article 25 co. 3 of Law 218/1995.
333 It should be noted that the Italian paper only focused on the emigration of legal entities.
334 See Trabattoni 2013 (Italy), p. 26, with reference to the Grundungstheory. However, where a company emigrates to a real seat
jurisdiction, winding-up may be required.
335 See Majda 2013 (Poland), p. 47, with reference to R. Lewandowski, Polish Commercial Law: An introduction, Beck, Warszawa 2007, p.
36.
336 See Lim 2013 (Sweden), p. 17.
337 See Lim 2013 (Sweden), p. 17, with referemce to the chapter 6 section 3 of the ITA. This provision is similar to the Dutch article 2(4)
CITA 1969.
338 See Stepien 2013 (U.S.), p. 50.
329
330
52
2.8 Specific tax provisions on business-emigration
A. Dutch tax system
In this paragraph, the Dutch tax provisions dealing with the emigration of a business will be analyzed and discussed.
Following the distinction made between enterprises carried on by individuals and those carried on by legal entities, the
relevant provisions for both categories will be discussed separately. This distinction has, however, not always existed in
Dutch tax law; when the revised personal income tax was introduced in 2001 (PITA 2001), the CITA 1969 was
amended as well. Whereas before 2001 the CITA referred via art. 8 CITA 1969 to art. 16 PITA 1964 for business
emigration cases, the CITA now contains an exit provision of its own. The current exit provisions of both the PITA
2001 (articles 3.60 and 3.61) and the CITA 1969 (articles 15c and 15d) essentially have the same rationale as their
predecessor - art. 16 PITA 1964.339 However, before discussing these exit provisions in further detail, some preliminary
remarks are in order.
2.8.1
Some preliminary remarks
2.8.1.1 Purpose and scope; the Dutch ‘total profit concept’
In order to understand the purpose and scope of the Dutch emigration provisions for businesses I will first discuss the
Dutch totaalwinstbegrip (total profit concept). According to article 3.8 PITA 2001340 all benefits obtained from a business
belong to the taxable profit. Unlike the concept of the annual taxable profit, the total profit concept implies that all
benefits obtained during the entire fiscal life of the business have to be taken into account.
There are situations in which there is no directly detectable benefit when applying the regular rules for determining the
annual profit or total profit. Obviously, the Netherlands does not want to lose its rightful claim to tax latent benefits.
Therefore, several provisions which are aimed at creating a taxable moment are included in the Dutch tax law. Articles
3.60 and 3.61 of the PITA 2001 as well as articles 15c and 15d of the CITA 1969 are these kinds of settlement
provisions. They serve to secure taxation on 1) unrealized capital gains and hidden reserves, fiscal reserves, goodwill,
and other value increases which normally would not be expressed (and taxed) in the annual profit, and 2) unrealized
gains in respect to single assets moved abroad. In the normal situation, taxation on these items of income would wait
until consumption (realization). However, since the realization will take place in the future and outside the Netherlands,
there is no guarantee for the Netherlands of recovery of the tax claim. Hence, the rationale behind exit provisions;
without them it might 341 not be possible to tax gains upon realization since realization will most likely occur in another
states’ territory, resulting in tax base erosion.342
2.8.1.2 Subject of Dutch exit provisions
The aforementioned total profit concept implicitly means that, from a Dutch perspective, the subject of exit taxes is
twofold.343 Firstly, emigrating taxpayers, i.e. residents (either individuals or companies) who move their tax residence
from the Netherlands to another country in order to continue their business abroad, will be faced with an exit tax.
Secondly, for the application of the final settlement provisions of articles 3.61 PITA 2001 and 15d CITA 1969, it is also
See Kamerstukken II 1998/99, 26 727, no. 3, p. 116 and Kamerstukken II 1998/99, 26728, no. 3, p. 55.
3.8 PITA 2001 also applies to the CITA 1969, due to the connecting provision in article 8 CITA 1969.
341 I say ‘might’, since as previously discussed, it has been put forward in literature that under a system of ‘succeeding-residencycompartmentalization’, tax deferrals will not necessarily escape the jurisdiction of the emigration state. See Conclusion A-G Wattel 28
August 2012, par. 1.3.
342 See Kamerstukken II 1998/99, 26 727, no. 3, p 116-118.
343 Since it was argued that exit taxes serve to secure taxation on 1) unrealized capital gains and hidden reserves, fiscal reserves, goodwill and
other value increases which normally would not be expressed (and taxed) in the annual profit, and 2) unrealized gains in respect to single
assets moved abroad.
339
340Article
53
possible that the subject of taxation is not an emigrating resident, but a non-resident moving (part of) his business
activities from the Netherlands abroad.
2.8.1.3 Object of Dutch exit provisions
The object of exit taxes encompasses tax latencies. These latencies represent 1) unrealized (not readily consumable)
capital gains and hidden reserves, fiscal reserves, goodwill and other value increases, and 2) unrealized gains in respect to
single assets moved abroad. It should be noted that all these unrealized gains and reserves normally would not be
expressed (and taxed) in the annual profit. As such, they represent elements over which the Netherlands does not want
to lose its claim.
1. Unrealized gains and hidden reserves (in Dutch: stille reserves): due to the fact that in the Netherlands the profit is
determined on the basis of what we call ‘goedkoopmansgebruik’344 (which roughly translates to ‘sound business
practice’) these reserves and gains are normally not expressed in the annual profit. Part of this goedkoopmansgebruik is
the principle of prudency, which implies that an enterprise is allowed to defer profits until realization.345
Consequently, reserves will come to existence with respect to, for example, depreciation on movable and
immovable property, the valuation of inventories, and value increases in assets and inventories.
2. Fiscal reserves: the Dutch legislator provides businesses with the opportunity to form several fiscal reserves, by
virtue of which taxation can be postponed. Examples include the reinvestment reserve346 (encompassing a deferral
of taxation on the capital gain resulting from the alienation of business assets, under the condition that the business
intends to reinvest this gain in a replacing investment); the old-age reserve347 (a reservation for the pension of the
individual entrepreneur); and the cost equalization reserve348 (a deduction from the annual taxable profit in order to
take into account reasonable future expenditures, such as the maintenance of a ship).
3. Goodwill: the Dutch Supreme Court349 argued that goodwill expresses the earnings power of a business above the
normal return on the capital invested in that enterprise and above the normal remuneration of the labor of the
entrepreneur. In other words, goodwill is the present value of the over-profits which can be achieved by the
business.
It should be emphasized that these elements will only be included in the object of the exit tax provisions if they have
not already been taken into account for other purposes in either the personal or corporate income tax.350
2.8.2
Exit provisions for businesses in the personal sphere
Articles 3.60 and 3.61 of the PITA 2001 regulate the emigration of a business falling under the personal income tax.
This thus concerns emigration of an entrepreneur.
2.8.2.1 Partial settlement
Article 3.60 regulates the transfer of asset components or part of the business abroad combined with the emigration of the
taxpayer.351 The article states the following:352
Goedkoopmansgebruik or ‘sound business practice’ is a concept which has been developed in case law.
See for example HR BNB 1957/208, in which the Dutch Supreme Court argued that, for the determination of the annual profit, the
entrepreneur does not have to count himself rich.
346 In Dutch: herinvesteringsreserve. See articles 3.53(1)(b) and 3.54 PITA 2001.
347 In Dutch: oudedagsreserve. See article 3.53(1)(c) and articles 3.67 – 3.73 PITA 2001.
348 In Dutch: kostenegalisatiereserve. See article 3.53(1)(a) PITA 2001.
349 See HR BNB 1953/190.
350 For example, in the situation in which an enterprise is liquidated before emigration (see paragraph 2.7.2.1 event (a)), there will be a
settlement by virtue of liquidation (in Dutch: staking). The elements taxed on the basis of that settlement will not be taxed again upon
emigration of the entrepreneur, since the business was already dissolved.
351 Where emigration means that the taxpayer is no longer a resident for the Dutch personal income tax. For the meaning of residency, see
paragraph 2.3.1.
352 Unofficial translations by EK, see: Kemmeren 2012, p. 183-212.
344
345
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‘If asset components of a business or an independent part of a business carried on in the Netherlands, from which the
taxpayer receives profits, are transferred to a business carried on outside the Netherlands, from which the taxpayer receives
profit, and simultaneously or afterwards the taxpayer ceases to be a resident taxpayer, insofar as these asset components
still belong to the assets of the business, these asset components are deemed to have been alienated at fair market value at
the time immediately preceding the cessation of being a resident taxpayer.’
When analyzing the exit provision laid down in art. 3.60 PITA 2001 it becomes clear that two requirements have to be
met cumulatively in order to be confronted with such an exit tax: 1) asset components353 are transferred to an enterprise
carried on abroad, and 2) simultaneously or afterwards the entrepreneur ceases to be a resident-taxpayer.354 At this point I
want to highlight three issues. First of all, it is not exactly clear what the Dutch legislator considers to be ‘afterwards’. It
is, however, clear that the provision of article 3.60 will enter into force in the year of emigration, even if the taxpayer
emigrates several years after having transferred the asset components.355 A second issue concerns the determination of
the place of residence. For the application of article 3.60, the place of residence should be determined purely on the
basis of national rules and provisions.356 The third and final issue I want to discuss here is the fact that the entrepreneur
should receive profits from the business outside the Netherlands to which the asset components have been transferred.
If this is not the case, i.e. if the asset components have been transferred to a company from which the profits are
received by another person than the entrepreneur in question, article 3.60 will not be triggered. However, there will still
be a tax settlement in this case, since there has been a withdrawal from the business’ working capital.
Now turning back to the two requirements; when asset components are transferred to a business carried on outside the
Netherlands and simultaneously or afterwards the entrepreneur ceases to be a resident-taxpayer in the Netherlands, the
exit tax provision of article 3.60 will be triggered. In case only the first requirement is met, indicating that part of the
business is transferred to a business carried on abroad but the entrepreneur remains in the Netherlands, art. 3.60 of the
personal income tax will not be triggered. This is explicitly mentioned in an explanatory memorandum:357 ‘if in a certain
year, asset components are transferred to a PE abroad, this will sort no effect. The Netherlands will keep its tax claim since the
entrepreneur will be taxed for its worldwide income358 in the Netherlands.’359 The exit tax provisions of article 3.60 will not apply
either in case only the second requirement is met, i.e. when the entrepreneur emigrates but no asset components are
transferred to a business carried on outside the Netherlands. The taxpayer is now a non-resident under the Dutch tax law,
which implies that the Netherlands does not lose its tax claim on this taxpayer. The taxpayer still makes profits in the
Netherlands, now from a business constituting a PE.
I.e. components which belong to the assets of (part of) the company. This concerns both tangible and intangible assets. See also BNB
2010/214, in which the Dutch Supreme Court argued that the reinvestment reserve should be seen as an asset. What is a reinvestment
reserve? In Dutch tax law it is, under conditions, fiscally allowed to form a reinvestment reserve after having alienated assets (see article 3.54
PITA 2001). Shortly put and without going into too many details, this reserve (which is the difference between the value realized at sale and
the book value) has to be reinvested in a new assets within three years after having alienated the ‘old’ assets.
354 The legislator used a broad formulation; not only emigration of the entrepreneur falls under the scope of this article, but in case the
entrepreneur deceases, art. 3.60 will be triggered as well in case asset components have been transferred to an enterprise carried on outside
the Netherlands.
355 Kamerstukken II 1998/99, 26 727, no. 3, p. 117, van Kempen 2011, par. 3.2.31.D. and Fiscal Encyclopedia personal income tax, article
3.60 PITA 2001, annotation 3.1.
356 As discussed, the place of residence of the taxpayer should be determined on the basis of the criteria of article 4 State Tax Law Act. For
article 15c CITA 1969, which is the counterpart of art. 3.60 PITA 2001 in the corporate income tax, both national provisions and applicable
treaty provisions are of importance in determining the location or place of residence of the business. See also Fiscal Encyclopedia personal
income tax, article 3.60 PTIA 2001, annotation 1.6.3 and 3.1.
357 Kamerstukken II 1998/99, 26 727, no. 3, p. 116.
358 Thus including the foreign derived profits.
359 The particular consequences of this arrangement will be discussed in more detail in chapter 4.
353
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2.8.2.2 Final settlement
It should be noted that article 3.60 contains a partial settlement. It is particularly meant to ensure payment of a
settlement tax in case assets are transferred abroad. The final settlement is regulated by article 3.61.360 Instead of only
referring to the transfer of asset components, article 3.61 also refers to the situation in which an entire business transfers
abroad, followed by the termination of tax residency. Moreover, it also applies in a non-residency context. Article 3.61
reads as follows:361
‘Benefits from a business, which have not already been taken into account for other reasons, are included in the profit of the
calendar year in which the taxpayer stops making profits in the Netherlands. In that case, goods are deemed to have been
withdrawn from the business for the application of the divestment addition.’
The general remarks previously made in relation to art. 3.60, are also applicable to art. 3.61. Indeed, articles 3.60 and
3.61 are closely related and overlap to some extent. However, article 3.61 is broader in scope. Whereas article 3.60
relates to a specific situation, i.e. the transfer of assets component abroad followed by emigration, article 3.61 is a
general final settlement provision. Article 3.61 also applies to situations in which not only asset components, but the
entire business is transferred abroad. Article 3.60 precedes the application of article 3.61; if there has already been a
partial settlement by virtue of art. 3.60, the tax latencies will not be taxed again under application of article 3.61.362 This
follows explicitly from the first sentence of article 3.61, which states ..’which have not already been taken into account for other
reasons’. In this sense, article 3.61 constitutes a safety net provision. If, for example, a tax payer emigrates before he or she
transfers asset components to a business carried on outside the Netherlands, article 3.60 will not apply. For the
application of article 3.60 it is required that the transfer of asset components takes place simultaneously to or right
before emigration, not after emigration of the entrepreneur. In this situation there will nonetheless eventually be a tax
settlement by virtue of article 3.61.363 Another example in which article 3.61 fills the gap which article 3.60 leaves open,
includes the transfer of the entire364 business of a non-resident taxpayer from the Netherlands to a business carried on by
that same non-resident taxpayer outside the Netherlands. Since the taxpayer does not move his residence from the
Netherlands to another country, article 3.60 does not apply.
There are however also situations in which both articles 3.60 and 3.61 may not apply. When, for example, a nonresident transfers part of his business from the Netherlands to another State and the entrepreneur remains a non-resident
in the Netherlands (meaning that he or she does not cease to derive profits from the Netherlands), article 3.60 will
definitively not apply, because the business taxpayer does not emigrate from the Netherlands to another State. In my
opinion, this case is not covered by article 3.61 either, based on a strict interpretation of this provision. Indeed, the
taxpayer does not cease to derive profits from the Netherlands, so there will be no tax settlement (at least not
immediately upon transfer). 365 Whether or not it might consequently be possible that assets leave the Dutch jurisdiction
without taxation, will be analyzed in more detail in paragraph 4.6.
360
Whereas article 3.60 is specifically aimed at taxation of business emigration, article 3.61 contains a general final settlement, which also
applies in situations other than emigration (e.g. death of the entrepreneur).
362 See also Fiscal Encyclopedia personal income tax, article 3.60 Wet IB 2001, annotation 1.6.1.
363 However, it is unclear whether upon the transfer of mere asset components after emigration, article 3.61 (respectively 15d in the context
of a company) will be triggered immediately (and therefore partially) or whether this article will only be triggered in ‘final’ situations. I will
discuss this in more detail in paragraph 4.6.1.
364 See for a discussion of the situation in which a non-resident entrepreneur transfers part of his Netherlands-driven business to a business
carried on outside the Netherlands, paragraph 4.6.
365 See also: Kemmeren 2012, p. 14, who argues that this case may be covered by article 3.61 and that the applicability of this article is still an
open question.
56
2.8.3
Exit provisions for businesses in the corporate sphere
The emigration of legal entities is regulated by articles 15c and 15d of the CITA 1969. Article 15c contains a partial exit
settlement, whereas article 15d provides for the final tax settlement.
2.8.3.1 Partial settlement
Similar to article 3.60 PITA 2001, article 15c regulates the transfer of asset components abroad combined with the
cessation of the taxpayer’s residency in the Netherlands (emigration of the taxpayer)366. The purpose of this provision is
to make it perfectly clear that a tax has to be settled when asset components have been transferred to a business of the
taxpayer carried on outside the Netherlands and the taxpayer transfers its real seat abroad.367 Article 15c provides:368
‘1. If, for the application of this act, a treaty to avoid double taxation, the Tax Agreement for the Kingdom, or the Tax
Agreement for the country of the Netherlands, a taxpayer is no longer considered to be a resident of the Netherlands, the
components of its assets the benefits of which no longer are included in its taxable profits are deemed to be alienated at fair
market value at the time immediately preceding the cessation of the above residence.
2. The first paragraph is equally applicable with respect to asset components of a fiscal unity which originate from a
subsidiary if in respect of that subsidiary conditions occur within the meaning of paragraph 1.’
When analyzing the first paragraph of the exit provision laid down in art. 15c CITA 1969 it becomes clear that, as was
the case with art. 3.60 PITA 2001, two requirements have to be met cumulatively in order to be confronted with this
exit tax: 1) asset components have been transferred to a foreign business of the taxpayer, and 2) the legal entity369 ceases
to be a resident taxpayer, either because of a transfer of its real seat abroad or because of a requalification of the place of
residence.370 The second paragraph of article 15c is meant to ensure that there will be a tax settlement in case asset
components are transferred from a Dutch subsidiary taking part in a fiscal unity371 to a foreign driven enterprise.
Two issues have led to the expansion of the scope of article 15c after its introduction in 2001. First of all, the
application of tax treaties and conventions can result in a taxpayer (legal entity) no longer being qualified as a resident of
the Netherlands, which in turn can lead to companies escaping a tax claim. Therefore, article 15c has been adapted in
order to make sure that the cessation of residency on the basis of a treaty qualification will fall under the reach article
15c.372 This was also put forward in the previous subparagraph; for article 15c CITA 1969 (contrary to article 3.60
PITA 2001) both national provisions and treaty provisions are of importance in determining the place of residence of
the taxpayer.373 A second issue which, eventually, resulted in an amendment of article 15c was the initial use of the term
366
Possibly in abundance, I note that the taxpayer here is thus the legal entity and not a natural person (individual).
See also: Kamerstukken II 1998/99, 26728, no. 3, p. 55 and Resolution State Secretary of Finance BNB 2001/230
369 I.e. the head office, since a permanent establishment has no separate legal identity.
370 For example through the application of a DTC (see later on the section above).
371 As previously stated, it goes beyond the scope of this thesis to discuss the entire Dutch tax system in detail. However, I do want to
provide the reader with a limited explanation of the content and meaning of the Dutch regime of the fiscal unity. The term fiscal unity in
Dutch tax law exists in both the value added tax and in the corporate income tax. However, the term carries a different meaning under both
areas of taxation. The emphasis here is obviously on the fiscal unity in the corporate income tax, for which the rules are laid down in articles
15-15b CITA 1969. The fiscal unity is a tax consolidation regime. The parent and subsidiaries can opt in for this regime if and when the
parent company both economically and legally, either directly or indirectly, owns at least 95% of all the issued share capital of the
subsidiaries. The result of forming a fiscal unity is that all profits and losses of group companies are consolidated and taxed at the level of
the parent company. For the tax receiver, the fiscal unity is seen as one taxpayer. This implies that intra-group transactions such as internal
assets transfers do not have tax consequences, and that reorganizations within the fiscal unity do not trigger corporate income taxation
either. It should be noted that only a ‘Dutch’ fiscal unity is possible; only companies which are established in the Netherlands can be part of
the fiscal unity (I will leave the exact details of this general rule out of the discussion for now).
372 See Kamerstukken II 2001/02, 28 034, nr. 3, p. 32.
373 See also paragraph 2.4.
367
57
company374, for which the legislator now uses the term ‘taxpayer’ in order to express that legal entities not forming a
material enterprise (like companies with purely investment activities) also fall under the scope of article 15c.375
Following the same structure as in paragraph 2.8.2, this section will provide a discussion of the two requirements laid
down in the first paragraph of article 15c. When asset components are transferred to a foreign business of the taxpayer
and the legal entity ceases to be a resident-taxpayer in the Netherlands, the exit tax provision of article 15c will be
triggered. In case only the first requirement is met, meaning that part of the business is being transferred to an abroad
business, but the legal entity (taxpayer) remains a resident of the Netherlands, art. 15c of the corporate income tax will
not apply. The same can be said when only the second requirement is met, meaning that the taxpayer (head office)
emigrates but no asset components are transferred from the Netherlands to a foreign business. The taxpayer is now a
non-resident for the purpose of Dutch tax law, which implies that the Netherlands does not lose its tax claim on this
taxpayer. The company does not cease to make profits in the Netherlands; it receives profits from a business
constituting a PE.
2.8.3.2 Final settlement
In line with the ‘exit’ provisions in the personal income tax, article 15c contains a partial settlement. Under the
corporate income tax the final settlement is found in article 15d. The partial settlement of 15c precedes this final
settlement. Article 15d states:376
‘Benefits which have not already been taken into account for other reasons, are included in the profit of the calendar year in
which the taxpayer stops making profits which are taxable in the Netherlands. In that case, for the application of the
divestment addition, asset components are deemed to have been alienated at fair market value.
The discussion provided in the final section of paragraph 2.8.2, concerning the relation between article 3.60 and article
3.61 PITA 2001, is similarly applicable to the relation between articles 15c and 15d CITA 1969. For the sake of
completeness, a brief review will be given. Articles 15c and 15d are closely related and overlap to some extent, but
article 15d is broader in scope; article 15d is a general final settlement provision, and functions like article 3.61 as a
safety net. As such, article 15d also applies to the situation in which not only asset components, but the entire business
is transferred abroad or to the situation in which the business of a non-resident taxpayer transfers from the Netherlands
to a business carried on by that same non-resident taxpayer outside the Netherlands. Article 15c precedes the
application of article 15d; if there has already been a partial settlement, a final settlement will not follow. Only ’benefits
which have not already been taken into account for other reasons’ will be taxed on the basis of art. 15d.
According to Bellingwout377 the ‘complete picture’ of taxation upon emigration of a company can be decomposed into
three subsequent steps: 1) the transfer of asset components abroad, followed by 2) the transfer of the place of effective
management abroad, and finally 3) cessation of business activities still remaining in the Netherlands. Approaching the
issue of exit taxation from this tree-stage perspective, article 15c would be applied after the second step, and article 15d
after the third.378 It might, however, be argued that this model is incomplete, as, in some situations, an additional stage is
needed in between the second and third stage in order to satisfy the total profit concept. This will be the case in the
interim transfer of asset components. More specifically, it is possible for the Dutch PE to transfers assets components
374 Or synonyms like undertaking, enterprise or business. This choice of wording was heavily scrutinized in literature. See for example:
Bellingwout 2001(I), par. 7.2.
375 See Kamerstukken II 2001/02, 28 034, nr. 3, p. 11 and p. 32, and Resolution State Secretary of Finance BNB 2001/230 case c: ‘partial or
final settlement will also be required in case the company did not carry on a material enterprise (e.g. an investment company).
377 See Bellingwout 2001(I), par. 7.5.
378 It should be noted that this is equally applicable to the exit provisions in the personal income tax.
58
to the head office of a Dutch incorporated company which is seated outside the Netherlands. This company is still
considered a resident taxpayer by virtue of article 2(4) CITA 1969. If this company continues to derive profits from the
Netherlands after the transfer, such an interim asset transfer takes place before stage 3 (cessation of business activities
still remaining in the Netherlands), but after stage 2 (emigration of the tax payer). As this is an transfer of assets in a
particular PE-situation, I will deal with the tax treatment of this transfer in detail in paragraph 4.6.1.
It is clear that when a business emigrates, certain tax effects can be triggered, such as the imposition of an exit tax. The
main criterion triggering emigration and thus an exit tax is cessation of residency. The analysis of the different tax
systems of the participating EUCOTAX countries has shown that there are different types or methods of exit taxation.
Roughly, two types have been identified:379 The first is the deemed disposal of assets. Under this type of exit tax, the
company will be taxed as if it disposed of its assets for a compensation corresponding to fair market value. The second
type is the deemed liquidation of the business. Then, there are countries which do not know or apply an exit tax as such,
but who require the liquidation of a business transferring cross-borders. This liquidation then triggers a final taxation
(liquidation tax). The exact nuances of these different types or methods differ from country to country.
Austria applies an exit tax of the type ‘deemed disposal of assets’. Even though Austria knows a real seat system, the
liquidation tax provisions in the Corporate Income Tax Act only apply when there is an actual sale of assets, and this will
not be the case in a regular company migration. It is then important to establish the termination of unlimited tax liability
in Austria. With respect to capital companies, unlimited tax liability ends when the enterprise is either fully wound up or
the relevant residence criteria, i.e. the seat or place of effective management, are no longer met.380 Similarly, for
individuals and partners, unlimited tax liability ends at the point of time when the relevant criteria are no longer met.381
Also, in case of termination of limited tax liability, there may be a deemed disposal of assets. Limited tax liability, then,
ceases when the respective source of income is no longer existent in Austria.382 So, rather than a liquidation tax, there is
an exit tax in the form of a deemed disposal of assets.383 more specifically, in Austria, an actual emigration of a business
is not possible. Rather, assets are transferred abroad. The particular Austrian exit provision of § 6 N 6 a and b Income
Tax Act applies to certain assets which are moved into another jurisdiction upon emigration and are no longer taxable in
Austria.384 Section a addresses the transfer385 of all economic goods from a domestic business or PE to a foreign
business of the same taxpayer386, including movements of the business or PE as a whole.387 The transferred assets are
deemed to have been alienated at a price that would have been charged upon a sale of the asset between two
379
Where Germany applies both methods.
See Pinetz 2013 (Austria), p. 39-40, with reference to Schneider in Wiesner/Schneider/Spanbauer/Kohler, Kommentar KStG, § 4, m.no.
18; VwGH 23.2.1951, 674/49; VwGH 17.12.1993, 92/15/0121.
381 See Pinetz 2013 (Austria), p. 40, with reference to Doralt in Doralt, Kommentar EStG, § 1, m.no. 30 and 31.
382 See Pinetz 2013 (Austria), p. 40.
383 I.e. a price is taken into account which would have been charged on a sale of the asset between independent business entities, which can
be determined applying the OECD Transfer Pricing guidelines. See Pinetz 2013 (Austria), p. 41.
384 See Pinetz 2013 (Austria), p. 38.
385 Provided that the goods are transferred permanently (>12 months). See Pinetz 2013 (Austria), p. 42-43, with reference to Income Tax
Directive 2000, GZ BMF-010203/0299-VI/6/2008 from 16.06.2008, m.no. 2010 in conjunction with m.no. 3727 ff.
386 More specifically, in this context it is required that either 1) the foreign business is owned by the same taxpayer, 2) the same taxpayer is
partner in the foreign and/or the domestic partnership, 3) the taxpayer holds directly or indirectly more than 25 percent of the shares in the
foreign entity or vice versa, or 4) both entities are managed by the same people, who effectively have influence over the decision making of
the company. See Pinetz 2013 (Austria), with reference to § 6 N 6 a.
387 See Pinetz 2013 (Austria), p. 42, with reference to Doralt in Doralt, Kommentar EStG, § 6, m.no. 381.
380
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independent companies (at arm’s length).388 This means that in case an entire business is relocated the value is the fair
market value of assets, including goodwill. The taxable amount is then calculated by deducting the book value.389
With respect to legal entities, Belgium generally applies a deemed liquidation exit tax and, in some cases, a deemed
alienation of assets type of exit tax. With respect to individual businesses, Belgium does not know an exit tax. More
specifically, in Belgium, an individual exercising an activity in as self-employed will be subject to tax on capital gains
realized on assets which are used for the purpose of his business activities.390 Value increases in business assets391 are
taxable as soon as they are actually realized, namely upon alienation or upon registration in the accounting or annual
accounts.392 There is no special provision in Belgian tax law which changes this taxable moment in case of emigration.
This means that when an entrepreneur emigrates from Belgium this will not result in a tax on capital gains which are
unrealized or latent on the moment of departure.393 Thus, with respect to individual businesses, there is no exit tax upon
emigration. With respect to companies, the Belgian tax treatment upon emigration is quite different. As a general rule,
the transfer of a company’s place of effective management outside Belgium will amount to a deemed liquidation.394. A
deemed liquidation will result in the imposition of a tax on all latent capital gains and on the exempt reserves, with the
possibility of deducting losses carried forward and other costs which have not been effectively deducted yet.395 There is,
however, one specific rule with regard to this general rule. Due to the implementation of the Merger Directive396, the
rules on exit taxation of companies transferring their seat to another EU Member State were modified.397 The new
Belgium regime foresees in deferral of taxation (not of payment) on latent capital gains, which would normally be taxed
upon exit. This temporary deferral of taxation will only be permitted for assets which are allocated to a PE in Belgium
and which contribute to the profit making activities of that PE,398 and reserves which are effectively attributed to the
equity of the PE.399 All other assets which exit the Belgian territory will be effectively subject to an exit tax.400 It follows
that in the context of emigration to third countries401, there is always a deemed liquidation type of exit tax. In case of
emigrations to another EU state, there will initially be a deemed liquidation type of exit tax as well. However, with
respect to assets and reserves which are allocated to a Belgium PE, there will be no exit tax imposed immediately.
France applies an exit tax which is twofold. In case of emigrations to non-EU/EEA States (third countries), there is
some sort of deemed liquidation. In case of emigrations to other MSs of the EU/EEA, there is a deemed disposal of
388 See Pinetz 2013 (Austria), p. 43, with reference to Income Tax Directive 2000, GZ BMF-010203/0299-I/6/2008 from 6.06.2008, m.no.
2511 ff referring to the OECD Transfer Pricing Guidelines (AÖF 1996/114, 1997/122 und 1998/155).
389 See Pinetz 2013 (Austria), p. 43 with reference to VwGH 19.3.08, 2005/15/0076: § 24 Income Tax Act applies analogously. Income Tax
Directive 2000, GZ BMF-010203/0299-VI/6/2008 from 16.06.2008, m.no. 2517.
390 See Bruyère 2013 (Belgium), p. 36-38, with reference to Article 24, al. 1, 2° ITC 1992. It should be noted that in Belgium, private assets
are generally not subject to a tax on capital gains.
391 Where business assets encompass all assets used for business purposes, including stocks and orders in process. See Bruyère 2013
(Belgium), p. 38, with reference to Article 24 al 2 ITC 1992.
392 See Bruyère 2013 (Belgium), p. 38, with reference to Article 24, al. 1, 2° ITC 1992.
393 See Bruyère 2013 (Belgium), p. 39.
394 See Bruyère 2013 (Belgium), p. 41, with reference to Article 210, §1, 4° jo. Article 208 and Article209. For additional information, Bruyèr
also refers to M. VAN GILS et al., ‘Zetelverplaatsing voor en na de wet van 11 december 2008 – Deel II. Emigratie’, T.F.R. 369, (2009), pp.
841-842; H. LAMON, ‘Emigration ou immigration de sociétés sous l’ingle comptable et fiscal : où en sommes-nous?’, Revue Générale de
Fiscalité, Edition 6-7, (2005), p. 6.
395 See Bruyère 2013 (Belgium), p. 41, with reference to E-J NAVEZ et al., ‘Emigratieheffing van vennootschappen naar Europees recht :
een noodzakelijke beperking om een evenwichtige verdeling van de heffingsbevoegdheid tussen de lidstaten te waarborgen’, T.F.R. 419,
(2012), p. 343.
396 Directive 2005/56/EC of the European Parliament and of the Council on cross-border mergers of limited liability companies, [2005] OJ
L 310/1.
397 See Bruyère 2013 (Belgium), p. 44, with reference to Wet houdende wijziging van het Wetboek van de Inkomstenbelastingen 1992.
398 See Bruyère 2013 (Belgium), p. 44, with reference to Article 214bis, al. 2 ITC 1992.
399 See Bruyère 2013 (Belgium), p. 44, with reference to Article 214bis, al. 3 ITC 1992. See also M. VAN GILS, ‘Zetelverplaatsing voor en
na de wet van 11 december 2008 – Deel II Emigratie’, TFR 389, (2010), p. 844.
400 See Bruyère 2013 (Belgium), p. 44, with reference to M. VAN GILS, ‘Zetelverplaatsing voor en na de wet van 11 december 2008 – Deel
II Emigratie’, TFR 389, (2010), p. 844.
401 It is not quite clear how emigrations to EEA States are treated. It might naturally be expected that these will be treated similar to
emigrations to EU States.
60
assets, provided that the assets are not (fictitiously) left behind on French territory. More specifically, when a resident
company transfers its seat (head office) to a country which is not a MS of the EU/EEA, an immediate exit tax will be
imposed with respect to unrealized (latent) gains and revenues which have not previously been taxed.402 The same tax
consequence is triggered in case a company ceases to be wholly or partially subject to the French Corporate Income
Tax.403 When, however, a company transfers its seat to another EU/EEA State, and the transfer also involves the
transfer of assets, the taxable income is calculated immediately (on the basis of the unrealized gains vested in the
transferred assets), but the actual payment can be deferred under certain conditions.404 I emphasize that only when the
seat transfer involves the transfer of assets, the French exit tax will be imposed. More specifically, the French tax
authority applies a policy under which there will be no exit tax when a (fictitious) permanent establishment is left behind
in France, with on the balance sheet the assets of the taxpayer.405
Germany applies an exit tax which shows similarities to the French exit tax. More specifically, in case a business
emigrates to a third country, there is some sort of deemed liquidation; in case a business emigrates to another EU/EEA
State, there is a deemed disposal of assets. With respect to the specific emigration provisions, the German tax law
contains exit provisions with respect to both corporations and other forms of businesses.406 The exit tax provisions
which target corporations, differentiate, as discussed, between emigrations to third countries and to other EU/EEA
States. When a company relocates its registered office or place of management, and thus is no longer unlimited liable to
tax, there is a deemed realization.407 It is irrelevant whether Germany retains a taxing right due to the fact that a PE is
left behind; merely the fact of relocation leads to the imposition of a tax on hidden reserves and unrealized gains, which
is similar to the tax treatment in case of liquidation.408 In case a company relocates its registered office or place of
management to another EU/EEA State, a tax will be imposed on hidden reserves and unrealized gains, only to the
extent that Germany actually loses its taxing right.409 Thus, when a PE is left behind in Germany, the assets and
liabilities which are connected to this PE will not be included in the exit tax. Only to the extent that capital is actually
transferred abroad, Germany will impose an exit tax. The legal consequence of this exit tax is a deemed alienation of the
assets concerned, where the fair market value is taken as a fictitious sales price.410
Hungary applies no exit tax as such.411 That is, if you define exit taxes as the tax which is imposed on unrealized gains
in case of the relocation of a business to another state. Since an emigration is not possible under Hungarian company
law, a company wishing to relocate has to liquidate and wind-up. The gain on the disposal of assets is subject to
corporate taxation.412 Thus, this is an example of a liquidation tax, which, similar to the idea of an exit tax, poses a
burden for the mobility of businesses from a tax perspective. The difference between this kind of taxation and exit taxes
is that here, an actual realization of hidden reserves takes place so the taxpayer effectively can pay the tax due, while exit
taxes are imposed without there being disposable income.
Italy applies the ‘deemed disposal of assets’ type of exit taxation. In case of the transfer of tax residence abroad, all
enterprise assets that are not linked to a permanent establishment in the territory of Italy, shall be considered realized
with respect to their normal value413.414 The requirement triggering the exit tax is thus the transfer of residence abroad
This follows from article 221 paragraph 2 in connection with article 201 paragraph 1 and 3 CGI. (the paper of Depaix 2013 (France)
contained insufficient and incorrect information).
403 See article 221 paragraph 2 (second sentence) CGI.
404 I will discuss this in more detail in paragraph 2.9.1.B.
406 However, the exit provisions with respect to individual businesses are not discussed by Mehlhaf 2013 (Germany).
407 See Mehlhaf 2013 (Germany), p. 20, with reference to sec 12 para. 3 KStG.
408 See Mehlhaf 2013 (Germany), p. 20, with reference to Frotscher KSTG, sec. 12 para. 154.
409 See Mehlhaf 2013 (Germany), p. 21-22, with reference to sec 12 para. 1 KsTG.
410 See Mehlhaf 2013 (Germany), p. 23.
412 See Varga 2013 (Hungary), p. 30-34.
413 Fair market value, article 9 T.u.i.r.
402
61
of natural persons and legal entities carrying on a business activity, which entails the loss of the resident status in Italy.415
Goodwill and capital losses are also included in the exit tax; assets not included in the enterprise are not considered.416
Assets which are allocated to a PE which is left behind in Italy by an emigrating business shall not be included in the
exit tax either.417 Where a non-resident transfers a PE abroad, the general rule is to consider capital gains related to that
PE as realized at normal (fair market) value.418
Poland has no exit tax at the moment. As discussed, emigration from Poland is not possible. Poland strictly applies the
real seat theory of company law. As such, businesses wishing to leave the Polish territory cannot continue their
existence under the law of that State. Termination is thus a more appropriate term than emigration. Consequently,
Poland does not know an exit tax as such; the emigration of a business (either individual or corporate entities) are
ignored altogether, and is not treated as a taxable event.419 However, Poland is currently reconsidering this tax treatment
and there is a draft bill on the basis of which a tax on certain activities in regards to the liquidation and reduction of
economic activities on Polish territory is introduced.420 If the bill passes, a transfer outside Polish territory of business
assets will be taxable, provided that this is a result of cessation or substantial reduction of economic activity. A transfer
encompasses legal actions, as well as actual transfers; donation, sale, lease, or lending are all considered as asset transfers.
The exit tax will be imposed on the difference between the fair market value and the book value, as it is on the day of
the transfer.421 The proposed Polish exit tax is thus of the type ‘deemed disposal of assets’.
Sweden applies an exit tax system in the form of a ‘deemed disposal of assets’. When a company leaves the Swedish tax
jurisdiction, either by moving its tax residence or by transferring the income source from Swedish territory abroad, it
will be subject to exit taxation. In four cases, any assets which leave the Swedish jurisdiction along with the company,
will be treated as if they have been disposed of for a compensation equal to the market value.422 These four cases
include the following: 1) a business ceases to exist,423 2) the tax liability for an income of a business ends completely or
partially,424 3) income from a business completely or partially ceases to be taxed in Sweden due to a tax treaty,425 or 4)
assets are transferred from one part of a business which is taxable in Sweden to part of the same business which is
exempted from Swedish taxation due to a tax treaty426.
The U.S. exit tax system is again somewhat different from the aforementioned systems of, in most cases, either a
deemed disposal or a (deemed) liquidation. In the U.S. a company would have to reincorporate in another country in
order to lose its resident status and emigrate.427 The two most direct ways to emigrate, then, include the following: 1)
liquidate, pay tax, and move assets, or 2) transfer assets to a foreign corporation and then liquidate.428 In the latter
See Trabattoni 2013 (Italy), p. 32 with reference to article 166 T.u.i.r.
See Trabattoni 2013 (Italy), p. 32, who argues that this is a subjective requirement.
416 See Trabattoni 2013 (Italy), p. 33, with reference to G. Melis – Art. 166 t.u.i.r, in Commentario breve alle leggi tributarie, Tomo III.
TUIR e leggi complementari (diretto da A. Fantozzi), Cedam, Padova, 2010, p. 530
419 See Majda 2013 (Poland), p. 54, with reference to C. Panayi, Corporate Mobility In the European Union and Exit Taxes, Bulletin for
international taxation, IBFD, October 2009, p. 459.
420 See Majda 2013 (Poland), p. 54, with reference to Draft bill submitted to the Parliament on September 7, 2012 by the members of the
political formation “Palikot Movement”.
421 See Majda 2013 (Poland), p. 55-56, with reference to Draft bill submitted to the Parliament on September 7, 2012 by the members of the
political formation “Palikot Movement”, articles 1-7.
422 See Lim 2013 (Sweden), p. 17, with reference to chapter 22, section 5 and section 7 of the ITA.
423 See Lim 2013 (Sweden), p. 19, with reference to chapter 22, section 5, subsection 1 of the ITA.
426 This covers situations when a taxable entity has businesses in two or more countries, and assets are transferred to a permanent
establishment in a country with which Sweden has a tax treaty based on the exempt method and thus, leave the Swedish tax jurisdiction. See
Lim 2013, p. 20, with reference to chapter 22, section 5, subsection 5 of the ITA.
427 See Stepien 2013 (U.S.), p. 50.
428 See Stepien 2013 (U.S.), p. 53-54.
414
415
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option, there will be a sort of exit tax imposed. More specifically, the transfer of assets to a foreign corporation will be
recognized for tax purposes, which implies that a gain will have to be taken into account with respect to the assets
transferred. This gain shall not exceed the amount that would have resulted if the property were sold.429 Thus, there are
some characteristics of the exit tax type ‘deemed alienation of assets’.
To summarize:
Austria
Belgium
France
Germany
Hungary
Italy
Netherlands
Poland
Sweden
USA
Exit tax ‘type’
- Deemed disposal of assets
- Deemed liquidation (with exception)
- EU/EEA States: deemed disposal of assets
- Third countries: deemed liquidation
- EU/EEA States: deemed disposal of assets
- Third countries: deemed liquidation
- Liquidation tax
- No exit tax
- Unqualified
2.9 Recovery of exit taxes
A. Dutch tax system
2.9.1
Recovery provisions and Law on deferral of exit taxation
Not only the exit tax provisions themselves are of importance, also the recovery of the tax must be assessed. Upon
emigration the Dutch tax authority will impose a regular tax assessment which, according to article 9(1) of the
Invorderingswet 1990 (Recovery Act 1990), is due and recoverable within six weeks after the date of the assessment. In the
Netherlands, decreases in value which occur after emigration are irrelevant for the amount over which the tax is
recovered. Moreover, there is no preservative tax assessment system in the Netherlands for emigrating businesses. This
is different for emigrating substantial shareholders.430 Finally, up until recently there was no deferral of payment
available for the tax assessment imposed on emigrating businesses. However, this has recently changed in the
Netherlands. I will elaborate on this in the next section, starting with a discussion of the reason(s) behind this change,
followed by an overview of the amendments and the current state of affairs.
2.9.1.1 Background: why the amendment of the Recovery Ac?
An important ruling of the Court of Justice of the European Union (CJEU) includes the National Grid Indus (NGI) 431
case. I will briefly discuss this case and the Court’s verdict. For a detailed discussion I refer to paragraph 7.3.2.5.
The NGI case concerned the transfer of the place of effective management of a Dutch B.V. from the Netherlands to
the United Kingdom (UK). Upon emigration in the year 2000, the only asset of the company was a receivable from a
group loan of GBP 33 million, containing an unrealized capital (currency) gain of approximately NLG 22 million. At the
429 See Stepien 2013 (U.S.), p. 555, with reference to section 367 U.S.C. and Temp Reg. § 1.367(a)-1T(b)(3)(i). Gain will be calculated the
same way as it is for a sale/exchange of property under Section 1001.
430 I note that the Dutch Tax Law has been amended in response to the rulings of the CJEU in Hughes de Lasteyrie du Saillant (Case C-9/02)
and N. (Case C-407/04). See also paragraph 7.3.1.
431 CJEU National Grid Indus (Case C-371/10)
63
time the emigration triggered the Dutch exit tax provision with respect to businesses, i.e. art. 16 of the PITA 1964. This
article provided: ‘Benefits derived from the business that have not yet been taken into account … are included in the profits for the calendar
year in which the person on whose behalf the business is run ceases to derive profits from the business taxable in the Netherlands …’.432 The
tax consequence in the Netherlands was thus immediate taxation of the unrealized currency gain of NGI, since the
company ceased to derive profits taxable in the Netherlands.433 The taxpayer challenged the indictment by arguing,
amongst others, that he was restricted in its freedom of establishment. In its ruling, the Court basically argued that there
was a discrimination resulting in a restriction of the freedom of establishment. The (old) Dutch exit provision of article
16 PITA 1969 was, however, considered appropriate to attain the aim of ensuring the preservation of the allocation of
taxing power between MSs.434 Additionally, the court did not consider it to be disproportionate if the exit State does not
take value decreases which occur after emigration into account.435 The only real question concerned the proportionality
of immediate payment. The tax assessment itself was subsequently qualified as being proportional.436 However, the
Court also considered immediate payment to be disproportional,437 and ruled that MSs should give companies who
transfer their place of effective management the choice between either immediate or deferred payment.438 In case a
taxpayer opts-in for deferred payment the Court argued that MSs can require interest calculation and the provision of
securities, such as a bank guarantee.439
Moreover, after NGI four additional cases were ruled which are of importance in this context. They include Commission
versus Portugal440 (ruled by the CJEU), Arcade Drilling AS441 (ruled by the EFTA court), and Commission v. Kingdom of the
Netherlands442 (ruled by the CJEU), and Commission v. Spain443 (ruled by the CJEU). I will discuss these cases shortly. For
an extensive discussion, I refer to paragraph 7.3.2.
In the first case, Commission versus Portugal, the exit taxes in the Portuguese corporate income tax were under
consideration.444 These case, however, barely offers any additional insights when compared to what was already decided
by the CJEU in the NGI case. Put briefly, the court considered immediate taxation of unrealized capital gains to be
incompatible with article 49 of the TFEU, “in the case of transfer, by a Portuguese company, of its registered office and its effective
management to another Member State or in the case of transfer, by a company not resident in Portugal, of some or all of the assets attached to
a Portuguese permanent establishment”.445 It is worth discussing the opinion of A-G Mengozzi with respect to this case. In his
conclusion of 28 June 2012446, the A-G has argued that MSs can calculate recovery interest in case of deferred payment
432
Unofficial translation.
Note that the BV did not cease to exist, since, as discussed, the Netherlands applies an incorporation system (see also: art. 2(4)CITA
1969). However, by virtue of art. 4(3) of the DTC Netherlands-UK, NGI was labeled as resident of the UK after transfer of its place of
effective management. So as from that moment on, the UK was entitled to tax profits and capital gains (art. 7(1) and 13(4) NL-UK).
434 CJEU National Grid Indus (Case C-371/10), paras 48 and 49.
435 CJEU National Grid Indus (Case C-371/10), par. 56.
440 CJEU Commission v. Portugal (Case C-38/10).
441 EFTA Court Arcade Drilling AS (Case E-15/11).
442 CJEU Commission v. Kingdom of the Netherlands (Case C-301/11)
443 CJEU Commission v. Spain (Case C-64/11)
444 More specifically, the exit provisions which were scrutinized related to the transfer of residence and the cessation of (part of) the activity
of a permanent establishment.
445 CJEU Commission v. Portugal (Case C-38/10), par. 36.
446 Conclusion A-G Mengozzi 28 June 2012.
433
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of exit taxes.447 With respect to securities, however, such as a bank guarantee, Mengozzi believes that these can be
required only if there is a genuine and serious risk of non-recovery of the tax claim.448
The second case, Arcade Drilling AS, dealt with Arcade, a limited liability company incorporated and registered in
Norway. The Norwegian tax system entails an obligation to liquidate to company if it has relocated its de facto head
office from Norway.449 This would lead to the imposition of a liquidation tax on the company.450 After a series of
events, Arcade was deemed to have relocated its head office outside Norway and, pursuant to company law, was under
an obligation to liquidate. This gave rise to liquidation taxation regardless of whether the company was actually
liquidated.451 The liquidation taxation encompassed a definitive establishment of the amount of tax payable. The
conclusion of the EFTA Court concurs with the CJEU’s ruling in the NGI case. The Court ruled that there is a
restriction of the freedom of establishment (i.e. articles 31 and 34 EEA). The final verdict is, however, more nuanced
than that given by the CJEU in the NGI case. The EFTA Court argued that when there is a real and proven risk of nonrecovery of the tax claim, States can take ‘certain measures’. It is unclear whether this means that States do not have to
offer the option between immediate and deferred payment, or whether it means that the option has to be offered but
that, in case of deferred payment, States can set stricter conditions.452 Whatever the meaning exactly is, the ruling in
Arcade Drilling implies that securities can only be required if and when they are truly necessary (thus when there is a
real and serious risk of non-recovery).453
In the case Commission v. Kingdom of the Netherlands454, the EC asked the Court of Justice of the European Union to
establish to whether the Dutch exit provisions with respect to business emigration (i.e. articles 3.60 and 3.61 PITA 2001
and article 15c and 15d) are compatible with article 49 TFEU. The CJEU came to the conclusion that the Netherlands
did not comply with, or failed to fulfill, its obligations under EU law by upholding the aforementioned exit provisions.
The Netherlands acknowledged in front of the Court that its exit provisions are disproportional, and that they are to be
amended in accordance with the Court’s ruling in National Grid Indus.455 Nonetheless, the Court acknowledges the
infringement procedure of the Commission, since the situation has to be judged as it was in July 2010. This was the
moment at which the time limit given in the reasoned opinion456 of the Commission lapsed.457 In my opinion, this
ruling does not offer any additional insights, when compared to the Court’s ruling in NGI.
Finally, the most recent case, Commission v. Spain458, was ruled on April 25, 2013. On the basis of Spanish national law an
immediate tax is levied on the unrealized gains accrued by Spanish resident companies and permanent establishments
located in Spain of non-residents when 1) a Spanish resident company transfers its tax residency outside Spanish
447 See Conclusion A-G Mengozzi 28 June 2012, paras 74-77; if, according to the national recovery law, recovery interest is charged in cases
in which taxpayers choose for deferred payment, there is on the basis of the principle of equivalence no reason to not apply these rule to a
company transferring its real seat to another MS. Moreover, when there is no recovery interest charged in case of deferred payment, a MS
cannot charge this recovery interest either to cross-border seat transfers.
448 See Conclusion A-G Mengozzi 28 June 2012, par. 82. Additionally, it is unclear why in the case of individuals (compare e.g. N-case) the
CJEU argues that requiring the provision of a bank guarantee is disproportionate, and refers to Council Directive 2010/24/EU of 16 March
2010 concerning mutual assistance for the recovery of claims relating to taxes, duties and other measures. In case of businesses carried on
by a legal entity however, such a bank guarantee is not seen as disproportionate. The Court has dealt with the ambiguities with respect to
this issue in the case Commission v. Portugal. The question as for the reason of the distinction remains unanswered.
449 It is noted that Norway applies a real seat system, as opposed to an incorporation system.
450 EFTA Court Arcade Drilling AS (Case E-15/11), par. 33.
451 EFTA Court Arcade Drilling AS (Case E-15/11), par. 28.
452 See also: V-N 2012/51.17, note of D.S. Smit.
453 See EFTA Court Arcade Drilling AS (Case E-15/11), par. 105. It is argued that when, for example, the shareholders can be held liable for
the tax debt of the enterprise, securities should not be required.
454 CJEU Commission v. Kingdom of the Netherlands (Case C-301/11).
455 CJEU Commission v. Kingdom of the Netherlands (Case C-301/11), paras 17 and 18.
456 In the reasoned opinion, the Commission sets out its position on the infringement and determines the subject matter of any action. The
Member State is requested to comply within a given time limit.
457 CJEU Commission v. Kingdom of the Netherlands (Case C-301/11), par. 20.
65
territory (without leaving a PE behind to which the assets are attributed), 2) a Spanish PE ceases its activities, or 3)
when a Spanish PE transfers its assets outside Spanish territory. The CJEU held that situations 1 and 3 breach the
freedom of establishment, following its own criteria of earlier judgments (National Grid Indus and Commission v. Portugal).
Again, the Court noted that the Spanish exit tax rules posed an obstacle to the freedom of establishment, but that this
can be justified on the basis of a balanced allocation of taxing powers and the fiscal coherence of national systems.
However, demanding immediate payment of the tax with regard to unrealized gains in case of an exit is disproportional.
It was argued that Spain was entitled to tax the unrealized gain upon exit, but that it could not collect the tax until the
gain has effectively been realized. Moreover, the Court noted that there are a number of mechanisms in place within the
EU that would enable Spain to collect the tax debt.459
From the previous discussion it has become clear that the Dutch exit provisions in the PITA 2001 and CITA 1969, with
respect to emigration of a business, are incompatible with treaty freedoms. More specifically, the problem particularly
lies in the area of the recovery of tax, as has been ruled by the CJEU in NGI. As such, the relevant recovery provisions
in Dutch tax law had to be changed.
2.9.1.2 Current state of affairs
On 15 May 2012, the Dutch legislator presented a Bill on the amendment of the Recovery Act 1990 (law on deferral of
exit taxes)460 in response to the ruling in the NGI case. In anticipation of the actual amendment, the State Secretary of
Finance has published a Resolution on 22 December 2011461, in which the conditions of deferred payment of the
assessment are described. The Resolution has a retroactive effect to 29 November 2011 (which is the date of the NGI
ruling) and will be of effect until the actual amendment of the Recovery Act 1990. On 4 December 2012, the Bill (to
which some minor modifications have been made in the meanwhile) has been accepted by the House of
Representatives. In the Dutch legislative process, a Bill has to pass the Senate after it has been accepted by the House of
Representatives. In the course of this process, the Senate conducted a preparative research on 22 January 2013. Steps
which followed included a preliminary report and a plenary meeting of the Senate. On 7 May 2013, the Bill passed the
Senate, by which it officially became Law.462 As the final step, the Law was published in the Gazette on 14 May 2013, by
which the aforementioned Resolution of the Dutch State secretary of Finance has lapsed.463
2.9.1.3 The amendments of the Recovery Act
In accordance with the recently accepted Law on deferral of exit taxation464, the new article 25a(1) of the Recovery Act
1990 will state that taxpayers will be offered the option of deferred payment (in addition to immediate payment). If a
taxpayer chooses for deferred payment, however, the Dutch tax collector will require the following: a) provision of
sufficient securities,465 b) payment of recovery interest,466 and c) provision of an administration, enabling the tax collector
to determine to what extent unrealized capital gains have been realized.
e.g. Directive 2008/55/EC on the mutual assistance for the recovery of claims relating to some levies, duties, taxes, and other measures.
Kamerstukken II, 2011/12, 33 262, nr. 2.
461 Resolution State secretary of Finance 14 December 2011.
462 See Dutch Senate – current state of affairs Kamerstukken 33.262.
463 See Act of 14 May 2013, amending the Recovery Act 1990 (Law on deferral of exit taxation).
464 Ibid.
465 The new article 25a(1) Recovery Act 1990.
466 Article 28(1) of the Recovery Act 1990 provides that recovery interest is charged as from the time that the payment term of the tax
assessment expires. See also Kamerstukken II, 2011/12, 33 262, nr. 3: recovery interest is regular practice in cases in which tax payment is
deferred. It is however argued by both Kemmeren and the Netherlands order of Tax advisors (NOB), that nowhere in NGI it reeds that
MSs can charge recovery interest. In NGI, the court considered in paragraph 73 that MSs can charge ‘interest in accordance with the
applicable national legislation. It is argued by the aforementioned, that this implies that ‘regular’ tax interest (heffingsrente) is allowed, but that
MSs cannot charge recovery interest in addition. See Kemmeren, 2012, p. 183-212 and NOB Commentary Law on deferral of exit taxation.
459
460
66
Following the new article 25a(2) of the Recovery Act 1990, the deferral of payment will be terminated in case the
taxpayer no longer resides in an EU/EEA State, in case the provided security is no longer sufficient, or in case the
unrealized gains would be considered realized in a domestic situation. It should be emphasized this realization will not
only considered to have taken place upon alienation but also as a consequence of regular use, i.e. by virtue of
depreciation.467 Finally, the deferral is not time-restricted. Taxpayers can, however, opt for payment in ten annual terms
on the basis of the new article 25a(3) Recovery Act 1990.468
The adjusted policy will not only apply to emigrating companies who are liable to tax under the CITA 1969 (with which
the NGI case dealt), but also to emigrating individual entrepreneurs who fall under the PITA 2001. Moreover, mergers
and divisions are provided for in the adjusted policy as well.469 It should finally be noted that the scope of the Act on
the deferral of exit taxation is limited to business emigrations (or asset transfers) from the Netherlands to another EUor EEA-Member State. Business emigrations to third countries are excluded from the option between immediate and
deferred payment. For a critical and more in-depth analysis of this Law on deferral of exit taxation I refer to paragraph
7.4.3.
B. EUCOTAX Comparative law
In analyzing the different national tax law systems it became clear that all States use different rules and systems with
respect to the recovery of the exit tax claim. The systems can be divided into four main categories. In the next section, a
short analysis will be provided. In paragraph 7.5, I will analyze these systems in detail in order to assess the compatibility
with EU law.
Option between immediate and deferred payment
As discussed, in Austria, an actual emigration of a business is not possible, but rather, assets are transferred abroad. In
case of such a cross-border transfer of assets, an exit tax is imposed. With respect to the recovery of this exit tax claim,
taxpayers are offered the possibility to request for deferred payment of the tax due.470 This request for deferral has to be
submitted to the tax authority in the year of actual transfer. The deferral of payment will only be granted when: 1) the
asset is transferred within the same business of the same taxpayer located in the EU/EEA; or 2) the whole firm or
permanent establishment is transferred to another EU/EEA State.471 Thus, the option for deferral of payment is limited
to EU/EEA States. With respect to other conditions, some remarks can be made as well. Firstly, the actual sale of the
asset in the immigration State has retroactive effect, which implies that decreases in value which occur after emigration
are deductible in Austria, provided that the immigration State does not grant such a deduction.472 Secondly, no interest
payments relating to the deferred payment have to be made by the taxpayer (irrespective of how long it takes before the
tax due can actually be recovered by the tax authority).473 Thirdly, collaterals or securities will only be required when this
is explicitly laid down in Austria.474 With respect to the legal rules of deferred payment, such a provision is not included
As was provided by the Dutch legislator in the explanatory memorandum to the Bill. See Kamerstukken II, 2011/12, 33 262, nr. 3, p. 5.
In case of payment in ten equal terms, the provision of an administration (in order to enable the tax collector to determine to what extent
unrealized capital gains have been realized) will not be required, since the recovery of tax is no longer related to the actual realization of
gains. See Kamerstukken II, 2011/12, 33 262, nr. 3 and van den Broek 2012, par. 4.
469 Where the acquiring company will take the place of company which disappears with respect to the arrangement of deferred payment.
See Kamerstukken II, 2012/13, 33 262, nr. 5, p. 9.
470 See Pinetz 2013 (Austria), p. 43, with reference to § 6 N 6 letter b of the Austrian Income Tax Act. Letter b grants a deferral for the tax
recovery. With the option for each individual asset; see also Income Tax Directive 2000, GZ BMF-10203/0299-VI/6/2008 from
16.06.2008, m.no. 2517a.
471 See Pinetz 2013 (Austria), p. 43-44.
472 See Pinetz 2013 (Austria), p. 44, with reference to § 295a Federal Fiscal Code.
473 See Pinetz 2013 (Austria), p. 44-45; this is explicitly laid down in § 205 Federal Fiscal Code.
474 See Pinetz 2013 (Austria), p. 90, with reference to § 222 Federal Fiscal Code.
467
468
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in the law.475 Thus, it is not required to provide securities in case of deferred payment. Austria relies completely on the
mutual assistance and recovery directives and considers securities unnecessary. Finally, the Austrian option for deferred
payment is of a preservative nature; after ten years of the accrual of the tax obligation, the absolute statute of limitations
comes into force and prohibits any further recovery of the tax.476
In Italy, the transfer of residence abroad will trigger a deemed disposal of assets to the extent that assets are not linked
to a PE in Italian territory. Thus, similar to most of the other systems, there will be no exit tax when assets are left
behind in a Italian permanent establishment. With respect to the exit tax imposed on transferred assets, Italy has
amended its recovery provisions as of 1 January 2013, in response to the Court’s ruling in National Grid Indus.477
Emigrating businesses can now ask for deferral of payment of the exit tax due.
Sweden, then, also applies an exit tax in the form of a deemed disposal of assets. With respect to the recovery of this
exit tax, emigrating businesses can apply for a tax deferral in certain cases. Unlike the other States, Sweden already
introduced this option in its law as of January 1 2010.478 Five criteria need to be fulfilled in order to receive the tax
deferral: 1) the taxable entity is unlimited liable to tax in Sweden, 2) the exit tax has been triggered due because income
from a business completely or partially ceases to be taxed in Sweden due to a tax treaty or because assets are transferred
from one part of a business which is taxable in Sweden to part of the same business which is exempted from Swedish
taxation due to a tax treaty, 3) the tax treaty has been concluded with another EU/EEA State, 4) the asset is included in
a business in another EU/EEA State, and 5 ) the business that is taxed in another country has not ceased to exist.479
Option between immediate payment and payment in 5 annual installments
France and Germany have a similar exit tax system, not only with respect to the type of exit tax itself, but also with
respect to the recovery of the tax. When a business emigrates to EU/EEA States, both countries apply an exit tax of the
type ‘deemed disposal of assets’; only to the extent that assets are transferred abroad an exit tax will be imposed. Thus,
is a PE is left behind on domestic territory, no exit tax will be imposed.480 When a business emigrates to a third country,
there will be a deemed liquidation in both States; whether assets are left behind in a PE or not is irrelevant. In general,
both France and Germany require immediate payment of the entire amount of exit tax due.481 In case of a transfer to
another EU/EEA state, there is a deemed disposal of assets type of exit tax, where it is possible pay this exit tax in five
annual installments. In case a taxpayer opts-in for payment in five installments, there are in Germany no additional
requirements such as the provision of securities and interest calculation, but administrative requirements may apply.482
In France, it is unclear what the exact requirements are (with respect to security provision, interest calculation, and so
See Pinetz 2013 (Austria), p. 90: “For deferrals of taxes in the area of income tax (Income Tax Act/Corporate Income Tax Act) normally
no collateral has to be provided according to § 212 Federal Fiscal Code. Anyhow, there is certainly no security required in the domestic case
for retroactive events under § 295a Federal Fiscal Code.”
476 See Pinetz 2013 (Austria), p. 45, with reference to § 209 (3) Federal Fiscal Code.
477 See Trabattoni 2013 (Italy), who argues that on the basis of D.L. 1/2012, two new commas have been added to Art. 166 T.u.i.r. (2-quater
and 2-quinquies), according to which a business transferring its residence in a white listed State that offers assistance in the collection of
taxes, is allowed to ask a payment deferral.
478 Thus before NGI was even ruled by the CJEU. See Lim 2013 (Sweden), p. 20, with reference to Chapter 63, section 14 of the TPA.
479 See Lim 2013 (Sweden), p. 21.
480 In France, the interplay of CGI sections 221 and 201 requires the immediate determination of the amount of income tax that would
payable on unrealized (latent) gains and on revenues not previously taxed. However, section 221 specifically excludes from such taxation the
transfer of a head office from France to another EU Member State if such a transfer does not include the transfer of underlying capital
assets. Thus, if a PE is left behind, no tax will be determined upon the transfer. See France - Cross-border implications of exit tax.
In Germany, in case a company relocates its registered office or place of management to another EU/EEA State, a tax will be imposed on
hidden reserves and unrealized gains, only to the extent that Germany actually loses its taxing right. Thus, when a PE is left behind in
Germany, the assets and liabilities which are connected to this PE will not be included in the exit tax. See Mehlhaf 2013 (Germany), p. 2122, with reference to sec 12 para. 1 KsTG.
481 In France the income tax calculated on transferred and immobilized gains has to be paid within a term of two months after the transfer of
assets on the basis of article 221 CGI. In Germany, the paper only describes the situation in respect to substantial shareholders (where
deferral of payment is offered). However, during the EUCOTAX Wintercourse week, this information was discussed in detail with Mehlhaf.
482 Discussed during EUCOTAX Wintercourse week with Mehlhaf.
475
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on), as this rule was recently introduced in January 2013. It is, however, clear that there is an administrative obligation
for the taxpayer in order to allow the tax authority to establish that the assets are still part of the taxpayer’s business.483
No option
In Belgium, the transfer of a company’s place of effective management will result in a deemed liquidation, where a tax
is imposed on all latent capital gains and reserves. As a general rule, this tax is due immediately; Belgium does not offer
emigrating businesses the option between immediate and deferred payment. This is distinguished from the possibility of
deferred taxation (which is offered when assets and reserves can be allocated to a Belgian PE).484 The focus here is on
the recovery of taxation, after an exit tax has been imposed. And as said, Belgium does not offer the option of deferred
payment.
Recovery of tax is irrelevant
Hungary and Poland, and the US do not impose an exit tax as such. Thus, there is no tax to recover.
2.10 Treatment of assets upon departure
A. Dutch tax system
I believe that the option which is currently offered in the Dutch tax system, between immediate and deferred payment,
will have an influence on the treatment of assets upon departure. It is important to emphasize that the emigration
provisions will not always be triggered when assets leave the Netherlands. The partial settlement provisions will only
apply when the cross-border asset transfer is followed by the emigration of the taxpayer (either factual or legal), and the
final settlement provisions will only apply when the taxpayer ceases to derive profits from the Netherlands. Therefore,
there are situations in which assets can be transferred abroad without taxation, such as when assets are transferred from
the Dutch head office to a foreign permanent establishment (PE).485 In this paragraph, however, I will focus on those
situations in which the transfer of assets does trigger an emigration provision.486
As was discussed in paragraph 2.8, the ratio of the emigration provisions can be found in the total profit concept.
According to article 3.8 PITA 2001487, all benefits obtained from a business belong to the taxable profit. There are,
however, situations, such as the cross border transfer of a taxpayer, in which there is no directly detectable benefit when
applying the regular rules. Obviously, the Netherlands does not want to lose its rightful claim to tax latent benefits.
Hence, the emigration provisions. As the total profit concept generally only sees to actual realization, unrealized gains
might not be captured in the total profit without these emigration provisions, and can consequentially leave the Dutch
jurisdiction without taxation.488 With respect to the option between immediate and deferred payment, I believe that this
option applies both when an exit tax is imposed on the basis of the emigration provisions and on the basis of the total
profit concept. For example, when assets are transferred from a PE in the Netherlands to a foreign part of the
taxpayer’s business, these assets are deemed to be alienated on the basis of the independence fiction and are
483
Discussed during the EUCOTAX Wintercourse week with Depaix.
As we will see soon, many countries apply this method.
485 See also paragraph 4.5.1.
486 Thus, when assets are transferred and subsequently the taxpayer emigrates, or when assets are transferred and the taxpayer ceases to
derive profits from the Netherlands.
487Article 3.8 PITA 2001 also applies to the CITA 1969, due to the connecting provision in article 8 CITA 1969.
488 It should be noted that the ratio of the exit provisions is, however, based on the total profit concept. See for example HR BNB 2013/94,
where the Court argued that the final settlement provision is meant to ensure that all benefits derived from a business should be included in
the taxable profit (in line with the total profit concept), and that when accumulated profits could possibly leave the Dutch territory without
taxation, a tax settlement is in order. The tax is eventually imposed on the basis of the final settlement provision and not on the basis of the
total profit concept, even though the rationale behind the final settlement provision is the total profit concept.
484
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consequently, on the basis of the total profit concept, included in the Netherlands taxable profit.489 The legislator has
pledged that the option of deferred payment will also apply when assets are transferred abroad, thus in situations such
as these.490 Moreover, the new article 25a Recovery Act 1990491 does seem to require that the tax is imposed by virtue of
a special provisions in the PITA 2001 or CITA 1969. The article regulates that deferral of payment will be granted
(under conditions) when a tax assessment has been imposed with respect to benefits relating to the cross-border
transfer of asset components, where, would the taxpayer have stayed in the Netherlands, such benefits would not have
been taken into account for tax purposes.492
Turning back to the treatment of assets upon departure in the light of the specific emigration provisions, the crossborder transfer of asset components will be treated as a deemed disposal of assets.493 With respect to, for example, the
partial settlement provisions, a fictitious alienation will enter into force.494 This means that the transferred assets
(provided that at the time of emigration of the entrepreneur those components still belong to the working capital of the
foreign driven enterprise) are deemed to have been alienated495 against fair market value at the moment right before the
entrepreneur loses his or her status as a resident taxpayer. The unrealized capital gains which have not yet been taxed in
the Netherlands are, for the application of the final tax settlements, regarded profit. Subsequently, the taxpayer
theoretically has to settle the tax claims while still being a Dutch resident for tax purposes. This is very important,
because at a later moment in time the Netherlands will possibly no longer have a full taxing right (due to a different
allocation of taxing powers). With respect to the final settlement provisions, there is a deemed alienation of assets as
well, and the difference between the fair market value and the book value of those assets is included in the profit of the
calendar year in which the taxpayer (resident or non-resident) stops making profits in the Netherlands.
After assets have left the Dutch jurisdiction the Dutch Tax Authority will also evaluate these assets over a certain period
of time if payment is deferred. The tax assessment will still be determined on the basis of the difference between the fair
market value and the book value of the assets upon emigration. However, the taxpayer will not have to settle the tax
claims immediately. As discussed, one of the requirements for this deferred payment is the provision of an
administration, enabling the tax collector to determine to which extent unrealized capital gains have been realized. In my
opinion this reflects that in case payment is deferred the tax collector will also evaluate assets which have been
transferred abroad.
All EUCOTAX countries who actually have an exit tax, apply a similar treatment of assets as the Netherlands. More
specifically, all countries feign a disposal or liquidation implying a realization at fair market value, even though different
terms are used such as normal value or arm’s length price. In Austria, the transferred assets are deemed to have been
alienated at a price that would have been charged upon a sale of the asset between two independent companies (at arm’s
489 See paragraph 4.6.2.2 for the detailed discussion of this situation in which an exit tax can be imposed on the basis of the total profit
concept.
490 See Kamerstukken II, 2012/13, 33 262, nr. 5, p. 7.
491 Which has been implemented on the basis of the Law on deferral of exit taxation. See Act of 14 May 2013, amending the Recovery Act
1990.
492 See the new article 25a of the Recovery Act 1990, paragraph 1.
493 Thus, as mentioned before, ignoring situations where assets are transferred from the Dutch head office to a foreign PE.
494 It should be emphasized that not every emigration mentioned in paragraph 1.3 will lead to a deemed disposal of assets. Only in case the
specific exit provisions are triggered this will be the case.
495 Or for the application of the divestment addition, deemed to have been withdrawn from the business. What is the divestment addition?
On the basis of the investment deduction provision of article 3.40 PITA 2001, taxpayers who invest in certain and further defined assets
can, in addition to the depreciation, also deduct part of the investment amount of their taxable profit. This is the investment deduction.
There are several categories of this deduction (articles 3.41 – 3.42a PITA 2001). However, in case the assets for which this investment
deduction was allowed are alienated within five years after the investment was made, and the combined value of those assets is higher than
€2.300, the taxpayer will have to refund part of the investment deduction. This is thus the divestment addition (article 3.47 PITA 2001).
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length).496 This means that in case an entire business is relocated, the value is the fair market value of assets, including
goodwill. The taxable amount is then calculated by deducting the book value.497 Belgium applies a deemed liquidation
which will result in the imposition of a tax on all latent capital gains (thus the difference between the market value and
the book value) and on the exempt reserves, with the possibility of deducting losses carried forward and other costs
which have not been effectively deducted yet.498 In France, an exit tax is imposed on capital gains vested in transferred
assets, where a capital gains is determined on the basis of the difference between the market value and the book
value.499 Germany imposes an exit tax in the form of a deemed alienation of the assets concerned, where the fair
market value is taken as a virtual sales price.500 In Hungary, a company cannot emigrate; a company wishing to relocate
has to liquidate and wind-up. The gain on the disposal of assets is subject to corporate taxation, which is a liquidation
tax.501 The difference between this kind of taxation and exit taxes is that here, an actual realization of hidden reserves
takes place so the taxpayer effectively can pay the tax due, while exit taxes are imposed without there being disposable
income. In Italy, the transfer of tax residence abroad will lead to all enterprise assets that are not linked to a permanent
establishment in the territory of Italy being considered realized with respect to their normal value502.503 Under the
Swedish exit tax, assets are treated as if they have been disposed of for a compensation equal to the market value.504 In
the U.S. a transfer of assets to a foreign corporation will be recognized for tax purposes, which implies that a gain will
have to be taken into account with respect to the assets transferred. This gain shall not exceed the amount that would
have resulted if the property were sold.505
2.11 Procedural obligations
In this paragraph I will look in to some procedural obligations in the Netherlands which are related to the emigration of
a taxpayer. I will limit my scope to the area of taxation. Moreover, I will distinguish between issues and obligations
which are related to the actual emigration, and issues and obligations which relate to the period after emigration.506
2.11.1 Upon emigration
2.11.1.1 Notification of movement
In the Netherlands, every movement of the place of residence, whether purely domestic or abroad, has to be reported.
With respect to individuals, it is required that one provides the new address to the municipality of residence before
moving. This will lead to an amendment in the official population register. Subsequently, the municipality will pass on
this new address to the relevant authorities, amongst which the Dutch Tax Authority. With respect to companies, there
496 See Pinetz 2013 (Austria), p. 43, with reference to Income Tax Directive 2000, GZ BMF-010203/0299-I/6/2008 from 6.06.2008, m.no.
2511 ff referring to the OECD Transfer Pricing Guidelines (AÖF 1996/114, 1997/122 und 1998/155).
497 See Pinetz 2013 (Austria), p. 43 with reference to VwGH 19.3.08, 2005/15/0076: § 24 Income Tax Act applies analogously. Income Tax
Directive 2000, GZ BMF-010203/0299-VI/6/2008 from 16.06.2008, m.no. 2517.
498 See Bruyère 2013 (Belgium), p. 41, with reference to E-J NAVEZ et al., ‘Emigratieheffing van vennootschappen naar Europees recht :
een noodzakelijke beperking om een evenwichtige verdeling van de heffingsbevoegdheid tussen de lidstaten te waarborgen’, T.F.R. 419,
(2012), p. 343.
500 See Mehlhaf 2013 (Germany), p. 23. Note that this is the treatment in case of transfers to EU/EEA States. In case of transfers to third
countries, there is a deemed liquidation which leads to the imposition of a tax on hidden reserves and unrealized gains.
501 See Varga 2013 (Hungary), p. 30-34.
502 Fair market value, article 9 T.u.i.r.
503 See Trabattoni 2013 (Italy), p. 32 with reference to article 166 T.u.i.r.
504 See Lim 2013 (Sweden), p. 17, with reference to chapter 22, section 5 and section 7 of the ITA.
505 See Stepien 2013 (U.S.), p. 555, with reference to section 367 U.S.C. and Temp Reg. § 1.367(a)-1T(b)(3)(i). Gain will be calculated the
same way as it is for a sale/exchange of property under Section 1001.
506 Strictly taken, the EUCOTAX questionnaire only asked: ‘What are the procedural obligations if the taxpayer wants to leave your
country?’. It should be noted that, there is no procedural obligation if one wants to emigrate. Essentially, one can just leave without
permission on forehand. That is why I will discuss the obligations which are related to emigration, which is broader.
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is no official population register. Rather, the Chamber of Commerce keeps a Trade Register of all companies (and of all
businesses carried on by an individual) in the Netherlands. Any changes, such as a transfer of the place of residence,
have to be reported to the Chamber of Commerce. The Chamber of Commerce will inform the Tax Administration; it
is not necessary (although it is possible and in some situations preferable) to contact the Tax Authority separately.507
2.11.1.2 Moment of emigration, tax declaration, and tax assessment
Both the personal and corporate income tax are what we call ‘assessment taxes’. In an assessment tax, the total amount
of tax is levied by virtue of a tax assessment.508 The personal and income tax can, additionally, be qualified as period
taxes, which means that the amount of tax is assessed over a certain period of time. Normally, this period of time is
equivalent to a calendar year (i.e. 1 January to 31 December).509 In order to enable the Dutch Tax Authority to establish
the amount over which the tax is assessed, the taxpayer will be invited to file a tax declaration at the end of the
period.510 Even though the word ‘invited’ may imply that this is non-committal, the opposite is true; after the taxpayer is
invited, he is also obliged to file a tax declaration. On the basis of article 10, State Law Tax Act, the term for filing such
a declaration in the context of the personal and corporate income tax will be determined by the tax inspector, but is at
least one month. After the taxpayer has filed the tax declaration the tax inspector will formalize the tax debt by issuing a
tax assessment.
In the context of formalizing the tax debt it is important to determine what exactly should be seen as the moment of
emigration, since at this particular moment the amount of the tax debt will be calculated (materialized).511 In the past,
there has been some discussion concerning this question. More specifically, it was unclear whether the moment at which
an entrepreneur or a company decides to emigrate and starts its preparatory activities, or the moment at which the
preparatory activities have been concluded and the entrepreneur or company has actually transferred its place of
residence was to be qualified as the moment of emigration. The Dutch State Secretary of Finance has solved this
problem by issuing a Resolution in which it is clarified that the moment at which the business is no longer effectively
managed from within the Netherlands should be seen as the moment of emigration.512 The moment of emigration will
most likely be a different moment than the ending of the period (December 31st). Generally, it is assumed that the tax
debt comes to existence (i.e. is materialized) at the end of the period.513 However, a specific provision has been
introduced in the State Law Tax Act in the context of business emigration. Article 2(5) of the Implementing
arrangement State Law Tax Act provides that the tax debt arises on the moment at which the tax period or the liability
to tax ends. From this provision, it can be derived that the moment of emigration is a fictitious point in time at which
the tax debt arises.514 After the tax debt has ‘officially’ arisen, i.e. when there is a material tax debt, the taxpayer will be
invited to file a tax declaration within six months, as follows from article 2(1) of the Implementing arrangement State
Law Tax Act. If the taxpayer has not received an invitation within these six months, he or she will have to request for
such an invitation, on the basis of article 2(4) of the aforementioned arrangement, within two weeks after the six monthterm has passed.
507
See KvK (Chamber of Commerce) – tax matters upon liquidating or selling the business.
de Blieck et al. 2011, par. 4.2.1.
509 See also article 10(2) State Law Tax Act.
510 See article 6 - 9 State Law Tax Act.
511 Losses which occur after emigration do not have to be taken into account by the Netherlands. See also CJEU National Grid Indus (Case
C-371/10).
512 See Resolution State Secretary of Finance BNB 2001/230, par. 1.
513 See article 11(4) State Law Tax Act.
514 In case law however, a different interpretation has been given in the context of the personal income tax. More specifically, the Dutch
Supreme Court argued that the tax debt relating to a certain calendar year arises at the moment at which the period ends, even if the
taxpayer was only a resident during part of the year. This applies both in the context of emigration and of death. See HR BNB 1983/232
and HR BNB 1998/263.
508
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2.11.2 The period after emigration
2.11.2.1 The influence of the incorporation system
With respect to companies it has already been put forward more than once that the Netherlands applies an
incorporation system. Consequently, the transfer of the place of effective management of a Dutch incorporated
company will not lead to that company no longer being qualified as a resident taxpayer for the purpose of national tax
law. It follows that a company which has transferred its place of effective management will remain liable to tax under
the corporate income tax. This implies that after departure the company filing obligation persists.515
With respect to businesses which have been established in the personal sphere, i.e. businesses carried on by a natural
person, there obviously will be no influence of the incorporation system. Indeed, the incorporation system only applies
to companies. It can be concluded that after these businesses have emigrated they will no longer be confronted with any
procedural obligations in the Netherlands, such as the filing of a tax declaration, provided that they no longer derive any
income from the Netherlands. This might, however, be different if the taxpayer chooses for deferred payment.
2.11.2.2Opting-in for deferred payment
As discussed, the Netherlands now offers emigrating companies and individual businesses who emigrate from the
Netherlands to another EU- or EEA State the choice between immediate and deferred payment. If a business taxpayer
opts-in for deferred payment this will have procedural implications. More specifically, the taxpayer will have to
remunerate recovery interest over the amount of tax which is deferred, and will have to provide securities, such as a
bank guarantee. From a procedural point of view, however, the most important implication of deferred payment is the
obligation to annually provide the Dutch Tax Authority with an administration and an overview of its fiscal capital
position, to the extent that this is relevant for the Dutch tax collector.516 In case the taxpayer opts-in for deferred
payment in ten equal terms this will probably not be required, since the recovery of tax is no longer related to the actual
realization of gains.517
2.12 Tax treatment of business emigration benchmarked against the
normative framework
In this paragraph, the Dutch tax treatment of emigrating business will be benchmarked against the normative
framework. More specifically, the criterion of capital import neutrality will be applied in order to assess the tax
treatment in the light of achieving highest possible level of European and global mobility without harming the fiscal
sovereignty of Member States.
2.12.1 The Dutch tax treatment upon business emigration: synopsis
The tax treatment of emigrating businesses generally encompasses an exit tax. These taxes are imposed on departing
residents. In this chapter, the Dutch exit tax provisions, articles 3.60 and 3.61 of the Personal Income Tax Act 2001 as
well as articles 15c and 15d of the Corporate Income Tax Act 1969, have been discussed in detail. These provisions
serve to secure taxation on 1) unrealized capital gains and hidden reserves, fiscal reserves, goodwill and other value
increases which normally would not be expressed (and taxed) in the annual profit, and 2) unrealized gains in respect to
515 I.e. the company has to file the tax declaration at the end of every period, including the annual accounts See Resolution State Secretary of
Finance BNB 2001/230, par. 2.
516 See also: the future Article 25a Recovery Act 1990; Kamerstukken II, 2011/12, 33 262, nr. 2 and 3; and Resolution State secretary of
Finance 14 December 2011.
517 See Kamerstukken II, 2011/12, 33 262, nr. 3 and van den Broek 2012, par. 4.
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single assets transferred abroad. In a purely domestic situation taxation on these items of income would be postponed
until consumption (realization). However, since the realization will take place in the future and outside the Dutch taxing
jurisdiction there is no guarantee for the Netherlands of recovery of the tax claim. For the legislator this is the perceived
rationale behind exit provisions; it is argued that without these rules it would not be possible to tax gains upon
realization, resulting in tax base erosion.518 The Dutch exit provisions essentially introduce a fiction into the national law
by which assets are deemed to be alienated instantaneously upon the moment of emigration or upon the moment at
which no connecting factors are left behind in Dutch territory.
It has been discussed that exit taxes can pose an obstacle to free movement, i.e. the freedom of establishment. Exit
taxes only apply to persons moving their tax residence abroad; in a purely domestic context, tax latencies which
represent unrealized income are in general only taxed upon realization. In case of the transfer of a taxpayer carrying out
an enterprise or in case of the transfer of asset components abroad the exit State will try to tax the unrealized income
before actual realization. This difference in treatment can be an obstacle to free movement, since these taxes can
seriously hinder an individual’s or company’s ability to move to another state. A tax is imposed on something which is
not there yet. As a result, the taxpayer has to pay cash which he or she may not have. In this respect, it is important to
note that the CJEU allows the imposition as an exit tax as such. In National Grid Indus, the Court held exit taxes
compatible with the freedom of establishment and provided that the exit State does not have to take into account value
decreases which occur after emigration. However, the problem with respect to the Dutch exit provisions lies in the area
of the recovery of the exit tax. More specifically, the immediate recovery was considered disproportional by the CJEU.
Consequently, the Dutch legislator responded with the Bill on the amendment of the Recovery Act 1990. In a nutshell,
the Netherlands now provides emigrating businesses (within the EU/EEA) with the option between immediate and
deferred payment of the exit tax claim. In case of deferral of payment additional requirements will apply, including the
following: a) provision of sufficient securities, b) payment of recovery interest, and c) provision of an administration,
enabling the tax collector to determine to what extent unrealized capital gains have been realized. Moreover, the
Netherlands does not take into account post-emigrational decreases in value. Even after the amendments in the area of
the recovery of taxation it is disputable whether the Dutch tax system with respect to the emigration of a business is
completely compatible with the freedom of establishment. In chapter 7, the focus will be on the compatibility with EU
law. In this paragraph, however, I will benchmark the Dutch exit tax system against the normative framework. As a
reminder, the normative framework is aimed at achieving highest possible level of European and global mobility,
without harming the fiscal sovereignty of Member States. The concept of international tax neutrality, more specifically,
capital import neutrality, will be used as a benchmark in order to secure the source country entitlement of States.
2.12.2 Dutch exit taxes and European and global mobility
If the only factor in the normative framework would be European and global mobility, exit taxes would most likely be
unacceptable. Exit taxes are, as noted several times, obstructing to mobility. Exit taxes only apply to persons moving
their tax residence abroad; in a purely domestic context, tax latencies which represent unrealized income are in general
only taxed upon realization. In case of the transfer of a taxpayer carrying out an enterprise or in case of the transfer of
asset components abroad, the exit State will try to tax the unrealized income before actual realization. This difference in
treatment poses an obstacle to mobility, since these taxes can seriously hinder an individual’s or company’s ability to
move to another state. A tax is imposed on something which is not there yet, and, as a result, the taxpayer has to pay
cash which he or she may not have.
518
See Kamerstukken II 1998/99, 26 727, no. 3, p 116-118.
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After the introduction of the Law on deferral of exit taxation the obstruction which exit taxes pose to European business
mobility has been reduced; immediate payment is no longer required within the EU/EEA.519 This implies that a
transferring business taxpayer is not confronted with a liquidity disadvantage when compared to a purely domestic
situation. However, the obstruction to mobility has in no sense been lifted. Upon emigration the tax debt is established
immediately; only payment can be deferred. The burden of having to pay this fixed debt is still obstructive, especially
taking into account the fact that later occurring value decreases are not taken into account, where, had the business not
emigrated these value decreases would have lowered the tax debt. In addition, “new” obstructions to mobility have been
introduced by the aforementioned Law due to the strict conditions under which payment will be deferred. Firstly,
businesses transferring cross-borders and subsequently opting in for deferred payment of the exit claim on unrealized
gains, have to provide securities. In comparable national situations, however, no securities have to be provided in the
context of a tax claim on unrealized gains. This requirement is thus restricting business mobility. Secondly, in order to
obtain the deferred payment the Dutch tax collector will require (amongst others) that the taxpayer provides its fiscal
balance sheet and the profit and loss account. These accounts have to be set up in accordance with Dutch tax law. It has
been argued that this requirement is disproportional.520 I also believe that business mobility will be restricted by too
strict administrative requirements. Rather, only necessary and relevant data which enable the Dutch tax collector to
determine to what extent the unrealized gains have been realized should have to be submitted.521 Finally, the Dutch
legislator will calculate recovery interest; with respect to the amount over which payment is deferred recovery interest is
charged as from the time that the payment term of the tax assessment expires.522 It has been argued that by the
calculation of recovery interest, the freedom of establishment, and thus business mobility, is obstructed.523 Indeed, in a
purely domestic situation the imposition of a tax is deferred until unrealized gains, reserves, and goodwill are actually
realized, without any interest being charged. In addition, with respect to emigrating substantial shareholders, no
recovery interest is charged either. For business mobility to be unrestricted, cross-border seat transfers are to be treated
the same as domestic transfers. Charging recovery interest, however, leads to an interest-disadvantage when compared
to domestic situations, where no recovery interest is charged over unrealized gains. Thus, the Netherlands does not
provide the Dutch tax treatment to cross-border transfers.524
To summarize, the Dutch exit provisions obstruct European and global mobility. On the basis of these provisions, a tax
is imposed on unrealized gains and reserves. The provisions are, however, only triggered in the context of businesses
transferring cross-borders; in a purely domestic context, tax latencies which represent unrealized income will generally
only be taxed upon actual realization. As cross-border movement is treated unequal when compared to movement in a
purely domestic situation, taxpayers might be impeded to stay in their home State. This leads to a sub-optimal allocation
of production factors which is not in the best interest of the internal European Market.525 In a European context,
emigrating businesses can opt-in for deferred payment of the tax claim. But even then business mobility is obstructed,
partly because of the strict requirements which apply in case of deferred payment. Thus, the current Dutch tax
treatment upon business emigration is highly undesirable in the light of European and global mobility.
519 The scope of the proposed Law is limited to the EU/EEA, and acknowledged that in principle third countries do not have to be
included. However, in the context of emigrating substantial shareholders and pensions, the rules for deferred payment do apply to third
countries (under the condition of providing securities). With respect to this limited scope, the Dutch legislator responded that the purpose
of the Law is to achieve alignment between Dutch tax law and the CJEU’s ruling in National Grid Indus. And by virtue of the Court’s ruling,
MSs are only obliged to offer the option of deferred payment to businesses emigrating to EU/EER-States. In addition, the Dutch State
Secretary of Finance argues that the background of the deferral arrangements for businesses, respectively emigrating substantial
shareholders and pensions, is different, and consequently, he sees no reason to expand the scope of the proposed amendments to the
Recovery Act. See Kamerstukken II, 2012/13, 33 262, nr. 5, p. 7.
520 See also NOB Commentary Law on deferral of exit taxation, p. 3, and van den Broek 2012, par. 5.
521 See also NOB Commentary Law on deferral of exit taxation, p. 3; and van den Broek 2012, par. 5; and van Sprundel 2012, p. 914.
522 See article 28(1) of the Recovery Act 1990 and Kamerstukken II, 2011/12, 33 262, nr. 3. The proposed Bill does not include a particular
provisions with respect to the recovery interest.
523 See NOB Commentary Law on deferral of exit taxation, p. 4, and Van den Broek 2012, par. 7.
524 Van den Broek 2012, paras. 7 and 9.
525 See the preambule of the Treaty on European Union (TEU), article 2 TEU and articles 26 and 119 TFEU. See also Vanistendael, 2000,
p. 142
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2.12.3 Dutch exit taxes and fiscal sovereignty
The second pillar of this normative framework is fiscal sovereignty. Member States enjoy a high level of fiscal
sovereignty in the area of direct taxation. States are largely free to design their direct tax systems in a way that meets
their domestic policy objectives and requirements. An important policy objective in the Netherlands is the prevention of
tax base erosion, in order to ensure sufficient financial resources. In this context, the Dutch exit provisions are logical
regulations; capital gains which have been build up in the Dutch tax jurisdiction are to be taxed by the Netherlands.
Without these exit taxes, capital gains might escape the Dutch jurisdiction without taxation. It was already discussed in
the first chapter that the concept of fiscal sovereignty is closely related to the principle of fiscal territoriality, as there
has to be a nexus between the build-up of unrealized capital gains and the Dutch tax jurisdiction. Exit taxes are then not
only permissible, but might even be necessary in the context of fiscal sovereignty
2.12.4 Dutch exit taxes and capital import neutrality
Exit taxes are highly undesirable in the light of European and global mobility, but are a logical measure in the context of
fiscal sovereignty. The goal is to achieve the highest possible level of European and global mobility, without harming
the fiscal sovereignty of Member States. When capital import neutrality is applied as a benchmark, this implies that MSs
cannot lose their source country entitlement, by which means the fiscal sovereignty is safeguarded.
Capital import neutrality seeks a tax system which does not distort the location of investors, thus where capital comes
from. This implies that tax considerations should not influence whether a particular investment is made by domestic
investors or by foreign investors. Put differently, investments originating in various States should compete on equal
terms in the capital market of any State, irrespective of where the investor resides. Investors who invest in a particular
country are subject to the same treatment, i.e. the treatment of the source State. The effective tax rate of all firms in a
given jurisdiction should be equal.
2.12.4.1Can the Netherlands impose an exit tax?
It was discussed that CIN ultimately implies source based taxation. In this respect, the Dutch exit tax legislation is
compatible with capital import neutrality, as it safeguards the source country entitlement. The Dutch exit taxes are
‘appropriate for ensuring the preservation of the allocation of powers of taxation between the Member States concerned. The final settlement
tax levied at the time of the transfer of a company’s place of effective management is intended to subject to the Member State of origin’s tax on
profits the unrealized capital gains which arose within the ambit of that State’s power of taxation before the transfer of the place of
management. Unrealized capital gains relating to an economic asset are thus taxed in the Member State in which they arose.
Capital gains realized after the transfer of the company’s place of management are taxed exclusively in the host Member State in which they
have arisen, thus avoiding double taxation.’526 The Dutch exit provisions stem from the principle of fiscal territoriality, and
are, consequentially, in line with source based taxation. And under source based taxation, CIN is satisfied. Moreover,
the Dutch exit tax provisions do not discriminate between whether the business investments are made by a domestic
investor or by a foreign investor. With respect to both ‘types’ of investors, the exit provisions apply similarly. Thus, the
Dutch treatment upon the emigration of a business is ‘neutral’ with respect to where the capital comes from, satisfying
CIN.
On the basis of CIN, the Netherlands can therefore impose an exit tax. Exit taxes ensure that Netherlands retains its
source country entitlement to tax income which accrued in the Dutch jurisdiction, protecting the fiscal sovereignty. The
fact that the imposition of an exit tax as such is in line with CIN does, however, not mean that the entire Dutch exit tax
526
See CJEU National Grid Indus (Case C-371/10), par. 48. Official text does not contain the underlining (this is added by the author).
76
system can pass the test. First, with respect to the amount of taxation, CIN requires that the Netherlands only imposes a
tax on gains which accrued within the Dutch jurisdiction. Later increases in value cannot be taxed and later decreases in
value should not be taken into account, as these are beyond the Netherlands source country entitlement. Therefore,
CIN requires that upon emigration the exit tax is definitive. CIN should also be applied to the question as to when the
recovery of the exit tax claim is permitted, and under which conditions. It should be noted that the aim is to achieve the
highest level of European and global mobility, where CIN is applied in such a manner that the fiscal sovereignty will be
safeguarded.
2.12.4.2
Immediate or deferred payment?
The question of when taxation (or more specifically, recovery of the tax) is permitted follows from National Grid Indus
case. The CJEU requires MSs to offer emigrating business the option between immediate and deferred payment, but is
this also required in the light of CIN? I believe that a strict application of CIN does not oblige MSs to offer emigrating
businesses the option between immediate and deferred payment. As discussed, CIN requires that the location of
investors is not distorted. In this respect, the Dutch exit tax provisions do not discriminate between whether the
business investments are made by a domestic investor or by a foreign investors; to both ‘types’ of investors, the exit
provisions apply similarly. CIN furthermore requires source based taxation. Based on the principle of territoriality
linked to a temporal component the Netherlands can, therefore, charge a tax on capital gains which arose during a
taxpayer’s residence for tax purposes within the Dutch territory. It is irrelevant whether this tax is due immediately, i.e.
when the taxpayer leaves the Netherlands, or whether this is due at a later point in time, i.e. upon actual realization
outside the Netherlands. CIN merely requires that the tax is assessed in accordance with those gains which accrued in
the Dutch jurisdiction (as the Netherlands, being the source country, is entitled to tax these gains). It follows that on the
basis of CIN MSs are not obliged to offer emigrating businesses the option between immediate and deferred payment.
However, in the light of the overall normative framework, which is aimed at achieving the highest possible level of
European and global mobility without harming the fiscal sovereignty of MSs, I believe that deferral of payment is to be
preferred. If payment of the tax is deferred until actual realization, it is my opinion that the obstacle to free movement
will be lower as the cross-border transferring taxpayer is treated more similar to the purely domestic situation.
Moreover, it follows from the application of CIN that the fiscal sovereignty of MSs is also protected in case payment is
deferred, as the source country entitlement will not be lost.
2.12.4.3
Conditions of deferral
The Dutch legislator currently offers emigrating businesses the option between immediate and deferred payment, where
in case of deferred payment additional requirements or conditions will apply. The second question put forward was
whether these conditions can pass the benchmark of capital import neutrality. The most important requirements in the
context of deferred payment include 1) provision of sufficient securities, 2) payment of recovery interest, and 3) provision
of an administration.
With respect to the first, the provision of securities, I believe that there are two possible ways to approach this. First, it
can be argued that securities, such as a bank guarantee, are in general permitted in the light of CIN, as they are aimed at
the preservation of the Netherlands source country entitlement. Secondly, it could also be argued that securities are only
permitted if there is a risk of non-recovery. If there is no such risk, there will be no need to protect the source country
entitlement, and, thus, no reason to require securities on the basis of CIN.527 The Netherlands legislator has ventured
527
It is noted that the discussion to which extent securities can be provided in the light of EU law closely resembles this discussion. I refer
to paragraph 7.4.3.1.
77
that, in practice, securities will only be required if there is a risk of non-recovery, which will be judged on a case-by-case
basis.528 In my opinion, this would then be fully compatible with CIN.
The second condition encompasses the calculation and payment of recovery interest. More specifically, with respect to
the amount over which payment is deferred recovery interest is charged as from the time that the payment term of the
tax assessment expires.529 I believe that CIN is satisfied both with and without the calculation of recovery interest.
However, when this requirement is analyzed in the light of the overall normative framework, it is my opinion that no
recovery interest should be calculated. Reason for this is that if the Netherlands calculates this recovery interest the
disadvantage of immediate recovery in terms of cash flow would effectively not be diminished. Indeed, a taxpayer might
as well take a bank loan upon emigration in order to pay the exit tax immediately and pay the interest on the loan to the
bank. The option between immediate and deferred payment is not a real option then. It is clear that the recovery of
interest is a clear obstruction to mobility, as it discriminates between cross-border transfers (where recovery interest is
charged immediately from the moment of emigration onwards) and domestic situations (where recovery interest might
only be calculated after actual realization). In the light of European and global mobility it would therefore be highly
preferable if the requirement of recovery interest would be cancelled. Moreover, this would not harm the fiscal
sovereignty of MSs; not charging recovery interest would be compatible with CIN, as this does not imply that the
Netherlands will lose its source country entitlement.
The final condition is the provision of an administration. On the basis of CIN, this would be required, as it enables the
Dutch tax collector to determine to what extent unrealized gains have been realized, and therefore, to what extent the
exit tax debt can be recovered. Thus, I believe that this requirement will secure that the Netherlands will not lose its
source country entitlement.
As a final remark, I note that I have not considered the Mutual Assistance Directive for the recovery of taxes530 and the
Mutual Assistance Directive for exchange of information531 in the discussion above. Reason for this is that I wanted to
focus on the measures which MSs can set sovereignly in order to protect their source country entitlement. Moreover, as
these instruments for cooperation may not always function in an efficient and satisfactory manner, I feel that they may
be insufficient to truly ensure that MSs will not lose their taxing right as a source country.532
2.12.5 Conclusion
Exit taxes are undesirable in the light of European and global mobility but are, on the basis of CIN, required for the
preservation of the source country entitlement on accrued yet unrealized income. If payment is deferred, the imposition
of an exit taxes will be less obstructive to mobility and CIN will still be satisfied. However, in case payment is deferred,
some conditions may apply on the basis of CIN in order to protect the tax base of the emigration State. For example,
when there is a risk of non-recovery the emigration State might risk losing its source country entitlement, which would
require the provision of securities. Also, an administration will have to be provided in order to determine the extent of
realization of income to which the emigration State, i.e. the Netherlands, is entitled. However, CIN does not require the
528 As of January 1, 2013, the Dutch policy with respect to security-provisions in cases of long-term deferral arrangements has been eased
for domestic situations. The Dutch State Secretary of Finance has put forward that the requirement of having to provide securities in case of
emigration will follow this amended policy. This implies that the determination if, and to what extent, securities will have to be provided will
be left to the Dutch Tax Authority. This will thus be judged on a case-by-case basis. In some cases this may also mean that no securities will
be required. The risk of non-recovery will be leading in this respect. See also paragraph 74.3.1 and Kamerstukken I - Stenogram vergadering
23 april 2013, p. 7 and p. 10.
530 Council Directive 2010/24/EU.
532 See CJEU Commission v. Spain (Case C-269/09), par 72, where the Court admits that these instruments for cooperation may not always
function in an efficient and satisfactory manner in practice.
78
calculation of recovery interest, as the Netherlands source country entitlement would also be preserved if no such
interest is calculated. Moreover, as the calculation of recovery interest might diminish the advantage (in terms of cash
flow) of not having to pay the exit tax immediately upon emigration, not charging recovery interest would be highly
preferable in the light of European and global mobility.
2.13 Summary and conclusion
The tax which is levied upon the emigration of a business is commonly called an exit tax. Exit taxes only apply to
persons moving their tax residence abroad and they serve to secure certain tax claims with respect to unrealized yet
accrued income. In a purely domestic situation, tax latencies which represent unrealized income are, in general, only
taxed upon actual realization. This difference in treatment poses an obstacle to free movement, i.e. the freedom of
establishment.
In the national law systems of most countries emigration provisions, i.e. provisions dictating the imposition of an exit
tax, can be found. In this chapter, I’ve described, analyzed and evaluated not only the Dutch tax treatment with respect
to the emigration of a business but also the tax treatment which is applied in the other EUCOTAX countries.
First of all, following the Dutch (tax) law system, a distinction was made between businesses carried on by individuals
(natural persons) and those carried on by companies (legal entities). The two ‘types’ of businesses are liable to tax under
different Acts. It was argued that the most important criterion differentiating between the two is the presence or
absence of a legal personality. With respect to partnerships, the additional criterion of free transferability of the
partnership interests was discussed. The distinction between individual businesses and companies has important
implications with respect to how a business can lose its status as a resident for tax purposes and how it can emigrate.
Individual businesses are considered to be transparent, implying that the entrepreneur itself is liable to tax, rather than
the objective enterprise. Companies, on the other hand, are considered to be liable to tax as an entity. The distinction
between businesses carried on by an individual and those carried on by a company has been followed throughout this
chapter. It followed from the EUCOTAX comparative law that all countries make a similar distinction in their national
tax law systems as the Netherlands does, although the exact criteria which are applied for distinguishing between the
two categories are not similar throughout.
After having discussed this important foundation, I analyzed how a business can lose its status as a resident. For Dutch
tax purposes, a resident is a taxpayer who is fully liable to tax in the Netherlands and taxed on its worldwide income. A
non-resident is a taxpayer who has a limited liability to tax in the Netherlands and is taxed only on income derived from
the Netherlands. The resident- and non-resident taxpayer have to be distinguished from the non-taxpayer, who has no
relation or bond with the Netherlands for tax purposes whatsoever. In the other EUCOTAX countries, a similar
distinction between residents and non-residents can be found. The determination of the place of residence, however,
differs. In the Netherlands, the place of residence of an individual business is determined on the basis of the criterion
‘living in’ the Netherlands, which is further operationalized through the notion of the center point of vital interests. For
companies, the main criterion is ‘establishment’, which is further operationalized by virtue of the concept of the place of
effective management. Having analyzed the residence criteria of the other EUCOTAX countries, it became clear
different criteria are used in different countries. It was argued that this might give rise to dual residency issues, as it is
possible that a natural person or legal entity is qualified as a resident for tax purposes in more than one State, based on
the applicable national tax law systems. In such situations, the applicable DTC can be consulted in order to allocate the
taxing right between the States involved.
In addition to the different criteria which are employed with respect to the determination of residency, it was also noted
that the co-existence of the incorporation law system (where companies exist by virtue of their statutory seat) and the
79
real seat law system (where companies exist by virtue of their real seat) can cause problems with respect to cross-border
business migration. The Netherlands applies an incorporation system, which plays an important role in the
determination of the place of residence with respect to companies. For as long as the statutory seat is situated in the
Netherlands, a company will continue to exist under Dutch company law, even if the real seat is transferred abroad. It
is, therefore, possible to transfer the place of effective management without this resulting in the liquidation of the
company. The majority of the participating EUCOTAX countries applies the incorporation system similarly, although
there are also countries who follow the less internal market friendly real seat system. Additionally, it was found that
some States which originally know a real seat doctrine are currently applying this in a more flexible, or hybrid manner
(in response to CJEU case law).
Having discussed the criteria on the basis of which taxpayers are considered a resident in the Netherlands, respectively,
the other EUCOTAX countries, the ways in which this residency status can be lost were discussed as well. Put briefly; if
the connecting factor or criterion is no longer met, the resident status will, in principle, be lost (ignoring fictions).
Moreover, the residency status might also be changed or lost due to the effect of a DTC. With respect to the
Netherlands in particular, it was noted that resident business taxpayers can lose their status as a resident in many ways,
one of which is emigration. Emigration and residency are two concepts which are closely related. It was noted that
emigration will always lead to a resident taxpayer losing its status as a resident, whereas the loss of the residency-status
does not necessarily imply emigration.
With respect to the concept of emigration, it was put forward that there is no explicit definition of this term in the
Netherlands. Nonetheless, the meaning of this concept can be deducted from the exit provisions which are laid down in
the PITA 2001 and CITA 1969, from legislative history, and from literature. Emigration occurs when a business carried
on in the Netherlands ceases to be a resident taxpayer, due to the fact that the tax residence is transferred abroad. After
the concept of emigration was defined, several examples of business emigrations were set forth. It is important to realize
that emigration does not necessarily trigger an exit tax provision. When, for example, a Dutch entrepreneur emigrates
but leaves his enterprise behind in the Netherlands there will be no exit tax settlement. Moreover, emigration is not a
prerequisite for the exit tax provisions to enter into force; it is possible that, for example, the final settlement provisions
are applied without there being a business emigration, as will be the case when a non-resident taxpayer transfers its
business activities (constituting a PE) away from the Netherlands. With regard to the other EUCOTAX countries, it
was noticed that the concept of emigration does not exist as such in the national law of most States. Similar to the
Netherlands, the concept is linked to the transfer of residency (or, more specifically, the connecting factors) abroad.
The next part of this chapter focused on the specific exit provisions. It was noted that these provisions make emigration
more difficult than the continuation of a purely domestic business. Articles 3.60 and 3.61 PITA 2001 as well as articles
15c and 15d CITA 1969 are these kinds of exit provisions. They serve to secure the Dutch tax claim with respect to
unrealized gains and hidden reserves. By virtue of the Dutch totaalwinstbegrip (total profit concept), these gains have to be
taken into account, since they relate to the Dutch fiscal life of the business. In a purely domestic situation, taxation
would wait until actual realization. However, due to the fact that the business emigrates, realization will most likely take
place in the future and outside the Netherlands. As the Netherlands does not want to risk losing its rightful tax claim the
aforementioned exit provisions create a taxable moment just prior to emigration. Subsequently, a distinction was made
between the partial settlements in the personal and corporate income tax, on the one hand, and the final settlement
provisions, on the other. The partial settlement provisions regulate the transfer of asset components or part of the
business abroad, combined with the simultaneous or subsequent emigration of the taxpayer. The final settlement
provisions are broader in scope; emigration is not required as they also apply to non-resident taxpayers and they apply
not only to transfers of single asset componetns but also to the transfer of the entire business abroad. The final
settlement provisions, in fact, constitute a safety net and they only apply to benefits which have not already been taken
into account for other reasons.
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The analysis of the different tax systems of the participating EUCOTAX countries has shown that there are different
types or methods of exit taxation. Roughly, two types have been identified. The first is the deemed disposal of assets.
Under this type of exit tax, the company will be taxed as if it disposed of its assets for a compensation corresponding to
fair market value (similar to the Netherlands). The second type is the deemed liquidation of the business. Then, there
are countries which do not know or apply an exit tax as such, but who require the liquidation of a business transferring
cross-borders. This liquidation then triggers a final taxation (liquidation tax). The exact nuances of these different types
or methods differ from country to country, and have been discussed in this chapter.
At this point, it can be concluded that the exit provisions obviously have a hindering effect on business mobility. These
exit taxes are imposed whereas nothing has been realized yet. However, in the case National Grid Indus, the Court
basically allowed the imposition of an exit tax as such, and provided that the exit country does not have to take into
account value decreases which occur after emigration. Moreover, in the Court’s point of view, the problem with respect
to the Dutch exit provisions lies in the area of the recovery of the exit tax. More specifically, the immediate recovery
was considered disproportional by the CJEU. Consequently, the Dutch legislator responded with the Bill on the
amendment of the Recovery Act 1990. This bill has recently been accepted by both the House of Representatives and
the Dutch Senate, by virtue of which the Law on deferral of exit taxation is official legislation. In a nutshell, the Netherlands
now provides emigrating businesses (within the EU/EEA) with the option between immediate and deferred payment.
In case of deferral of payment, additional requirements will apply, such as the provision of sufficient securities, the
payment of recovery interest, and the provision of an administration (enabling the tax collector to determine to what
extent unrealized capital gains have been realized). Moreover, the Netherlands does not take into account postemigrational decreases in value. Analyzing the different national tax law systems of the other EUCOTAX countries, it
was noticed that all States use different rules and systems with respect to the recovery of the exit tax claim. Roughly,
four different categories were distinguished; countries who offer the option between immediate and deferred payment,
countries who offer the option between immediate payment or payment in five annual installments, countries who
require immediate payment of the tax, and countries where the recovery of the exit tax is irrelevant, as no such tax is
imposed.
In the Netherlands, the effect of the exit tax provisions entering into force is a fictitious alienation; the transferred assets
are deemed to have been alienated at the moment right before transfer or emigration. The difference between the fair
market value and the book value is subsequently included in the profit of the taxpayer. All EUCOTAX countries who
actually have an exit tax in their national tax law system, apply a similar treatment of assets as the Netherlands. More
specifically, all countries feign a disposal or liquidation implying a realization at fair market value, even though different
terms are used such as normal value or arm’s length price. In the Netherlands, the fact whether payment of the exit tax
claim is due immediately or can be deferred will influence the treatment of assets upon emigration. In case an emigrating
resident opts-in for deferred payment, the system of a fictitious alienation is equally applicable. However, in this case,
the Dutch tax collector will also evaluate the transferred assets after emigration, in order to determine to what extent the
gains vested in the assets have been realized.
In the final part of this chapter the normative framework was applied to the Dutch tax treatment on business
emigration. It was argued that exit taxes are undesirable in the light of European and global mobility, but that, on the
basis of CIN, they are required for the preservation of the source country entitlement on accrued yet unrealized income,
and, consequentially, serve to safeguard MSs’ fiscal sovereignty. With respect to the recovery of the exit tax claim, it was
argued that payment should preferably be deferred. If payment is deferred, the imposition of an exit taxes will be less
obstructive to mobility and CIN will still be satisfied. However, in case of deferred payment, some conditions may apply
on the basis of CIN in order to protect the tax base of the emigration State. For example, when there is a risk of nonrecovery the emigration State might risk losing its source country entitlement, which would require the provision of
securities. Also, an administration will have to be provided in order to determine the extent of realization of income to
which the emigration State, i.e. the Netherlands, is entitled. CIN does, however, not require the calculation of recovery
81
interest, as the Netherlands source country entitlement would also be preserved if no such interest is calculated.
Moreover, as the calculation of recovery interest might diminish the advantage (in terms of cash flow) of not having to
pay the exit tax immediately upon emigration, not charging recovery interest would be highly preferable in the light of
European and global mobility.
With respect to the research question of this thesis, which reads as follows: How does the Netherlands tax system with respect
to business migration impact on European and global mobility, and what should be the impact in the light of tax conventions, EU law, and
international tax neutrality? the foundation has been laid. In this chapter, the Netherlands tax system with respect to
business emigration has been described and analyzed. It has become clear that the emigration of a business is not as
‘easy’ as the transfer and continuation of a business in a purely domestic context. Crossing the border implies that a tax
will have to be settled on something which is not realized yet. In a purely domestic context, taxation would wait until
actual realization. Exit taxes, therefore, pose an obstacle to free movement. As the CJEU ruled in NGI, the problem
specifically lies in the area of the recovery of the exit taxes. However, even after the Netherlands responded to this by
providing emigrating businesses with the option of deferred payment, there are still obstructions to European and
global mobility. The option of deferred payment is accompanied by strict obligations, which can possible neutralize the
financial benefit of not having to pay an immediate tax upon emigration. European and global mobility of businesses
can only truly be unobstructed when the tax treatment of businesses transferring cross-borders and businesses
transferring within one nation is equal. However, in the light of the capital import neutrality, MSs have the right to
safeguard their source country entitlement and an exit tax system is the easiest way to do so. This leads me to conclude
that in order to respect MSs fiscal sovereignty, some obstructions to business mobility have to be taken for granted.
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3.
IMMIGRATION OF A BUSINESS
3.1 Introduction
As discussed, exit taxes can hinder a taxpayer’s ability to move to another state. Different treatment, a tax burden
whereas nothing has been realized, and possible double taxation, are only a few of the many problems which can face a
cross-border-transferring taxpayer. There is no emigration without immigration and vice versa; it are two sides of the
same medal. In the previous chapter, important tax aspects of business mobility were analyzed from an outbound
perspective, i.e. emigration. The inbound perspective of immigration is, however, equally important, even though it does
not receive the same amount of attention in mainstream literature. For all these reasons, this chapter will deal with the
immigration aspects of business mobility.
The vital point of the tax treatment upon immigration lies in whether or not the enterprise transferring its tax residence
from one state to another will be granted a step-up in the immigration State. A tax base step-up means that the
destination state will value the assets and liabilities at fair market value on the fiscal opening balance sheet, so that
unrealized gains accrued elsewhere will be left out.533 It is possible that the revaluation from book value to fair market
value essentially turns out to be a step-down, as will be the case when the fair market value lies below the book value. In
most cases, however, the fair market value will be higher than the book value. Consequently, revaluation from book
value to market value will increase the depreciable base of asset components for tax purposes. In turn, higher
depreciation will lead to the taxable profit being lower. Therefore, it might be argued that the disadvantage of having to
pay an exit tax on unrealized gains is compensated by lower taxation in the immigration state (the new residence
state).534 Terra and Wattel state that ‘if the unrealized gains taxed by the exit State and the step up provided in the immigration state
match, and if the average (remaining) depreciation period for assets matches the period of exit tax installment payments in the exit State, then
the tax payments in the exit State and the tax advantage in the immigration State will roughly cancel each other out’.535 Therefore, some
might say that having to pay an exit tax on unrealized gains is not as big of a hindrance as it seems, since the transferred
enterprise will probably be granted a step-up in the immigration State.536
Thus, the disadvantage of having to pay a tax settlement on the difference between the fair market value and the book
value in the exit State can possibly be neutralized by the benefit of having a higher depreciable base in the immigration
State, especially when payment is deferred. However, not all States will grant immigrating businesses with a tax base
step-up, even though this was advised by the Ecofin in 2008. A different discussion then deals with the question
533
See also: Terra and Wattel 2012, p. 506 and p. 514.
See also: note to National Grid Indus, V-N 2011/67.8.
535 Terra and Wattel 2012, p. 514.
536 It is possible to debate whether or not the tax treatment of the immigration state is even relevant. In judging whether a certain provision
constitutes an obstacle to one of the treaty freedoms, followers of the single country approach would argue that only the national tax law
system from which the questionable provision is derived (thus the tax law system of one country), is of relevance. In such a view, the tax
system of the immigration state is irrelevant. A totally different approach is the internal market approach, in which not only the national tax
law system of one country is of importance, but also treaty provisions and the national tax law systems of other states involved. The tax
treatment in the immigration state (step-up) can possibly take away the disadvantage of having to pay an exit tax. This is what Kemmeren
(see Kemmeren 2008) calls the integrated bundle of taxing systems. As previously discussed, the CJEU also acknowledges the interaction of
different tax systems. See for example CJEU FII Group Litigation (Case C-446/04), CJEU Haribo (Cases C-436/08 and C-437/08), and CJEU
Commission v. Germany (Case C-284/09). In these cases, the CJEU judged the entire assembly of transactions and looked at the combined
fiscal treatment of the States involved, in order to establish whether or not there was a less favorable treatment in a cross-border situation.
As such, not only the stand alone treatment in on State is of importance, but also the possible neutralizing effect on the level of the other
State.
534
83
whether not providing immigrating businesses with a tax base step-up is an infringement of EU law. The CJEU seems
to suggest that the immigration State is obliged to grant a tax base step-up.537
3.2 How does a business become a tax-resident
A. Dutch tax system
In the previous chapter, extensive attention has been paid to the concept of residency in the Netherlands. I will
therefore be concise in the following discussion on how a business can obtain the status as a resident of the Netherlands
for tax purposes. Again, natural persons have to be distinguished from legal entities.
3.2.1
Natural persons
The question of how a business carried on by an individual can obtain the status of a resident status of the Netherlands,
is essentially a question of how a natural person in general can become a resident of the Netherlands for tax purposes.
The subjective enterprise is liable to tax; the objective enterprise has no legal personality and can therefore not be a
resident for tax purposes in the first place. The establishment of an objective enterprise in the Netherlands by a person
who already was considered to be a resident of the Netherlands will therefore not lead to a taxpayer obtaining the status
of a Dutch resident. But how can a taxpayer, more specifically an individual carrying on a business, gain the status of a
resident of the Netherlands? In order the be qualified as a resident, a person’s center point of vital interests should be
located in the Netherlands, and there should be a sustainable bond between the taxpayer and the Netherlands.538
Whether or not this is the case has to be determined by taking into account all relevant facts and circumstances. To
conclude, an individual taxpayer carrying on a business can become a resident of the Netherlands by transferring its
center point of vital interests to the Netherlands (which is a factual matter). Whether or not the objective enterprise is
located in the Netherlands (e.g. a foreign PE) is irrelevant for the status of a resident in the Netherlands.
3.2.2
Legal entities
Under the Dutch tax law system companies are incorporated. The incorporation of a legal entity in the Netherlands will
lead to a business obtaining the status as a resident of the Netherlands. The nationality and domicile of the
incorporators of a business is irrelevant. When company incorporated under foreign law transfers its place of effective
management to the Netherlands, this transfer of the real seat will give rise to subjective tax liability in the Netherlands.
The company falls under the scope of the provision of article 2(1) CITA 1969539 and is therefore considered to be
established in the Netherlands. Through transfer of the place of effective management, irrespective of whether or not
the actual business is transferred to the Netherlands, the company has become a resident taxpayer and is subsequently
taxed for its worldwide profit in the Netherlands.540
With respect to the resident criteria of the different EUCOTAX participating countries, I refer to paragraph 2.3.1 for
natural persons, and to paragraph 2.3.2 for legal entities. The following table summarizes the different residence criteria.
When these criteria are met in a particular case, the business will be considered a resident of the country in question.
Residence criteria for individuals
Residence criteria for companies
See par. 58 of CJEU National Grid Indus (Case C-371/10). See also: note to National Grid Indus, V-N 2011/67.8. The question whether
EU law requires the provision of a step-up will be discussed in chapter 7.
538 See also Burgers 2007, par. 4.2.4.2.1; Hof ‘s-Gravenhage LJN: AH9812; and HR BNB 1998/71.
539 See the exordium of article 2(1) CITA 1969.
540 See also van de Streek et al. 2012, par. 2.0.7.C.d.
537
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Austria
Belgium
France
Germany
-
Domicile or
Residence
Domicile or
Seat of fortune
-
Home or main place of residence,
Non-incidental professional activity, or
Centre of economic interests
Residence or
Habitual abode linked to permanency test
≥ 183 days
Citizenship
Habitual abode linked to permanency test
≥ 183 days
Registration in civil register, and
a. Domicile or
b. Residence
Living in (based on all relevant facts and
circumstances)
Stay on Polish territory ≥ 183 days or
Centre personal and economic interest
Essential ties, and
Having been resident at a previous date
Hungary
-
Italy
-
Netherlands
-
Poland
-
Sweden
USA
- Residence of an individual is not relevant
(incorporate a business)
-
Statutory seat or
Place of effective management
Head office,
Place of effective management or control
Place of effective management
-
Place of business management
Registered office
-
Place of effective management of listed
companies
-
Legal seat, place of management,
Main object
Establishment (place of effective management)
-
Registered office or
Place of management
Registration in the SCRO,
Residence of the board, or
Any other relevant circumstances
Incorporation
3.3 Business-immigration: meaning and how to
A. Dutch tax system
The concept of business immigration as such is not defined in Dutch tax law. This is obvious, since immigration alone
is not a taxable event. However, at the beginning of this chapter it has been put forward that emigration and
immigration are two sides of the same medal. The definition which was provided for emigration could then also be used
to define its counterpart, which is immigration. Consequently, business immigration can be said to have the following
meaning: the situation in which a business (carried on by either a natural person a legal entity) is transformed from a
non-resident taxpayer or non-taxpayer to a resident taxpayer. It is required that there is a business both before and after
this transformation. The tax treatment which the Netherlands applies to immigrating taxpayers is the provisions of a
tax-base step up (which will be discussed in more detail in paragraph 3.4). In the context of emigration, it was also
argued that, in some cases, the Dutch exit provisions can also be triggered without there being an emigration of a
taxpayer. Similarly, it is in the context of immigration also possible that a tax base step-up is provided, even though
there is, strictly taken, no immigration of a taxpayer. This will, for example, be the case when a limited resident taxpayer
is transformed to a resident taxpayer, by virtue of which the Netherlands acquires a taxing right which it did not have
before this transformation.541
How can a business immigrate to the Netherlands? Again, I will distinguish between businesses in the personal and
corporate sphere. Moreover, I will analyze whether or not the Netherlands provides a tax base step-up to fair market
value in the different scenarios. It should be noted at this point that, in the Netherlands, there is no special regime for
541
See for a more detailed explanation paragraph 3.3.1.2.
85
any business taxpayers in particular, such as partnerships or trusts. All businesses are treated according to the same
regime, apart from the distinction between the personal and the corporate sphere.
3.3.1.1 Natural persons
Only the entrepreneur carrying on the business can immigrate.542 Consequently, the transfer of the place of residence of
the entrepreneur from another country to the Netherlands is to be labeled as a business immigration in the personal
income tax. The qualification of whether or not the place of residence has been transferred to the Netherlands will again
depend on all relevant facts and circumstances.543
In line with the discussion provided regarding the concept of emigration, I will discuss several examples of what does
and doesn’t lead to the immigration of a business:
a. On the eve of his immigration, the entrepreneur ceases his enterprise. Thus, after moving to the Netherlands the
business is not continued. This is not a business immigration but simply the immigration of a natural person.
Obviously, in the absence of the transfer of a business a tax base step-up is out of the question.
b. The entrepreneur moves to the Netherlands without previously carrying on any business activities in the
Netherlands. His formerly foreign-driven enterprise is continued in the Netherlands. This is how a business can
immigrate to the Netherlands for tax purposes.544 The taxpayer is required to draft an opening balance upon the
commencement of his business activities in the Netherlands. The Netherlands will provide a tax base step-up to fair
market value in this case.
c. The entrepreneur, living outside Netherlands but already carrying on business activities in the Netherlands (through
a PE), moves his residence to the Netherlands. This situation is to be qualified as a business immigration as well,
and essentially sorts the same effect as situation (b). This entrepreneur will be transformed from a non-resident into
a resident by moving his place of residence to the Netherlands.545 There is, however, a difference with respect to
the provision of a tax base step-up. To the extent that business activities were already carried on in the Netherlands
through a PE, there will be no revaluation of assets and liabilities to fair market value, since these were already
valuated for Dutch tax purposes.546 On the other hand, to the extent that assets are transferred to the Netherlands
upon immigration, the Netherlands will provide a tax base step-up.
d. The entrepreneur moves to the Netherlands, leaving his enterprise behind in the exit State. The business operations
will be carried on from the Netherlands from that moment forward. The entrepreneur is transformed from a nontaxpayer (or alternatively from a non-resident) to a resident taxpayer, which is to be labeled as a business
immigration. Additionally, he now holds a PE outside the Netherlands. Again, the immigrated business will have to
draft an opening balance upon the commencement of his liability to tax in the Netherlands.547 The starting capital
will be valuated at fair market value, which means that the Netherlands provides a step-up.548
542 As emphasized several times, businesses in the personal sphere have no legal personality, and are never liable to tax. Such a business can
therefore never acquire the status of a resident taxpayer. The entrepreneur, i.e. the natural person carrying on the enterprise, is the taxpayer
for tax purposes and only he or she can become a resident in the Netherlands.
544 See also van Kempen and Essers 2011, par. 3.2.2.A.b.
545 It can be taken from situations b and c that it is completely irrelevant whether the enterprise is carried on in or outside the Netherlands
after the immigration of the entrepreneur (see also: van Kempen and Essers 2011, par. 3.2.2.A.b).
546 See amongst others: Fiscal Encyclopedia personal income tax, annotation 4.2.4 (valuation of asset components at immigration); van Kempen
and Essers 2011, par. 3.2.2.A.b and van de Streek et al. 2012, par. 2.0.7.B.a. and par. 2.0.7.C.d.
547 See also van de Streek et al. 2012, par. 2.0.7.B.b.
548 This step-up will apply to both the general profit of the enterprise and the deductible profit of the PE. I will explain these concepts in
more detail in chapter 3. At this point, I note that the deductible profit is the profit for which the Netherlands has to see to the avoidance of
double taxation; the general profit is the profit of the entire enterprise, including the PE profit. I believe that the step-up will also apply to
the deductible profit, since immigrating businesses are required to draft an opening balance upon the commencement of their liability to tax
in the Netherlands, by virtue of the total profit concept. On this opening balance, the starting capital (i.e. all assets and liabilities) will be
valued at fair market value. Peeters argues that the profit of the foreign PE is determined according to Dutch standards; the tax law of the
86
3.3.1.2 Legal entities
Again taking the starting point that only non-resident taxpayers or non-taxpayers can immigrate, the transfer of the
place of residence of a company from another country to the Netherlands is a business immigration in the corporate
income tax sphere. Similarly as discussed for individuals, the qualification of whether or not the place of residence of a
legal entity has been transferred to the Netherlands will predominantly depend on the formal criterion of the place of
effective management. Only in case of doubt, additional facts and circumstances will be considered.549
Some examples of what does and does not constitute immigration of a legal entity to the Netherlands include the
following:550
a. A foreign company starts business operations in the Netherlands through a PE. This will lead to the company
becoming a non-resident taxpayer in the Netherlands, by virtue of article 3(1) CITA 1969. However, since a nontaxpayer is transformer to a non-resident taxpayer, this situation is not to be labeled as a business immigration. The
subject of taxation is still not a resident of the Netherlands, but a company established outside the Netherlands.
The establishment of a PE in the Netherlands will, however, lead to the company being limited liable to tax in the
Netherlands. By virtue of the total profit concept, the company will therefore have to draft an opening balance with
respect to the assets and liabilities allocated to that PE.551 These will be valued at fair market value, which means
that the Netherlands provides a tax base step-up to the extent that business operations are transferred to the
Netherlands.
b. A foreign company starts business operations in the Netherlands by establishing a subsidiary in the Netherlands.
This is no business immigration, but the establishment of a new legal entity. The foreign company itself will not
become a resident or non-resident in the Netherlands, since the subsidiary is a separate legal entity. This subsidiary
has to be established in accordance with Dutch law and as such will obtain the status as a resident company in the
Netherlands by virtue of article 2(1) CITA 1969. A tax base step-up is irrelevant in this case. There is a completely
‘new’ tax subject, which obviously implies the drafting an opening balance on which assets and liabilities are valued
at fair market value.
c. A foreign company transfers its place of effective management to the Netherlands, without previously having any
business activities in the Netherlands. By virtue of the transfer of the place of effective management, i.e. the real
seat, the company will become liable to corporate income taxation in the Netherlands. The company falls under the
scope of article 2(1) CITA 1969552 and is, therefore, considered to be established in the Netherlands. By means of
the transfer of its place of effective management, irrespective of whether or not the actual business is transferred to
the Netherlands, the company has become a resident taxpayer and is subsequently taxed for its worldwide profit in
the Netherlands.553 This situation is, therefore, to be labeled as a business immigration. By virtue of the total profit
concept the immigrated business will have to draft an opening balance on which the starting capital is valued at fair
market value.554 The Netherlands thus provides a tax base step-up. It is irrelevant to what extent business activities
are actually transferred to the Netherlands. Indeed, the company is a resident taxpayer and therefore subject to tax
for its worldwide profit.
d. A Dutch incorporated business with no business activities in the Netherlands and its place of effective management
outside the Netherlands, transfers its place of effective management (back) to the Netherlands. By virtue of article
2(4) CITA 1969, a Dutch incorporated company is qualified as a resident for the purpose of national law. The
country in which the PE is located is irrelevant. (see Peeters, 2011, par. 2.1). Subsequently, the step-up will also apply to the deductible
profit of the PE, since these have to be revalued according to Dutch standards.
550 See for a few of these examples: van de Streek et al. 2012, par. 2.0.7.C.d.
552 See the exordium of article 2(1) CITA 1969.
553 See also van de Streek et al. 2012, par. 2.0.7.C.d.
554 See amongst others: van Kempen and Essers 2011, par. 3.2.2.A.b and van de Streek et al. 2012, par. 2.0.7.B.a. and par. 2.0.7.C.d.
87
e.
f.
company, therefore, never ceased to be liable to tax in the Netherlands. This situation can not to be labeled as a
business immigration; a resident taxpayer is transformed from a limited resident taxpayer555 to a resident taxpayer.
However, the Netherlands acquires a taxing right after immigration (i.e. the transfer of the pace of effective
management), which it did not have before due to the fact that the taxpayer previously was a limited resident
taxpayer and the taxing right was allocated to another State. Thus, upon commencement of unlimited liability to tax
in the Netherlands, the assets which previously fell beyond the Dutch taxing right will have to be valued at fair
market value implying that a tax base step-up is granted.556
The company, already carrying on business operations in the Netherlands through a PE, subsequently transfers its
place of effective management to the Netherlands. In this situation, a non-resident taxpayer, which was already a
subject of taxation, will obtain the status as a resident taxpayer, analogue to situation (c). Thus, there is a business
immigration in this situation. There is, however, a difference with respect to the provision of a tax base step-up. To
the extent that business activities were already carried on in the Netherlands through a PE, there will be no
revaluation of assets and liabilities, since these were already valuated for Dutch tax purposes.557 On the other hand,
to the extent that assets are transferred to the Netherlands upon immigration, the Netherlands will provide a tax
base step-up.
The place of residence of a Dutch incorporated company with its place of effective management abroad is
considered have transferred to the Netherlands, due to the fact that a new DTC between the Netherlands and the
other country entered into force containing a different criterion for the tiebreaker rule. This situation was discussed
in paragraph 2.6.3.2.558 There is no factual change in the situation before and after the renewal/revision of the
DTC, but from a fiscal-legal perspective there will be an immigration for the purpose of the treaty (disregarding
transitional law)559. For the purpose of national law however, this situation is equal to that described under situation
(d). More specifically, a Dutch incorporated company is qualified as a resident for the purpose of national law by
virtue of article 2(4) CITA 1969. The company, therefore, never ceased to be liable to tax in the Netherlands. This
situation is not to be labeled as a business immigration; a resident taxpayer is transformed from a limited resident
taxpayer to a resident taxpayer. As discussed under situation (d), there will nonetheless be a step-up in tax base, at
least to the extent in which the Netherlands acquires a taxing right after the taxpayer’s immigration which it
previously did not have (as the exercitation of the Dutch taxing right was restricted by the DTC). This has also been
ruled by the Dutch Supreme Court in HR BNB 2002/402, where, due to the fact that the new treaty between the
Netherlands and the United Kingdom entered into force (in 1981) the taxing right over the benefits derived from a
company’s Dutch immovable property was allocated to the Netherlands, whereas this right was previously limited.
Upon commencement of full liability to tax in the Netherlands the property consequently had to be valued at fair
market value.560
See paragraph 1.3.2.
See also HR BNB 2002/402, par. 3.11.
558 It was argued that when the Netherlands concludes a subsequent, renewed DTC, this can influence the place of residence of a company
for the purpose of the treaty, due to the fact that a different criterion is applied for the tiebreaker rule. When for example the criterion is
changed from the place of effective management to the more material benchmark of the place of central management and control (as was
the case in the renewed DTC between the Netherlands and the UK), there might be a change of the place of residence for the purpose of
the treaty when the renewed DTC enters into force.
559 The transitional law encompasses that for the purpose of the tax treaty, the ‘old’ residence qualification of dual residents will be
respected, provided that there is no material change in the facts and circumstances. See also Kamerstukken II, 2010/2011, 32 145, nr. 7, and
paragraph 2.6.3.2.
560 See HR BNB 2002/402, par. 3.11.
555
556
88
In Austria, immigration for tax law purposes means establishing limited or unlimited tax liability in that country.561
Thus, both a natural person and a company can immigrate by establishing limited or unlimited tax liability.562 A
company can obtain unlimited liability to tax in Austria if it has its real seat or place of effective management in
Austria.563 As Austria is a real seat jurisdiction, the immigration of a business leads to a change into a national company
statute, provided that the emigration State is a real seat jurisdiction as well.564 If, on the other hand, the emigration State
follows the incorporation doctrine this will be different. More specifically, on the basis of the fundamental freedoms
companies from foreign MSs can keep their foreign company statute. From a tax perspective, then, the classification of
the foreign entity is decisive, i.e. is the company more comparable to a legal person or a partnership. In both cases,
registration in the Austrian commercial register is mandatory. Consequently, foreign businesses which are comparable to
national businesses are after immigration subject to corporate tax in Austria under the same conditions as national
company forms, which prevents any discriminatory treatment.565
Under Belgian tax law, the concept of immigration as such is not defined. Generally, the immigration of a business is
equated with the acquisition of the status of resident for tax purposes of the entrepreneur or legal entity (see paragraph
3.2), or the fact that the business activities become subject to tax in Belgium by application of national or international
provisions.566 It should be noted that Belgium applies the real seat theory in order to determine the connecting factor of
the lex societatis.567 A company is governed by the law of the State in which it has its real seat. The determination of the
real seat has to be carried out pursuant to a number of factors such as the centre of management and the place where
the company carries on its business activity.568 A company can, however, immigrate to Belgium without necessarily
having to wind-up in the emigration State, as long as certain conditions are fulfilled.569
In France, the immigration of a business is not defined. Nonetheless, several situations are to be labeled as the
immigration of a business for tax purposes. The most important include: 1) the transfer of a company’s head office
from an EU/EEA State to France; 2) the transfer of a company’s head office from a non-EU/EEA State to France; 3)
the transfer of the place of residence of an owner of a sole proprietorship (entrepreneur) to France; and 4) the transfer
of partners or of a partnership to France570. It seems that in France immigrating businesses are treated similar to purely
domestic founded businesses.
German tax law does not include a definition of the term immigration either. The immigration itself is a factual act,
which is not bounded on constitutive obligations for tax purposes. 571 More specifically, it is required that the business
acquires the resident status via location of the business on German territory. It should be noted that Germany follows
the real seat theory, which implies that an immigrating business has to be liquidated before immigration and
subsequently reestablished in Germany.572 Immigrating businesses are generally treated similar to start-up companies.573
561
See Pinetz 2013 (Austria), par. 3.3. The author provides no source for this definition.
See Pinetz 2013 (Austria), par. 3.3.
563 See Pinetz 2013 (Austria), par. 3.3.1. with reference to §1 (2) N 1 Corporate Income Tax Act in connection with §27 Federal Fiscal
Code.
564 See Pinetz 2013 (Austria), par. 3.3.1. with reference to §10 International Private Law Act.
565 See Pinetz 2013 (Austria), par 3.3.2.
568 See Bruyère 2013 (Belgium), p. 19-20, with reference to Article 4, §3 IPLC. See also A. AUTENNE et al., ‘Cartesio – Les contours
incertains de la mobilité transfrontalière des sociétés revisités’, 45 Cahiers de Droit Européen 1-2, (2009), p. 117.
569 See Bruyère 2013 (Belgium), p. 20. These conditions are that the State of origin must permit the transfer of a company’s seat without
automatic loss of legal personality and the company has to take a Belgium legal form.
570 See Depaix 2013 (France), p. 15 and p. 23-24; in France, partnerships can be considered transparent or non-transparent. More
specifically, as a starting point they are transparent, but they can opt-in for tax treatment under the corporate tax regime. See also paragraph
2.2.B.
572 See Mehlhaf 2013 (Germany), p. 8, with reference to Rehberg, p. 152.
562
89
In Hungary, the immigration of a business is not defined under national law. Immigration generally means bringing a
new business in Hungary, after which it is considered a resident for tax purposes in that country.574 As Hungary is a real
seat jurisdiction, immigration of a business is treated equal to the foundation of a purely domestic business; both require
(re)incorporation under Hungarian law.575
In Italy, the immigration of a business presupposes the transfer of the attachment criteria on which the taxation is
based.576 Thus, the transfer of residence to Italy is considered as the immigration of a business.
Poland does not have a definition of immigration for tax purposes either.577 The immigration process is strongly
associated with obtaining a resident status. Legal entities and individuals can become residents after meeting certain
criteria (as previously discussed). With respect to companies, immigration then particularly concerns the transfer of a
seat to Poland. Similar to Hungary, Poland applies the real seat theory, which implies that such a transfer requires the
dissolution in the home state and reincorporation in Poland. Thus, foreign companies have to establish a company
similar to resident business taxpayers and in that respect they are treated equally.578
Under Swedish tax law, corporate immigration occurs when a company becomes a Swedish resident by registering at
the SCRO.579 However, it is called taxation entry when an individual or legal entity who has not been subject to taxation
in Sweden before becomes subject to taxation in Sweden. There are several possibilities for such a taxation entry.580
Personally, however, I believe that the notion of taxation entry is broader than immigration, as the establishment of
limited tax liability is also captured under taxation entry, whereas in case of immigration, only the establishment of
unlimited tax liability is under consideration.
Last, but not least, immigration to the U.S. means becoming a U.S. person (including individuals and entities).581 Thus,
in order to immigrate for tax purposes, foreign individuals and entities must become U.S. persons. Reincorporation in
the U.S. is then required for a business. It is noted that when an entity reincorporates to the U.S., this is accomplished
through the formation of a new corporation and the transportation of assets, or through a reorganization.582
3.4 Specific tax provisions and treatment of assets upon arrival
A. Dutch tax system
In this paragraph, several issues will be analyzed. More specifically, the following questions will be considered: are there
specific provisions which make the immigration of a business easier or more difficult than the foundation of a purely
See Mehlhaf 2013 (Germany), p. 7.
See Varga 2013 (Hungary), p. 7.
578 See Majda 2013 (Poland), p. 18-19
579 See Lim 2013 (Sweden), p. 12, with reference to chapter 6, section 3 of the ITA.
580 See Lim 2013 (Sweden), p. 13, with reference to Government bill 2002/03:96, p. 154. The five main situations include: 1) an individual
who is resident in another State and conducts a business there migrates to Sweden (and thus becomes unlimited liable to tax) but continues
conducting the business in the other State, 2) a corporate entity, which is resident in another state starts a permanent establishment in
Sweden, 3) a tax treaty ceases to have affect or changes in a way that makes a business, which was exempted from taxation in Sweden
before, no longer exempted from taxation in Sweden, 4) a foreign corporate entity transfers an asset from a business located abroad to an
existing or new permanent establishment in Sweden which is not exempted from taxation in Sweden, and 5) A Swedish corporate entity
conducts business at a permanent establishment located abroad, which is exempted from taxation here according to a tax treaty, transfers an
asset from the permanent establishment to a business in Sweden.
581 See Stepien 2013 (U.S.), p. 33.
582 See Stepien 2013 (U.S.), p. 33-34.
573
574
90
domestic business; what cost base is used for depreciable property when a business becomes a resident of the
Netherlands; is there a deemed acquisition of assets or any tax upon arrival of a business; and are assets evaluated by the
tax administration upon arrival. The answer to all these questions essentially lies in the tax base step-up. Therefore, I will
start with a discussion of this element of the Dutch tax system.
3.4.1
Tax base step-up
On 2 December 2008, the Ecofin Council adopted a Resolution583 in which guidelines are provided for the coordination
of the various exit taxes of different Member States. It is emphasized that the Resolution has no binding force. As
Member States adopted this Resolution, they are required, yet not obliged, to incorporate the recommendations into
their national law in order to achieve fiscal coherence. States can decide for themselves how they wish to do so.584 In
this Resolution MSs agreed that the exit State can impose an exit tax. It was also agreed that the immigration State has
to grant a step-up, implying that this State has to accept the market value of assets and liabilities, as applied by the exit
State when the exit tax was established. The Netherlands already grants a step-up upon immigration, in accordance with
international law.585 In this respect, the Resolution has no further implications for the Netherlands.586 The Resolution
also recommends that when the exit State reserves the option to exercise its taxing rights on the reserves made and to
take back the provisions made, the immigration State should provide for the creation of reserves and provisions, in
accordance with the rules governing the tax base in that State, and allow deduction from taxable results for the year in
which they were established. The Netherlands will allow for the creation of reserves and provisions, as all assets and
liabilities will have to be valued at fair market value upon commencement to tax liability in the Netherlands.587 It is,
however, required that these reserves and provisions are in line with the rules governing the tax base in the Netherlands,
i.e. goedkoopmansgebruik (‘sound business practice’).588
The fact that the Netherlands provides a tax base step-up follows from the already discussed total profit concept. The
Dutch total profit concept, which is laid down in article 3.8 PITA 2001, implies that all benefits obtained during the
entire fiscal life of the business belong to the taxable profit. Obviously, this provision refers to the Dutch fiscal life of the
business; i.e. the period in which the Netherlands has the possibility to tax the benefits obtained. Where, in the context
of cross-border movement of businesses, emigration is the closing entry of the total profit concept,589 immigration is
the opening entry. Thus, the legal base for providing immigrating business with a step-up upon immigration is anchored
in article 3.8 PITA 2001.
So, at first glance, the tax base step-up is a more beneficial method for corporate taxpayers. By increasing the value of
assets to the fair market value, businesses are allowed to recognize a lower gain in time. Provided that businesses are
confronted with an exit tax upon emigration, a tax base step-up better corresponds with the economic reality of the
business. It should, however, be noted that it is implicitly assumed in this chapter that the fair market value will be
higher than the book value. It is also possible that the revaluation from book value to fair market value essentially turns
out to be a step-down, as will be the case when the fair market value lies below the book value. In this case, the method
of revaluation to fair market value can be detrimental to businesses, as it results in a "step-down" in basis. When an
asset is “stepped-down”, the depreciable basis will be below the previous book value. Moreover, when such an asset
increases in value in the period after immigration, and the taxpayer subsequently decides to sell this asset, the
Netherlands will impose a tax whereas there is no actual profit made, from an economic point of view.
583
Council Resolution OJEU 2008 C323/1 . This resolution is not binding.
See also Janssen 2011, p. 117.
585 See Peters and Monfrooij 2009, note 17.
586 See also Janssen 2011, p. 117.
587 Fiscale Encyclopedie corporate income tax, article 2 CITA 1969.
588 See also paragraph 2.8.1.3.
589 See paragraph 2.8.1.1.
584
91
To summarize, immigrating businesses are required to draft an opening balance upon the commencement of their
liability to tax in the Netherlands, by virtue of the total profit concept.590 On this opening balance, the starting capital
(i.e. all assets and liabilities) will be valued at fair market value.591 By the revaluation from book value (pre-immigration)
to fair market value, the Netherlands provides a step-up (or step-down). It should, however, be emphasized that there
will only be a revaluation of assets and liabilities if a taxpayer is transformed from a non-taxpayer to a (resident or nonresident) taxpayer. The situation in which a non-resident taxpayer, carrying on business activities in the Netherlands
through a PE, becomes a resident taxpayer will give no rise to revaluation of assets and or liabilities592, since these assets
and liabilities were already used for business operations carried on in the Netherlands and as such already valuated for
Dutch tax purposes.593 In paragraph 3.3.A, I have provided an analysis of whether or not the Netherlands provides a tax
base step-up in different situations. It was also noted that the provision of a tax base step-up is not strictly related to the
immigration of a taxpayer, as it is also possible that a tax base step-up is provided even though there is no immigration
of a taxpayer. This will, for example, be the case when a limited resident taxpayer is transformed to a resident taxpayer,
by virtue of which the Netherlands acquires a taxing right which it did not have before this transformation.
3.4.2
Immigration versus foundation of a business in the Netherlands
With respect to either a purely domestic or an immigrating business, it should be emphasized that we have no special
regime in the Netherlands; both businesses which are founded in the Netherlands and businesses which immigrate to
the Netherlands are treated equally. So, from a tax perspective, there are no specific provisions in the Dutch tax system
which make immigration more difficult than the foundation of a purely domestic business. More specifically, we provide
immigrating businesses with a tax base step-up (as discussed in paragraph 3.4.1). A business cannot be immigrated
readily into the Netherlands. In order enable the Dutch Tax Authority to determine the total profit of the entire (Dutch)
fiscal life of the business, the immigration of a business requires a ‘new start’ of the enterprise upon establishment in the
Netherlands. From a practical point of view, this new start implies that the immigrating business is required to draft an
opening balance on which all assets and liabilities are entered at fair market value (which is the tax base step-up). This
revaluation to fair market value will effectively sort the same result as the foundation of a purely domestic business. A
business founding in the Netherlands will be required to draft an opening balance on which all assets and liabilities are
valued at fair market value.
The equal treatment between an immigrating business and a purely domestic, Dutch founded, business is considered
very important in the Netherlands. Indeed, the Netherlands is a small country with an open economy. As a
consequence, the Netherlands depends, in an economic sense, on its connections and relations with the rest of the
world. For this reason, improving and upholding the (attractive) business climate in the Netherlands is high on the
agenda of the Dutch legislator.594 Foreign investments in the Netherlands are to be stimulated, and provisions which
might make the immigration of a business more difficult than the foundation of a purely domestic business are
incompatible with such a policy.
3.4.3
Cost base used for depreciable property
When a taxpayer becomes a resident of the Netherlands, the depreciable base for property owned by that taxpayer is, by
virtue of the tax base step-up, equal to the fair market value, provided that this property was not previously valuated for
Dutch tax purposes. If the property was indeed previously valuated for Dutch tax purposes (due to, for example, the
590
See also van de Streek et al. 2012, par. 2.0.7.B.b.
See amongst others: van Kempen and Essers 2011, par. 3.2.2.A.b and van de Streek et al. 2012, par. 2.0.7.B.a. and par. 2.0.7.C.d.
592 Obviously, this only holds for the assets and liabilities belonging to the Dutch business activities of the non-resident taxpayer.
594 See also Memorandum Dutch tax treaty policy 2011, par. 1.2.3.
591
92
fact that the business previously carried on activities in the Netherlands through a PE), then the Dutch valuation which
was already determined upon commencement of those activities in the Netherlands will be used as the depreciable base
for the property.
3.4.4
Deemed acquisition of assets
One of the questions in the context of the treatment of assets in case of immigration, as discussed in the introduction of
this paragraph, includes whether there is a deemed acquisition of assets or any tax upon arrival of a business. It was
provided in the second chapter of this thesis that, in the Netherlands, we apply a system of a deemed, fictitious
alienation of assets upon the emigration of a business. It was also argued that emigration and immigration are two sides
of the same medal. So, if there is a deemed alienation on the one side, there will logically be a deemed acquisition of
assets on the other side. This acquisition is modeled by the step-up. As discussed, applying the step-up will lead to the
capital of the business (all assets and liabilities) being entered on an opening balance at fair market value. This is equal to
the situation in which the capital of the business is acquired. Therefore, it can be said that there is a deemed acquisition
of assets upon immigration of a business to the Netherlands. Besides this, there is no specific tax upon arrival.
3.4.5
Evaluation of assets by the tax administration
In the Netherlands, assets are generally indirectly evaluated by the Tax Authority. Since the enterprise has to provide
both its profit and loss account and its balance sheet at the annual tax declaration, the Dutch Tax Administration is able
to evaluate assets. This is an ongoing process. Upon immigration, there will be no additional or special evaluation of
assets but newly founded or immigrated businesses are regularly visited by a tax inspector who checks whether the
business administration meets the required standards. It is also possible to ask for an ‘introductory visit’. Moreover, the
Dutch Tax Authority will assess the annual tax declaration and potentially correct any inaccuracies or errors in the
valuation of assets upon the subsequent imposition of a tax assessment.
As follows from the above discussion, a central issue upon immigration is how capital (assets and liabilities) are valued
and whether or not a step-up is granted to immigrating businesses. Roughly, two different approaches can be used with
respect to the valuation of assets upon immigration; States can ‘take over’ the original book value used in the
emigration State595, or States can value the assets of an immigrated business at fair market value, which means that a tax
base step-up from original book value to fair market value is granted. The majority of participating EUCOTAX
countries uses the fair market value-method and, thus, grant immigrating businesses a tax base step-up, even though in
some States this is limited to companies immigrating from another EU/EEA State or any State with which a treaty
containing an exchange of information clause is concluded.596
In Austria, companies gain unlimited tax liability by establishing the constitutive basis of the company in Austria.
Austria applies, as discussed, the real seat theory while respecting EU-law. This implies that companies from an
incorporation jurisdiction can immigrate to Austria. From a tax perspective, then, a comparability assessment will
determine whether the foreign legal entity can be seen as a legal person according to domestic law.597 In any case,
registration in the Austrian commercial register is mandatory. Consequently, foreign businesses which are comparable to
national businesses are, after immigration, subject to corporate tax in Austria under the same conditions as national
595 Where it should be noted that due to different national tax and accounting rules, this book value will not necessarily be the same as the
book value in the departure State. Nevertheless, key point is that historical book values are used.
596 Countries in which step-up basis is granted includes: Sweden (for EU/EEA states, and states with which it has an information exchange
agreement only), Germany (Sec. 4 Para. 1 Sent. 8 EStG), Austria (§ 6 N 6 letter c Income Tax Act), Italy (Revenue Agency, Risoluzione
345/E/2008 and consistent with DTT Tax Treaty practice), and Hungary .
597 See Pinetz 2013 (Austria), p. 30, with reference to Heidenbauer in Lang/Schuch/Staringer, Kommentar KStG, § 4, m.no. 41.
93
company forms, which prevents any discriminatory treatment.598 With respect to the valuation of assets, Austria
generally aims at taxing only those hidden reserves and gains which have been accumulated on Austrian territory. This
means that assets are always valued at fair market value upon the transfer of the asset or relocation of the business to
Austria.599
Similar to Austria, Belgium is a real seat jurisdiction as well. The method with respect to the valuation of assets upon
immigration is, however, different. The real seat theory is applied in a flexible manner; a company may move its seat
in Belgium without necessarily having to wind up.600 As a consequence, a distinction has to be made between the
situation where a company moves to Belgium without losing its legal personality (i.e. transfer from an incorporation
jurisdiction to Belgium) and the situation where a company loses its legal personality by transferring its seat (i.e. transfer
from another real seat jurisdiction to Belgium).601 In the first situation, a company continues to exist despite of the fact
that it is transferred from one State to another. Consequently, no realization of the assets is deemed to take place from a
Belgian tax law perspective.602 Thus, the assets and liabilities will be valued at the book value they had at the time the
company transferred its seat.603 It is not clear whether Belgian accounting rules or the accounting rules of the country of
origin have to be applied in order to establish this book value. What is clear, is that Belgium does not provide a tax base
step-up upon the immigration of a continued business.604 When a company is dissolved before moving to Belgium, the
assets and liabilities are valued exclusively according to Belgian rules. Again, the (opening) book value in Belgium is the
book value of the assets upon transfer.605 This implies that a tax base step-up is practically possible but that this depends
completely on how assets are accounted for in the departure State.606 Belgium does not grant a tax base step-up as such;
all assets transferred to Belgium maintain their book value.
France will value assets which are transferred to France in the context of a business immigration at book value if the
company maintains records in accordance with the International Financial Reporting Standards (IFRS). In all other
cases, assets will be valued under provision of a tax base step-up, thus at fair market value. This fair market value is the
amount that could be obtained if the asset were sold to an independent knowledgeable party, under normal market
conditions.607
Business assets which become subject to taxation in Germany as a consequence of business immigration are valued at
common value, irrespective of whether the assets are depreciable or not.608 However, with respect to assets which were
already connected to a PE on German territory, this treatment does not apply; these assets have to be put on the
balance sheet at the (already German) book value.609 The term common value is used for the price which is usually
achievable in the market.610 This term, thus, bears similar meaning as fair market value, or at arm’s length price. The
valuation at common value guarantees that, in case of alienation, only hidden reserves created in Germany will be taxed.
See Pinetz 2013 (Austria), p. 23-24.
See Pinetz, 2013 (Austria), p. 31, with reference to § 6 N 6 letter c Income Tax Act.
602 See Bruyère 2013 (Belgium), p. 24, with reference to M. VAN GILS, ‘Zetelverplaatsing voor en na de wet van 11 December 2008 – Deel
I. Immigratie’, T.F.R. 369, (2009), p. 834.
603 See Bruyère 2013 (Belgium), p. 24, with reference to Article 184ter, § 2, al. 2 ITC 1992.
604 See Bruyère 2013 (Belgium), p. 25, with reference to H. LAMON, ‘Emigration ou immigration de sociétés sous l’angle comptable et
fiscal : où en sommes-nous?’, Revue Générale de Fiscalité, nr. 06-01, (2005), p. 5.
605 See Bruyère 2013 (Belgium), p. 26, with reference to Article 39 Royal Decree on Company Law Code
606 See Bruyère 2013 (Belgium), p. 26, with reference to M. VAN GILS, ‘Zetelverplaatsing voor en na de wet van 11 December 2008 – Deel
I. Immigratie’, T.F.R. 369, (2009), p. 835.
608 See Mehlhaf 2013 (Germany), p. 14, with reference to sec 6, para 1, no. 5a EStG.
609 See Mehlhaf 2013 (Germany), p. 14, with reference to Rehberg, p. 245.
610 See Mehlhaf 2013 (Germany), p. 15, with reference to sec 9, para. 2, BewG.
598
599
94
Moreover, this treatment prevents discrimination between a purely domestic founded business and an immigrated
business.611
In Italy, assets of an immigrating business are only revalued to the extent that they did not already belong to a PE in
Italy.612 For assets which do enter Italy for the first time it is necessary to determine the opening value for the purpose
of calculating capital gains related to future realization. In some DTCs which Italy has concluded, it is established that
entering assets shall be valued with respect to their fair value if and when an exit tax is paid in the previous home State
at the moment of emigration.613 Following a Resolution of the Italian Revenue Agency, the same treatment is applied
with respect to countries where this clause is not specifically included in a DTC.614 This interpretation is justified by the
fact that when an exit tax applies, the only way to correctly divide the taxing power between two countries is by granting
a step-up to fair market value. Recently, this view was revised, as a result of which the cost criterion can be used in some
cases (such as a seat transfer or merger) characterized by the lack of realization of assets and by the necessity to maintain
the same value (for tax purposes) as before.615
In Poland, the concept of immigration of a business for tax purposes does not exist in a literal sense. More specifically,
Poland requires the incorporation of a new business followed by the transfer of assets, in order to effectively transfer a
corporate business into the Polish jurisdiction.616 In Poland, the taxpayer is given some margin of appreciation to
determine the tax basis between the purchase price or the fair market value.617 This determination is, of course, subject
to adjustments by the tax administration.618
As discussed, under Swedish tax law the term taxation entry is used, rather than the notion of business immigration.
Upon taxation entry, then, assets are deemed to have been acquired.619 As a general rule, assets such as stocks,
progressive works, and customer debts are valued at the lower of the historic acquisition cost and the net sales value.
Inventories, buildings, and land constructions are valued at historic acquisition costs and improvement costs minus the
depreciation deductions, unless the market value is lower than the sum. All other assets are estimated to the lowest value
of historic acquisition costs and the market value.620 It can be noted that re-valuation to fair market value is not the
general rule in Sweden. Nonetheless, there is a special provision on transactions within the EU/EEA and with countries
with which Sweden has concluded a tax treaty with an information exchange clause. This special rule encompasses the
following:621 if the transaction of the asset has led to exit taxation in another country, the asset shall be deemed to be
acquired for market value.622 In other words, if an asset is taxed up until market value in the exit country, this market
value (as opposed to the actual and lower acquisition cost) will be deemed as the acquisition cost. Sweden thus provides
a step-up in these cases in order to avoid double taxation. Any value changes in the asset after the taxation entry are
regarded in Sweden.
611
See Mehlhaf 2013 (Germany), p. 14, with reference to Meurer, Lademann, sec 4 ESTG note 410b.
See Trabattoni 2013 (Italy), p. 30. These assets of a formerly Italian PE are still subject to the Italian tax regime and are valued at their
‘historic’ value. T. Tassani, Transfer of residence and exit taxation in EU law: the italian approach, in Studi Tributari Europei, 1/2009
613 See Trabattoni 2013 (Italy), p. 31, with reference to V. Uckmar, G. Corasaniti, P. De’ Capitani di Vimercate, C. Corrado Oliva, op. cit., p
245. This is the case in for example the DTCs with Canada and Germany.
614 See Trabattoni 2013 (Italy), p. 31, with reference to Revenue Agency Risoluzione 67/E/2007.
615 See Trabattoni 2013 (Italy), p. 31, with reference to Revenue Agency Risoluzione 345/E/2008.
616 See Majda 2013 (Poland), p. 19-20.
617 See Majda 2013 (Poland), p. 43-44, with reference to art. 16g para 1 and Art. 16 para.1 item 4 of CITA.
618 See Majda 2013 (Poland), with reference to art 14 of CITA.
619 See Lim 2013 (Sweden), p. 16, with reference to chapter 20 (A), section 2, of the ITA.
620 See Lim 2013 (Sweden), p. 16, with reference to chapter 20 (A), section 3-5 of the ITA.
621 “This special provision is, in practice, the principal rule since it is applicable to transfers from most countries. The exceptions are low tax countries, so called tax
havens. The evaluation of the assets according to chapter 20(A) is not established immediately upon taxation entry. It takes place at the tax assessment instead.”
See Lim 2013 (Sweden), p. 16.
622 See Lim 2013 (Sweden), p. 16, with reference to chapter 20 (A), section 7 of the ITA.
612
95
The U.S. system is essentially the same as the Polish system. The concept of business immigration for tax purposes is
non-existent; rather, businesses are required to incorporate and transfer its assets to U.S. territory. Consequently, assets
are generally valued at purchase price or fair market value upon incorporation.623
3.5 Procedural obligations
The most important procedural obligation for Netherlands immigrating individual businesses or companies is the
requirement to register themselves at the Trade Register of the Chamber of Commerce. This obligation is, however, also
imposed with respect to the foundation of a purely domestic business, so there is no difference between the registration
of immigrating businesses and domestic businesses. The Chamber of Commerce will inform the Tax Authority, and it is
not necessary to also register separately at the Authority.624 However, it is possible to directly inform the Tax
Administration by filing a relevant form, called ‘Opgaaf gegevens startende onderneming’ (statement of information for starting
up a business). This might be done for the purpose of a refund of the VAT.625
In this context, however, we have one specific Act in the Netherlands, called the Wet op de Formeel Buitenlandse
Vennootschappen (Law on the Formally Foreign Companies, from here on LFFC). This Act applies to capital companies
with a legal personalities, formed under laws other than those of the Netherlands, which carry on its activities (almost)
entirely in the Netherlands and do not have any real connection with the State according to the law of which it was
formed.626 Additional obligations are imposed on companies falling under the LFFC. For example, on the basis of
article 3 LFFC, the fact that the company is formally foreign must be indicated; the company cannot ‘pretend’ to be a
Netherlands legal person. A discussion of all obligations goes beyond the scope of this thesis.
After a business has immigrated to the Netherlands it will be treated, from a procedural perspective, equal to a Dutch
business. They are both treated as resident taxpayers. This means, for example, that the business will be required to file
an annual tax declaration and pay its taxes after having received the tax assessment.
3.6 Tax treatment of business immigration benchmarked against the
normative framework
In this paragraph I will evaluate the Netherlands tax treatment upon the immigration of a business in the light of the
normative framework, applying the benchmark of capital import neutrality. The Netherlands tax treatment of
immigrating businesses essentially lies in the provision of a tax base step-up. More specifically, immigrating businesses
are required to draft an opening balance upon the commencement of their liability to tax in the Netherlands, by virtue
of the total profit concept.627 On this opening balance, the starting capital (i.e. all assets and liabilities) will be valued at
fair market value.628 By the revaluation from book value (pre-immigration) to fair market value, the Netherlands
provides a step-up (or, in some cases, a step-down).
If the Netherlands would not grant a tax base step-up to immigrating businesses, this would discourage companies to
transfer their place of management to the Netherlands, as this would result in a (latent) tax claim over gains that already
See Stepien 2013 (U.S.), executive summary. Even though the author described different ‘methods’ of immigration, the incorporation in
the U.S. generally requires valuation of assets at fair market value.
624 See KvK (Chamber of Commerce) – registration at Tax Authority
625 With respect to the Value Added Tax, it is to the advantage of the taxpayer to provide information at an early stage; ‘new’ or immigrated
enterprises, which have made investments in their business, often receive money back, because these enterprises often pay more VAT in the
beginning than they actually charge.
626 See article 1 of the LFFC.
628 See amongst others: van Kempen and Essers 2011, par. 3.2.2.A.b and van de Streek et al. 2012, par. 2.0.7.B.a. and par. 2.0.7.C.d.
623
96
accrued outside the territory of that State. This is disadvantageous, both for the immigrating company and for the
Netherlands, and will obstruct European and global mobility. But does the fact that this treatment is disadvantageous
also mean that not providing a step-up incompatible with CIN? This question will be analyzed further in the next
paragraphs.
3.6.1
Immigration and European and global mobility
If States don’t provide an immigrating business with a tax base step-up the historical book value will be activated on the
balance sheet in the destination State. If there eventually is a realization this will most likely trigger a tax settlement over
a gain which is larger than the gain actually accrued in the immigration State.629 Had the taxpayer stayed in his home
State, he would not have been confronted with this larger tax burden. This is, therefore, in my opinion an obstruction to
cross-border mobility. In literature, is has been argued that these kinds of consequences of emigration and immigration
are not suitable in an internal market.630 The internal market, and thus European mobility, is fostered if a step-up is
granted to immigrating businesses. Moreover, in an ideal internal market, the principle of territoriality works both ways;
where it will prevent tax base erosion in one State, it will prevent over-taxation in the other State.631
3.6.2
Fiscal sovereignty and capital import neutrality
The second pillar of this normative framework is fiscal sovereignty. Member States enjoy a high level of fiscal
sovereignty in the area of direct taxation. States are largely free to design their direct tax systems in a way that meets
their domestic policy objectives and requirements. It was already discussed in the first chapter that the concept of fiscal
sovereignty is closely related to the principle of fiscal territoriality, as there has to be a nexus between the establishment
or creation of unrealized capital gains and the Dutch tax jurisdiction. In this respect, the benchmark of CIN has been
chosen to safeguard MSs source country entitlement.
As stated in the previous section, the principle of territoriality works both ways; where it will prevent tax base erosion
for one State, it will prevent over-taxation in the other State.632 By not granting immigrating businesses a tax base stepup the immigration State will eventually impose a tax on more than it is rightfully entitled to; i.e. on the total value
increase, rather than the value increase accrued in the immigration State’s jurisdiction. In my opinion, this implies that
CIN can only be satisfied when MSs provide a tax base step-up to immigrating businesses. Additionally, the provision
of a tax base step-up will not lead to a MS losing its source country entitlement and will therefore not impede on MSs
fiscal sovereignty.
3.6.3
Conclusion
The Netherlands tax treatment upon immigration is ‘internal market friendly’; European and global mobility is fostered
if a step-up is provided to immigrating businesses. In the absence of a tax base step-up, a tax settlement will eventually
be triggered over a gain which is larger than the gain actually accrued in the immigration State. Had the taxpayer stayed
in his home State, he would not have been confronted with this higher total tax burden. Not granting a tax base step-up
is, therefore, an obstruction to cross-border mobility. This is why I believe that in the light of European and global
mobility, a tax base step-up is required. Regarding the other pillar of the normative framework, i.e. fiscal sovereignty, I
believe that the provision of a tax base step-up should also be preferred, as the provision of a tax base step-up will not
lead to a MS losing its source country entitlement this is in line with the concept of fiscal sovereignty. Again, when no
629 Since the company will have to settle a tax over the difference between the historical book value and the fair market value upon
subsequent emigration or cessation.
630 See van den Hurk, van den Broek, and Korving 2012, par. 4.1.
631 See van den Hurk, van den Broek, and Korving 2012, par. 5.
97
tax base step-up is provided, the immigration State will eventually impose a tax on more than it is rightfully entitled to;
i.e. on the total value increase rather than the value increase accrued in the immigration State’s jurisdiction. This has led
me to conclude that CIN can only be satisfied when MSs provide a tax base step-up to immigrating businesses.
In the second chapter, some tax aspects of business mobility were analyzed from an outbound perspective, i.e.
emigration. As there is no emigration without immigration and vice versa, this chapter dealt with the counter side of
emigration, i.e. immigration. More specifically, the Dutch tax treatment upon the immigration of a business, as well as
the tax treatment applied in other EUCOTAX countries has been described, analyzed and evaluated.
First of all, since becoming a resident for tax purposes in the Netherlands is a prerequisite for immigration, it was
discussed how businesses can become a Dutch resident. A distinction was made between natural persons and legal
entities. In the other EUCOTAX countries, the similar distinction can be made.
Subsequently, the focus was on the concept of business immigration. Immigration is one of the ways in which a
taxpayer can become a resident, but there are other ways. Immigration of a business is not a taxable event as such in the
Netherlands. Consequently, there is no definition of this concept. Taking into account the fact that immigration is the
counter side of emigration the following meaning of business immigration was put forward: the situation in which a
business is transformed from a non-resident to a resident taxpayer, where there is a business both before and after this
transformation. In the other EUCOTAX countries, no definition of the concept of immigration is provided in national
tax law either. Nonetheless, when a business taxpayer acquires the status as a resident of a particular country this is
generally considered to constitute the immigration of that taxpayer.
A central issue upon immigration is how capital (assets and liabilities) are valued and whether or not a step-up is granted
to immigrating businesses. Roughly, two different approaches can be used with respect to the valuation of assets upon
immigration; States can ‘take over’ the original book value used in the emigration State, or States can value the assets of
an immigrated business at fair market value, which means that a tax base step-up from original book value to fair market
value is granted. The majority of participating EUCOTAX countries uses the fair market value-method and, thus, grant
immigrating businesses a tax base step-up. Nonetheless, in some States this is limited to companies immigrating from
another EU/EEA State or any State with which a treaty containing an exchange of information clause is concluded. In
the Netherlands, a step-up is provided to immigrating businesses irrespective of their origin. It was discussed that upon
immigration the Dutch ‘fiscal life’ of the enterprise starts. Equal to the foundation of a purely domestic business this
requires drafting an opening balance on which the starting capital is valued at fair market value. For immigrating
businesses, this revaluation from book value (foreign period) to fair market value (Dutch period) is the step-up. There is
however one precondition; a tax base step-up will only be provided when assets and liabilities have not already been
valued for Dutch tax purposes. When, for example, a non-resident taxpayer already used assets for business operations
in the Netherlands, those will not be re-valued (in other words: no step-up will be provided). In the context of
emigration it was argued that, in some cases, the Dutch exit provisions can also be triggered without there being an
emigration of a taxpayer. Similarly, in the context of immigration it is also possible that a tax base step-up is provided,
even though there is no immigration of a taxpayer. This will, for example, be the case when a limited resident taxpayer is
transformed to a resident taxpayer, by virtue of which the Netherlands acquires a taxing right which it did not have
before this transformation. Subsequently, it was discussed that there is a deemed acquisition of assets in case of
immigration in the Netherlands and that the cost base used for depreciable property is fair market value, assuming the
step-up applies. Also, it was put forward that we have no special regime or particular provisions in the Netherlands
which make immigration easier or more difficult than the foundation of a purely domestic business. Immigration
requires a ‘new start’ in the Netherlands, equal to the foundation of a purely domestic business. This is similar to the
approach taken by most EUCOTAX countries.
98
Finally, the Netherlands tax treatment upon immigration was evaluated in the light of the normative framework, where
it was concluded that the Dutch treatment is ‘internal market friendly’; European and global mobility is fostered if a
step-up is provided to immigrating businesses. In the absence of a tax base step-up a tax settlement will eventually be
triggered over a gain which is larger than the gain actually accrued in the immigration State. Had the taxpayer stayed in
his home State, he would not have been confronted with this higher total tax burden. Not granting a tax base step-up is,
therefore, an obstruction to cross-border mobility. I concluded that, in the light of European and global mobility, the
provision of a tax base step-up is required. Regarding the other pillar of the normative framework, i.e. fiscal sovereignty,
I argued that the provision of a tax base step-up should also be preferred, as the provision of a tax base step-up will not
lead to a MS losing its source country entitlement this is in line with the concept of fiscal sovereignty. Again, when no
tax base step-up is provided, the immigration State will eventually impose a tax on more than it is rightfully entitled to;
i.e. on the total value increase, rather than the value increase accrued in the immigration State’s jurisdiction. This led me
to conclude that CIN can only be satisfied when MSs provide a tax base step-up to immigrating businesses. The
Netherlands tax treatment thus passes the benchmark of CIN, as a step-up is provided upon emigration.
With respect to the research question of this thesis, which reads as follows: How does the Netherlands tax system with respect
to business migration impact on European and global mobility, and what should be the impact in the light of tax conventions, EU law, and
international tax neutrality?, another part has been discussed in this chapter. More specifically, the impact of taxation in the
context of business immigration has been analyzed. Basically, it can be said that the Netherlands system is minimally
obstructing to European and global mobility of businesses. The Netherlands applies the same tax treatment to the
immigration of a business and the foundation of a purely domestic business. With respect to immigrating businesses, an
important part of this tax treatment is the provision of a tax base step up. Whereas it was concluded after the previous
chapter that from an outbound perspective the Dutch tax system can be obstructing to European and global mobility of
businesses, it can be concluded at this point that from an inbound point of view the Dutch tax system does not pose
such an obstruction. Moreover, the Netherlands tax system with respect to the immigration of a business passes the
benchmark of CIN.
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4.
CROSS-BORDER TRANSFERS OF ASSETS TO AND FROM A
PERMANENT ESTABLISHMENT
4.1 Introduction
Business emigration and the transfer of asset components are two separate events which together can lead to one of the
exit provisions in the personal or corporate income tax being triggered. Emigration, both alone and combined with the
transfer of asset components abroad, has been extensively analyzed in the first chapter of this thesis. However, it is also
possible that asset components are transferred within an organization without there being a business emigration. In this
chapter, the Dutch tax treatment of these kinds of transfers will be discussed. The discussion will be limited to what I
will denote as ‘PE-situations’: asset transfers from a PE to the head office or from the head office to a PE. Contrary to a
subsidiary, a PE is no separate legal entity. Rather, it is part of the general business.
Before analyzing the tax and accounting treatment of asset transfers in PE situations, I will first elaborate on what
exactly is understood in the Netherlands when we speak about a permanent establishment.633 Put generally, a PE is the
minimum quantity and -quality of business activities which has to exist in a State (other than that in which the
entrepreneur resides or is established) in order to give rise to tax liability. Subsequently, the focus will be on the how and
what of a PE starting business activity in the Netherlands. After that, two ‘PE-situations’ will be analyzed: the transfer
of assets 1) from a Dutch head office to a PE abroad, and 2) from a Dutch PE to the head office abroad. The observant
reader will have noticed that the focus is on ‘outbound’ PE-situations in this chapter, i.e. asset transfers from the
Netherlands abroad.
4.2 Permanent establishment under national law
A. Dutch tax system
4.2.1
Definition
In the Dutch Unilateral Decree for the Avoidance of Double Taxation 2001 the term permanent establishment is
defined. Article 2(1) of this Decree provides that a permanent establishment is understood to be ‘…a permanent place of
business through which the business activities of an enterprise are completely or partially carried out. The place of a building site or of
construction- and installation projects, only constitutes a permanent establishment in case its duration exceeds twelve months.’634
Subsequently, paragraph 2 of the same article provides a list of situations which are not to be regarded as a permanent
establishment.635 However, in both the Dutch personal and corporate income tax Acts (PITA 2001, respectively, CITA
1969), a definition of the meaning and substance of the term permanent establishment is not provided, even though the
633 Although the tax treatment is ultimately the same, a permanent establishment should be distinguished from a permanent agent, since the
definition of a permanent agent bears a different substance.
634 Unofficial translation.
635 The following situations are mentioned (unofficial translation): a) the use of facilities, solely for the purpose of storage, display or delivery
of goods or merchandise belonging to the taxpayer; b) the maintenance of a stock of goods or merchandise belonging to the taxpayer, solely
for the purpose of storage, display or delivery; c) the maintenance a stock of goods or merchandise belonging to the taxpayer, solely for the
purpose of adaptation or processing by another; d) the maintenance of a fixed place of business, solely for the purpose of purchasing goods
or merchandise or of collecting information for the enterprise; e) the maintenance of a fixed place of business, solely for the purpose of
exercising some business activity of preparatory or auxiliary nature for the enterprise; and f) maintaining a fixed place of business solely for a
combination of the elements a) to e) mentioned above, provided that the overall activity of the fixed place of business resulting from this
combination is of preparatory or auxiliary nature.
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term is used more than once in these Acts.636 For the application of these laws the concept of the PE is to be
understood as it has been interpreted and applied by the Dutch Supreme Court.637
Before elaborating on this any further two preliminary remarks are in order. First of all, it should be emphasized that,
equal to the term residency, the term permanent establishment is a factual concept; the qualification as a PE will always
depend on the facts and circumstances of the particular case. Secondly, we generally distinguish between two types of
PEs.638 The first is the ‘general PE’ and the second is the ‘agent PE’639. Moreover, some might argue that there is a third
(special) type of PE, the ‘building site PE’640.
Thus, for both the personal and corporate income tax, the term permanent establishment is to be understood as it has
been interpreted and applied by the Dutch Supreme Court.641 The first type of PE is the general PE. On the basis of case
law of the Dutch Supreme Court, the following interpretation has been given to the term permanent establishment:642
a. A physical construction. The Dutch Supreme Court has considered for example an office space to be a physical
construction.643 Moreover, as the Court decided in the circus tent-case644, a physical construction does not have to
be fixed to the ground.
b. Which is available to the taxpayer (enterprise), either legal or factual. This means that the business must be at the
disposal of the taxpayer.645 As such, ownership is not required, but it is required that the taxpayer can use the place
at its own discretion. Consequentially, the rental of a physical construction can also lead to the qualification of a
PE.646
c. The availability is permanent (sustainability- or permanency requirement). Permanent is to be understood as there
being an enduring bond both between the establishment and the territory and between the establishment and the
taxpayer. It is required that one specific location is at the disposal of the taxpayer during a certain period of time. In
a particular case, for example, a salesman selling artificial eyes rented different hotel rooms to perform this business.
The business activity of the salesman was not considered a PE, since in the Court’s opinion the hotel rooms where
not at the disposal of the taxpayer during a certain period of time. Thus, the requirement of permanency was not
met.647 However, a minimum period of time in order to ‘pass’ this permanency requirement has not been given by
the Dutch Supreme Court.648
d. The construction is made appropriate or equipped for the proceedings of the enterprise. In the previously cited
artificial eyes case649 it was ruled that the working space, i.e. the hotel room, was not equipped for the fitting of
artificial eyes and that, consequently, the business did not constitute a PE.
To summarize, a PE is not only (part of) a building or structure. Under circumstances, ‘moving objects’ can also be
qualified as a PE. The nature of the business activity will determine the required equipment and amenities of the
636
See for example article 17 CITA 1969.
The Supreme Court refers in many cases to article 5 (and the commentary to this article) of the OECD MC.
638 These types can also be found in article 5 of the OECD MC. Paragraph 1 concerns the general PE, paragraph 3 the building site PE and
paragraph 5 and 6 the agent PE.
639 In Dutch: ‘vaste vertegenwoordiger’.
640 In Dutch: ‘uitvoering van werkzaamheden’.
641 The following has been mentioned in literature concerning the in case law defined PE (see Definition of ‘permanent establishment’ –
The Netherlands, par. 56): “The definition of permanent establishment has been primarily developed in case law (ruled for the purpose of
interpretation of either the Unilateral Decree, or the domestic provisions, or specific tax treaties). In case law, the Dutch tax courts have
frequently referred to the OECD MC and Commentary as guidance for the interpretation of the definition of permanent establishment.’
642 All four requirements have to be met cumulatively in order to be qualified as a permanent establishment. See also: van Raad 2011, par.
0.8.2.B and de Graaf 2009, par. 2.2.2.
643 HR BNB 2000/159.
644 HR BNB 1954/336.
645 See also HR BNB 1957/44.
646 See for example HR BNB 1961/161, which concerned leased property.
647 This was ruled by the court in the artificial eyes case, HR BNB 1955/277.
648 The Court has however ruled that a six months is insufficient (HR BNB 1975/66) whereas shortly after that ruling, a period of 9,5
months was considered sufficient (HR BNB 1976/121).
649 HR BNB 1955/277.
637
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working space. As for the time-element of the sustainability- or permanency requirement, the time involved with
performing the specific work within the territory of the State will be conclusive; it is not required that the construction
is fixed to one particular geographical point of that State.
The second recognized type of PE in the Netherlands is the agent PE. The following persons are qualified as agents:
natural persons or legal entities who are authorized to conclude contracts in the Netherlands on behalf of a non-resident
taxpayer (principal) and who exercise this authority on an habitual basis.650 On the basis of this description of a agent,
the following requirements have to be met in order to be qualified as an agent PE:
a. The agent is another person than the principal.
b. A certain level of dependency; the agent cannot be completely independent.651 The dependency can be both legal
and economic. Legal dependency, then, is to be understood as the principal being bound to strict instructions and
supervision. For economic dependency, it is required that the representative bears some risk.652 When a
representative is legally and economically completely independent from the principal, there will be no agent PE.653
c. The authority to conclude contracts on behalf of the principal, which means that the agent has to act for the
account and risk of the principal. Whether this is the case or not will be judged on a factual basis, i.e. substance over
form; not the formal power of an agreement but the factual behavior of the representative will be decisive. 654
d. Habitual exercise of this authority. This criterion has to be considered in relation to the nature of the business and
the contracts.655
e. The business activities performed by the agent have to be in the ordinary course of business of the principal.656
In addition to the general PE and the agent PE, it might be argued that there is a third special type of PE; the building site
PE. In the Netherlands, this type of PE is not actually known for purely national purposes. Since the building site PE is
not an ‘acknowledged’ PE in the Netherlands, the Dutch Supreme Court argued that for the purpose of double tax
conventions the building site PE is a fictitious PE.657 Even though this qualification as a fictitious PE was given by the
Court there are still ambiguities concerning this type of PE. For example, when there is a building site, construction or
installation project, it is for the application of the Dutch income tax not clear whether, in addition to the minimum time
requirement of usually 12 months658, the criteria which apply to the general PE have to be met. On the one hand, it
might be argued that when there is a building site PE which meets the time requirement there is a PE by virtue of a
fiction, and that the other criteria are irrelevant.659 In my opinion, this implies an expansion of the meaning and
qualification of a PE for Dutch national law and I also believe that this was the Court’s intention. On the other hand, it
might also be argued that, in the context of a building site, there is only a PE when the ‘general’ criteria are met.660
Following this line of reasoning, a site or project will only qualify as a PE when there is a fixed place of business, which
is available to the taxpayer, equipped for the specific business activities, and established for twelve months or longer.
In addition to the three types of PEs which have been discussed in the previous section several provisions concerning a
fictitious permanent establishment have been included in the Dutch income tax.661 For example, by virtue of Article
650
See van Raad 1990, p. 507-523
The Dutch Supreme Court considered for example a shipbroker to be an independent agent, and subsequently, his activities were not
qualified as encompassing an agent PE (see HR BNB 1988/258).
652 The number of principals of the representative is important for the interpretation of this criterion. For example, an insurance agent who
‘worked’ for 58 foreign companies, was considered to be completely independent by the Court (see HR BNB 1996/108).
653 One exception includes a representative who does not act in its ordinary course of business, see HR BNB 1971/43.
655 For example, an air-plane salesmen will exercise its authority to conclude contracts less frequently than a bicycle salesmen.
657 HR BNB 1999/267.
658 This time requirement follows from DTCs, see also paragraph 4.3.
659 This explanation seems to be in line with the previously cited Court’s ruling in HR BNB 1999/267.
660 Annotation of van Raad to HR BNB 1999/267.
661 An enumeration of all fictitious PEs falls beyond the scope of this thesis.
651
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7.2(3), PITA 2001, a brief performance in the Netherlands by an independent artist or sportsman is, under conditions,
designated as a PE. Another example of the fictitious PE includes article 17a of the CITA 1969, by virtue of which
several activities are treated as a PE as well, such as the activities performed by a legal entity in the function as director
or commissioner of a company in the Netherlands.
4.2.2
Starting up a PE in the Netherlands
With respect to starting up a PE in the Netherlands there are no special provisions. Rather, there are some general
regulations. For example, in the Netherlands, all enterprises (whether foreign or domestic) with an establishment in the
Netherlands have to enroll themselves in the Trade Register at the Chamber of Commerce upon the commencement of
business activities in the Netherlands.662 This also applies to a PE belonging to a foreign enterprise. With respect to
registration of this foreign enterprise, several documents are required for registration, such as an official certificate of
registration of the enterprise in the country of incorporation, a transcript of the deed of foundation, a transcript of the
statutes, and a certificate of incumbency.663 Registration is an important obligation for starting business activity through
a PE in the Netherlands. Failure to register has the following consequences:664
- No external or third party effect: the PE cannot invoke inaccuracies in or incompleteness of the registration in
relation to third parties if the latter were not or could not have been aware of them.
- Registration in the Trade Register is obliged; failure to do so is considered an economic offence. Details and
information of the enterprise abroad must also be provided upon registration.
Moreover, all enterprises in the Netherlands, thus also foreign ones, are required to keep accounts and retain financial
records for seven years.665 In addition, the enterprise annually has to deposit the most recent financial statements at the
Chamber of Commerce to the extent that the obligation to publish also applies under the law of the country of
formation of the foreign enterprise.666
According to the prevailing opinion in Austria, a branch establishment667 is a spatial, but neither legally separate nor
economically independent organizational unit on a permanent basis.668 The establishment of a branch in Austria is
always assessed by domestic law; foreign legal qualifications are irrelevant.669
In Belgium, an enterprise will deemed to have a PE in that State where it disposes of a so-called Belgian establishment.
This concept is defined as a fixed place of business in Belgium through which a non-resident fully or partially carries on
its business activities.670 A list of possible PEs is given in the Belgian Income Tax Code, including an office, a
manufacture, or an inventory. The concept of a Belgian establishment is broader than that given in the OECD MC. For
example, under Belgian law, a building site PE already arises after thirty days.671
662
See KvK (Chamber of Commerce) – Do I need to register my company?
See KvK (Chamber of Commerce) – Registration of foreign enterprises.
664 See CCAH – Starting a company in the Netherlands.
665 This is however post-start-up.
666 See KvK (Chamber of Commerce) – Registration of foreign enterprises, and CCAH – Starting a company in the Netherlands.
667 It is noted that the author of the Austrian paper consistently talks about a branch establishment. See Pinetz 2013 (Austria), p. 55. It bears
similar meaning as a PE.
668 See Pinetz 2013 (Austria), p. 55, with reference to Nowotny in Kodek/Nowotny/Umfahrer, Kommentar FBG, § 13 UGB, m.no. 1.
669 See Pinetz 2013 (Austria), p. 55, with reference to Nowotny in Kodek/Nowotny/Umfahrer, Kommentar FBG, § 13 UGB, m.no. 4 and
Jabornegg/Geist in Jabornegg/Strasser, Kommentar AktG4, § 254, m.no. 22.
670 See Bruyère 2013 (Belgium), p. 51, with reference to article 229 § 1 ITC and to Court of First Instance of Ghent, 11June 1998,
Fiscoloog, Editie 671, (1998), p. 10.
671 See Bruyère 2013 (Belgium), p. 52. More examples are given by the author, including the following: 1) persons representing the
enterprise, other than independent agents, also constitute PEs of the enterprise, even when they do not have the power to bind the
enterprise contractually, provided that the agent in question is economically and legally dependent on the foreign enterprise, and 2) in case
663
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France refers to article 5 of the OECD MC with respect to the definition of a permanent establishment combined with
the interpretation of the national Courts of this definition.672 This means that on some elements the French notion of a
PE differs somewhat from article 5 OECD MC. For example, the French administrative case law rejects the criterion of
independence of the PE.673
In Germany, a definition for the term permanent establishment is given in national tax law. A PE means any fixed place
of business or facility serving the business of an enterprise.674 The following shall be considered PEs: 1) the place of
business management, 2) branches, 3) offices, 4) factories or workshops, 5) warehouses, 6) purchasing offices or sales
outlets, 7) mines, quarries or other stationary moving or floating facilities for the exploitation of natural resources, 8)
building sites or construction installation projects lasting more than six months. Moreover, the requirements for a PE
are: a fixed place of business or facility, sustainability, and the entrepreneur’s authority to dispose of the object.675
In Hungary, the term permanent establishment is defined similar to the OECD MC definition for corporate income
tax law purposes. A PE is a permanent business place, installation or equipment which the taxpayer uses partly or
wholly for its business activity, irrespective of its legal title.676 The following examples are mentioned: representation,
office, factory, plant, workshop, mine, or place of administration. In addition, the agent PE and the building site PE are
defined in the Hungarian Corporate Income Tax in accordance with the OECD MC. It is emphasized that if there is no
PE in terms of a particular DTC, there is no PE under Hungarian tax law either. In addition, if there is no PE under
Hungarian law, the DTC cannot ‘create’ a PE.677
In Italy, the notion of the permanent establishment was up until recently not defined under Italian law. For the
meaning of this term, case law referred to article 5 of the OECD MC. Now, the PE concept has been codified in Italy; a
PE is a fixed place of business through which a non-resident enterprise carries on its business partially or entirely in the
territory of the State.678 Effectively, not that much has changed by the introduction of this definition in Italian law; the
definition is in line with article 5 of the OECD MC and the OECD commentary applies to the Italian definition.679
In Poland, the Corporate Income Tax Act follows article 5 of the OECD MC as well and defines a PE as 1) a
permanent establishment through which an entity having a registered office or management within the territory of one
country carries out its business activity, in part or in whole, within the territory of another state, in particular a division,
branch, office, factory, workshop or place where natural resources are extracted, a construction site, a construction in
progress or an assembly, being operated within the territory of one state by an entity having its registered office or
management within the territory of another country, or 2) a person acting within the territory of a state for and on
behalf of an entity having its registered office or management within the territory of another state, if this person is
authorized to enter into agreements for and on behalf of such an entity and actually exercises the rights granted through
such authorization.680
of transparent partnerships, Belgian law also foresees that every partner residing abroad will be deemed to have a PE in Belgium for the
activities carried out through the partnership.
673 See Depaix 2013 (France), p. 49, with reference to CE, April 5, 2006 min c / Company Mindex.
674 See Mehlhaf 2013 (Germany), p. 36, with reference to sec. 12 AO.
676 See Varga 2013 (Hungary), p. 36, with reference to Act LXIII of 1996 on Corporate Income Tax, para 4 (33).
678 See Trabattoni 2013 (Italy), p. 39, with reference to article 162 T.u.i.r.
679 See Trabattoni 2013 (Italy), p. 40,
680 See Majda 2013 (Poland), p. 60, with reference to article 4a item 11 of the CITA.
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In Sweden, a PE is defined as a fixed place of business where the business is wholly or partially carried out. This term
includes any special place of management, branch, office, factory, workshop, mine, oil or gas well, quarry or any other
place of extraction of natural resources, building site, construction or installation project an real property that
constitutes business inventory.681 With respect to the agent PE, a PE is deemed to exist where a person acts on behalf
of an enterprise and has, and habitually exercises, an authority to conclude contracts in the name of the enterprise. A
permanent establishment is not deemed to exist in Sweden merely because someone carries on business through a
broker, general commission agent, or any other agent of an independent status, provided that such representatives are
acting in the ordinary course of their business.682
4.3 Permanent establishment in DTCs
In most DTCs which the Netherlands has concluded the term permanent establishment has explicitly been defined.683
In these DTCs, which are mostly concluded in accordance with the Dutch Standard Treaty684, the definition of a
permanent establishment is roughly the same as that of article 5 OECD MC.685 This is also logical, since it is Dutch
policy to include a definition of the term permanent establishment in DTCs, more specifically, the definition provided
by the OECD.686
In article 5 of the OECD MC the definition of the term ‘permanent establishment’ can be found. According to
paragraph 1, a permanent establishment is ‘… a fixed place of business through which the business of an enterprise is wholly or partly
carried on.’ From the analysis of this definition and the OECD commentary to article 5 the following requirements or
characteristics can be derived:687
a. The existence of a place of business; there must at least be a facility, machinery or equipment;
b. The place of business, i.e. the premises, facility or installations must be owned, rented, or otherwise at the disposal
of the enterprise;
c. The place of business must be fixed; a distinct place with a certain degree of permanence. There has to be a link
between the place of business and a specific geographical point, but it is not needed that the business is actually
fixed to the soil. Rather, there must be some geographic stability or a certain degree of permanency; and
d. The business must be carried on through this fixed place of business; usually this implies some human activities.
Paragraph 2 of article 5 continues by providing several examples of permanent establishments. There can, however, be
discussion as to the extent in which these examples bear relevance. Even if there is a ‘place of management’688, the
aforementioned requirements will still have to be met in order to be qualified as a PE.689 With respect to paragraph 4 of
article 5, which contains an enumeration of several exclusions690, I again wonder what the actual relevance is. Paragraph
3, 5 and 6 of article 5 indeed are relevant, since they concern the ‘types’ of PEs discussed in the previous subparagraph.
Paragraph 3 provides that a building site or construction or installation project constitutes a PE only if it lasts more than
twelve months.691 Paragraphs 5 and 6 of the OECD MC contain specific allocation rules with respect to the agent PE.
681
See Lim 2013 (Sweden), p. 10-11, with reference to chapter 2 section 29 of the ITA.
See Lim 2013 (Sweden), p. 11, with reference to chapter 2 section 29 of the ITA.
683 This means that in a cross-border context, this definition will be followed and there is no need to apply a national definition (by means of
article 3(2) OECD MC).
684 The Dutch Standard Treaty (in Dutch: Nederlands Standaard Verdrag), can be seen as the Dutch comparable of the OECD MC; it is the
foundation for the Netherlands when negotiating and concluding DTCs.
685 There are however exceptions, such as the minimum time requirement with respect to treaties concluded with developing countries.
686 See Memorandum Dutch tax treaty policy 2011, par. 2.6.2.
687 See OECD Commentary 2010 on article 5, par. 2-11.
688 Article 5(2)(a) OECD MC.
689 See also HR BNB 2000/159.
690 The exclusions related mostly to activities of a preparatory and auxiliary nature. See also article 2(2) Unilateral Decree for the Avoidance
of Double Taxation 2001.
691 The Netherlands explicitly declared to not always follow the definition of the OECD in this context. See Memorandum Dutch tax treaty
policy 2011, par. 2.6.2. In particular in treaties concluded with developing countries, the criterion for a building site, construction and
682
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4.4 PE-profit allocation
4.4.1
Article 7 OECD model tax convention
In case a resident (either a natural person or a legal entity) of the Netherlands carries on business activities in, for
example, Osnabruck (Germany) through a PE both the Netherlands and Germany will claim taxing rights to (part of)
the profits derived by that business. Starting from the perspective of the Netherlands, the business is seen as a resident
taxpayer and consequently taxed for its worldwide profits (thus including foreign-derived profits).692 In case Germany
uses the same qualifications as the Netherlands, Germany will treat the Dutch business as a non-resident taxpayer and as
such will impose a tax on the business for any profits derived in the German territory. Without any further measures,
double taxation would arise for the Dutch business. In order to prevent double taxation, article 7 of the OECD MC
provides states with an allocation provision for business profits. The first paraphrase of the first paragraph of this article
can be seen as the general rule: ‘The profits of an enterprise of a Contracting State shall be taxable only in that State…’ Thus,
starting point is the full taxing right of the state in which the enterprise is a resident. However, article 7(1) continues:
‘…unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein…’ This
means that, as an exception to the general rule, the State in which the company carries on business activities through a
PE has a taxing right as well. As for the size of that taxing right the following is further regulated in article 7(1): ‘…If the
enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is
attributable to that permanent establishment.’ The true issue then is about allocating profits to a permanent establishment.
4.4.2
Avoidance of double taxation
3.4.4.1 OECD model tax convention and Dutch Standard Treaty
Where with respect to business profits article 7 of the OECD MC sees to the allocation of taxing rights amongst States,
article 23 contains rules dictating which State has to see to the prevention of double taxation. More specifically, article
23A contains an exemption method and article 23B contains a credit method. In the Netherlands, we generally use the
Dutch Standard Treaty in which article 24, paragraphs 2 and 3, contains similar provisions. Article 24(2) of the Dutch
Standard Treaty applies to active foreign income, amongst which business profits. The exemption method is used for
the avoidance of double taxation. For passive items of income such as dividends, interests and royalties, article 24(3)
dictates rules for the avoidance of double taxation. Consequently, in the context of PE-situations, article 23A or article
24(2) of the Dutch Standard Treaty will be applicable. The general rule is as follows: the residence State of the taxpayer
is obliged to give avoidance of double taxation with respect to certain items of income for which, in accordance with the
provisions of the Convention (i.e. article 7 of the OECD MC), the taxing right is allocated to the source State.
3.4.4.2 Dutch method of exempting profits from a foreign PE
As of January 1, 2012, the Netherlands applies a tax base exemption to the results generated by a foreign PE. This is
regulated for in article 15e of the CITA 1969.693 Under the tax base exemption, the results of the foreign PE are initially
included in the taxpayer’s worldwide profits, and subsequently eliminated from the worldwide profits694. It should be
emphasized that the tax base exemption sees to the avoidance of double taxation. With respect to the internal transfer
of assets, however, such an avoidance will, in most cases, not be necessary, since there will be no realization of profits.
installation projects to be a PE is less strict. See for example the DTCs Netherlands-Philippines art. 5(2)(g) and Netherlands-Nigeria, in
which thresholds of 183 days respectively 3 months apply for triggering the deemed existence of a PE. See Memorandum Dutch tax treaty
policy 2011, par. 2.6.2.
692 This follows from articles 2 and 8 CITA 1969.
693 See also Kamerstukken II, 2011/12, 33 003, nr. 2.
694 For a detailed discussion of the application of the tax base exemption to business profits derived through a foreign PE, see Pötgens and
Bellingwout 2012.
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Both under the old regime of an exemption on the tax payable and the new regime of the tax base exemption it is
possible for currency exchange results of the foreign PE to arise.695 Finally, it should be noted that, in general, the tax
base exemption only applies to active foreign business investments, not to passive foreign portfolio investments.
4.4.3
Method of profit allocation to a PE
It is necessary to allocate profits to a permanent establishment, even though the taxpayer and the PE are essentially one
and the same. But how should the profit of the PE be calculated? In 2010, a revised OECD report on the attribution of
profits to PEs (PE-Report)696 was published. According to this report, the starting point for profit allocation to a PE is
the ‘Authorized OECD Approach’ (AOA). This approach is as follows: ‘the profits to be attributed to the PE are the profits the
PE would have earned at arm’s length, in particular in its dealings with other parts of the enterprise, if it were a separate and independent
enterprise engaged in the same or similar activities under the same or similar conditions, taking into account the functions performed, assets
used and risks assumed by the enterprise through the permanent establishment and through the other parts of the enterprise’.697 An
important part of the AOA approach is a functional and factual analysis leading to the attribution of assets and risks to
the PE. The location of significant people functions, which are related to people who exercise activities with respect to
managing risks and day-to-day activities, will be decisive for this attribution. Subsequently, capital has to be allocated to
the permanent establishment as well.
The allocation of profits as if the PE were a separate and independent enterprise is also called the functionally separate
entity approach698, or the direct method of profit allocation. As opposed to the direct method, the indirect method, also
called the relevant business activity approach699, assumes that the PE and the general enterprise are one enterprise with one
profit, which has to be divided between the PE and the general enterprise on the basis of an allocation key or formula.
As said, the OECD prescribes the direct method. The Netherlands endorses the PE-report fully700 and, consequently,
the preferred method in the Netherlands for PE profit allocation is the functionally separate entity approach.701 The
application of the independence fiction and the direct method is also regulated in article 9(3) of the Unilateral Decree
for the Avoidance of Double Taxation 2001. As a result, the PE is treated as if it is an independent part of the
enterprise (the general enterprise), and the main assumption is that it deals with other parts of the business at arm’s
length.
4.4.4
Profit of the PE and profit of the general enterprise
When taking again the example of the Dutch business with a PE in Osnabruck (Germany), the fictitious independence
of the PE does not mean that, for the purpose of profit allocation, the entire business has to be cut in two pieces (i.e.
the PE in Germany and the head office in the Netherlands). Rather, it means that the PE should be treated as an
independent business by both the Netherlands and Germany. As a consequence of article 7 of the OECD MC,
Germany will have the taxing right over the PE-profits, and the Netherlands, as the State of residence, has to give
695 A detailed discussion of the currency exchange results falls beyond the scope of this thesis. However the following might be noted: the
currency exchange result is the difference between the contribution profit and the deductible profit. The deductible profit is the profit
which the Netherlands has to exempt. This profit can be calculated in two phases: 1) calculation of the profit as it is expressed in the foreign
country, according to the foreign currency. With respect to currency exchange results, fixed assets and liabilities are to be valued at the
historical exchange rate and current assets and liabilities are to be valued at actual exchange rates (see also Dutch Rupiah cases, amongst
which HR BNB 1960/163). 2) the profit calculated under 1) has to be converted to the currency of the head office (i.e. Euro’s). For this
conversion, the average annual exchange rate is normally used (HR BNB 2004/139).
696 OECD PE-Report 2010.
697 OECD PE-Report 2010, part I, item B-1 and article 7(2) OECD MC.
698 Dutch term for this method is: ‘ondernemingssplitsing’ (roughly translated: company split)
699 Dutch term for this method is: ‘winstsplisting’ (roughly translated: profit split)
700 See Kamerstukken II 2010/11, 25 087, nr. 7, par. 2.6.4 and Resolution BNB 2011/91 (PE profit allocation), par. 1.2. Even before the
OECD PE-report however, the Netherlands already applied the arm’s length principle for the allocation of profits to PEs. See for example
HR BNB 1960/163 (concerning a resident taxpayer) and HR BNB 1990/36 (concerning a non-resident taxpayer).
701 See Resolution BNB 2011/91 (PE profit allocation), par. 2.2.
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avoidance of double taxation. From a Dutch perspective then, the enterprise is said to have two profits: the general and
the contribution profit. The profit of the entire enterprise702 (thus including the PE-profit) is called the general profit.
The profit allocated to the PE is called the PE-profit or the contribution-profit. The profit of the foreign PE is
determined according to Dutch standards; the tax law of the country in which the PE is located is irrelevant.703
4.5 Transfer of assets from a national head office to a PE abroad
Asset components, such as goods available for sale or assets, can be transferred from head office to a PE, or from a PE
to the head office or to another PE. For the purpose of this thesis, I will focus on the transfer of assets, and not on the
transfer of goods available for sale. More specifically, emphasis will be on tangible assets.
It should be noted that assets cannot be allocated to a permanent establishment on the basis of legal ownership. Indeed,
a PE is no separate legal entity, but part of the enterprise. This is why the PE-report looks at whether assets of the
enterprise are economically owned by and/or used in the functions performed by the PE.704 Generally, tangible assets
are attributed on the basis of a determination of the significant people functions relevant to the economic ownership of
those assets, by means of a functional and factual analysis of the case.705
A. Dutch tax system
4.5.1
Asset transfer from the Dutch head office to a PE abroad
The situation of the asset transfer from the Dutch head office to a PE abroad is illustrated below. It should be noted
that for illustration’s sake, Germany is taken as the other State. This choice is further irrelevant.706 In addition, it is
irrelevant whether the head office is the head office of a Dutch incorporated company or of a company incorporated
under the law of another State. Both companies will be considered as a resident taxpayer, as they maintain their place of
effective management in the Netherlands and are consequently considered to be established in the Netherlands.
The tax consequence of an asset transfer from a Dutch head-office to a permanent establishment outside the
Netherlands will depend on whether the assets are transferred temporarily or permanently. The OECD PE-report also
provides a detailed discussion of the attribution of tangible assets to the PE. It is put forward that, generally, Member
702
In the Netherlands this is often called the ‘general enterprise’ in PE-situations.
See also Peeters 2011, par. 2.1.
704 OECD PE-report 2010, part I, par. 72.
705 OECD PE-report 2010, part I, par. 75.
706 Although it should be noted that with respect to the recovery of taxation (if the transfer would even lead to a tax imposition), it may be
of importance whether the company resides in a EU/EEA State or in a third State.
703
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States provide different views. At one end of the spectrum it was argued that assets should be attributed to a PE based
on a determination of the significant people functions relevant to the economic ownership of said assets, by means of a
functional and factual analysis. At the other end of the spectrum, it was argued that the place of use should be the only
criterion for attributing tangible assets to a PE. However, with respect to the practical implications of these two ends of
the spectrum, it was concluded that they should both arrive at the roughly the same results, that is: ‘where a PE is treated
as the economic owner of a tangible asset, it will typically be entitled to deductions for depreciation (in the case of depreciable assets) and
interest (in the case where the asset is wholly or partly debt-financed). Where a PE is treated as the lessee of a tangible asset, it will typically
be entitled to deductions in the nature of rent’. 707 As discussed, the Netherlands completely endorses the OECD PE-report.
However, there are slight differences between the approach chosen by the OECD and the approach which is used in
practice in the Netherlands. It should be stressed that even before the first PE-report was published in 2008, a
distinction between temporary and permanent transfer of assets to a PE already existed in the Netherlands.708 What
does the Dutch approach then looks like in practice? In the Netherlands, the first step in asset transfers to a PE is the
analysis of whether the transfer is permanent or temporary in character. This analysis will be carried out on the basis of
the servitude criterion.709 It can be said that an asset is subservient to the PE in case 1) the asset is managed in or from the
PE, and 2) exploitation of the asset is controlled and monitored in or from the PE.710 If both elements 1) and 2) of the
servitude criterion are positive, then it is assumed that the asset is transferred permanently to the PE. If one or both of
the elements are negative, then the asset transfer is seen as temporary.
4.5.1.1 Temporary transfer of assets
When the application of the servitude criterion has led to the conclusion that assets are transferred to a PE temporarily,
what are the implications? As discussed, the Netherlands has explicitly rejected the approach chosen in the OECD PEreport in the context of temporary asset transfers.711 Rather, the Netherlands will apply the ‘rent-rental analogy’. The PE
will be considered the tenant or lessee of the asset and the head office is considered to be the lessor.712 From an
accounting perspective the asset is not actually transferred to the PE, since the PE is treated as lessor and not as the
economic owner of the transferred asset. As a result, the asset will not be activated on the balance sheet of the PE. The
fact that the economical ownership of the asset does not transfer, indicates that there will be no realization of any
reserves vested in the asset, nor will there be a revaluation of the asset. Remember, that from a Dutch perspective, the
enterprise is said to have two profits: the general and the contribution profit. The profit of the entire enterprise (thus
including the PE-profit) is called the general profit. The profit allocated to the PE is called the PE-profit or the
contribution-profit. This is the profit for which the Netherlands, if it is the residence country, will provide a tax base
exemption. Translating this back to the example, if the economical ownership of the asset does not transfer, there will
be no revaluation of assets, and, consequently, the deductible profit and the contribution profit will be equal. A
difference between the two will, however, arise when the asset is activated on the PE balance sheet at fair market value,
since this can lead to higher depreciation expenses in the deductible profit whereas the depreciable base in the general
profit remains unchanged. As will become clear in the next sub-paragraph, this will the case when assets are transferred
permanently.
In summary, the temporary transfer of assets from the head office to a PE implies that the head office will remain the
economic owner of the asset. Following the rent-rental analogy, there will be a fictitious lease of the asset from the head
office to the PE. Under this fiction, the head office will charge an at arm’s length rent to the PE for the lease of the
707
OECD PE-report 2010, part I, par. 75.
Both the Dutch Supreme Court and the Dutch legislator made the distinction between temporary and permanent transfers of assets to a
PE, see for example Explanatory Memorandum Bvdb 2001, p. 37 and Resolution BNB 2011/91 (PE profit allocation), par. 5.1.
709 This servitude criterion (in Dutch: ‘dienstbaarheidscriterium’) has been developed by the Dutch Supreme Court. See for example HR
BNB 1997/264 and HR BNB 2003/246.
710 See case law mentioned in the previous note and Peeters 2011, par. 6.
711 See Resolution BNB 2011/91 (PE profit allocation), par. 5.1.
712 See HR BNB 1986/100; HR BNB 1990/36; HR BNB 2007/117; and Resolution BNB 2011/91 (PE profit allocation), par. 5.1.
708
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asset.713 An at arm’s length rent is the ‘price’ which could be stipulated in case the asset would have been leased to a
completely independent third party. Generally, this at arm’s length rent will consist of three components: depreciation,
interest, and profit.714 This rent will be charged to the result of the PE, thus lowering the PE profit. Additionally, the
exemption for the profits of the PE is reduced by the same amount.
4.5.1.2 Permanent transfer of assets
When both elements of the previously discussed servitude criterion are positive, i.e. when the asset is managed in or
from the PE and exploitation of the asset is controlled and monitored in or from the PE, the asset transfer from the
Dutch head office to the PE outside the Netherlands will be qualified as being permanent. The tax and accounting
treatment of a permanent transfer of assets differs from the treatment described in the previous subsection. The most
important difference lies in the fact that instead of a rent-rental analogy, a ‘buy-sale analogy’ is used. Under this analogy,
it is assumed that the PE has bought the asset and that the head office has sold it. The PE is, therefore, treated as the
economic owner of the transferred asset.715 The OECD PE-report argues that ownership is transferred only when the
asset transfer is a real and identifiable event. The economic ownership would then be attributed to the PE using the
asset.716 Thus both under the Dutch and the OECD approach, there is, in case of a permanent asset transfer, a shift of
economic ownership from the head office to the PE. From an accounting perspective, the transfer of the asset will lead
to that asset being activated on the balance sheet of the PE. At the same time, however, the asset will also remain on the
balance sheet of the general enterprise, as the PE is part of the general enterprise. Nevertheless, there is an important
difference. The transfer from the head office to the PE concerns an internal asset transfer, which means that it is not
possible for the enterprise to realize any gains. Obviously, internally transferred assets are not revaluated on the balance
sheet of the general enterprise. The PE, however, is to be treated as if it were an independent and separate legal entity.
From the perspective of the PE the asset has been acquired. This acquisition means that the asset should be valued at
fair market value at the time of transfer on the balance sheet of the PE.717
Thus, for the deductible profit718, the depreciation base is higher after the transfer of the asset, and subsequently the
profit of the PE will be lower. The exemption which the Netherlands, being the residence state, has to provide is
therefore lower. It would be superfluous to impose an exit tax for assets leaving the Dutch tax territory in this PEsituation, since the Netherlands will not lose its tax claim.719 Rather, the ‘realization’ of a transferred asset occurs
gradually by means of the aforementioned lower exemption. Remember that from a Dutch perspective, the enterprise is
said to have two profits: the general and the contribution profit. The profit of the entire enterprise (thus including the
PE-profit) is called the general profit. The profit allocated to the PE is called the PE-profit or the contribution-profit.
This is the profit for which the Netherlands, if it is the residence country, will provide a tax base exemption. Going back
to the situation of a permanent transfer of assets, a difference between the two will exist due to the fact that the asset is
activated on the PE balance sheet at fair market value. This will lead to higher depreciation expenses in the deductible
713 Peeters (see Peeters 2011, par. 6.1) however argued that in order to prevent abuse and tax base erosion, this analogy will only be applied
when the ‘internal rent-agreement’ is recognized. If the agreement relates to a real and identifiable event which has adequate economical
relevance in the relation between the PE and the head office, the internal rent-agreement will be recognized. If on the other hand there is no
real change in the economic reality, the internal rent-agreement will not be recognized. The consequence of such an internal agreement not
being recognized is that no internal rent will be taking into account when drawing up the results. In such a case there will merely be a cost
allocation on the basis of historical costs (see for example BNB 1964/95, in which the Dutch Supreme Court explicitly disregarded the rentrental analogy)
714 See also van Raad 2011, par. 3.4.2.c5.
715 See also Resolution BNB 2011/91 (PE profit allocation), par. 5.1.
716 OECD PE-report, part I, part. 194 and 195.
717 See also HR BNB 1994/190; Explanatory Memorandum Bvdb 2001, p. 33-38 (commentary on article 9); and OECD PE-report 2010,
part I, par. 196.
718 I.e. the profit for which the Netherlands has to provide a tax exemption.
719 See also: Kamerstukken II 1998/99, 26 727, no. 3, p. 117.
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profit whereas the depreciable base in the general profit remains unchanged. Consequently, the profit for which the
Netherlands has to provide a tax base exemption will be relatively lower. An example includes the following:720
Example: on January 1, 2008, a Dutch B.V. has bought a machine for €1.000. The estimated life of the asset is 5 years,
which means that annual depreciation is equal to €200. On January 1, 2011, the machine is transferred permanently from
the Dutch head office to a PE located in Osnabruck, Germany. This means that the book value at the time of transfer is
equal to €400. However, the fair market value of the machine upon the transfer to the PE is equal to €500. This means
that the machine is activated on the balance sheet of the PE for an amount of €500. As will be demonstrated shortly,
there will be a gradual realization of the asset, due to a difference between the profit which the Netherlands has to
exempt and the profit over which the Netherlands will actual levy tax. Let’s assume that upon the transfer the
depreciation period still remaining is 2 years (i.e. the depreciation period has not changed due to the transfer of the
machine). Let’s further assume that the PE generates an annual result from operations of €600 (before depreciation).
For both years remaining (2011 and 2012), the contribution profit, i.e. the profit which the PE contributes to the profit
of the general enterprise, can be calculated as follows: €600 -/- €200 (depreciation) = €400. This is part of the worldwide
profit which will be taxed in the Netherlands. The profit for which the Netherlands has to provide an exemption, i.e. the
deductible profit, the calculation is as follows: €600 -/- €250 (depreciation) = €350. Assuming an average annual profit
of the Dutch B.V. (head office) of €2.000, the results in the remaining years will be as follows: (remember that the
Netherlands applies a tax base exemption to the results generated by a foreign PE)
2011
2012
Profit Dutch B.V.
€2.000 €2.000
Profit PE (contribution)
€400
€400
Worldwide profit
€2.400 €2.400
Tax base exemption:
profit PE (deductible)
€350
€350
Taxable base Netherlands
€2.050 €2.050
As a result, the tax claim which the Netherlands had vested in the machine, based on the difference between the fair
market value (€500) and the book value (€400) at the time of transfer, is ‘realized’ due to the fact that in each of the two
remaining years, an amount of €50 of the foreign derived PE profits is not exempt from the worldwide income.
In case the taxpayer ceases to be a resident taxpayer at the moment of or after the transfer of assets, the emigration
provisions discussed in the first chapter op this thesis will be triggered. The difference between the fair market value
and the book value (as it is shown on the balance sheet of the general enterprise) of the previously transferred assets will
be added to the total worldwide profit. This will be part of the amount over which an exit tax will have to be settled.
The following example illustrates this:
Example (continued): immediately after the transfer of the machine in 2011, the Dutch B.V. emigrates (i.e. ceases to
be a resident taxpayer in the Netherlands). The machine is deemed to have been alienated at fair market value of €500.
By this fictitious alienation, the previously unrealized gain in the machine of €100 (€500-/- €400) is realized. The
Netherlands will include this amount in the worldwide profit of the taxpayer.
In Austria, the transfer of assets from a domestic business to a foreign part of the business of the same taxpayer
triggers the Austrian exit provision.721 It is noted that when assets are only relocated to a foreign PE temporarily, this is
not considered as an asset transfer. A transfer that lasts more than twelve months is no longer considered as being
Other examples served as the basis for this example. Sources include: Dutch legislative history (see Kamerstukken II 1998/99, 26 727, no.
3, p. 116-118; this example was discussed in the context of the exit tax provisions in the personal income tax) and van Raad, 2011, par.
3.4.2.A.c5.
721 See Pinetz 2013 (Austria), p. 42, with reference to § 6 N 6 letter a.
720
111
temporary.722 Thus, when assets are transferred from an Austrian head office to a foreign PE for a period longer than
12 months, Austria will impose an exit tax.
In Belgium, the transfer of capital assets from a Belgian head office to a foreign PE may lead to the imposition of an
exit tax as well, as the value upon transfer is deemed to be the fair market value of the assets.723 Belgium thus applies the
at arm’s length principle to these transfers of assets. As a consequence, latent capital gains are deemed to have been
realized upon the transfer of assets. These capital gains are taxable in the year in which the transfer actually occurs; any
later capital gains will be attributable to the foreign PE.724
In France, a company shall only conduct business with its PE as if they are two independent companies. This means
that when assets transfer from a head office in France to a foreign PE, the tax consequences will be similar to the
situation where assets are transferred between independent companies. There are two possibilities. Firstly, an asset can
be transferred to a foreign PE in exchange for money; thus payment of a price which corresponds to a market with full
competition. The transaction is treated as a sale to an independent company, where profits or losses arising from the
sale may either be in the form of capital gains or losses, depending on the book value of the asset. If a capital gain
results, the gain will be taxed as it is considered an operating profit.725 Secondly, an asset can be transferred to a foreign
PE without a remuneration. In this case, the company has to include in its taxable income the results from the
management or disposition of the asset concerned.726
In Germany, there is a deemed withdrawal when assets are transferred from a domestic head office to a foreign PE. As
a result, the transfer of assets will result in a tax on the asset’s fair market value, provided that the German tax right
becomes excluded or restricted after the transfer.727
In Italy, the general principles of the exit provisions in case of the emigration of a business are also applied when assets
are transferred from a domestic head office to a foreign PE. Thus, the assets are valued at fair market value upon the
transfer cross-borders, implying that the capital gains vested in the assets are deemed to have been realized.728
Sweden also applies its regular exit tax provisions to cross-border asset transfers in general, as these assets will leave the
Swedish tax jurisdiction.729 Thus, where assets are transferred from a Swedish head office to a foreign PE, there will be
a deemed realization of the assets at fair market value.
In Hungary and Poland there are no exit taxes as such. In Hungary and Poland, asset transfers from a domestic head
office to a foreign PE are not considered as a taxable event.
722 See Pinetz 2013 (Austria), p. 42, with reference to Income Tax Directive 2000, GZ BMF-010203/0299-VI/6/2008 from 16.06.2008,
m.no. 2010 in conjunction with m.no. 3727 ff.
723 See Bruyère 2013 (Belgium), p. 55, with reference to Commentary on the Income Tax Code, nr. 144/4. See also R. OFFERMANS,
‘Belgium’ in R. RUSSO, The Attribution of Profits to Permanent Establishments: The Taxation of Intra-company dealings, IBFD,
Amsterdam, (2005), p. 84; T. WUSTENBERGHS, ‘The attribution of profits to permanent establishments – Branch report for Belgium’,
Cahiers de droit fiscal international, Vol. 91B, IFA, (2006), p. 186; T. WUSTENBERGHS, ‘Belgium: Attribution of profits to permanent
establishments’, 35 Intertax 6/7, (2007), p. 396.
724 See Bruyère 2013 (Belgium), p. 55, with reference to T. WUSTENBERGHS, ‘The attribution of profits to permanent establishments –
Branch report for Belgium’, Cahiers de droit fiscal international, Vol. 91B, IFA, (2006), p. 186.
726 See Depaix 2013 (France), p. 58, with reference to article 238 bis-01.
727 See Mehlhaf 2013 (Germany), p. 40, with reference to sec. 12 para 1 KStG and sec. 4 para 1 EStG.
728 See Trabattoni 2013 (Italy), p. 43-44, with reference to article 9 T.u.i.r.
112
4.6 Transfer of assets from a national PE to a head office or PE abroad
A. Dutch tax system
In this paragraph, I will distinguish between two categories: 1) the transfer of assets from a Dutch PE to the head office
abroad, and 2) the transfer of assets from a Dutch PE to another PE abroad. With respect to category 1, the transfer to
the head office of a resident taxpayer outside the Netherlands (the interim transfer of asset components) and the
transfer to the head office of a non-resident taxpayer abroad will be discussed. With respect to the second category, I
will discuss the following situations: the company is a resident taxpayer, the company is a limited resident taxpayer, and
the company is a non-resident taxpayer. I again note that for illustration’s sake, Germany is taken as the other State, and
that this choice is further irrelevant.730
4.6.1
Asset transfer from a Dutch PE to the head office of a limited resident taxpayer
As discussed in chapter 2, it has been argued that the ‘complete picture’ of taxation upon emigration of a company can
be decomposed into three subsequent steps, according to Bellingwout731: 1) the transfer of asset components abroad,
followed by 2) the transfer of the place of effective management abroad, and finally 3) cessation of business activities
still remaining in the Netherlands. Looking at exit taxation from this tree-stage perspective, article 15c would be applied
after the second step, and article 15d after the third.732 In my opinion, Bellingwout’s three-stage model733 is incomplete.
When a Dutch incorporated company has transferred its place of effective management abroad but left behind some
business activities in the Netherlands, we have arrived at step two of the three-stage model. At this point, a partial
settlement has been imposed on the basis article 15c. I believe that after this second stage, it is possible to have an
additional step before arriving at the third stage. More specifically, it is possible for the Dutch PE to transfers asset
components to the head office outside the Netherlands, after which the latter continues to derive profits from the
Netherlands. Such an interim asset transfer takes place before stage 3 (cessation of business activities still remaining in
the Netherlands), but after stage 2 (emigration of the tax payer).
One might subsequently wonder whether this transfer would trigger a tax settlement. Article 15c734 was specifically
incorporated into the Dutch income tax in order to make it perfectly clear that there will be a partial settlement when
business activities are left behind in the Netherlands after emigration.735 In the current situation of an interim asset
transfer, however, this partial settlement provision does not apply, since article 15c additionally requires that there is an
730 Although it should be noted that with respect to the recovery of taxation (if the transfer would even lead to a tax imposition), it may be
of importance whether the company resides in a EU/EEA State or in a third State.
732 It should be noted that this is equally applicable to the exit provisions in the personal income tax.
734 Or art. 3.60 PITA 2001 in case of a business carried on by an individual.
735 See also Kamerstukken II 1998/99, 26728, no. 3, p. 55 and Resolution State Secretary of Finance BNB 2001/230
113
emigration (i.e. the taxpayer ceases to be a resident). Therefore, stage 2 of the three-stage model is definitively passed.
We have not arrived at stage three yet either, since there is no cessation of remaining business activities in the
Netherlands. If we wish to tax unrealized gains as they leave the Dutch territory in this situation, the three stage model is
incomplete. More specifically, there then ought to be an additional stage in between the second and third, which deals
with the interim transfer of asset components from a PE to the head office (in between the current partial and final
settlement provisions).
In the previous section, I deliberately chose the following wording: if we wish to tax unrealized gains as they leave the Dutch
territory. On the one hand, it might be argued that article 15d will eventually lead to taxation, since this article applies
once the business taxpayer does ceases to derive profits from the Netherlands. At that moment, all benefits which have
not already been taken into account for other reasons are added to the Dutch profit; assets which have been transferred
in the past included. Moreover, no profits are actually realized upon the interim transfer of asset components, and the
asset components do not leave the property of the taxpayer; they are merely transferred to another (foreign) part of the
taxpayer’s business.736 Judging from all these considerations, it might seem abundant to include an additional exit tax in
the Dutch tax system. It has, however, also been argued that at the time of transfer, the Netherlands will lose its tax
claim on the unrealized gains if it does not impose an exit tax.737 This argument is based on the fact that after the
transfer treaty allocation rules will limit the object of taxation in the Netherlands. It has also been argued that the assets
leave the Dutch territory, and therefore an exit tax seems to be in order, since there is a realization.738 Most importantly,
it should be noted that the Dutch incorporated company which has transferred its place of effective management
abroad, remains a resident taxpayer for the purpose of the corporate income tax on the basis of article 2(4) CITA 1969,
and is as such liable to tax for its worldwide income in the Netherlands. Consequently, the interim transfer of asset
components is a non-event from a tax perspective; assets are transferred to a resident taxpayer from a part of the
business of that same resident taxpayer. In order to be able to tax this event an explicit exit provision is required. It
should be noted that this issue will not occur in situations in which assets are transferred from a Dutch PE to a
company with both its statutory and real seat outside the Netherlands, as the independence fiction will then apply.739
4.6.1.1 Partial settlement under the final settlement provision?
The relevant question then is whether it is possible to have a partial settlement in between the application of article 15c
and 15d, or whether article 15d can be applied in order to tax the event of an interim asset transfer. As explained, article
15c has definitively been passed since this provision (containing a partial settlement) is linked to the emigration of the
taxpayer. The taxpayer has, however, already emigrated. Consequently, the focus is on article 15d.740 With respect to the
question whether article 15d can be applied to the interim transfer of asset components, this article basically provides
the same as its predecessor, article 16 PITA 1964. In this context, the of 1 March 2013, HR BNB 2013/94, and the
conclusion of A-G Wattel741 in this case are very relevant, since these deal with more or less the same question. More
specifically, it was asked whether it is possible to impose a partial settlement under a provision which, when interpreted
strictly as it reads, does not apply at the time of transfer since it is required that the company ceases to derive profits
from the Netherlands. And this is not the situation.
See also: Kemmeren 2012, p. 15.
See also: Kemmeren 2012, p. 15. Moreover, extrapolating the point of view of the Dutch tax inspector in HR BNB 2013/94, will lead to
the argumentation that part of the total profit will escape the Dutch tax jurisdiction without taxation, if there is no tax imposed immediately
upon the transfer of asset components.
738 See also: van de Streek 2011, par. 3.0.5.B.d. and Hafkenscheid and Hosman 1998, par. 3.2.2.2.
739 See also V-N 2011/6.11, note redaction Vakstudie Nieuws. However, I emphasize that the independence fiction does not mean that
there will be a tax settlement. I will elaborate on this in paragraph 4.6.2.
740 Or art. 3.61 PITA 2001 in case of a business carried on by an individual.
741 Conclusion A-G Wattel 28 August 2012.
736
737
114
The aforementioned case of 1 March 2013, HR BNB 2013/94, concerned a Dutch B.V.742 which roughly owned two
assets: an investment portfolio with hidden reserves and a premises which was rented to a subsidiary. In 2000, the B.V.
transferred its place of effective management to Malta, leaving the rented premises behind in the Netherlands.743 The
Dutch tax inspector argued that the this transfer triggered the settlement provision of article 16 PITA 1964, and
imposed a tax assessment on the hidden reserves in the investment portfolio. The interested person, on the other hand,
contended that he did not have to settle an exit tax, since, at the time the taxpayer emigrated, the Dutch tax law did not
provide for a partial tax settlement. The B.V. left a rented premises (constituting a PE) behind in the Netherlands as a
consequence of which the taxpayer did not cease to derive taxable profits from the Netherlands after the transfer of its
real seat. The tax inspector responded to this argument by stating that article 16 PITA 1964 should be explained in a
teleological way, i.e. in accordance with the purpose and scope of this provision. This would imply that a partial tax
settlement is in order; otherwise a part of the total profit would escape the Dutch jurisdiction without taxation.
Although the position taken by the tax inspector is disputable744, it must be emphasized that when strictly interpreting
the exact wording of article 16 PITA 1964, a tax settlement would only be imposed in case the last source of income
ceases to exist or is no longer allocated to the Netherlands.745 However, if such an interpretation were correct, it would
be very easy to neutralize the tax settlement of article 16 PITA 1964 by leaving a PE, specially created for this purpose,
behind in the Netherlands. According to Wattel, this was clearly not the intention of the legislator.746 Article 16 PITA
1964 should, therefore, be interpreted in a teleological fashion.
In respect to the B.V. which transferred its place of effective management to Malta, the Dutch Supreme Court basically
followed the A-Gs conclusion, and argued that the final settlement provision of article 16 PITA 1969 also applies when
for the application of the tax treaty the taxpayer is no longer a resident of the Netherlands. In such a situation, the
Netherlands might risk losing its tax claim on profits which accumulated within the Dutch jurisdiction, as, after the
application of the DTC, the taxing right over these profits will no longer be allocated to the Netherlands. Therefore, the
Court applies a teleological interpretation to article 16 PITA 1964.747 The Court argued that this provision is meant to
ensure that all benefits derived from a business should be included in the taxable profit (in line with the total profit
concept), and that when accumulated profits could possibly leave the Dutch territory without taxation, a tax settlement
is in order.748
4.6.1.2 Consequences for the interim transfer of asset components
The issue of the interim transfers of asset components is not exactly the same as the situation of the aforementioned
case. The aforementioned case took place under the old personal income tax. After the introduction of the PITA 2001
and the adjustments which were made simultaneously in the CITA 1969, this case would, without any doubt, lead to a
partial settlement on the basis of article 15c CITA 1969. I, however, focused on the question whether the final settlement
should be interpreted in such a way that a partial settlement is possible, which essentially is the issue in the context of interim asset
transfers. The Dutch supreme Court ruled that article 16 PITA 1964 had to be interpreted teleological. Taking into
consideration the fact that article 15d basically provides the same as its predecessor and that the purpose and scope of
this article are unchanged when compared to article 16 PITA 1964, I believe that the same teleological interpretation is
742
As a reminder I note that a Dutch B.V. (Besloten Vennootschap) is comparable to a private limited company.
Note that this case should be placed in the context of the corporate income tax, since it deals with a private limited company. However,
through the connecting provision of article 8 CITA 1969, this case concerned the ‘old’ PITA 1964. The provision under scrutiny is
therefore article 16 PITA 1964.
744 See the conclusion of A-G Wattel to this case and paragraph 4.6.1.3.
745 See conclusion A-G Wattel 28 August 2012, par. 1.4.
747 Note the difference with HR BNB 2013/114. In this case, the Court did not interpret article 16 in a teleological way, but left room for
compartmentalization, as in this case, the taxing right over the replacement reserve (which is similar in nature to immovable property) was
allocated to the Netherlands on the basis of the DTC. The Netherlands did, therefore, not risk losing its tax claim. See also paragraph
4.6.1.3.
748 See HR BNB 2013/94, paras 3.3.1-3.3.3.
743
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to be applied to article 15d. This would imply that the interim transfer of asset components, from a Dutch PE to the
head office of a Dutch incorporated company with its place of effective management outside the Netherlands, would
‘partially’ trigger article 15d at the moment of the transfer of assets. If a strict literal interpretation were to be chosen,
article 15d would eventually be triggered once the taxpayer ceases to derive profits from the Netherlands. Under this
interpretation, however, it would be very simple to manipulate the exit settlement by, for example, leaving a PE in the
Netherlands (as put forward by A-G Wattel), and this is clearly not the intention of article 15d.
Personally, I am an advocate of the teleological interpretation. I believe in the principle that the total of the benefits and
costs attributable to a business carried on in Dutch territory should, at some point in time, be taxable in the
Netherlands. This is also in line with the benchmark of capital import neutrality.749 In the context of interim asset
transfers, there is a non-event from a tax perspective, as, on the basis of the establishment fiction of article 2(4) CITA
1969, assets are transferred to a resident taxpayer. On the basis of the residency provisions in OECD-modeled DTCs,
however, the Netherlands risks losing its tax claim. After all, the income will no longer be allocated to the Netherlands
after the transfer. A teleological interpretation is thus required in order to prevent loss of the Dutch tax claim.
Nonetheless, I am of the opinion that the legislator should have anticipated issues such as this when the personal
income tax was revised in 2001. Especially the clause in the final settlement provisions which provides that ‘the taxpayer
stops making profits which are taxable in the Netherlands’ seems to cause confusion. It would have been better if the
legislator actually articulated the actual purpose and scope of the final settlement in the wording of this provision.750 An
alternative solution would be to incorporate an additional exit tax settlement in Dutch law, specifically aimed at the
interim transfer of asset components. It has also been argued that abolishing the establishment fiction of article 2(4)
CITA 1969 would be a solution to the problem described above.751
4.6.1.3 Alternative: compartmentalization
In his conclusion to the case of 1 March 2013, HR BNB 2013/94, A-G Wattel argues that the reasoning of the Dutch
tax inspector is not very sound. As a reminder, the tax inspector contended in this case that article 16 PITA 1964 should
be explained in a teleological way, i.e. in accordance with purpose and scope of this provision, since otherwise a part of
the total profit will escape the Dutch jurisdiction without taxation. The A-G noted that under a system of succeeding
residency compartmentalization, the Netherlands will not necessarily lose its tax claim, as the inspector claimed.752 In such a
system, the Netherlands would conserve the unrealized gains and reserves at the moment of emigration.753 Taxation
would, however, be postponed until actual realization.754 Such a temporal compartmentalization system would make the
settling of a tax claim upon emigration superfluous, as the Netherlands could also exercise its taxing right after
emigration.
In imitation of the A-G, the Dutch Supreme Court seemed to have created the possibility of a compartmentalization
system as well in the case of 22 March 2013, HR BNB 2013/114. This case dealt with a Dutch business taxpayer who
transferred its place of effective management from the Netherlands to Luxembourg in the year 1995. After emigration,
the taxpayer maintained his immovable property (i.e. two premises) in the Netherlands, by virtue of which he did not
cease to derive profits from the Netherlands. Consequently, no final settlement provision was triggered in 1995.
Moreover, the Netherlands did not risk losing its tax claim, since the DTC Netherlands – Luxembourg allocated the
taxing right over this property to the Netherlands. Therefore, a teleological interpretation of the final settlement is not
required in this situation, as the profits are eventually taxable and will not escape the Dutch jurisdiction without
749
See paragraph 4.7 for a more detailed discussion.
Obviously, the same van be said with respect to article 3.61 PITA 2001.
751 See V-N 2011/6.11, note redaction Vakstudie Nieuws.
753 This is shaped by simulating that a fictitious PE is left behind in the Netherlands.
750
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taxation.755 In 1998, respectively 1999 (thus, after emigration), the taxpayer alienated his two Dutch premises. In relation
to this alienation, the taxpayer created a so-called replacement reserve. The creation of such a reserve will lead to
taxation being postponed; the gain from the alienation of the immovable property is not included in the taxable profit
immediately, but will be added to the taxable profit in future years when the reserve is being employed. The question
then is: when will the taxpayer cease to derive profits from the Netherlands? In the opinion of the Court of appeal, the
alienation of the last premises in 1999 resulted in the taxpayer no longer deriving profits from the Netherlands, implying
that a final tax settlement would be in order.756 The Dutch Supreme Court, however, took a different position.
According to this Court, the taxpayer did not cease to derive profits in 1999, as, under the DTC the (eventual) release of
the replacement reserve was qualified as a capital gain from immovable property. Also, as the Court noted, the bilateral
treaty did not state when the benefits are to be included in the taxable base. It was argued by the Dutch Supreme Court
that upon utilization of the reserve the released profits can be included in the taxable base in the Netherlands.757 This
also implies that for as long as the reserve is maintained758, the taxpayer will not cease to derive profits which are taxable
in the Netherlands. The Court, therefore, seems to opt for a system of temporal compartmentalization. More
specifically, the capital gains are conserved upon alienation, as they are added to a replacement reserve. In future years,
when the reserve is employed, the capital gains can be taxed, even though the taxpayer is no longer a resident of the
Netherlands at that time.
In my opinion, and following the A-G, a compartmentalization system would be a good alternative for the partial
settlement which was applied by the Court in the case HR BNB 2013/94. Under temporal compartmentalization, the
Dutch tax claim can be secured without an exit tax being imposed immediately upon emigration. Moreover, a
compartmentalization system is compatible with the benchmark of capital import neutrality, as the taxing right is
allocated to the jurisdiction in which the income accrued, i.e. the source State. The fact that the realization takes place at
a later point in time and in a different jurisdiction than the jurisdiction where the income accrued should, in my opinion,
not lead to a different allocation of taxing rights. This is effectuated under a system of temporal compartmentalization.
4.6.2
Asset transfer from a Dutch PE to the head office of a non-resident abroad
Something which isn’t owned, either economically or legally, cannot be transferred in the first place. This means that the
transfer of assets from a PE to the head office is only possible when the assets are permanently allocated to that PE.
This also means that they should be subservient to the business activities of the PE. Having placed this preliminary
755
Compare HR BNB 2013/94.
See HR BNB 2013/114, par. 3.2.
757 See HR BNB 2013/114, par 3.
758 Which requires that the taxpayer also continues having the intention of replacing the alienated property.
756
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comment, the real question is: what is the tax treatment of an asset transfer from a Dutch PE to the head office abroad?
Up until now, this still is an open question. There is no specific tax provision, nor is there case law in the Netherlands
on the consequence(s) of such an asset transfer for the application national tax law. Therefore, all I can do is set forth
what has been stated on this in literature and provide my own opinion.
First of all, both according to literature759 and in my own opinion a distinction between a temporary and permanent
asset transfer has to be made. As a reminder I note that this distinction is based on the servitude criterion.
4.6.2.1 Temporary transfer of assets
In case of a temporary transfer of assets from a Dutch PE, the asset will not cease to be subservient to the PE. This
means that both before and after the ‘transfer’ the asset is managed in or from the PE and exploitation of the asset is
controlled and monitored in or from the PE. It has been argued in literature that in such a situation, a PE only has to
correct its profits in order to account for the actual costs of the specific asset.760
In my opinion, the transfer of assets from a Dutch PE to the head office located abroad can be equated to a transfer of
assets from the Dutch head office to a foreign PE. This equation implies that, in line with the discussion provided in
paragraph 4.5.1.1, the rent-rental analogy will apply. As a result, the PE will remain the economic owner of the asset and
there will be a fictitious lease of the asset from the PE to the head office. Under this fiction, the PE will charge an at
arm’s length rent to the head office for the lease of the asset.761 This rent will enlarge the profit of the PE, but will not
affect the overall result of the general non-resident enterprise (since the PE and the enterprise are one and the same).
The Netherlands is not the country of residence, and will therefore not have to provide avoidance of double taxation.
4.6.2.2 Permanent transfer of assets
The permanent transfer of assets has already been discussed to some extent in paragraph 4.6.1, which dealt with the
interim transfer of asset components from a PE in the Netherlands to a company incorporated under Dutch law but
with its place of effective management outside the Netherlands. This transfer is a non-event from a tax perspective,762 as
assets are transferred to a resident taxpayer from a part of the business of that same resident taxpayer. With respect to
these asset transfers it was concluded that if article 15d is interpreted strictly, there will eventually be a tax settlement once
the taxpayer ceases to derive profits from the Netherlands. Under this interpretation, however, it would be very simple
to manipulate the exit settlement by, for example, leaving a PE in the Netherlands. An alternative solution would be to
incorporate an additional exit tax settlement in Dutch law, specifically aimed at the interim transfer of asset components
(as this currently is a non-event from a tax perspective). This will, however, probably not be necessary as the Dutch
Supreme Court has ruled, following the conclusion of A-G Wattel, that when the Netherlands risks losing its tax claim,
the final exit settlement (old article 16 PITA 1964) has to be interpreted in a teleological fashion. Consequently, this
article also applies when for the application of the tax treaty the taxpayer is no longer a resident of the Netherlands. In
such a situation, the Netherlands might risk losing its tax claim on profits which accumulated within the Dutch
759
See for example Hafkenscheid and Hosman 1998, par. 3.2.2.2.
See Hafkenscheid and Hosman, 1998, par. 2.2.5 and par. 3.2.2.2.
761 Peeters (see Peeters 2011, par. 6.1) however argued that in order to prevent abuse and tax base erosion, this analogy will only be applied
when the ‘internal rent-agreement’ is recognized. If the agreement relates to a real and identifiable event which has adequate economical
relevance in the relation between the PE and the head office, the internal rent-agreement will be recognized. If on the other hand there is no
real change in the economic reality, the internal rent-agreement will not be recognized. The consequence of such an internal agreement not
being recognized is that no internal rent will be taking into account when drawing up the results. In such a case there will merely be a cost
allocation on the basis of historical costs (see for example BNB 1964/95, in which the Dutch Supreme Court explicitly disregarded the rentrental analogy)
762 By virtue of article 2(4) CITA 1969, a Dutch incorporated company is a resident taxpayer for the purpose of the corporate income tax.
Consequently, assets are transferred to a resident taxpayer, from a part of the business of that same resident taxpayer.
760
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jurisdiction as after the application of the DTC the taxing right over these profits will no longer be allocated to the
Netherlands. Therefore, the Court applies a teleological interpretation.
With respect to the permanent asset transfer from a PE in the Netherlands to the head office of a non-resident taxpayer
abroad, the situation can be different from the previously discussed situation, which constituted a non-event from a taxperspective. If assets are transferred from a Dutch PE to the head office of a foreign company, or to the business of a
natural person residing outside the Netherlands there will indeed be an event from a tax perspective. How should we
then treat such an asset transfer? More specifically, do the exit provisions apply to such asset transfers?
In literature the following has been put forward: from the perspective of the state in which the PE is located, i.e. the
Netherlands, it might be argued that the transfer of assets to the head office will normally directly lead to profit. Van de
Streek has argued that an exit tax seems to be in order, as the assets leave the Dutch territory.763 Janssen also clearly
stated that the transfer of assets from a Netherlands PE to a foreign part of the business will lead to a tax on the hidden
reserves and unrealized gains, immediately upon transfer, since these assets leave the Netherlands-driven part of the
business.764 It has also been argued that when an asset is transferred permanently from a Dutch located PE to the head
office abroad, the unrealized gains vested in that asset will be deemed to have been realized.765 This follows from the
fact that the PE is to be treated as if it were a separate and independent enterprise.766 On the basis of the independence
fiction there will be, from the perspective of the PE, an alienation upon the transfer of asset components to a foreign
part of the business, as the application of the subservient criterion will lead to the PE no longer being qualified as the
economic owner of the asset. By virtue of the total profit concept, the gains realized upon the transfer of the asset will
be treated as part of the total profit of the PE, and are subsequently taxable in the Netherlands.767 To summarize: the
main assumption is that the transfer of asset components from a Dutch PE to the head office abroad is covered by
article 3.8 PITA 2001 (the total profit concept). Moreover, it might be argued that without taxation upon transfer part
of the total profit may escape the Dutch jurisdiction without taxation.768 In addition, the Netherlands Order of Tax
Advisors769 seems to assume that there will be an exit tax settlement when assets are transferred from a Dutch PE to the
foreign head office.770 The Dutch legislator does not contradict this assumption.771
Having analyzed this there are, in my opinion, two possible ways of dealing with the asset transfer from a Dutch PE to
the head office abroad where both options will amount to a tax settlement. Under the first option, the total profit
concept will lead to a tax settlement; under the second option, the exit provisions will lead to a tax settlement. I will
discuss both options below.
Option 1: Total profit concept and independence fiction
The independence fiction requires that the PE and the foreign head office are to deal with one another as if they were
separate and independent entities. The transfer of assets from a Netherlands PE to the head office abroad then implies
that assets are transferred from one independent entity to another. An essential characteristic of the concept of
alienation is that assets (or an asset component) are transferred from the capital of one person to the capital of
763
See also van de Streek 2011, par. 3.0.5.B.d.
See van Raad 2011, par. 3.4.2.A.c2.
765 See for example: Hafkenscheid and Hosman 1998, par. 3.2.2.2.
767 However, it is noted that the fact that a profit is realized at the level of the PE, this will not lead to profit for the general enterprise of the
taxpayer. Indeed, profits with regard to assets are only realized if these assets actually leave the taxpayer’s business. Compare to van Raad
2011, par. 3.4.2.A.c4.
768 This is in line with the viewpoint of a Dutch Tax Inspector in the case HR BNB 2013/94 (in which a Dutch B.V. emigrated to Malta but
continued to derived profits from the Netherlands by virtue of a PE).
769 Nederlandse Orde van Belastingadviseurs, NOB.
770 See NOB commentary Law on deferral of exit taxation.
764
119
another.772 By means of the application of the independence fiction this characteristic will be met, even though strictly
taken the asset is not alienated but remains within the worldwide business of the same non-resident taxpayer (see also
option two, where this conception is taken as the starting point). Thus, application of the independence fiction will
imply the alienation of transferred assets as these assets leave the Netherlands enterprise of the taxpayer. This alienation
will lead to realization of the gains vested in the asset, and on the basis of the total profit concept these gains will be
included in the taxable profit.
Option 2: Exit settlement provisions
It can also be argued that, strictly taken, the main assumption in literature is not sound. When an asset component is
transferred from a Dutch PE to the head office abroad, this asset is not alienated but remains within the worldwide
business of the non-resident taxpayer. Consequently, the total profit concept of article 3.8 PITA 2001 will not lead to
the capital gains with respect to the transferred assets being included in the taxable profit. Moreover, the provisions
aimed at incorporating a fictitious taxable moment in the law, i.e. the exit tax provisions, do not apply either when they
are explicated literally. First of all, for the partial settlement provisions of article 3.60 PITA 2001 and article 15c CITA
1969 it is required that the taxpayer emigrates at a certain moment after having transferred the assets. When these
provisions were discussed, I already provided that these partial settlement provisions do not apply in the situation of a
non-resident taxpayer carrying on business activities in the Netherlands through a PE, as a non-resident taxpayer cannot
emigrate. The next question then is whether taxation might be possible by virtue of either article 3.61 PITA 2001 or
article 15d CITA 1969. The first paraphrase of both provisions reads: ‘Benefits which have not already been taken into account
for other reasons, are included in the profit of the calendar year in which the taxpayer stops making profits which are taxable in the
Netherlands.’ Assuming that the taxpayer will continue its business operations in the Netherlands after the transfer of an
asset component I would conclude that the final settlement provision is not applicable either, since it is required that the
taxpayer stops making profits which are taxable in the Netherlands.773 In summary, I do not believe that in this context
there strictly is any legal basis for the Netherlands to levy a tax on the unrealized gains in the transferred assets in this
case.774
In the absence of clear and decisive legislation, case law of the Dutch Supreme Court might be used to provide us with
the answer as to which tax treatment should be applied to asset transfers from a Dutch PE to the head office of a
foreign company. In this respect I want to discuss two cases. It is noted that these cases dealt with issues which are not
directly similar to the present asset transfer. In the case of 1 March 2013, HR BNB 2013/94, which was discussed in
detail in paragraph 4.6.1.1, the Dutch Supreme Court basically concluded that based on the purpose and scope, an exit
tax settlement is in order in situations in which the Netherlands might risk losing its tax claim on profits which
accumulated within the Dutch jurisdiction, but where after the application of the DTC the taxing right over these
profits will no longer be allocated to the Netherlands. Applying this reasoning to the asset transfer from a Dutch PE to
the head office of a foreign company, the Court will most likely rule in favor of application of the exit settlement
provisions, as these are to be interpreted in a teleological fashion and the Netherlands might risk losing its rightful tax
claim. However, if after the transfer the Netherlands can possibly still enact its taxing right over the assets which have
been transferred, I believe that on the basis of HR BNB 2013/114 a temporal compartmentalization system might be
applied.775 Such a compartmentalization system has also been proposed by A-G Wattel.776 Moreover, in a case of the
German Bundesfinanzhof777 (the German Federal Finance Court) which concerned an entrepreneur who moved his
residence and transferred his business from Germany to Belgium, a compartmentalization system was proposed as well.
772
See Kemmeren, 2005, par. 7.2.2.
Kemmeren 2012, p. 16 also argued that it is very doubtful whether article 3.61 PITA can be applied, and that this might possibly lead to a
loophole in the Dutch tax law.
774 It should be emphasized that this statement will only hold in case the non-resident taxpayer continues business operations in the
Netherlands.
777 Bundesfinanzhof 28 October 2009, I R 99/08.
773
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In this case, an entrepreneur had a PE and his entire business in Germany, and subsequently moved his residence and
transferred his business to Belgium. The German Court ruled that there may be no taxation, not even a tax assessment
with deferral of payment upon the transfer of an asset when there is no explicit, sufficient, and detailed legislation concerning the
tax treatment in such as case. The Court additionally ruled that after assets have been transferred Germany keeps its
taxing right by virtue of a system of compartmentalization.
Trning back to the situation where we have a Dutch PE The subsequent question is whether this means that the
Netherlands loses its tax claim on the unrealized gains in the transferred asset. I believe that if the Netherlands would
lose its tax claim, the line of reasoning which the Court provided in HR BNB 2013/94 ought to be applied, which
means that an exit tax settlement would be imposed. If the Netherlands does not lose its tax claim as a consequence of
the asset transfer an exit tax settlement would not be required on the basis of HR BNB 2013/114. In this last case, the
DTC was taken as a starting point with respect to establishing whether or not the Netherlands will lose its taxing right.
In the context of the asset transfer from a Dutch PE to the head office of a foreign company then, article 7 of the
OECD MC provides that the country from which the asset is transferred will generally no longer have a taxing right
after the transfer. Kemmeren778, however, believes that in this case the Netherlands will not lose its tax claim if the
Dutch Supreme Court were to follow the previously cited ruling of the German Federal Tax Court, in which it was
decided that any later realization of unrealized gains and reserves remained taxable in Germany in so far as those gains
and reserves were attributable to the former PE in Germany.779 In line with this ruling of the German Court, A-G
Wattel has also argued that there is no legal basis for a tax settlement if the Netherlands does not lose its tax claim.780 He
subsequently proposed a system of compartmentalization as well. However, I interpret the cases HR BNB 2013/94 and
HR BNB 2013/114 in such a way that the Court only sees room for a compartmentalization system if the Netherlands
does not lose its taxing right after emigration. On the basis of HR BNB 2013/114 I believe that a temporal
compartmentalization system might be applied by the Court if after the transfer the Netherlands can still enact its taxing
right over the assets which have been transferred.781 If, however, the Netherlands might risk losing its tax claim on
profits which accumulated within the Dutch jurisdiction as, after the application of the DTC, the taxing right over these
profits will no longer be allocated to the Netherlands, a teleological interpretation of the final settlement provision is
preferred by the Court, on the basis of HR BNB 2013/94. This logic is also reflected in the compartmentalization
system proposed by A-G Wattel.782 The A-G argued that under ‘his’ system, the income accrued within the Netherlands
jurisdiction should be conserved upon emigration and allocated to a fictitious PE which is left behind in the
Netherlands. In my opinion, this fictitious PE is required in order to retain a taxing right in the Netherlands. Otherwise,
a compartmentalization system which only sees to the temporal element of taxation (i.e. taxation upon actual, later
realization) cannot be employed in situations such as these.
Conclusion
As discussed, an essential characteristic of the concept of alienation is that assets (or an asset component) are (is)
transferred from the capital of one person to the capital of another. By means of the application of the independence
fiction this characteristic will be met, even though strictly taken the asset is not alienated but remains within the
worldwide business of the same non-resident taxpayer. These two considerations have been taken as the starting point
in elaborating on the two possible options regarding the tax consequences of the transfer from a Dutch PE to the head
office abroad.
778
See Kemmeren 2012, p. 15.
This approach has however also been commented heavily, the dominant point put forward being that ‘the assignment of an asset to a PE
does not imply that all asset related inflows, outflows, capital gains and capital losses are attributable to that permanent establishment’. See
Smit and Peters 2011, p. 227.
780 Conclusion A-G Wattel 28 August 2012, par. 1.3.
779
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Under the first option, the asset transfer from a Dutch PE to the head office abroad will amount to an alienation on the
basis of the independence fiction. Consequently, the capital gain ‘realized’ upon alienation will be included in the taxable
profit in the Netherlands on the basis of the total profit concept.
Under the second option, there is no alienation or realization of the assets; they remain within the taxpayer’s worldwide
business. Therefore, the total profit concept does not cover this transfer. In addition, when interpreting the exit
settlement provisions literally as they read, there will neither be an exit tax settlement upon the permanent transfer of
assets from a Dutch PE to a head office abroad. However, this does not mean that the Netherlands will lose its tax
claim. Even though article 7 of the OECD MC strictly allocates the taxing right over the transferred asset to the
residence State of the company, the Netherlands will not lose its tax claim when a system of compartmentalization is
applied. This does require some means of securing the Dutch tax claim, such as for example establishing a fictitious PE
in the Netherlands.783 Upon later realization outside the Dutch jurisdiction the tax claim can then be collected. As this
tax claim only concerns income which accrued within the Netherlands jurisdiction it is compatible with the benchmark
of CIN. The Netherlands can enact its full source country entitlement even though the taxpayer resides outside the
Dutch jurisdiction at the moment of actual realization. If, however, the Netherlands tax claim cannot be secured, the
Netherlands risks losing its tax claim on the unrealized gains in the transferred asset. In my opinion, with reference to
HR BNB 2013/94, an exit tax settlement would be imposed.
4.6.3
Asset transfer from a Dutch PE to a PE abroad
It should first of all be emphasized that the Dutch tax treatment of an asset transfer from a Dutch PE to a PE abroad is
‘unknown’, as there is no case law or legislation in this respect. In addition, there is (almost) no literature either. I can
therefore only provide arguments in favor of or against a certain tax treatment. Moreover, I will only consider the ‘real’
transfer of asset components where the economic ownership is transferred from the Dutch PE to a PE abroad. This is
thus a permanent asset transfer. Where there is no transfer of economic ownership, i.e. when the asset is and remains to
be subservient to the Dutch PE, the PE abroad will most likely pay a remuneration for the ‘use’ of the asset in the form
of an at arm’s length rent.
I will distinguish between several situations. The first is where both the Dutch PE and the abroad PE are part of the
company of a resident taxpayer. The second is where both PEs are part of the company of a limited resident taxpayer.
The last situation is where both PEs are part of the company of a non-resident taxpayer. It should be noted that these
situations are non-exhaustive.
783 Conclusion A-G Wattel 28 August 2012, par. 8.0. Otherwise, the Netherlands will lose its taxing right after emigration, and a
compartmentalization system will not be a solution.
122
4.6.3.1 Where the company is a resident taxpayer
Firstly, as we have seen in the previous sub-paragraph, some might argue that the independence fiction applies to this
transfer. Taking this independence fiction to an extreme we see two independent entities; the one alienating an asset and the
other acquiring that asset. From the perspective of the Dutch PE, the capital gain realized upon alienation will be
included in the taxable profit on the basis of the total profit concept (article 3.8 PITA 2001). However, the PEs are in
fact no independent entities. More specifically, the taxable entity is a Dutch incorporated company which is liable to tax for
its worldwide income in the Netherlands on the basis of article 2(4) CITA 1969. This transfer is then, from a tax
perspective, a non-event, as assets are transferred to a resident taxpayer from a part of the business of that same
resident taxpayer. The independence fiction will apply when assets are transferred from a Dutch PE to another part of a
company with both its statutory and real seat outside the Netherlands.784
Having disregarded the independence fiction in this situation, I want to turn back to the original situation. Fact still
remains that, similar to the transfer from a Dutch PE to the head office abroad, there is no actual realization upon the
asset transfer. More specifically, the assets are not alienated to an actual third party but remain within the worldwide
business of the resident taxpayer. Consequently, the total profit concept of article 3.8 PITA 2001 will not lead to the
capital gains with respect to the transferred assets being included in the taxable profit. Aside from the fact that there is
no actual realization, the provisions aimed at incorporating a fictitious taxable moment in the law, i.e. the exit tax
provisions, do not apply either when they are explicated literally.
Again emphasizing that this is a permanent asset transfer from a part of a resident taxpayer’s business to another part of
that taxpayer’s business outside the Netherlands, I then believe that there will be a gradual realization. I.e., I believe that
the tax treatment of this situation will essentially be the same as that described in the context of a permanent asset
transfer from the Dutch head office to a foreign PE (see paragraph 4.5.1.2). The economic ownership has transferred to
the PE abroad as a consequence of the application of the servitude criterion. From an accounting perspective, the
transfer of the asset will lead to that asset being activated on the balance sheet of the PE. At the same time, however,
the asset will also remain on the balance sheet of the general enterprise. Even though it was subservient to and
economically owned by a Dutch PE before the transfer, it never left the balance sheet of the general enterprise. As the
transfer from one PE to another PE of the same company concerns an internal asset transfer, it is not possible for the
company to realize any gains. Obviously, internally transferred assets are not revaluated on the balance sheet of the
general enterprise. The PE, as an separate and independent entity, will acquire an asset at fair market value. Thus, for
the deductible profit785, the depreciation base is higher after the transfer of the asset and subsequently the profit of the
PE will be lower. The exemption which the Netherlands, being the residence state, has to provide is therefore lower. It
784
785
See also V-N 2011/6.11, note redaction Vakstudie Nieuws. I will discuss this in paragraph 4.6.3.3.
I.e. the profit for which the Netherlands has to provide a tax exemption.
123
would be superfluous to impose an exit tax for assets leaving the Dutch tax territory in this PE-situation, since the
Netherlands will not lose its tax claim786. Rather, the ‘realization’ of a transferred asset occurs gradually by means of the
aforementioned lower exemption.787
4.6.3.2 Where the company is a limited resident taxpayer
It is also possible that assets are transferred from one PE of a limited resident taxpayer to another PE abroad of a
limited resident taxpayer. In paragraph 4.6.1, I already discussed the interim transfer of asset components. I believe that,
from a Dutch perspective, it is irrelevant whether the assets are transferred to the head office of the Dutch incorporated
company outside the Netherlands or to another part of that company (i.e. another PE). Firstly, it should be emphasized
that a Dutch incorporated company outside the Netherlands remains a resident taxpayer for the purpose of the
corporate income tax on the basis of article 2(4) CITA 1969, and is, consequently, liable to tax for its worldwide income
in the Netherlands. However, as the company is effectively managed in Germany, the company is also considered a
resident of that country. The company is a dual resident, and after applying the tie-breaker rule in the DTC it will be
deemed a resident of Germany. This implies that the Netherlands can lose its taxing right after the asset component are
transferred abroad. Even though the outcome is the same as the situation in which the company in Germany is a nonresident taxpayer (see the next subparagraph), this situation is different from a legal perspective.
For the detailed discussion of the tax treatment in this situation I refer to paragraph 4.6.1. Put briefly, it might be argued
that the Netherlands will lose its tax claim on the unrealized gains if it does not impose an exit tax at the time of
transfer.788 This argument is based on the fact that after the transfer treaty allocation rules will limit the object of
taxation in the Netherlands. However, it is not possible to impose a tax on the basis of the total profit concept as there
is not actual realization. More specifically, a strict interpretation of the partial and final exit settlement provisions will
not lead to the imposition of an exit tax either, provided that the company does not cease to derive profits from the
Netherlands. Only when the final exit settlement provisions are interpreted in a teleological fashion this transfer would
786
See also: Kamerstukken II 1998/99, 26 727, no. 3, p. 117.
Remember, that from a Dutch perspective, the enterprise is said to have two profits: the general and the contribution profit. The profit
of the entire enterprise (thus including the PE-profit) is called the general profit. The profit allocated to the PE is called the PE-profit or the
contribution-profit. This is the profit for which the Netherlands, if it is the residence country, will provide a tax base exemption. Going back
to the situation of a permanent transfer of assets, a difference between the two will due to the fact that the asset is activated on the PE
balance sheet at fair market value. This will lead to higher depreciation expenses in the deductible profit whereas the depreciable base in the
general profit remains unchanged. Consequently, the profit for which the Netherlands has to provide a tax base exemption will be relatively
lower.
788 See also: Kemmeren 2012, p. 15. Moreover, extrapolating the point of view of the Dutch tax inspector in HR BNB 2013/94, will lead to
the argumentation that part of the total profit will escape the Dutch tax jurisdiction without taxation, if there is no tax imposed immediately
upon the transfer of asset components.
787
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be taxable in the Netherlands. Based on HR BNB 2013/94, I believe that this is also the tax treatment which will be
applied in this case.
4.6.3.3 Where the company is a non-resident taxpayer
I believe, that from a Dutch perspective, this situation is virtually the same as the situation where assets are transferred
(permanently) from a Dutch PE to the head-office of a non-resident company. More specifically, assets are transferred
from a Dutch PE to another part of the business of a non-resident taxpayer. In my opinion, it is irrelevant whether the
assets are transfers to the head office of that company or to a PE. In both cases the assets will leave the Dutch tax
jurisdiction permanently. I therefore refer to paragraph 4.6.2.2 for the tax treatment of this transfer. To summarize,
there are two options. Under the first option, the asset transfer from a Dutch PE to the head office abroad will amount
to an alienation on the basis of the independence fiction. Consequently, the capital gain ‘realized’ upon alienation will be
included in the taxable profit in the Netherlands on the basis of the total profit concept. Under the second option, there
is no alienation or realization of the assets; they remain within the taxpayer’s worldwide business. Therefore, the total
profit concept does not cover this transfer. In addition, when interpreting the exit settlement provisions literally as they
read there will neither be an exit tax settlement upon the permanent transfer of assets from a Dutch PE to the head
office abroad; both the partial and the final settlement articles do not apply, provided that the non-resident taxpayer
continues his business operations in the Netherlands after the transfer of the assets. On the basis of HR BNB 2013/94,
however, it can be argued that an exit tax settlement (following a teleological interpretation) is in order in situations such
as these. Indeed, after the application of the DTC the taxing right over profits which accumulated within the Dutch
jurisdiction will no longer be allocated to the Netherlands, implying that the Netherlands might risk losing its tax claim.
Austria treats assets transfers from a domestic PE to a foreign head office similar to any other cross-border transfer of
assets, such as for example the transfer from an Austrian head office to a foreign PE (see paragraph 4.5.B). More
specifically, when assets are transferred from a domestic business or permanent establishment to a foreign part of the
business owned by the same taxpayer, Austria will impose an exit tax.789 Belgium also treats the transfer of capital
assets from a Belgian PE to a foreign head office equal to the transfer from a Belgium head office to a foreign PE (see
paragraph 4.5.B). Such a transfer must be carried out in accordance with the arm’s length principle. Therefore, upon the
transfer the assets will be valued at fair market value which may entail the realization of latent capital gains for the
Belgian PE. This capital gain will be subjected to income tax for non-residents in Belgium.790 In France, a company
See Pinetz 2013 (Austria), p. 42, with reference to § 6 N 6 letter a.
See Bruyère 2013 (Belgium), p. 56, with reference to T. WUSTENBERGHS, ‘Belgium: Attribution of profits to permanent
establishments’, 35 Intertax 6/7, (2007), p. 396.
789
790
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shall only conduct business with its permanent establishment as if they are two independent companies. This means that
irrespective of whether assets are transferred from a French PE to a foreign head office, or from a French head office
to a foreign PE, the tax consequences will be similar to the situation where assets are transferred between independent
companies. As discussed in paragraph 4.5.B, there are two possibilities. Firstly, an asset can be transferred to a foreign
PE in exchange for money; thus payment of a price which corresponds to a market with full competition. The
transaction is treated as a sale to an independent company, where profits or losses arising from the sale may either be in
the form of capital gains or losses, depending on the book value of the asset. If a capital gain results, the gain will be
taxed as it is considered an operating profit.791 Secondly, an asset can be transferred to a foreign PE without a
remuneration. In this case, the company has to include in its taxable income the results from the management or
disposition of the asset concerned.792 In Germany, there is a deemed withdrawal when assets are transferred from a
German PE to a foreign head office (or PE), as the German taxing right becomes excluded or restricted after the
transfer. As a result, the transfer of assets will result in a tax on the asset’s fair market value.793 In Italy, the general
principles of the exit provisions in case of the emigration of a business also apply when assets are transferred from a
domestic head office to a foreign PE or from a domestic PE to a foreign head office. Thus, the assets are valued at fair
market value upon the transfer cross-borders, implying that the capital gains vested in the assets are deemed to have
been realized.794 Sweden also applies its regular exit tax provisions to cross-border asset transfers in general, as these
assets will leave the Swedish tax jurisdiction.795 Thus, where assets are transferred from a Swedish PE to the head office
abroad, there will be a deemed realization of the assets at fair market value. In Hungary and Poland there are no exit
taxes as such. In Hungary and Poland, asset transfers from a domestic PE to a foreign head office are not considered as
a taxable event.
4.7 Tax treatment of transfers of assets to and from a PE benchmarked
against the normative framework
The focus of this chapter was on the Netherlands tax treatment of asset transfers to and from a PE, where several
situations were analyzed. It can be concluded, however, that in the absence of clear and decisive legislation, it is not
quite clear in all these situations what the Dutch tax treatment exactly is. The following table summarizes my
interpretation of the Dutch tax treatment in different situations:
Transfer
Tax treatment
From a Dutch head office the PE abroad Temporary: no transfer of economic ownership. Rent-rental analogy
From a Dutch PE to a PE abroad of a (fictitious lease and at arm’s length remuneration). No exit tax.
resident taxpayer
Permanent: transfer of economic ownership. Gradual realization (lower
exemption in the Netherlands). No exit tax.
From a Dutch PE to a foreign part of a Teleological interpretation of the final settlement provision exit tax.
limited resident taxpayer’s business
From a Dutch PE to a foreign part of a Temporary: no transfer of economic ownership. Rent-rental analogy
non-resident taxpayer’s business
(fictitious lease and at arm’s length remuneration). No exit tax.
Permanent: two options
1. Alienation of assets on the basis of the independence fiction, gain is
included in the taxable profit on the basis of the total profit concept.
2. Total profit concept does not apply (no alienation). Teleological
See Depaix 2013 (France), p. 57.
See Depaix 2013 (France), p. 58, with reference to article 238 bis-01.
794 See Trabattoni 2013 (Italy), p. 43-44, with reference to article 9 T.u.i.r.
791
792
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interpretation and exit tax if Netherlands tax claim cannot be secured.
Otherwise compartmentalization.
4.7.1
Asset transfers to and from a PE in the light of European and global mobility
The table above shows that in some situations in which assets are transferred to and from a PE, an exit tax might be
imposed. It was previously argued that if the only relevant factor would be European and global mobility, exit taxes
would most likely be unacceptable. Exit taxes are obstructing to mobility. In regards to cross-border asset transfers
within the business of one single taxpayer, exit taxes imply that a tax is imposed on something which has not come to
realization yet and, as a result, the taxpayer has to pay cash which he or she may not have. The taxpayer thus suffers a
liquidity disadvantage when compared to a transfer in a purely domestic situation. Moreover, in a purely domestic
situation an tax would only be imposed upon actual realization. An exit tax can therefore increase the cost of
transferring this asset cross-borders. In short, exit taxes can possibly hinder the efficient allocation of production factors
within this taxpayer’s business, which is undesirable in the light of European and global mobility.
It is noted that when payment of the exit tax claim is actually deferred, the obstruction to European and global mobility
will be lower. This discussion was already set out in paragraph 2.12.2. Unconditional deferral would imply that a taxpayer
transferring assets cross borders within its own business is not confronted with a liquidity disadvantage, when compared
to a purely domestic transfer; in both cases, the taxpayer will have to pay upon actual realization. However, it was
argued that the current option of deferred payment is not unconditional, but requires the provision of securities, of an
administration, and the calculation of recovery interest. Especially this last condition can possible neutralize the benefit
of not having to pay the exit tax debt immediately upon transfer.
Bottom line, provided that an exit tax is actually imposed, cross-border asset transfers are currently treated unequal to
purely domestic asset transfers, which might restrain taxpayers from transferring assets to foreign parts of their own
business, even though this would be more rational and efficient from an economic perspective. Exit taxation can
therefore lead to a sub-optimal allocation of production factors, which is not in the best interest of the internal
European Market. This is why, in my opinion, the imposition of an exit tax upon the cross-border transfer of assets is
undesirable in the light of European and global mobility.
4.7.2
Fiscal sovereignty and capital import neutrality
As a reminder, it is noted that Member States enjoy a high level of fiscal sovereignty in the area of direct taxation. States
are largely free to design their direct tax systems in a way that meets their domestic policy objectives and requirements.
It was already discussed in the first chapter that the concept of fiscal sovereignty is closely related to the principle of
fiscal territoriality, as there has to be a nexus between the build-up of unrealized capital gains and the Dutch tax
jurisdiction. In this respect, the benchmark of CIN has been chosen to safeguard MSs source country entitlement.
With respect to the Dutch tax treatment upon the asset transfer to and from a PE, then, it follows from the discussion
above that only in case assets are transferred from the Dutch head office to a PE abroad, the tax treatment is quite clear.
Focusing on the permanent transfer, no exit tax is imposed. Rather, the transferred assets are activated on the balance
sheet of the PE, at fair market value. The exemption on the PE profit in the Netherlands will be lower resulting in a
gradual ‘realization’ of transferred assets. In my opinion, this tax treatment is in line with benchmark of capital import
neutrality, as the income which accrued in the Netherlands jurisdiction is effectively taxed.
In most of the other situations, the legislator has not clearly prescribed a particular tax treatment. However, I believe in
the principle that the total of the benefits and costs attributable to a business carried on in Dutch territory should, at
some point in time, be taxable in the Netherlands. This is also in line with the benchmark of capital import neutrality.
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With respect to the moment at which the Netherlands can exercise its taxing right with regard to transferred assets, a tax
settlement would without any doubt be imposed in case the last source of income ceases to exist or is no longer
allocated to the Netherlands. this follows from the strict interpretation of the final settlement provisions in the PITA
2001 and CITA 1969. However, it was put forward that if such an interpretation were correct, it would be very easy to
avoid the imposition of an exit tax, by leaving a PE, specially created for this purpose, behind in the Netherlands.796
This was clearly not the intention of the legislator.797 However, what I find more important, is that the avoidance of an
exit tax by such means would be incompatible with the benchmark of CIN, as it would mean that the Netherlands loses
its source country entitlement. This is why I am an advocate of the teleological interpretation of the final settlement
provisions. Alternatively, a compartmentalization system can be applied in my opinion.798 Both under the teleological
interpretation of the final settlement provision and under an compartmentalization system, the taxing right of the
Netherlands will be preserved. More specifically, unrealized gains which accrued in the Netherlands, should be taxable
in the Netherlands. Whenever assets might risk escaping the Dutch jurisdiction without taxation, this would mean that
the Netherlands might lose its source country entitlement. So even though the exit provisions do not apply in some
situations based on a strict interpretation, CIN might still require that an exit tax settlement is imposed on the basis of a
teleological interpretation of the particular provision. The case law of the Dutch Supreme Court is, in this respect, in
line with CIN.799
4.7.3
Conclusion
Exit taxes on cross-border asset transfers are undesirable in the light of European and global mobility, but are, on the
basis of CIN, required for the preservation of the source country entitlement on accrued, yet unrealized gains. When
assets are transferred from the head office in the Netherlands to a PE abroad or from a resident taxpayer’s Dutch PE to
a PE abroad, no exit tax is required at all; in this situation the Dutch source country entitlement is preserved by means
of a lower exemption and, thus, gradual realization of gains vested in the transferred assets. In some other cases, where
assets are transferred from a Dutch PE to a foreign part of the taxpayer’s business, effectively taxing these unrealized
gains as they leave the Dutch jurisdiction requires the imposition of an exit tax. However, strictly taken, there is no legal
basis to impose an exit tax in some situations such as these. In these situation, a teleological interpretation of the exit
settlement provisions is required in order satisfy CIN, as the Netherlands might otherwise lose its source country
entitlement. Alternatively, a compartmentalization might be applied in order to preserve the Netherlands source
country entitlement and to satisfy CIN.
Taking into account that in the Netherland we do not apply a compartmentalization system (yet), I believe that the
imposition of an exit tax is required in some situations in which assets are transferred from a PE in the Netherlands to a
foreign part of the taxpayer’s businesses. However, exit taxes are undesirable in the light of European and global
mobility. Following the discussion provided in regards to the recovery of exit taxes in general, it is noted that if payment
is deferred, the imposition of an exit taxes will be less obstructive to mobility and CIN will still be satisfied. However, in
case payment is deferred, some conditions may apply on the basis of CIN in order to protect the tax base of the
emigration State, i.e. the provision of securities in and the provision of an administration.800
796
See conclusion A-G Wattel 28 August 2012, par. 1.4
Ibid.
798 The question as to whether a compartmentalization is to be preferred over the current system of exit taxation will be further analyzed in
chapter 8.
799 See HR BNB 2013/94, where a teleological interpretation is proposed, and HR BNB 2013/114, where the Court leaves room for a
compartmentalization system.
800 For the detailed analysis, I refer to paragraph 2.12.
797
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In the context of business migration, not only the emigration and immigration of a business but also the tax treatment
of asset transfers in so-called PE-situations should be taken into consideration, as internal asset transfers are an
important element of business mobility.
Before discussing the tax treatment of asset transfers between the head office and a PE, this chapter started out with an
analysis of the meaning of the term permanent establishment for Dutch purposes. As was discussed, we have no
specific definition of the PE in the Netherlands with respect to the personal and corporate income tax. Moreover, there
are three types of PEs; the general PE, the agent PE, and the building site PE. These types of PEs are to be interpreted
as they have been explained by the Dutch Supreme Court. It follows that the general PE is a physical construction
which is available to the taxpayer (either factual or legal) on a permanent basis and the construction is made appropriate
or equipped for the proceedings of the enterprise. With respect to the agent PE, the Court provided the following
requirements: the agent is another person than the principal, who has a certain level of dependency, who has and
habitually uses the authority to conclude contracts on behalf of the principal, and whose business activities are in the
ordinary course of business of the principal. The building site PE is for Dutch tax purposes considered to be a fictitious
PE. In contrast to Dutch national law, the term permanent establishment has explicitly been defined in most DTCs
which the Netherlands has concluded. A permanent establishment is a fixed place of business through which the
business of an enterprise is wholly or partly carried on. Moreover, special provisions are included in DTCs with respect
to the agent PE and the building site PE. Regarding the national tax law systems of the other EUCOTAX countries, it
can be concluded that most countries provide for a definition of the PE in their tax law, where this definition in most
cases follows the definition of the OECD MC.
In addition to providing a definition of the term permanent establishment, DTCs also include rules with respect to the
allocation of taxing rights between MSs in which the enterprise, respectively, the PE are established. The general rule
encompasses a full taxing right for the State in which the enterprise is a resident. However, as an exception, the State in
which the PE is established has a taxing right as well to the extent that profits are attributable to that PE. Subsequently,
this chapter continued with an analysis on how profits are to be allocated to a PE. It was argued that the preferred
method in the Netherlands for PE profit allocation is the functionally separate entity approach (the direct method). As a
result, the PE is treated as if it is an independent part of the enterprise and it deals with other parts of the business at
arm’s length.
The chapter continued with an analysis of the impact of asset transfers between the head office and a PE on their
respective profits, and of the tax treatment which is to be applied to such transfers. The asset transfers analyzed were
outbound, i.e. from the Netherlands to another country. Moreover, the focus was on tangible assets.
First, the transfer of assets from the head office to a PE was analyzed, where the head office was situated in the
Netherlands. It was argued that in this context, a distinction has to be made between the permanent and the temporary
transfer of assets based on the servitude criterion. Very roughly put, if the exploitation of assets are not managed,
controlled, and monitored in or from the PE, the transfer of assets is qualified as temporary. In such a situation, the
economic ownership of the asset does not transfer from the head office to the PE and the transferred assets are not
activated on the balance sheet of the PE. Moreover, a ‘rent-rental analogy’ is applied, by virtue of which there is a
fictitious lease of the assets from the head office to the PE. The head office will charge an at arm’s length rent for this
lease. If, however, the servitude criterion is positive, implying that assets are managed in or from the PE and
exploitation of the assets is controlled and monitored in or from the PE, the asset transfer is permanent. In this case,
the economic ownership will have transferred from the head office to the PE and a ‘buy-sale analogy’ is applied. The
transferred assets are activated on the balance sheet of the PE, at fair market value. As a result of this, the Netherlands
(as a residence state) will have to provide a lower exemption resulting in the gradual ‘realization’ of transferred assets. It
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is emphasized that the Netherlands does not impose an exit tax in case assets are transferred from the Dutch head
office to a foreign PE.
Assets can also be transferred from a national PE to a foreign part of a taxpayer’s business. Again, lacking clear
legislation the tax treatment is ‘unknown’. By applying case law of the Dutch Supreme Court I’ve provided my
interpretation of the tax treatment which should be applied in these situations. Two situations were distinguished; one
where the taxpayer is a limited resident taxpayer and one where the taxpayer is a non-resident taxpayer. With respect to
the Netherlands tax treatment, it was put forward that equal to a transfer in the other direction, a distinction can be
made between the permanent and temporary transfer based on the servitude criterion. With respect to the temporary
transfer, the final result was the remuneration of an at arm’s length rent from the head office to the PE. With regard to
the permanent transfer of assets the treatment is different for the limited resident taxpayer and the non-resident
taxpayer, as these situations are from a legal perspective not the same. More specifically, with respect to the limited
resident taxpayer the transfer is a non-event from a tax perspective as the independence fiction does not apply.
Subsequently, it was discussed that the outcome of the transfer of assets from a national PE to the head office of a
limited resident taxpayer abroad, can go in one of two directions; following a teleological interpretation of the final
settlement provision, an exit tax will be imposed on the transfer of assets, or, if the Netherlands will not some
mechanism of temporal compartmentalization, the assets might escape the Dutch jurisdiction without taxation. With
respect to the non-resident taxpayer, the transfer of assets from a Dutch PE to the head office abroad, I provided two
possible options regarding the tax treatment. Under the first option, the transfer would amount to the alienation of
assets on the basis of the independence fiction, as a consequence of the total profit would apply and the gain would be
included in the taxable profit. Under the second option, the transfer would not lead to the alienation or realization of
transferred assets, as these assets remain within the same taxpayer’s worldwide business. Consequently, the total profit
does not apply. Nonetheless, I argued that on the basis of case law an exit tax settlement (following a teleological
interpretation) is in order. Indeed, after the application of the DTC the taxing right over profits which accumulated
within the Dutch jurisdiction will no longer be allocated to the Netherlands, implying that the Netherlands might risk
losing its tax claim.
All in all it can be argued that the Netherlands emigration provisions are not adequate to preserve the Dutch tax claim
in all situations. From the EUCOTAX comparative law, it might be concluded that the Netherlands is unique in this
respect. Most countries apply their regular exit tax provisions to cross-border asset transfers in general. Thus, when
assets are transferred from the domestic head office to a foreign PE, from a domestic PE to the foreign head office, or
from a domestic PE to a PE abroad, an exit tax will be imposed.
Finally, my interpretation of the Dutch tax treatment in case assets are transferred in PE-situations was benchmarked
against the normative framework. Exit taxes on cross-border asset transfers are undesirable in the light of European and
global mobility, but are, on the basis of CIN, required for the preservation of the source country entitlement on
unrealized gains. As discussed, when assets are transferred from the head office in the Netherlands to a PE abroad no
exit tax is required at all; in this situation the Dutch source country entitlement is preserved by means of a lower
exemption and, thus, gradual realization of gains vested in the transferred assets. In some other cases, where assets are
transferred from a Dutch PE to a foreign part of the taxpayer’s business, effectively taxing these unrealized gains as they
leave the Dutch jurisdiction requires the imposition of an exit tax. However, strictly taken, there is no legal basis to
impose an exit tax in situations such as these. Therefore, a teleological interpretation of the exit settlement provisions is
required in order to satisfy CIN, as the Netherlands might otherwise lose its source country entitlement. Alternatively, a
compartmentalization might be applied in order to preserve the Netherlands source country entitlement and to satisfy
CIN. It was argued that conditional deferral of this exit tax claim is then preferred in the light of European and global
mobility.
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With respect to the research question of this thesis, which reads: How does the Netherlands tax system with respect to business
migration impact on European and global mobility, and what should be the impact in the light of tax conventions, EU law, and
international tax neutrality?, this chapter dealt with cross-border asset transfers in PE-situations. The most important
conclusion in this respect is that in case assets are transferred permanently from a head office in the Netherlands to a
foreign part of the same taxpayer’s business there is only a marginal impact on European and global mobility, by means
of a gradual realization. In case assets are transferred from a PE in the Netherlands to a foreign part of the same
taxpayer’s business, the Dutch tax law is not clear with respect to the tax treatment. In my opinion, based on case law
and on the benchmark of CIN, a final settlement provision ought to be applied following a teleological interpretation.
The fact that this has a negative impact on European and global mobility has to be taken for granted, as without the
imposition of an exit tax the Dutch source country entitlement might be lost. Moreover, it followed from the
EUCOTAX comparative law that the other countries apply their exit tax system in a general sense; asset transfers in
PE-situations will trigger the imposition of an exit tax. Other countries, therefore, also protect their source country
entitlement, where the negative impact on European and global mobility is accepted. As a closing remark I want to note
that even though I am an advocate of the teleological interpretation, I am of the opinion that the legislator should have
anticipated that assets can, under the current settlement provisions, possibly escape the Netherlands jurisdiction without
taxation. It would be advisable to articulate the actual purpose and scope of the final settlement in its wording, so that
this provision will be triggered in all situation in which the Netherlands might risk losing its tax claim on profits which
accumulated within the Dutch jurisdiction.
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5.
ALTERNATIVE METHODS OF BUSINESS MIGRATION
(OTHER THAN SEAT TRANSFERS)
5.1 Introduction
Obviously, a seat transfer is only one of the many ways in which a business can migrate from one country to another. In
this chapter, I want to focus on two other methods of business migration, namely cross-border mergers and divisions
and cross-border conversions. For both ‘alternative’ methods, I will first discuss the corporate and civil law aspects,
followed by an analysis of the tax consequences. In chapter 7, I will focus on European Union law issues of these forms
of business migration.
5.2 Cross-border mergers and divisions
5.2.1
Introduction
Equal to cross-border transfers of (part of) a business and seat transfers, cross-border mergers and divisions trigger, in
most cases, an exit tax on the unrealized gains and reserves with respect to transferred assets or exchanged shares. In a
domestic situation MSs typically provide for deferral of taxation. However, such deferral was not always granted to
cross-border situations. Thus, cross-border mergers and divisions were treated unfavorably, inhibiting the proper
functioning of the internal market. The problem can be substantial: in case of a merger or divisions, there is a realization
for tax purposes of capital gains, whereas in economic reality there is no cash realization yet but just a substitution of
assets or shares for other shares. This is illustrated by the following example:801 company A, seated in MS A, transfers a
factory to company B, seated in MS B, in exchange for shares in company B. As a consequence of this transaction,
company A must pay a tax on the difference between the market value and the book value of the factory. However, as
company A receives shares rather than cash for the factory, it may not have the liquidities to pay the tax. From the
perspective of company B the same problems can arise. Upon the transfer of the shares the company realizes a capital
gain on these shares. But, as the company has not received cash in return for the shares, it may not be able to pay the
capital gains tax.
There are several settlement provisions in the Dutch tax system which closely resemble the exit provisions discussed in
chapter 2. These provisions relating to mergers and divisions are laid down in the Corporate Income Tax Act 1969;
article 14a deals with the division and article 14b with the legal separation. In a European context, the Tax Merger
Directive, which was adopted by the European Council in 1990, deserves further analysis. It should be emphasized that
I will only discuss the mergers and divisions broadly; a detailed discussion falls beyond the scope of this thesis.
5.2.2
Tax merger directive
On a European level, the need to intervene between the different treatment of domestic and cross-border situations was
felt, as cross-border mergers and divisions were treated unfavorably, inhibiting the proper functioning of the internal
market. The four freedoms which are laid down in the TFEU are the most important agents of what is called negative
integration.802 We also have what is called positive integration in the European Union, in the form of EU legislation or
coordination. However, due to the lack of positive integration and MSs’ reluctance to give up fiscal sovereignty there is
801
802
See Terra and Wattel 2012, p. 335.
See also Terra and Wattel 2012, p. 23.
132
little secondary EU law on direct taxation.803 We do, however, have a few important tax directives which are binding
legal instruments for the harmonization of direct taxes of MSs. One of these directives, which is of importance in the
context of exit taxation, is the Tax Merger Directive804.
In order to provide for equivalent deferral of taxation in a cross-border context, the European Council adopted in 1990
the ‘first’ Tax Merger Directive Council Directive 90/434/EEC. The main objective of this directive was to take away the
tax problems arising when two or more companies from different MSs merged, or when a company divided into entities
in different MSs. The Merger Directive applies to both economical mergers (share mergers and company mergers) and
legal mergers and divisions. The Directive only deals with operations which involve more than one company from more
than one MS. This follows from article 1 of the Directive: the directive applies to “mergers, divisions, partial divisions,
transfers of assets and exchanges of shares involving companies from two or more Member States”.805 In article 2(a-e), these operations
are subsequently defined. A detailed discussion goes beyond the scope of this thesis and I refer to the Council directive.
What is more interesting, is the Dutch treatment of mergers and divisions.
5.2.3
Mergers and divisions in the Netherlands
5.2.3.1 Company law aspects
The legal merger and division are governed by Book 2, title 7, of the Dutch Civil Code. In section 2, article 309, of this
title, a merger is defined as a legal action between two or more legal persons, where 1) one of these persons acquires,
under general title, the capital of the other , or 2) an in the merger newly established legal person acquires, under
general title, the capital of the other legal persons. All legal persons other than the acquiring legal person will cease to
exist after the merger. In principle, only legal persons with the same legal form can merge under the Dutch legal
system.806 There are three exceptions to this rule: 1) public companies (Dutch NVs) can merge with private limited
companies (Dutch BVs),807 2) if the acquiring entity is a cooperative, association, or foundation, this entity can merge
with a public company or private limited company in which it holds all shares, and 3) an acquiring foundation, public
company, or private limited company can merge with an association or cooperative in which the first is the only
member.808
The possibility of a cross-border merger, involving a foreign legal entity, has only been introduced a few years ago in the
Dutch civil tax system. The Tenth Company law Directive809 on cross-border mergers of limited liability companies was
implemented in Dutch company law by the Act of 27 June 2008810. This Act resulted in the amendment of Book 2, title
7, of the Civil Code. The amendment of the Dutch Civil Code has to be seen in the light of the developments within the
European Union. In, for example, the case SEVIC System811, the CJEU ruled that on the basis of the freedom of
establishment, MSs are obliged to allow the merger between a domestic company and a company from another MS, if
such a merger would be permitted when both companies were established in the first MS.812
After the amendment of the Dutch Civil Code, a merger of a public company, a private limited company, or an
European Cooperative Society (SCE) with limited liability company of another EU/EEA State is possible under Dutch
803
See Council Directive 2009/133/EC. This directive is the codified version of Council Directive 90/434/EEC and Council Directive
2005/19/EC.
805 Official text is not underlined; underlining added by author.
806 See article 2:310, paragraph 1 Civil Code.
809 Council Directive 2005/56/EC.
810 Act of 27 June 2008, Stb. 2008, 260 and Stb 2008, 261.See also V-N 2008/47.2.
811 CJEU SEVIC System (Case C-411/03).
812 See paragraph 7.3.2.3 for a detailed discussion of this case.
804
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company law. Cross-border mergers of other legal forms are not possible.813 This is an important difference between
the amended Dutch company law and the Court’s verdict in SEVIC ; the case SEVIC System related to companies in
the sense of article 48 TFEU, whereas in the Netherlands the cross-border merger of legal forms other than limited
liability companies is still not possible.
5.2.3.2 Tax law aspects
The possibility of a cross-border merger under Dutch tax law has been possible ever since the introduction of the
merger directive in 1990. A cross-border merger was therefore possible under tax law before it was even possible under
company law. Nonetheless, the tax law aspects were only regulated very superficial initially. In 1998 this changed. As of
18 June 1998814, the tax provisions with respect to mergers and divisions have been codified in detail in the CITA 1969.
These provisions apply to both cross-border and domestic mergers and divisions.
In the current Corporate Income Tax Act, the company (economical) merger is regulated by article 14, the rules with
respect to the legal division can be found in article 14a CITA 1969, and the corporate merger is provided for in article
14b CITA 1969. Generally, similar to the Dutch exit provisions, both the merger and the division are deemed as an
alienation of (part of) a business. This means that, in principle, a tax claim will have to be settled. However, on the basis
of the aforementioned provisions regulating the merger and division it is, under conditions, possible to transfer the
book value to the acquiring entity. One requirement is that the legal entities involved in the division, respectively, the
legal merger, are established in the Netherlands or in a MS of the EU/EEA.815
In a company merger, (part of) a business is transferred to another legal entity in exchange for shares. The first business
(the transferor) does not cease to exist after the transfer.816 As asset components are being transferred from one
company to another, a tax settlement on capital gains will be in order on the basis of the general rule. However, the
provision of article 14, paragraph 1, CITA 1969 provides for a facility on the basis of which the capital gain realized as a
result of the transfer can be ‘passed on’ to the company taking over the capital. There are three ‘standard’ requirements
which have to be met in order to receive this facility: 1) the transferor and transferee apply the same tax regime817, 2) the
transferee cannot claim a carry-forward of losses818, avoidance of double taxation, or the application of the innovation
box, and 3) later taxation is secured. It is noted that without leaving behind a PE in the Netherlands, this final
requirement shall not be fulfilled, as a consequence of which a tax will have to be settled. If all three requirements are
met, the transferee will ‘automatically’ take the place of the transferor in respect of all assets transferred and there will be
no realization of a capital gain. If, however, one or more requirements are not met, the facility can still be granted, but
the taxpayer will have to apply for this at the Tax Authority. On the basis of article 14, paragraph 2, CITA 1969,
additional requirements can then be set.819 It should be emphasized that the merger facility will not be granted when the
merger is predominantly aimed at avoiding or deferring taxation. This is the tax avoidance reservation of article 14
paragraph 4 CITA 1969. On the basis of the reservation, it is assumed that the merger is predominantly aimed at the
avoidance or deferral of taxation when there are no underlying business considerations. In addition, when the
transferred shares are alienated within three years after the merger it is assumed that business considerations are absent.
The rules for the legal division and legal merger closely resemble those of the company merger. However, in a legal
merger, the entire capital of one company is transferred to that of another, after which the first ceases to exist. In a legal
813
See also V-N 2008/27.2, note.
The Act of 17 June 1998 on the fiscal treatment of mergers and divisions entered into force on this date.
815 See article 14a paragraph 11 and article 14b paragraph 8.
816 Which is different in case of a legal merger. In a legal merger, one of the businesses involved will always cease to exist.
817 For example, a limited liability company cannot merge with an insurance company, as insurance companies fall under a different tax
regime in the Netherlands.
818 On the basis of article 20 CITA 1969.
819 These additional requirements are bounded by article 14 paragraph 7 CITA 1969.
814
134
division, one business is divided into two or more businesses where the original business can either continue to exist
(separation) or cease to exist (pure division). The tax consequences of the legal division are laid down in article 14a
CITA 1969 and those of the legal merger in article 14b CITA 1969. As a general rule, a tax claim will have to be settled
as a consequence of the division, respectively the merger. However, similar to article 14, articles 14a and 14b contain
facilities for legal divisions, respectively mergers. The capital gain realized as a result of the transfer can be ‘passed on’ to
the company taking over the capital. On the basis of paragraph 2 of article 14a, respectively 14b, the same three
standard requirements apply as in case of a company merger. Again, when one of these requirements isn’t met, the
facility can still be granted when applied for on the basis of the third paragraph of the previously cited articles.
It can be concluded that in the Netherlands we have different ‘facilities’ for mergers and divisions on the basis of which
the book values are transferred to the receiving business along with the transferred asset components. As a result,
realization of capital gains can be ‘postponed’. In this sense, I also believe that the facility is somewhat contradictory.
Indeed, an important element of the facility is the tax avoidance reservation, which encompasses that the merger cannot
be predominantly aimed at avoiding or deferring taxation, while the purpose of the facility itself is the postponement or
deferral of taxation.
When the standard requirements are not met it is, as discussed, possible to apply for the facility at the Tax
Administration under additional requirements. However, if later taxation cannot be secured or when the tax avoidance
reservation enters into force, the facility will not be granted. As a consequence, the tax claim will have to be settled.
Similar to the Dutch exit provisions which have been discussed in chapter 2, this implies that a tax has to be settled
whereas nothing is actually realized. Indeed, in return for the merger or division only shares are exchanged. And with
shares, one cannot readily settle a tax claim. The Dutch legislator recognized this ‘restriction’ to business mobility, and
clarified that the Law on deferral of exit taxation820 also applies to mergers and divisions.821 This means that businesses
who have to settle a tax claim as a result of a merger or division, can opt-in for deferred payment. Deferred payment
will require the following: a) provision of sufficient securities, b) payment of recovery interest, and c) provision of an
administration, enabling the tax collector to determine to what extent unrealized capital gains have been realized. All
these requirements will have to be met at the level of the acquiring company, as this company will take the place of the
acquired company.822
5.3 Cross-border conversions
5.3.1
Introduction
Another form of business mobility is the cross-border conversion. In a conversion in general, a business changes its
legal form into another legal form while obtaining its legal personality. The cross-border conversion, then, is the legal
act in which a company governed by the law of one State (the state of origin, also called the outbound State) is
converted into a company governed by the law of another State (the destination State, also called the inbound State).
Thus, the law which applies to the company, the lex societatis, is changed in a cross-border merger.823 Similar to the
transfer of the seat and the cross-border merger and division, the freedom of establishment applies to cross-border
conversions within the European Union.824
Kamerstukken II, 2011/12, 33 262, nr. 2 (See also paragraph 2.9.1).
See Kamerstukken II, 2012/13, 33 262, nr. 5, p. 9.
823 See also: Roelofs 2013, p. 1.
824 See for example CJEU Cartesio (Case C-210/06) and CJEU VALE (Case C-378/10).
820
821
135
5.3.2
Cross-border conversions in the Netherlands
5.3.2.1 Company law aspects
Article 18 of Book 2 of the Civil Code regulates the conversion of legal entities. In article 2:18, paragraph 1, the general
rule is formulated: a legal entity can convert itself into another legal entity, taking into account the other paragraphs of
the article.825 The conversion does not end the legal existence of the entity.826 It is, however, not explicitly stated
whether this article only sees to domestic entities or whether it also applies to non-domestic legal forms. In literature, it
has been argued that article 2:18 of the Civil Code only sees to private legal entities as defined in the Civil Code, thus
only domestic forms.827 Legal forms which are governed by the law of another nation are thus excluded from the
conversion provision of article 2:18 Civil Code, which would imply that a cross-border conversion results in the
cessation of the legal existence of the entity in question.828 To summarize; in the Civil Code, the possibility of a crossborder conversion is currently missing.829
Nonetheless, on the basis of the Council Regulation on the Statute for a European Company830, the cross-border
conversion of a Societas Europaea (European Company, SE) is possible in and from all EU/EEA Member States.831 In
addition, as follows from EU case law, legal forms other than an European Company (SE) can also ‘enjoy’ a crossborder conversion, with an appeal on the freedom of establishment.832 This is true for both outbound833 and inbound834
conversions. Firstly, the Cartesio case dealt with an outbound conversion. In this case, the Court of Justice of the
European Union ruled that not allowing an outbound cross-border conversion is a restriction of the freedom of
establishment.835 I.e., where in case of a cross-border conversion the destination State recognizes the legal personality of
a company and enables the continuation of that company in a national legal form, the departure State may require an
emigrating company to give up its status as a company under its law, but it would be disproportionate if that State
would force the company to dissolve and liquidate.836 However, when there is no cross-border conversion (i.e. when
the destination State does not continue a company’s legal existence), a departure State can demand the dissolution of a
company transferring its statutory and/or real seat to another State without infringing on the freedom of establishment,
irrespective of whether it is an incorporation jurisdiction or a real seat jurisdiction.837 In Cartesio, the CJEU limited the
‘playing field’ of departure States, thus from an outbound perspective. In the later VALE case, the inbound perspective
was further taken into consideration by the Court.838 The CJEU argued that where national law enables national
companies to convert, but does not allow companies incorporated under the law of another MS to do so, this amounts
to an unjustifiable restriction of the freedom of establishment.839 Taking into account both Cartesio and VALE, it can
be concluded that cross-border conversions are fully covered by the freedom of establishment, both from an outbound
and inbound perspective.
To conclude, the Netherlands has to accept both inbound and outbound conversions on the basis of EU law (i.e. the
freedom of establishment). Firstly, it follows from the VALE-case, that the freedom of establishment requires the
825
The other paragraphs contain the rules for the conversion, such as the required documents, the procedural aspect, etc.
As stated in paragraph 8 of article 18, Book 2, Civil Code.
827 See for example Fiscale Encyclopedie aantekening 2.2.16: Omzetting van rechtspersonen; and van de Streek 2008, par. 2.9.
828 As paragraph 8 of article 2:18 Civil Code does not apply.
829 See also van de Streek 2010, p. 85.
830 Council Regulation (EC) no. 2157/2001.
831 See also Roelofs 2013, p. 1.
832 See also Bellingwout 2009, par. 7; and van de Streek 2010, par. 1.
833 See CJEU Cartesio (Case C-210/06).
834 See CJEU VALE (Case C-378/10).
835 For a more detailed discussion of this case I refer to paragraph7.3.2.4.
836 See CJEU Cartesio (Case C-210/06), par. 112. See also: Terra and Wattel 2012, p. 513.
837 See CJEU Cartesio (Case C-210/06), paras. 119 and 124.
838 See for a more detailed discussion of this case paragraph 7.3.2.6.
839 See CJEU VALE (Case C-378/10), par. 36.
826
136
Netherlands to allow companies from another Member State to convert into Netherlands legal entities, as, in a purely
domestic context, companies are enabled to convert as well. Secondly, it follows from the Cartesio-case, that the freedom
of establishment also requires the Netherlands to allow Dutch companies to convert into a legal form of another
Member State, if that other State also accepts the conversion.840 Moreover, on the basis of VALE, this conversion has
to be accepted by the other State (provided that in a purely domestic context such a conversion would be accepted).
In response to the Cartesio-case, the Dutch Committee Corporate Income Tax has spontaneously introduced a proposal
on the cross-border conversion, which pertains to both inbound and outbound movements.841 As this proposal is not
an ‘official’ proposal of the Dutch legislator, I will not discuss this proposal in detail.842
5.3.2.2 Tax law aspects
Assuming that the cross-border conversion is possible from a civil law perspective, the tax consequences of such a
conversion have to be analyzed as well. From a civil law perspective, there are 28 possible conversions (in a domestic
context). For tax law purposes, these can be divided into two main categories; the non-regulated conversions and the
regulated conversions. With respect to the tax treatment of these conversions, article 28a of the CITA 1969 is the
starting point.843
The first category encompasses the non-regulated conversion. More specifically, there are four conversions which are
not provided for in the Corporate Income Tax Act; the conversion from a limited liability company to a public
company and vice versa, and the conversion of a foundation to an association and vice versa. Article 28a, first
paragraph, of the CITA 1969, explicitly states that the liquidation-fiction844 does not apply to the aforementioned four
conversions. Consequently, these conversions are not accompanied by a final settlement with respect to the goodwill
and reserves in the corporate income tax, as the legal personality and subjective liability to tax is maintained. In the
context of cross-border conversions, then, it is important to realize that an outbound cross-border conversion of one of
the four types will only have a tax consequences if it is accompanied by the actual transfer of the real seat abroad. Where
the real seat is not transferred abroad, the cross-border conversion is a non-event from a tax perspective.845 This implies
that there will be no final settlement with respect to the reserves and goodwill if, for example, a Dutch limited liability
company is converted into a (comparable) legal form of another EU/EEA State, when in fact the company is still
established in the Netherlands. When the cross-border conversion is accompanied by the transfer of the real seat
abroad, the exit tax provisions in the Corporate Income Tax Act will be triggered; on the basis of article 15c and/or 15d
CITA 1969, a tax will have to be settled on the reserves and goodwill.846 The rules laid down in chapter 2 will then apply
to these conversions, including the option between immediate and deferred payment of the exit tax claim.
The second category encompasses the regulated conversions. These can be subdivided into the non-facilitated
conversions and the facilitated conversions. First of all, the regulated conversions are the other 24 conversions which
are possible on the basis of civil law. The non-facilitated conversions are provided for in article 28a CITA 1969,
paragraph 1. On the basis of this provisions, a legal entity which is converted is deemed to be liquidated and the capital
of this entity is deemed to be paid out to its shareholders. It is subsequently assumed that this capital is inserted into
another legal entity. The facilitated conversions are regulated in article 28a CITA 1969, paragraph 3. More specifically,
See also Bellingwout 2009, par. 7.
Letter of the Committee Corporate Income Tax, 12 February 2012.
842 For the interested reader I refer to Roelofs, 2013, for a detailed discussion of this Committee proposal.
843 See also van de Streek 2010, p. 85.
844 On the basis of which converting legal entity is deemed to be liquidated and that the capital of this entity is paid out to its shareholders,
where this capital is subsequently inserted into another legal entity.
845 See van de Streek 2010, par. 5. I believe this statement is true, provided that the conversion remains within either the personal income
tax (transparent entities) or within the corporate income tax (legal entities).
846 See also van de Streek 2010, par. 5.
840
841
137
for all 24 regulated conversions it is possible to request for a facilitation of this conversion. The Dutch Tax Authority
will determine the conditions under which the conversion-facility will be granted on the basis of seven standard
conditions.847
Article 28a refers to the conversions of article 18, Book 2 of the Dutch Civil Code. Thus, strictly taken, the conversions
which can be facilitated from a tax law perspective only include domestic ones. However, it was argued that the
Netherlands has to accept both inbound and outbound conversions on the basis of EU law (i.e. the freedom of
establishment). It can then be assumed that a cross-border conversion is possible from a civil law perspective (on the
basis of EU law), these tax provisions will apply similarly to cross-border conversions.
In this chapter, the focus was on two other methods of business migration, namely cross-border mergers and divisions
and cross-border conversions. Equal to cross-border transfers of (part of) a business and seat transfers, cross-border
mergers and divisions trigger, in most cases, an exit tax on the unrealized gains and reserves with respect to transferred
assets or exchanged shares. It was argued that in a domestic situation, MSs typically provide for deferral of taxation.
Such deferral was not always granted to cross-border situations. Thus, cross-border mergers and divisions were treated
unfavorably, inhibiting the proper functioning of the internal market. This has led to the introduction to the Tax Merger
Directive, which was briefly discussed in this chapter.
Next, the Netherlands national law with regard to mergers and divisions was discussed, starting with company law
aspects. It was noted that the possibility of a cross-border merger has only been introduced a few years ago in the Dutch
civil law system. However, this cross-border merger is only possible for limited liability companies. On the basis of the
freedom of establishment, I argued that other legal forms should also be allowed to merge. In regards to tax law, I
discussed that a cross-border merger was long possible under tax law before it was even possible under company law. In
the current Corporate Income Tax Act, the company (economical) merger is regulated by article 14, the rules with
respect to the legal division can be found in article 14a CITA 1969, and the corporate merger is provided for in article
14b CITA 1969. Generally, similar to the Dutch exit provisions, both the merger and the division are deemed as an
alienation of (part of) a business. This means that, in principle, a tax claim will have to be settled. However, as discussed
in this chapter, it is, under conditions, possible to transfer the book value to the acquiring entity. The provisions with
respect to the merger and division were all analyzed in this chapter and it can be argued that in all these cases, there are
generally three ‘standard’ requirements which have to be met in order to receive the facility (i.e. transfer of the book
value to the acquiring entity): 1) the transferor and transferee apply the same tax regime, 2) the transferee cannot claim
a carry-forward of losses, avoidance of double taxation, or the application of the innovation box, and 3) later taxation is
secured, where it was noted that without leaving behind a PE in the Netherlands, this final requirement shall not be
fulfilled, as a consequence of which an exit tax will have to be settled. When the three standard requirements are not
met the facility will not apply automatically. As discussed, it is then still possible to apply for the facility at the Tax
Administration, in which case additional requirements might apply.
This chapter continued with a discussion of cross-border conversions. The cross-border conversion is the legal act in
which a company governed by the law of one State (the state of origin, also called the outbound State) is converted into
a company governed by the law of another State (the destination State, also called the inbound State). With respect to
company law, it was noted that in Dutch national law the possibility of a cross-border conversion is currently missing.
Nonetheless, I argued that in my opinion, the Netherlands has to accept both inbound and outbound conversions on
the basis of EU law (i.e. the freedom of establishment).
847
A detailed discussion of these conditions goes beyond the scope of this thesis.
138
Finally, the tax law aspects of the cross-border conversion were discussed. From a civil law perspective, there are 28
possible conversions in a domestic context. For tax law purposes, these can be divided into two main categories; the
non-regulated conversions and the regulated conversions. The non-regulated conversions are four conversions to which
the liquidation fiction of the conversion provision in the CITA 1969 does not apply. These conversions are,
consequently, not accompanied by a final settlement as the legal and subjective liability to tax is maintained. The regular
emigration tax treatment will then apply in cross-border situations, which, put briefly, means that the imposition of an
exit tax will depend on whether or not the real seat is transferred abroad. The regulated conversions, then, are those
conversions in which the converted legal entity is deemed to be liquidated. As discussed, it is possible to request for a
facilitation of this conversion, where the Dutch Tax Authority will determine the conditions under which the
conversion-facility will be granted. As a final remark it was noted that the conversion provision in the CITA 1969 refer
to company law. In company law, however, the possibility of the cross-border conversion is missing. Therefore, it
might be argued that the only domestic conversions can be facilitated from a tax law perspective. In my opinion, the
cross-border conversion is possible from a civil law perspective on the basis of EU law. More specifically, as argued, the
Netherlands has to accept both inbound and outbound conversions on the basis of the freedom of establishment. The
tax provisions discussed will, therefore, apply similarly to cross-border conversions.
international tax neutrality?, two ‘alternative’ methods of business migration have been discussed in this chapter. Overall, it
can be concluded that the Netherlands company law is in some situations unsatisfactory in the context of fostering
European and global mobility, as cross-border mergers and conversions are not always possible. However, the research
question of this thesis focuses on the Netherlands tax system. In this respect, no particular new obstacles were found.
The only obstacle with respect to business mobility lies in the fact that in some situations an exit tax will be imposed.
The imposition of an exit tax as such was already analyzed in utmost detail in the second chapter (also in the light of the
normative framework), and not re-analyzed in the current chapter.
139
6.
THE RELATIONSHIP BETWEEN EXIT TAXATION AND
TAX CONVENTIONS: FROM A DUTCH PERSPECTIVE
6.1 Introduction
The rationale behind the Netherlands imposing exit taxes on emigrating businesses lies in the prevention of losing
taxing rights over accrued but unrealized profits. These profits have their origin in the Netherlands, which, in her own
opinion, gives the Dutch legislator the right to tax these profits848. In this chapter, I will analyze how the termination of
residency and succeeding residency in another state are treated under international tax conventions. I.e. how are taxing
rights allocated between States in case a taxpayer emigrates from one country and immigrates into another? The OECD
MC does not contain any provision which specifically addresses the tax consequences of emigrating persons or
companies.849 Therefore, the focus will be on the OECD commentary, case law, and literature.850
Moreover, it is generally assumed that Netherlands will lose its tax claim after emigration. Indeed, tax treaties prescribe
that there should be no taxation after emigration, since the right of taxation is allocated to the country of residence. The
Dutch legislator came up with a creative solution in order to prevent the loss of a tax claim. Under the exit tax system
applied by the Netherlands, the specific fact which triggers taxation is treated as a domestic event. Consequently, it can be
argued that these exit taxes do not have to be included in bilateral tax treaties between states. Indeed, there is a deemed
disposal immediately before emigration and tax treaties generally do not apply to such domestic issues.851 The provision
which the Netherlands has introduced thus encompasses a fictitious realization. It is, however, possible that the other
country ascribes a different tax treatment to the emigration and subsequent immigration of the taxpayer, and for
example does not provide a step-up upon immigration. This might result in double taxation. Additionally, double
taxation might result from mismatches in valuation methods. The question then is, which country has the right to tax
the unrealized gains? More precisely, are the exit provisions which the Netherlands introduced in the context of
business emigration, which encompass a fictitious alienation upon emigration, allowable under DTCs, or does the
introduction of these provisions constitute treaty override? This question will be further analyzed in the final part of this
chapter.
6.2 Allocation of taxing rights
Both article 7 and article 13 of the OECD MC can be applied to the emigration of businesses, since these articles relate
to unrealized gains in transferred assets. As discussed, emigration implies that a taxpayer loses his status as a resident.
Consequently, it is generally assumed that the emigration State will lose its taxing right after the enterprise has
transferred his place of residence, since this will be allocated to the new residence state on the basis of article 7,
respectively, article 13 OECD MC. After distinguishing between the function of tax treaties and the function of national
law in respect to taxing rights, and discussing the main elements of the Dutch tax treaty policy, I will discuss both
articles.
See: Kamerstukken II 1998/99, 26 727, no. 3, p 116-118.
See for example: Hji Panayi 2011 and Goldberg 2000. Goldberg argues that the OECD MC does not deal with “the consequences of the
change of residence of an individual who ceases to be a resident of one contracting state and becomes a resident of the other”.
850 With respect to the commentary, it has been argued by Lang and Brugger (2008) that the commentary of the OECD MC is very
important. They provide: “The OECD Model Convention and the OECD Commentary carry significant weight in the interpretation of double taxation
conventions. If a double taxation convention is, in principle, based on the OECD Model and a certain provision follows the wording of the OECD Model, it is then
only reasonable to assume that the contracting states intended such a provision to have the meaning it has in the OECD Model, as outlined in the OECD
Commentary.”
851 See also: Hji Panayi 2011, p. 247.
848
849
140
6.2.1
National law, tax treaties and taxing rights
First of all, it should be emphasized that tax treaties do not create taxing rights; they merely allocate these rights. The right
to tax certain items of income (or capital for that matter) is only created by virtue of national tax law. Tax treaties
subsequently limit the possibility to exercise these taxing rights in cross-border situations. In the Netherlands, the
precedency of treaties above national law follows from article 94 of the Constitution, which provides that legal
regulations applicable within the Kingdom do not apply, if such application is incompatible with any mandatory
provisions from treaties and from decrees of international organizations.
6.2.2
Tax treaties and Dutch policy
Since the Netherlands has an open economy with a small domestic market and large foreign market, it is crucial to
eliminate obstacles or barriers to international trade, such as double taxation. This is why the Netherlands has an
extensive tax treaty network, which makes the business climate of the Netherlands attractive. These tax treaties always
deal with persons (either natural or legal) who invest or develop activities cross-borders. Indeed, in such situations, two
or more States will wish to tax the generated income on the basis of their respective national tax law systems. The main
purpose of these tax treaties is twofold.852 First, the treaties are concluded to eliminate double taxation on the basis of
mutuality.853 In addition, they are aimed at the prevention of fiscal evasion. The ‘full’ DTCs see to both the allocation of
taxing rights and the prevention of tax evasion. In addition to these DTCs, the Netherlands has also concluded many
Tax Information Exchange Agreements (TIEAs). These TIEAs are predominantly aimed at preventing tax avoidance
and evasion, by enabling the exchange of information in tax affairs. They are generally concluded in respect to ‘tax
paradises’.
The Dutch legislator uses the OECD MC and accompanying commentary as a guidebook when concluding DTCs.854 In
case treaties are concluded with low-tax States, these DTCs often contain special provisions in order to prevent erosion
of the Dutch tax base.855 Special provisions can also be found in DTCs concluded in relation to developing countries.856
6.2.3
Allocation of taxing rights under art. 7 of the OECD model tax convention
Taking the OECD MC as starting point, the allocation of business profits is regulated in article 7. The first paraphrase
of the first paragraph of this article can be seen as the general rule: ‘The profits of an enterprise of a Contracting State shall be
taxable only in that State…’ Thus, starting point is the full taxing right of the State in which the enterprise is a resident.857
However, article 7(1) continues: ‘…unless the enterprise carries on business in the other Contracting State through a permanent
establishment situated therein…’ This means that as an exception to the general rule, the State in which the company carries
on business activities through a PE has a taxing right as well. As for the size of that taxing right, the following is further
regulated in article 7(1): ‘…If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State
but only so much of them as is attributable to that permanent establishment.’ Paragraph 2 of article 7 further elaborates on the
profits which are attributable to a PE. the profits to be attributed to the PE ‘are the profits it might be expected to make, in
particular in its dealings with other parts of the enterprise, if it were a separate and independent enterprise engaged in the same or similar
852
See Memorandum Dutch tax treaty policy 2011, par. 1.2.1.
The focus is on the elimination of legal double taxation, not on the elimination of economical double taxation. Legal double taxation
means that one and the same subject is taxed over the same object more than once (in different states). Economical double taxation means
that an object is taxed more than once, however not in the hands of the same subject.
857 See also OECD Commentary on article 7, par. 1.
853
141
activities under the same or similar conditions, taking into account the functions performed, assets used and risks assumed by the enterprise
through the permanent establishment and through the other parts of the enterprise’.858 This is called the ‘at arm’s length’profit’.
Article 7 basically takes residency as the criterion for the allocation of the taxing right over business profits, with the PE
as an exception. In the context of business emigration and unrealized gains and reserves vested in transferred assets, the
place of residence on the moment of realization will determine to which country taxing rights are allocated. At first
sight, the place in which (territory) or time over which the unrealized gains were build up until realization are irrelevant
for the allocation under tax treaties.859 Thus, the residency principle prevails over the source principle. In order to
prevent loss of a tax claim, the Netherlands (as one of many countries) has introduced a fictitious alienation of assets
upon the emigration of a business. The permissibility of the introduction of such a provision under DTCs is disputable.
I will elaborate on this in paragraph 6.3.
6.2.4
Allocation of taxing rights under art. 13 of the OECD model tax convention
In the 2010 version of the OECD MC, Article 7 paragraph 4 provides:860 ‘Where profits include items of income which are dealt
with separately in other Articles of this Convention, then the provisions of those Articles shall not be affected by the provisions of this Article.’
This means that priority is to be given to other articles over article 7, if those articles cover the same items of income. In
this respect, article 13 of the OECD MC is applicable to capital gains derived by an enterprise.861 Paragraph 1 of article
13 concerns the alienation of immovable property, and refers to article 6 of the Convention, of which the last paragraph
specifically emphasizes that the article also applies to the income from immovable property of an enterprise. In the
context of PE-situations, article 13, paragraph 2 provides: ‘Gains from the alienation of movable property forming part of the
business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State, including such
gains from the alienation of such a permanent establishment (alone or with the whole enterprise), may be taxed in that other State.’ Thus,
the state in which the PE is established, has the right to tax gains derived from the alienation of movable property,
under the condition that the property in question is part of the business capital of the PE.862 The third paragraph of
article 13 specifically sees to the alienation of ships, aircrafts and boats. Paragraph 4 then, regulates the allocation of
taxing rights with respect to gains derived from the alienation of a substantial shareholding in immovable property. The
final paragraph of article 13 is a ‘remainder’ article, which allocates the taxing right over the gains from alienation of all
property not covered in the other paragraphs.
Article 13 takes the legal act of alienation as the starting point. It might be argued that upon emigration or upon the
transfer of assets in PE-situations there is no real alienation, but a deemed or fictitious alienation. Kemmeren has also
argued that an essential characteristic of the concept of alienation is that assets (or an asset component) are transferred
from the capital of one person to the capital of another, and obviously, this is not the case when a business emigrates or
when assets are transferred from the head office to a PE and vice versa.863 The assets remain part of the capital of one
taxpayer. In my opinion however, the Dutch legal fiction by virtue of which there is a deemed alienation upon
858
OECD PE-Report 2010, part I, item B-1 and article 7(2) OECD MC.
However, under a compartmentalization such as proposed in the previously cited case of the Bundesfinanzhof this will lead to a different
outcome. See Bundesfinanzhof 28 October 2009, I R 99/08.
860 Article 7 paragraph 7 for DTCs concluded on the basis of the OECD MC 2003.
861 However, article 7 and 13 allocate the taxing right equally. See also paragraph 4 of the OECD commentary to article 13: ‘It is normal to
give the right to tax capital gains on a property of a given kind to the State which under the Convention is entitled to tax both the property
and the income derived therefrom. The right to tax a gain from the alienation of a business asset must be given to the same State without
regard to the question whether such gain is a capital gain or a business profit. Accordingly, no distinction between capital gains and
commercial profits is made nor is it necessary to have special provisions as to whether the Article on capital gains or Article 7 on the
taxation of business profits should apply.’
862 Whether the movable property ‘is part of’ the PE is thus a question of whether it has been allocated to the PE on the basis of the AOA,
i.e. on the basis of a functional and factual analysis. The location of significant people functions, which are related to people who exercise
activities with respect to managing risks and day-to-day activities, will be decisive for this attribution. See paragraph 4.4.
863 See Kemmeren, 2005, par. 7.2.2.
859
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emigration, is an alienation as it is to be understood for the application of article 13 OECD MC. I believe this is so on
the basis of the OECD commentary to article 13. It follows from paragraph 5 that the term alienation is to be
interpreted broadly. Moreover, in paragraph 6 the following is stated in the commentary: ‘…Whether or not there is an
realization has to be determined according to domestic law.’ In paragraph 10 of the commentary to article 13, the transfer of
assets from a PE is discussed. As said, there is no ‘actual’ alienation in such a case which meets the essential
characteristic of alienation, i.e. a transfer from the capital of one person to the capital of another.864 However, the
OECD commentary specifically states that such a deemed or fictitious alienation falls under the scope of article 13: ‘In
some states the transfer of an asset from a permanent establishment situated in the territory of such State to a permanent establishment or the
head office of the same enterprise situated in another State is assimilated to an alienation of property. The article does not prevent these States
from taxing profits or gains deemed to arise in connection with such a transfer, provided, however, that such taxation is in accordance with
Article 7.’ I therefore conclude that, for the purpose of article 13 OECD MC, the legal act of alienation both
encompasses the real alienation (which will lead to actual realization of gains), and the fictitious alienation (by which
gains are deemed to have been realized). Additionally, this interpretation is in line with the opinion of the Dutch
Supreme Court. In the case HR BNB 2009/261 (which will be discussed in paragraph 6.3.1) the Court argued that the
OECD commentary is to be interpreted in such a way that it does not exclude that a tax is imposed on a capital gain
which has been accrued but not effectively realized, as there has been no actual alienation.
6.3 Treaty override
Treaty override would arise when a country, in this case the Netherlands, has signed away taxing rights to a treaty
partner by concluding a DTC, but afterwards appropriates those same taxing rights unilaterally, by introducing for
example a new provision in to national law.865 This would imply an infringement of the ‘good faith principle’, which is
laid down in articles 26, 27 and 31 of the Vienna Convention on the Law of Treaties.866 Additionally, in judging whether
a certain provision constitutes treaty override, the national tax system of the treaty partner is of importance as well, for
two reasons.867 Firstly, if the other country has introduced a similar rule into its national tax law, the Netherlands
provisions may be justifiable.868 Secondly, if the immigration country provides a step-up, no double taxation will arise.
In both cases, there is no unilateral shift in tax jurisdiction, and consequently no treaty override. Summarizing the
aforementioned, whether treaty override is at stake will have to be judged on a case-by-case basis, and, as such, can be
qualified as an open question.869 If the conclusion is that there actually is treaty override in a particular case, the
consequence will be that the particular ‘overriding’ provision may not be applied.
Concerning the current exit provisions in the PITA 2001 and CITA 1969, which are imposed on emigrating businesses,
the following can be said. These provisions have formally been introduced on the first of January 2001, so it might be
argued that in respect to treaties concluded before this date treaty override is likely to arise. The Dutch legislator,
however, does not believe that these provisions constitute treaty override, since the current provisions in the profit
sphere are either clarifications or successors of provisions of similar nature, which were already included in Dutch law in
1941.870 In my opinion this is stating the obvious; the legislator will naturally defend its own law. Therefore, an in-depth
See also: Kemmeren 2012, p. 9; Fiscal Encyclopedia personal income tax, article 3.60 PITA 2001, annotation 1.8; Kemmeren 2005, par.
7; Peters and Monfrooij 2009, par. 3.
866 “Vienna Convention”, concluded in Vienna, 23 May 1969.
867 See also: Kemmeren 2012, p. 10 and Kemmeren 2006, p. 290.
868 See HR BNB 2003/379 and 381. Kemmeren however argues that whether or not the treaty partner has introduced a similar provision is
not decisive. In his opinion, the Dutch Supreme Court will only accept Dutch legal fictions in case they relate to income which has already
been appointed to the Netherlands by virtue of the nature of that income. See Kemmeren 2005, par. 7.2.1 and Kemmeren 2006, p. 290.
870 As discussed, article 16 PITA 1964 was the predecessor of the current exit provisions on business emigration in both the PITA 2001 and
the CITA 1969; whereas before 2001 the CITA referred via art. 8 CITA 1969 to art. 16 PITA 1964 for business emigration cases, the CITA
now contains an exit provision of its own. The current exit provisions of both the PITA 2001 (articles 3.60 and 3.61) and the CITA 1969
(artices 15c and 15d) essentially have the same rationale as their predecessor, art. 16 PITA 1964. Article 16 PITA 1964 in turn, was the
864
865
143
analysis of case law and literature dealing with the question of treaty override in the context of taxation on business
emigration might be more informative.
6.3.1
Case law
In judging, on a case-by-case basis, whether the introduction of the business emigration provisions in the PITA 2001
and CITA 1969 encompasses treaty override, the criteria formulated by the Dutch Supreme Court in several cases may
be of help.
In 2003 the Dutch Supreme Court ruled the ‘fictitious wage’ case.871 In this case, the Dutch tax inspector determined
the remuneration of a director-shareholder of a Netherlands-established B.V.872, who lived in Belgium himself, on the
basis of article 12a of the Wet Loonbelasting 1964 (Wage Tax Act (WTA) 1964)873. This article contains a rule, the ‘usual
wage scheme’, on the basis of which the wage is to be determined by means of a legal fiction. The director-shareholder
fought the position taken by the tax inspector, arguing that the article in question was introduced after the NetherlandsBelgium DTC was concluded in1971. The Dutch Supreme Court ruled that the mere fact that the Netherlands taxes
income from employment using the usual wage scheme (art. 12a WTA 1964), by virtue of which income which has not
actually been obtained is taxed, does not justify the conclusion that the Netherlands has extended its taxing rights
beyond the borders set by the treaty concluded with Belgium. The Court continued by providing that when certain
income is allocated to the Netherlands by virtue of the nature of that income, the DTC leaves room for the Netherlands
to tax that income according to Dutch legal rules. Within that framework, legal fictions can be applied as well.874
However, the Court argued that the Netherlands is not allowed to exercise its taxing rights in case the Dutch legislator
tries to impose a tax on income which by its nature has not been allocated to the Netherlands. For example, by
introducing a legal fiction into national law or by labeling income in such a way that it will fall under a certain article
which does allocate taxing rights to the Netherlands, there will be a unilateral change in the allocation of the taxing
rights, which would constitute treaty override. However, there will be no question of treaty override when the countries
involved explicitly agreed on and accepted the effects of national legal fictions for the purpose of the allocation of
taxing rights under the DTC.875 An example of this can be found in the new treaty between the Netherlands and
Belgium. In the case HR BNB 2013/73, the Dutch Supreme Court argued that the Netherlands can exercise its taxing
right over fictitious income, i.e. the fictitious commutation of a pension which was build up in the Netherlands, derived
by a taxpayer who was a Belgian resident. As a general rule, the taxing right over pension is allocated to the residence
state (in this case Belgium) on the basis of article 18, paragraph 1, of the 2001 DTC Netherlands – Belgium. Paragraphs
2 and 3 of article 18 contain exceptions to this general rule, where in paragraph 3 the taxing right is, under certain
conditions, allocated to the source State. As follows from this provision and the commentary to this paragraph, the
Netherlands and Belgium explicitly agreed upon the meaning of the term ‘payment’, by which means the exception of
this paragraph applied to the Netherlands fictitious commutation of pension in the present case. Consequently, the
Netherlands, as the State of source, was allowed to exercise its taxing right without this constituting treaty override.876
successor of article 7(2) Besluit Inkomstenbelasting 1941 (Decree Income Tax 1941), and, according to legislative history (Kamerstukken II,
1958/59, 5380, no. 3, p. 37), the rationale of both article 16 PITA 1964 and article 7(2) Decree Income Tax 1941 is the same. I.e. to
safeguard the Dutch tax claim on accrued but unrealized profits, if it is uncertain whether such profits can be taxed in the future.
871 HR BNB 2003/379.
872 The Dutch B.V. is a private limited company.
873 From here on WTA 1964.
874 See also: Kemmeren 2005, par. 7.2.1. Kemmeren concludes that with this ruling, the Dutch Supreme Court leaves room for Dutch
fictitious provisions to impact on previously concluded DTCs, but only in case these fictitious provisions concern income which was already
allocated to the Netherlands by virtue of the nature of that income
875 See HR BNB 2003/379, note of Kavelaars.
876 See HR BNB 2013/73 and conclusion of A-G Niessen (in particular paragraph 6,9-6.11).
144
Another case in which the Dutch Supreme Court provided its view on treaty override is the Singapore pension
commutation case.877 This case dealt with a natural person (X), who lived in Singapore but worked for a period of 23
years for a Dutch B.V. The work was mostly performed outside the Netherlands. In 1988, X commutated the part of
his pension entitlement which related to the years of work performed outside the Netherlands. Over the commutation
amount the Netherlands withheld wage tax. The Dutch Supreme Court, however, ruled that this implied that the
Netherlands unilaterally shifted taxing rights towards itself, and rejected the Dutch legal fiction by virtue of which the
tax was withheld. The Court argued that the Netherlands-Singapore DTC appointed the taxing right over pensions and
similar remunerations, including a commutation amount, to the residence State (in this case Singapore). Up until 1995,
the payment in respect of pension commutation was qualified as income from former employment. The right to tax this
type of income was appointed to Singapore. The Court continued by arguing that a treaty provision on the basis of
which the right to tax the commutation sum is allocated to the residence State, cannot be escaped by the other State by
including a provision in its domestic tax law system on the basis of which the commutation amount is considered to be
part of the value of the pension entitlement immediately before the pension is commutated. In summary, the Court
ruled that the Netherlands has no right to tax the pension commutation, since the taxing right was allocated to the
residence country (i.e. Singapore). There is no room for Dutch legal fictions in this context.878
Another set of interesting cases are the so-called February cases879 of the Dutch Supreme Court. In these cases, the Court
ruled that the exit tax provision with respect to emigrating substantial shareholders (article 20a PITA 1964 or article 4.16
PITA 2001) do not infringe on DTCs. One of these cases, HR BNB 2009/261, dealt with a substantial shareholder (X)
on who a preservative tax assessment was imposed due to the fact that X emigrated to the United States, along with her
substantial shareholding in a Dutch N.V.880. X posed that the imposition of this preservative assessment infringed on
the DTC between the Netherlands and the US. The Dutch Supreme Court finally concluded that the exit tax on
substantial shareholdings does not imply an infringement on the good faith principle of the Vienna Convention. The
Court first elaborated on the exit provision with respect to substantial shareholders. At the time, article 20a PITA 1964
provided that there is a (fictitious) alienation of shares in case the substantial shareholder ceases to be a resident
taxpayer. It is assumed that the benefit from the alienation is derived immediately before emigration, and that this
subsequently falls beyond the scope of the treaty. The Court argued that on the basis of the OECD commentary to
article 13, paragraph 5, it is possible that tax is levied on capital gains, even if those capital gains did not arise by virtue
of an actual alienation. In this context, the Dutch exit provision is aimed at taxing the value increases in shares
belonging to a substantial shareholding, more specifically, the increases in value which relate to the period that the
holder of those shares was a resident taxpayer. In the opinion of the Court, this tax does not infringe on the good faith
principle and, therefore, does not amount to treaty override. The Court came to the same conclusion in another February
case, HR BNB 2009/260.881 This case dealt with a director-substantial shareholder (X), who emigrated to Belgium in
1998 and was confronted with a preservative tax assessment with respect to the fictitious alienation of his substantial
shareholding in a Dutch B.V. In the opinion of X, the preservative-aspect of the assessment infringed on the DTC
Netherlands-Belgium 1970, since the Netherlands extends its taxing right from 5 years (as provided by article 13(5) of
the DTC) to 10 years. Additionally, X argued that the Netherlands transforms dividend, over which the taxing right is
allocated to Belgium upon payment, to capital gains which, by virtue of the legal fiction, are deemed to have been
enjoyed immediately before emigration. In its ruling, the Dutch Supreme Court first established that the exit provision
on the emigration of substantial shareholders is aimed at taxing the value increases in shares belonging to a substantial
shareholding, more specifically, the increases in value which relate to the period that the holder of those shares was a
877
HR BNB 2003/380.
Compare to HR BNB 2013/73, from which it can be concluded that there will be room for legal fictions if countries explicitly agreed
upon the application and effects of these fictions.
879 HR 20 Februari 2009, nrs. 42699, 42701, 42702, 43760.
880 A Dutch N.V. is a public company.
881 The preceding procedure at a lower Court (Hof ‘s Hertogenbosch V-N 2005/47.11) however ended with this lower Court concluding
that the exit provision could possibly lead to a unilateral shift in the allocation of taxing rights, and it was ruled that the exit provision
constituted treaty override.
878
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resident taxpayer. In the Court’s view, a rule by virtue of which the value increases which are present at the moment of
emigration are taxed, is a rule which is aimed at capital gains and not at a (potential) dividend payment. That the
character of this rule is preservative (which means that deferral of payment is possible and that, under conditions, the
tax assessment will be waived), does not change the character of the taxation; it is a tax over capital gains, embodied in
value increases of the substantial shareholding of a Dutch resident. The Court ruled that such a tax does not infringe on
the good faith principle. It can be concluded from these two February cases, that the Court did not consider the Dutch
exit provisions with respect to emigrating substantial shareholders to infringe on either the DTC Netherlands-Belgium
1970 and the DTC Netherlands-United States 1992.
The question to whether or not exit taxes are allowed by the Dutch Court with respect to previously concluded DTCs
has now been analyzed for exit taxes on pensions and on substantial shareholders. However, the main question in the
context of this thesis is whether the exit provisions imposed on emigrating businesses constitute treaty override. Therefore,
I want to conclude with a discussion of a ruling of the Dutch lower Court of Amsterdam882, which specifically dealt
with the exit tax levied in the profit sphere. The case concerned the Dutch B.V. National Grid Indus883, who transferred
its place of effective management from the Netherlands to the United Kingdom. Upon emigration in the year 2000, the
only asset of the company was a receivable from a group loan of GBP 33 million, containing an unrealized capital
(currency) gain of approximately NLG 22 million (which is equal to about 1 million Euros). The Dutch tax inspector
imposed a tax assessment on the basis of which the B.V. had to immediately pay a settlement over the unrealized gains
and reserves. Indeed, the emigration triggered the Dutch exit tax provision of at the time art. 16 of the PITA 1964:884
‘Benefits derived from the business that have not yet been taken into account … are included in the profits for the calendar year in which the
person on whose behalf the business is run ceases to derive profits from the business taxable in the Netherlands …’. The tax consequence
in the Netherlands thus constituted immediate taxation of the unrealized currency gain of NGI.885 The lower Court of
Amsterdam argued in its ruling of 15 Juli 2012, that since NGI was taxed at the time it still was a resident of the
Netherlands, the exit tax in itself is not incompatible with article 7(1) and article 13(4) of the DTC Netherlands-United
Kingdom 1980. In the lower Court’s view, the tax may be imposed on the bases of national law but also on treaty law.
In my opinion it can be concluded that on the basis of the cited case law the Netherlands exit provisions stipulating a
disposal of assets upon emigration do not amount to treaty override as there is no infringement of the good faith
principle. First of all, the nature of the income is not changed by virtue of the emigration provisions. Secondly, the exit
provision are aimed at taxing the increases in value which relate to the period that the business taxpayer was a resident
of the Netherlands. Finally, the exit tax itself is not incompatible with the provisions of the DTC itself.
6.3.2
Literary review
Kemmeren has provided his view on the treaty override question in several articles. In the context of emigration of a
substantial shareholder, Kemmeren argues that there is no actual alienation of shares886 upon emigration, since an
essential characteristic of the concept of alienation is that the shares in question are transferred from the capital of one
882
Hof Amsterdam, LJN: BN1231.
Do not confuse the ruling of the Dutch Court, discussed here, with the ruling of the CJEU, which will be discussed in chapter 5.
884 When the PITA 2001 was introduced, the CITA 1969 was amended as well. Whereas before 2001 the CITA referred via art. 8 CITA
1969 to art. 16 PITA 1964 for the business emigration cases, the CITA now contains an exit provision of its own (art. 15c and 15d). The
current exit provisions in the CITA 1969 essentially have the same rationale as its predecessor art. 16 PITA 1964. See Kamerstukken II
1998/99, 26 727, no. 3, p. 116 (explanatory memorandum).
885 Note that the BV did not cease to exist, since, as discussed, the Netherlands applies an incorporation system. According to art. 2(4) a
body is regarded as established in the Netherlands, if a body has been established under Netherlands law. In principle, NGI thus remained
liable to tax indefinitely in the Netherlands. However, by virtue of art. 4(3) of the DTC Netherlands-UK, NGI was labeled as resident of the
UK after transfer of its place of effective management. So as from that moment on, the UK was entitled to tax profits and capital gains (art.
7(1) and 13(4) NL-UK).
886 Shares are an asset component of the capital of the substantial shareholder.
883
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person to the capital of another.887 Merely by virtue of a legal fiction, there is a deemed alienation of shares upon the
emigration of a substantial shareholder. At that same moment, there is an already existing assembly of mutual rights and
obligations. Kemmeren argues that the Netherlands can only levy a tax in case the taxpayer performs a legal act as a
result of which the shares actually leave the taxpayer’s capital, since for treaty provisions equal to article 13 OECD MC,
this is how the concept of alienation should be interpreted. The fact that the exit tax upon emigration is of a
preservative character is irrelevant according to Kemmeren.888 The applicable treaty provision relates to the allocation of
taxing rights over capital gains, not to the recovery rules and provisions (post-allocation). Having discussed the
unacceptability of the Dutch exit provisions with respect to substantial shareholders, Kemmeren continues his plea with
a discussion of the exit provisions in respect of pensions, where he comes to the same conclusion; the Netherlands exit
provisions infringe on the good faith principle, and therefore constitute treaty override.889 However, the main question
in the context of this thesis is whether the exit provisions imposed on emigrating businesses constitute treaty override.
Kemmeren has analyzed this question with respect to article 3.60 PITA 2001, which, as discussed, deals mainly with the
transfer of asset components in PE-situations.890 Kemmeren’s argumentation is based on the previously discussed
‘fictitious wage’ cases.891 Kemmeren concludes that with this ruling, the Dutch Supreme Court leaves room for Dutch
fictitious provisions to impact on previously concluded DTCs, but only in case these fictitious provisions concern
income which was already allocated to the Netherlands by virtue of the nature of that income. The question then is
whether this is the case. Kemmeren argues that the OECD commentary of art. 7 is of relevance here, since in this
commentary attention is paid to the transfer of assets from a domestic PE to a PE abroad or to the head office
abroad.892 When Kemmeren wrote his article, paragraph 15 of the OECD commentary893 to article 7 contained the
following: ‘However, the mere fact that the property leaves the purview of a tax jurisdiction may trigger the taxation of the accrued gains
attributable to that property as the concept of realization depends on each country’s domestic law.’ It follows that the OECD
commentary does not allocate taxing rights in general to the Netherlands in case assets are transferred the other way
round, i.e. from a domestic head office to a PE abroad. Moreover, in the Dutch tax system, such asset transfers are only
taxed in case they are accompanied or followed by emigration of the taxpayer.894 In line with the fictitious wage cases, a
case-by-case analysis will have to clarify whether the treaty partner has a similar provision in its national law system. If
so, then the Netherlands will be allowed to realize its exit tax claim of article 3.60 PITA 2001 in that case.895 According
to Kemmeren, the same is true when the treaty partner provides a step up upon immigration, i.e. when for purpose of
profit calculation the ‘beginning’ value of transferred assets is set at fair market value.896 In such a situation, there will be
no legal double taxation. When the treaty partner does not provide a step-up, Kemmeren believes that, with reference to
a ruling of a Dutch lower Court (Hof ‘s Hertogenbosch)897, the introduction of article 3.60 PITA 2001 constitutes a
unilateral shift of taxing rights in favor of the Netherlands, and that, subsequently, the good faith principle is harmed.898
In the context of the previously discussed NGI case ruled by the lower Court of Amsterdam899, Kemmeren has
however also argued that the exit provision of article 8 CITA 1969 in conjunction with article 16 PITA 1964 is not
prohibited under the 1980 DTC Netherlands-United Kingdom, because this provision dates from before the DTC was
889 See Kemmeren 2005, par. 7.2.2.
890 See Kemmeren 2006, p. 290-292.
891 HR BNB 2003/379 and HR BNB 2003/381.
893 OECD Commentary 2005. In the 2008 Commentary, paragraph 21 contained the same sentence. In the 2010 Commentary, the cited
sentence cannot be found anymore. However, the 2010 revision of the commentary does not mean that older commentary no longer plays a
role in the context of conventions concluded before the 2010 amendment. See Lang and Brugger 2003, p. 214: ‘Amendments to the OECD
Model Convention and to the OECD Commentary made after the conclusion of a double taxation convention have to be seen in a different light. Later Commentary
amendments cannot serve to establish the parties’ intentions upon conclusion of a double taxation convention.’
894 See also paragraph 1.5 and paragraph 3.5 of this thesis.
896 See Kemmeren, p. 291-292.
897 Hof ‘s Hertogenbosch 15 September 2005, nr. 03/0689.
898 See Kemmeren, 2006, p. 292
899 Hof Amsterdam, LJN: BN1231.
887
888
147
concluded. This means that it was already part of the tax law systems on which the treaty partners based the
agreement.900
In the February case HR BNB 2009/260, the Dutch Supreme Court did not consider the Dutch exit provisions with
respect to emigrating substantial shareholders to be incompatible with the DTC Netherlands-Belgium 1970.901
However, concerning the same case, the Dutch lower Court of ‘s Hertogenbosch came to the verdict that the exit
provision on substantial shareholders could possibly lead to a unilateral shift in the allocation of taxing rights, and it was
ruled that the exit provision constituted treaty override.902 In his conclusion to this case, A-G Wattel argued that this
ruling of hof ‘s Hertogenbosch was incorrect.903 In Wattel’s view, a preservative assessment imposed on an emigrating
substantial shareholder is not incompatible with the 1970 DTC Netherlands-Belgium. Wattel argued that since the treaty
provides no rules with respect to the allocation of taxing rights on value increases of shares amongst subsequent
resident States, this cannot be a reason to prohibit the imposition of a preservative tax assessment by the emigration
State. Moreover, Wattel states that under a system of a preservative tax assessment, not a fictitious, but a real, temporal,
and territorial unrealized value increase is subject to tax. It would be incorrect to argue that this cannot be allocated to
the Netherlands by virtue of the nature of the income. Wattel closes his plea by arguing that there is no re-qualification
of a category of income either in order to change the treaty allocation unilaterally (compare to the pension commutation
case). Summarizing the above, Wattel is of the opinion that the Dutch lower Court of ‘s Hertogenbosch incorrectly
concluded that the Dutch exit provision with respect to a substantial shareholder constitutes treaty override, since 1)
there are no specific rules in the treaty which deal with the allocation of taxing rights in the case of emigration, 2) the
object of taxation under a preservative tax assessment is real rather than fictitious, and 3) the reasoning used by the
Court in the pension commutation cases does not apply in the present case. Ergo, there is no treaty override. As
discussed, in the February case HR BNB 2009/260, the Dutch Supreme Court came to the same conclusion as Wattel.
In my opinion, Wattel gave a clear and convincing analysis with respect to the question of treaty override in the context
of exit taxes on emigrating substantial shareholders. However, he did not provide his view on the acceptability of exit
provisions which relate to emigrating businesses. Fortunately, other authors have done so. Peters and Monfrooij argue
that for emigrating businesses, a similar reasoning applies as for emigrating substantial shareholders.904 They argue that
after the Court’s rulings in the February cases, it is certain that the exit tax on substantial shareholders does not conflict
with DTCs.905 With respect to exit taxes in the business sphere, the authors state that a similar reasoning would imply
that the income from the alienation is deemed to have been derived immediately before emigration and that this
income, by virtue of its nature, does not belong to the tax jurisdiction of the immigration state. Consequently, article 7
nor article 13 of the OECD MC prevent the taxation over the reserves, unrealized gains and goodwill, which came to
existence during the period in which the business was a resident taxpayer of the Netherlands. Kavelaars has also
provided his opinion concerning the implications of the February cases (dealing with emigrating substantial shareholders)
for exit taxes on emigrating businesses.906 Using the criteria formulated by the Dutch Supreme Court in these cases,
Kavelaars argues that the settlement provisions of articles 3.60 and 3.61 PITA 2001 and articles 15c and 15d CITA 1969
are not inconsistent with treaty provisions. The author observes that the exit tax for businesses goes beyond the exit tax
for substantial shareholders; the former is not of a preservative character and is final tax, so that it cannot be reversed.
Kavelaars assumes that, considering the systematics of allocation in the profit sphere, article 7 of the OECD MC
900
See Kemmeren, 2012, p. 10 (note 23).
HR BNB 2009/260. The preceding procedure at a lower Court (Hof ‘s Hertogenbosch 15 September 2005, nr. 03/0689) however ended
with this lower Court concluding that the exit provision could possibly lead to a unilateral shift in the allocation of taxing rights, and it was
ruled that the exit provision constituted treaty override.
902 Hof ‘s Hertogenbosch V-N 2005/47.11
903 Conclusion A-G Wattel 4 October 2006.
904 Peters and Monfrooij 2009, par. 3.
905 In my opinion, the authors misinterpret the cases. It is not certain that the exit tax on substantial shareholders does not infringe on
DTCs in general. Rather, there are preconditions under which this will not be the case.
906 Kavelaars 2009, par. 3d.
901
148
allocates the taxing right to the State in which the enterprise is established during the period over which the profits are
derived. This implies that in the approach taken by the Court, an exit tax imposed upon the transfer of the place of
effective management of the enterprise is not hindered. Additionally, it might be argued that the Dutch system is
symmetrical, since the Netherlands provides, on the basis of article 3.8 PITA 2001, a step-up upon immigration.
It can be concluded that the general assumption in literature is that the exit provisions relating to emigrating businesses
will not amount to treaty override.907 In my opinion, this assumption is correct. First of all, there are no specific rules in
DTCs which deal with the allocation of taxing rights in case of emigration. I believe that as the exit tax is imposed on
business income which accrued in the Netherlands during the period in which the taxpayer was a resident, the taxing
right over this income is, by virtue of its nature, allocated to the Netherlands rather than to the immigration State.
Moreover, the exit provisions are not incompatible with treaty provisions. Finally, there is no re-qualification of a
category of income. All in all, there is, in my opinion, no infringement of the good faith principle; the Netherlands
merely imposes a tax on reserves, unrealized gains and goodwill, which came to existence during the period in which the
business was a resident taxpayer, and this is not prevented under DTCs.
In this chapter, the Netherlands exit tax system has been assessed in the light of DTCs. It is generally assumed that the
Netherlands will lose its tax claim after emigration, as tax treaties allocate taxing rights to the country of residence.
Under the exit tax system applied by the Netherlands, the specific fact which triggers taxation is treated as a domestic
event, i.e. a fictitious alienation upon emigration. The central question was whether this is permissible under DTCs, or
whether this constitutes treaty override.
First, the rules for the allocation of taxing rights under DTCs have been discussed. Taking the OECD MC as a
guideline, article 7 regulates the allocation of taxing rights with respect to business profits. This article basically takes
residency as the criterion for the allocation of the taxing right over business profits, with the PE as an exception. In the
context of business emigration and unrealized gains and reserves vested in transferred assets, the place of residence on
the moment of realization will, in principle, determine to which country taxing rights are allocated. In addition to article
7, article 13 of the OECD MC was analyzed, as this article is (amongst others) applicable to capital gains derived by an
enterprise. With respect to immovable property, the taxing right is allocated to the State in which that property is
located. With respect to movable property which is part of the business capital of a PE, the taxing right is allocated to
the State in which the PE is established. Article 13 takes the legal act of alienation as a starting point. It was discussed
that it is disputable whether the Dutch exit tax rules, by virtue of which there is a deemed alienation upon emigration, is
an alienation as it is to be understood for the application of article 13 OECD MC. I argued that in my opinion, it
follows from the commentary to article 13 that, for the purpose of article 13 OECD MC, the legal act of alienation both
encompasses the real alienation (which will lead to actual realization of gains) and the fictitious alienation (by which
gains are deemed to have been realized).
After having discussed the allocation rules under DTCs with regard to business income, the question of treaty override
was addressed. Treaty override arises when a country infringes on the good faith principle by unilaterally appropriating
taxing rights which were previously given up by concluding a DTC. In order to establish whether the Netherlands exit
tax system amounts to treaty override, both case law and literature were discussed and analyzed. In this context, the
Dutch Supreme Court has argued that when certain income is allocated to the Netherlands by virtue of the nature of
907 Kemmeren seems to be the only author who has argued differently (with respect to emigrating substantial shareholders and pensions,
which is also different). However, taking into consideration that the cases on which he predominantly based his opinion have been
overthrown (in particular Hof ‘s Hertogenbosch 15 September 2005, nr. 03/0689), I believe that his argumentation is no longer entirely
valid.
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that income, the DTC leaves room for the Netherlands to tax that income according to Dutch legal rules. Within that
framework, legal fictions such as the Netherlands exit provisions can be applied as well. It is, however, not allowed to
include in its tax base income which, by its nature, has not been allocated to the Netherlands. There will then be a
unilateral change in the allocation of the taxing rights, which would constitute treaty override. An exception to this rule
is the explicit agreement between the countries involved that the effects of national legal fictions will be accepted for the
purpose of the allocation of taxing rights under the DTC. Moreover, in the context of exit taxation with respect to
emigrating substantial shareholders, the Court ruled in several cases that the Dutch exit provisions are aimed at taxing
the increases in value of the shares which relate to the period that the shareholder was a resident of the Netherlands. In
the opinion of the Court, this tax does not infringe on the good faith principle and therefore there is no treaty override.
On the basis of the cited case law, I concluded that the Netherlands exit provisions stipulating a disposal of assets upon
emigration do not amount to treaty override as there is no infringement of the good faith principle. First of all, the
nature (business income) of the income is not changed by virtue of the emigration provisions. Secondly, the exit
provision are aimed at taxing the increases in value which relate to the period that the business taxpayer was a resident
of the Netherlands. Finally, the exit tax is not incompatible with the provisions of the DTC itself. On the basis of a
literary review, I essentially came to the same conclusion.
international tax neutrality?, the tax convention element has been addressed in this chapter. It was argued that the most
important question was whether the Netherlands exit provisions in regards to businesses can result in treaty override. In
my opinion this question can be answered in one sentence as follows: all in all, there is no infringement of the good
faith principle; the Netherlands merely imposes a tax on reserves, unrealized gains and goodwill, which came to
existence during the period in which the business was a resident taxpayer, which is not prevented under DTCs.
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7.
EUROPEAN UNION LAW
7.1 Introduction
In the previous chapter, an analysis was provided on the extent to which Dutch exit provisions in the business sphere
are allowed in the light of DTCs. DTCs are, however, only a part of the international tax law framework. Another very
important part is European Union law. In this chapter, I will analyze to what extent the provisions relating to the
emigration and immigration of a business are (in)compatible with EU law. It should be noted that EU law is directly
applicable to national law. This was decided by the CJEU in the case Van Gend & Loos908. This implies that taxpayers
can directly invoke freedoms which stem from Union law, such as for example the freedom of establishment previously
discussed. Moreover, even though direct taxation essentially is the sole responsibility of MSs and not within the
competencies of the EU (at least not directly), MSs have to arrange their direct tax systems in a manner which is
compatible with EU law. European Union law exists through several ‘sources’. An important source in the context of
exit taxation is the Treaty of Functioning of the European Union (TFEU), in particular article 49 of this treaty, which
deals with the freedom of establishment. An additional source of Union law which is of relevance with respect to exit
taxes, is the merger directive.
7.2 Article 49 TFEU: freedom of establishment
Article 49 of the TFEU909 provides the following: ‘Within the framework of the provisions set out below, restrictions on the
freedom of establishment of nationals of a Member State in the territory of another Member State shall be prohibited. Such prohibition
shall also apply to restrictions on the setting-up of agencies, branches or subsidiaries by nationals of any Member State established in the
territory of any Member State. Freedom of establishment shall include the right to take up and pursue activities as self-employed persons and
to set up and manage undertakings, in particular companies or firms within the meaning of the second paragraph of Article 54, under the
conditions laid down for its own nationals by the law of the country where such establishment is effected, subject to the provisions of the
Chapter relating to capital.’ The freedom of establishment thus encompasses both market access (the right to take up and
carry on activities as a self-employed person and to set up and manage undertakings) and market equality (the right to
treatment as a domestic entrepreneur in the Member State (MS) of establishment). Additionally, it covers both primary
and secondary establishments. The right of establishment is only accessible for individuals having a EU nationality and
legal entities having their principal place of business within the Union.910
In general, the Dutch exit tax provisions on businesses represent a restriction to the freedom of establishment.
Companies transferring their place of effective management outside the Netherlands are taxed on an accruals basis
whereas in a purely domestic situation, transferring companies are taxed on a realization basis. This poses a difference in
treatment constituting an obstacle to free movement.911 More specifically, transnational transfers become less attractive
than purely domestic transfers due to the imposition of exit taxes, resulting in a restriction to the freedom of
establishment without there being an objective difference in the situation. Consequently, it has to be judged on a caseby-case basis whether this different tax treatment can be justified by an imperative reason of public interest, and if so,
whether the scrutinized provisions are appropriate to attain the aim.912
908
CJEU Van Gend & Loos (Case 26/62).
Ex. art. 43 TEC
910 Art. 49-54 TFEU
911 See also: COM(2006) 825 final, para 2.1.
912 The general aim or rationale of exit taxes is to safeguard the Dutch tax claim on accrued but unrealized profits, if it is uncertain whether
such profits can be taxed in the future. Additionally, recovery of the claim has to be guaranteed.
909
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7.3 Court of Justice of the European Union cases on business migration
The Court of Justice of the European Union has ruled several cases in the context of business migration. In this section,
I will again follow the distinction previously made, between natural persons and legal entities.913
7.3.1
Case law on individuals (natural persons)
In the context of business migration, the CJEU has not ruled any cases yet with respect to natural persons. In the context
of the emigration of substation shareholders, however, two important cases have been ruled. They include Hughes de
lasteyrie du Saillant914 and N. v. Inspecteur915. In addition, the case Commission v. Spain916 has been ruled in the context of an
individual transferring his place of residence outside Spain.
7.3.1.1 Hughes de Lasteyrie du Saillant
Hughes de Lasteyrie du Saillant917 was the first true emigration case which was ruled by the Court of Justice of the
European Union. This case dealt with a natural person (H. de Lasteyrie du Saillant, from here on mr. de Lasteyrie) who
transferred his tax residence from France to Belgium, taking along his substantial shareholding in a French company.
Upon emigration, France imposed an exit tax over unrealized increases in value in his substantial shareholding. With
regard to this tax, payment could be deferred until the taxpayer actually sold the shares, but only if the taxpayer would
provide sufficient securities to the French tax administration. Moreover, if the taxpayer would still own the shares after
five years the tax could be waived entirely.918
In the opinion of the Court, the restriction posed by the French emigration rules was limited in scope, but nonetheless
there was a restriction of the freedom of establishment. The French rules did not prevent a French taxpayer from
exercising its right to free establishment. However, the Court argued that the rules had a dissuasive effect; taxpayers
who emigrated from France were treated disadvantageous when compared to persons who did not emigrate.919 “That
taxpayer becomes liable, simply by reason of such a transfer, to tax on income which has not yet been realized and which he therefore does not
have, whereas, if he remained in France, increases in value would become taxable only when, and to the extent that, they were actually
realized. That difference in treatment concerning the taxation of increases in value, which is capable of having considerable repercussions on the
assets of a taxpayer wishing to transfer his tax residence outside France, is likely to discourage a taxpayer from carrying out such a
transfer”.920 It was possible to apply for deferred payment, but this was not automatic and subject to strict conditions,
amongst which the filing of a specific application at the same time as making the latent capital gains declaration,
designating a tax representative, sending a statement of changes in the capital gains on an annual basis to the tax
authority, and most importantly, the provision of guarantees.921 The Court argued that the obligation to provide
guarantees had a restrictive effect in itself, as it deprived the taxpayer of the enjoyment of the assets.922 The French
government argued that the emigration rule was justified because of its aim of preventing tax avoidance. The Court did
not recognize this justification, as the French rule was too broad for the purpose of anti-abuse; it was not specifically
designed to exclude purely artificial tax arrangements aimed at circumventing French tax law from a tax advantage.923 In
913 It should be noted that other categorizations are possible, such as a distinction between cases ruled under a real seat jurisdiction versus
cases ruled under incorporation systems. In the set-up I’ve chosen, this distinction is however a sub-distinction of the legal entities.
914 See CJEU Hughes de Lasteyrie du Saillant (Case C-9/02).
915 See CJEU N. v. Inspecteur (Case C-407/04).
916 See CJEU Commission v. Spain (Case C-269/09).
917 See CJEU Hughes de Lasteyrie du Saillant (Case C-9/02).
918 See CJEU Hughes de Lasteyrie du Saillant (Case C-9/02), paras. 3-11.
919 See CJEU Hughes de Lasteyrie du Saillant (Case C-9/02), paras. 45 and 46.
920 See CJEU Hughes de Lasteyrie du Saillant (Case C-9/02), par. 46.
921See Opinion A-G Mischo 13 March 2003, paras. 36-37.
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addition, the cross-border transfer of an individual’s tax residence does not, in itself, imply tax avoidance.924 The
suggested justification of preventing tax avoidance was thus rejected by the Court, as it could not justify the French
emigration rules which posed a restriction to the freedom of establishment.925 The second justification (which was put
forward by the Dutch government in this case) of ensuring the coherence of the French tax system was rejected as
well.926 According to the Court, the French emigration rule was not aimed at ensuring that increases in value are to be
taxed, in case a taxpayer transfers his tax residence outside France, to the extent that the particular increases in value are
acquired during the taxpayer’s stay on French territory.927 The Court finally also rejected the preservation of the
allocation of taxing rights between MSs as a justification, as the dispute dealt with the question whether measures
adopted to tax latent value increases upon the transfer of residence comply with the freedom of establishment, rather
than with the question of the allocation of taxing powers.928 Put briefly, in its final verdict, the Court concluded that the
French exit tax was an infringement of the freedom of establishment.
Some conclusive remarks
The Court’s ruling was straightforward but not very detailed. The Court roughly ruled that the French exit tax was an
infringement of the freedom of establishment, where it was clear that the obligation to provide guarantees has a
restrictive effect.929 Other details and obligations were not explicitly noted as restrictive by the Court. Preventing tax
avoidance, ensuring the fiscal coherence of the tax system, and preserving the balanced allocation of taxing powers,
were all disregarded as justification grounds with respect to emigrating individuals. This implies that the Court does not
easily accept restrictions to individual’s freedoms.
7.3.1.2 N. v. Inspecteur
After the French rules on emigrating substantial shareholders were examined by the CJEU in the case Hughes de Lasteyrie
du Saillant, it was the turn of the Dutch tax rules with respect to substantial shareholders930 transferring their tax
residence abroad. In the N. case931, a Dutch resident emigrated to the United Kingdom (UK), taking along his
substantial shareholding in three Dutch companies, which were effectively managed from the Netherlands Antilles
(more specifically, mr. N. was the sole shareholder of these companies).932 In the Dutch tax system, the taxpayer was
granted extension to pay of 10-years, and if after this period no shares had been disposed of, the tax claim on the
taxpayer was waived. This is a system of a preservative tax assessment. However, this system was not granted
automatically and unconditionally. For example, at the time the dispute came to existence (1997), securities had to be
provided to the Dutch tax authority. In response to the Court’s ruling in Hughes de Lasteyrie du Saillant the Dutch
government canceled the requirement to provide these securities. Consequently, the securities which mr. N. provided
upon emigration in 1997 were released in 2004.933 Fact remains that upon emigration mr. N. received a preservative
assessment for unrealized value increases in his substantial shareholdings. In his opinion, his freedom of movement was
restricted due to the Dutch rules dictating the imposition of such an assessment.
The Court first examined whether mr. N., being a sole shareholder, could even invoke the freedom of establishment.
Put briefly, it was confirmed that mr. N. fell within the freedom of establishment, as he had the substantial influence
924
See CJEU Hughes de Lasteyrie du Saillant (Case C-9/02), par. 51.
See CJEU Hughes de Lasteyrie du Saillant (Case C-9/02), par. 51.
929 After the ruling of the CJEU in Hughes de Lasteyrie du Saillant, the Dutch government amended its regime for emigrating substantial
shareholders, by cancelling the security requirement which, up until then, applied to such emigrations.
930 In the Netherlands, a substantial shareholders is any person holding at least a 5 percent interest in a legal entity).
931 See CJEU N. v. Inspecteur (Case C-407/04).
932 See CJEU N. v. Inspecteur (Case C-407/04), par. 11.
925
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over the company’s decisions and activities.934 Subsequently, as the freedom of establishment was applicable, the Court
found that the Dutch rules with respect to emigrating substantial shareholders constituted an obstacle to this
freedom.935 The CJEU cited its reasoning in Hughes de Lasteyrie du Saillant: a taxpayer who transfers his residence abroad,
was subjected (at the time of the facts) to disadvantageous treatment in comparison with a person who maintained his
residence in the Netherlands. Only because of such a transfer, the taxpayer became liable to a tax on income which had
not yet been realized and which he therefore did not have. If he had remained in the Netherlands, only increases in
value which are actually realized are taxed. In the Court’s opinion, this difference in treatment was likely to discourage
mr. N. from transferring his residence outside the Netherlands.936 It is possible to benefit from suspension of payment,
but this is not automatic and it is subject to conditions, such as the provision of guarantees. The Court again argued that
those guarantees in themselves constitute a restrictive effect, in that they deprive the taxpayer of the enjoyment of the
assets given as a guarantee.937 In addition, decreases in value occurring after the transfer of residence were not taken
into account, implying that the tax on the unrealized increase in value is fixed at the time of that transfer. The tax on
income calculated on the basis of the increase in value actually achieved at the time of the disposal might be less, or
even non-existent.938 Moreover, the tax declaration required at the time of transferring residence outside the
Netherlands is an additional formality, which is likely to further hinder mr. N.’s freedom of establishment.939
The Court continued with its well-known reasoning that hindering measures may, nonetheless, be allowed if they pursue
a legitimate objective in the public interest, are appropriate to attain that objective, and do not go beyond what is
necessary to attain it (proportionality).940 The Court observed that the emigration rules on substantial shareholders are
designed to allocated taxing powers between MSs941, on the basis of the territoriality principle.942 More specifically, the
Court argued that “…it is in accordance with that principle of fiscal territoriality, connected with a temporal component, namely residence
within the territory during the period in which the taxable profit arises, that the national provisions in question provide for the charging of tax
on increases in value recorded in the Netherlands, the amount of which has been determined at the time the taxpayer concerned emigrated and
payment of which has been suspended until the actual disposal of the securities.”943, 944 Thus, the Court in principle accepted the
emigration tax on substantial shareholders and the preservative assessment as appropriate to attain the aim.945 With
respect to the proportionality of the measure, however, the Court observed some problems. The tax declaration
demanded at the time of emigration was not regarded as disproportionate in the context of the allocation of taxing
powers, in particular for the purpose of eliminating double taxation.946 The obligation to provide securities, on the other
hand, was seen as disproportional, as there are methods which are less restrictive of fundamental freedoms.947 More
specifically, MSs can make use of the Mutual Assistance Directive for the recovery of taxes948 and the Mutual Assistance
934
See CJEU N. v. Inspecteur (Case C-407/04), par. 27.
941 Preserving the allocation of the power to tax between Member States is a legitimate objective recognized by the Court of Justice, see
CJEU N. v. Inspecteur (Case C-407/04), par. 42.
943 CJEU N. v. Inspecteur (Case C-407/04), par. 46.
944 It is, however, disputable whether the argument of the Court is really sound. More specifically, it might be argued that in the context of
the principle of fiscal territoriality the Dutch rules were not fully consistent. Firstly, under the system of a conservative assessment, the tax
claim is waived completely after 10 years. At that time, the principle of fiscal territoriality combined with a temporal component is still the
same as it was on the moment of emigration. Secondly, article 13(5) OECD MC (to which the Court refers) provides that gains derived
from disposing of assets are taxable in the State of residence of the ‘disposer’. This might not be in accordance with the principle of
territoriality.
946 See CJEU N. v. Inspecteur (Case C-407/04), par. 49. The tax declaration is an administrative formality likely to hinder the exercise of
fundamental freedoms by the person concerned or make such exercise less attractive, but it cannot be regarded as disproportionate.
935
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Directive for exchange of information949. The Court also considered it to be disproportional that reductions in value
arising after the transfer of residence were not taken into account (unless such reductions have already been taken into
account in the host Member State).950 To summarize: the Court allowed the preservative assessment, provided that
there is no immediate payment. Tax collection has to be postponed until actual realization of the gain, and in the
meanwhile, MSs cannot require the provision of guarantees. Also, the exit State has to take into account any reductions
in value which arise after emigration of the taxpayer, unless these reductions are taken into account by the other State.
In the N. case, the Court confirmed its previous ruling in Hughes de Lasteyrie du Saillant. However, where in the latter case
the Court did not elaborate on what elements exactly it considered to be incompatible with the freedom of
establishment, this was specified further in the N. case. The Court basically allowed the imposition of a preservative
assessment on emigrating substantial shareholders, provided that there is no immediate collection of the tax. In
addition, tax collection has to be postponed automatically until actual realization of the gain, and in the meanwhile, MSs
cannot require the provision of guarantees. This is a very clear decision when compared to de Lasteyrie case. It should
also be noted, that in the N case, the Court accepted the justification of the balanced allocation of taxing powers, where
in the de Lasteyrie case, all justification grounds were disregarded. This may explain why the Court did not consider the
proportionality of the exit provisions in that case in more detail.
7.3.1.3 Commission v. Spain
The case Commission v. Spain951 dealt with an individual wishing to transfer his residence from Spain to another place.
Under the Spanish exit tax regime for individuals, taxpayers who transfer their place of residence outside Spain must
include in the last tax year’s tax base all income which has not yet been charged to tax.952 Taxpayers who do not transfer
their residence outside Spanish territory, are not under such an obligation; they automatically receive a deferral of tax
payment. The Spanish legislation “triggers an obligation for the taxpayer to pay tax before taxpayers who continue to reside in Spain
are required to do so. That difference in treatment is capable of placing persons who transfer their residence abroad at a financial disadvantage
by providing that the income still to be charged to tax has to be included in the tax base for the last tax year in which those persons were
resident”.953 This difference in treatment cannot be explained, in the present case, by an objective difference in the
situation.954 Consequently, the Court argued that the Spanish measure could possibly obstruct the free movement of
persons (article 39 TFEU) and the freedom of establishment (article 43 TFEU).955 The Kingdom of Spain has
contended that income which was already obtained by taxpayers should be taxed before a person loses all links with the
Spanish tax authorities. If not, it would be difficult to recover the tax, for both legal and factual reasons, as it is very
difficult in many cases to trace the tax debtor.956 The Court disregarded this position and held the Spanish exit tax rules
on individuals as being disproportionate; the Spanish measures go beyond what is necessary, since the MSs can use the
mechanism provided for under the Directives on mutual assistance for recovery, 76/308957 and 2008/55958: “the
cooperation mechanisms existing at EU level between the authorities of the Member States are sufficient to enable the Member State of origin
to recover the tax debt in another Member State”.959 The Court admits that these instruments for cooperation may not always
949
Council Directive 2011/16/EU.
951 CJEU Commission v. Spain (Case C-269/09).
952 See CJEU Commission v. Spain (Case C-269/09), par. 4 with reference to article 14(3) of Law 35/2006.
953 See CJEU Commission v. Spain (Case C-269/09), par. 57, where the Court refers to Lasteyrie du Saillant, par. 46, and N, par. 35.
954 See CJEU Commission v. Spain (Case C-269/09), par. 60.
957 Currently: Council Directive 2010/24/EU.
958 Council Directive 2008/55/EC.
959 See CJEU Commission v. Spain (Case C-269/09), par. 68, with reference to National Grid Indus, paragraph 78.
950
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function in an efficient and satisfactory manner in practice, but that this does not justify a restriction of the fundamental
freedoms.960
As several cases dealing with exit taxes were ruled after Hughes de Lasteyrie and N. such as National Grid Indus, in which
the Court came to completely different outcomes with respect to legal entities, some might pose that the new line which
the Court took in National Grid Indus also applies to emigrations of natural persons. This would imply no automatic
deferral of payment, no requirement to take into account post-emigrational value decreases for emigration States, and
securities provisions and interest calculation in case of deferral, for both individuals and legal entities. However, this
position is, in my opinion, wrong, as in the case Commission v. Spain the Court reaffirmed its reasoning set out in Hughes
de Lasteyrie and N. for individuals in general. More specifically, there should be automatic deferral of payment without
securities and interest calculation.961
7.3.2
Case law on companies (legal entities)
Companies transferring their residence abroad may also face the restricting exit taxes on unrealized gains and hidden
reserves. Several cases which deal to some extent with the migration of a company have been ruled, including Daily
Mail962, Überseering963, Cartesio964, SEVIC Sytem965, National Grid Indus966, VALE967, Commission v. Portugal968, Arcade
Drilling AS969 (which, unlike the other cases, was ruled by the EFTA Court instead of the CJEU), Commission v. Kingdom
of the Netherlands970, and finally Commission v. Spain971. As companies only exist by virtue of the law under which they have
been incorporated, an important element is the influence of the application of an incorporation system versus a real seat
system.972 Therefore, particular attention will be paid to this in discussing the different cases, as it also affects the extent
to which the freedom of establishment will offer protection.973
7.3.2.1 Daily Mail
Daily Mail974 was the first case which was ruled in the area of business emigration by the CJEU. This case particularly
shows the aforementioned influence of the incorporation system. The case dealt with Daily Mail and General Trust
PLC975, a company incorporated under the legislation of the United Kingdom and having its registered office in the
United Kingdom. Daily mail wanted to transfer its central management976 to the Netherlands. The main reason for this
transfer was tax-driven; the company wanted to sell some of its holdings, which, in the UK, would trigger gains
taxation.977 By transferring to the Netherlands, the following system would prevent such a taxation: after the company
would become a non-resident of the UK, it would sell a significant part of its holdings. The proceedings of that sale
960
See CJEU Commission v. Spain (Case C-269/09), par 72.
See also: Lambooij 2013, par. 4.
963 CJEU Überseering (Case C-208/00).
964 CJEU Cartesio (Case C-210/06).
969 EFTA Court Arcade Drilling AS (Case E-15/11).
972 For the distinction between the two systems, I refer to paragraph X.
975 Listed on the London Stock Exchange.
976 Its primary establishment / its residence for tax purposes.
977 See CJEU Daily mail (Case-81/87), par. 7.
961
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would be used to buy own shares, a transaction which was not taxable in the UK. In the Netherlands, the Daily Mail
would have to draw an opening balance on which its holdings would be entered at fair market value (step-up). As such,
there would only be a tax on gains accrued after the company would be a resident of the Netherlands. The UK tax claim
on the capital gain could thus be avoided by transferring to the Netherlands. After the transfer, the Daily Mail would
become a non-resident and would, consequently, no longer be subject to corporation tax in the UK. At the same time,
the Daily Mail wanted to retain its status as a UK company. This was allowed under UK company law (incorporation
system),978 but required the consent of the Treasury.979 As the transfer was mainly tax-driven, the Treasury would only
give its consent if the Daily Mail would sell some of its holdings or pay tax before leaving the UK jurisdiction.980 The
Daily Mail argued that this condition, of having to sell or pay tax before receiving permission to transfer its residence
outside the UK, was a violation of its freedom of establishment, which “gave it the right to transfer its central management and
control to another Member State without prior consent or the right to obtain such consent unconditionally”.981
In the first place, the CJEU emphasized that in the present state of Union law, the conditions under which a company
can transfer its real seat to another MS, depend on the national law of the State in which the company is
incorporated.982 It was argued that companies are creatures of the national law, and that they exist only by virtue of the
national legislation determining their incorporation and functioning.983 In addition, there is no harmonization at a EU
level. The Court discussed that the legislation of different MSs varies widely with respect to the connecting factor
required for the incorporation of a company, and how such a factor could be modified.984 It argued “The Treaty places on
the same footing, as connecting factors, the registered office, central administration and principal place of business of a company”985 The
Court thus answered the question of whether and how a registered office incorporated in one MS may be transferred to
another was subject to national law, rather than that it was resolved by the freedom of establishment. To conclude, it
was found that in the present state of Union law, the freedom of establishment confers ‘no right on a company incorporated
under the legislation of a Member State and having its registered office there to transfer its central management and control to another Member
State‘.986
It should be noted that in the Daily Mail case, the CJEU only considered the migration of a company from an outbound
perspective. The Court did not examine conflict of law rules nor the issue of recognition of a foreign company.987 I
believe this was not necessary either, as the Netherlands and the UK both apply an incorporation system of company
law. The transfer is therefore without repercussions from a company law perspective; the legal personality would be
recognized and retained under the corporate law of both States. The real issue was the question of the permissibility of
an exit tax. And in this context, it might be argued that the Court eventually answered the wrong question. More
specifically, the Court should have examined the proportionality of the Treasury consent requirement.988 But instead of
focusing on the sanctions of the real seat transfer (the ‘exit tax’), the Court focused on the transfer of the real seat as
such.
978
See CJEU Daily mail (Case-81/87), par. 3.
See CJEU Daily mail (Case-81/87), par. 18.
988 See also Terra and Wattel 2012, p. 511.
979
157
7.3.2.2 Überseering
In the Überseering case989, the question which had to be answered did concern the issues related to the transfer of a real
seat as such. More specifically, the case concerned the transfer of a company from an incorporation jurisdiction (the
Netherlands) to a real seat system (Germany)990. Überseering BV, a company incorporated under Dutch corporate law,
tried to sue a German company in 1996 for damages on defective work carried out in 1992 on a German building work
of Überseering BV.991 In 1994, all the shares in Überseering BV were acquired by two German nationals.992 Both the
German Regional Court and the Higher Regional Court dismissed the action of Überseering, as they found that the
Dutch incorporated company had transferred its centre of administration to Germany once its shares had been acquired
by two German nationals. In addition, a company incorporated under Netherlands law did not have legal capacity in
Germany and could, therefore, not bring legal proceedings there.993 The company should have followed the required
formation formalities under German law in order to acquire to legal capacity to proceed. By failing to do so,
Überseering could not be entitled to rights or subject to obligations. In order to have legal dealings, it had to dissolve
and reincorporate as to acquire legal capacity under German law.994 The Bundesgerichtshof, wondered whether the
refusal to recognize the legal capacity of a company incorporated validly under the law of another MS and the resulting
denial to bring legal proceedings was compatible with the freedom of establishment.995
With respect to the refusal to recognize the legal capacity of a company validly incorporated under the law of another
MS, the CJEU argued that there was a restriction of the freedom of establishment.996 As to whether the restriction to
the freedom of establishment was justified, the German government submitted that the rules were aimed at enhancing
legal certainty and protecting creditors, minority shareholders, and employees.997 In addition, the German government
argued that fiscal grounds also justified the company seat principle, as there is a risk that companies might claim and be
granted tax advantages simultaneously in several Member States.998 Despite all these arguments, the Court found that
the refusal to recognize the company form of another MS could not be justified on the basis of overriding requirements
in the public interest. It argued that “It is not inconceivable that overriding requirements relating to the general interest, such as the
protection of the interests of creditors, minority shareholders, employees and even the taxation authorities, may, in certain circumstances and
subject to certain conditions, justify restrictions on freedom of establishment. Such objectives cannot, however, justify denying the legal capacity
and, consequently, the capacity to be a party to legal proceedings of a company properly incorporated in another Member State in which it has
its registered office.”999 This was, in the opinion of the Court, an outright prohibition of the freedom of establishment.
It follows that Member States are required to grant national treatment to companies incorporated under the law of
another MS comparable to their own legal forms, as the aforementioned companies continue to exist under the
corporate law of the incorporation State. At this point, it can therefore be concluded that MSs may not restrict the
immigration of other States’ valid legal forms, if those companies would not lose their legal personality upon emigration.
Moreover, in the context of the previously discussed Daily Mail case, it can be argued that this is different from an
989
See CJEU Überseering (Case C-208/00).
See CJEU Überseering (Case C-208/00), par. 4: “A company's legal capacity is determined by reference to the law applicable in the place where its actual
centre of administration is established.”
991 See CJEU Überseering (Case C-208/00) paras. 2, 6 and 8.
992 See CJEU Überseering (Case C-208/00), par. 7.
994 See CJEU Überseering (Case C-208/00), paras 20 and 23.
995 See CJEU Überseering (Case C-208/00), paras 20 and 21.
996 See CJEU Überseering (Case C-208/00), paras 82.
997 See CJEU Überseering (Case C-208/00), paras 87-89.
999 See CJEU Überseering (Case C-208/00), paras. 92 and 93.
990
158
outbound perspective. More specifically, MSs are allowed make the transfer of the actual centre of administration of a
company incorporated under its law subject to restrictions.1000
In the opinion of Terra and Wattel the tax implications of the combined cases Daily Mail and Überseering seem to be that
whether or not a company exist is a sovereign decision of the MS of incorporation.1001 The existence or non-existence of a
company is then essentially a question of national law only and of the fiscal sovereignty of the State. The incorporation
State is the only State with the competence to decide the circumstances under which a company’s legal existence ends,
as it also sovereignly decides the legal Statute governing the company’s existence and functioning. In this line of
reasoning, MSs would be free to restrict the emigration of companies incorporated under their law, and if the exit State
may legally kill a company upon emigration, it would also be allowed to tax it upon emigration.1002 The immigration
State, however, is not allowed to restrict the immigration of other States’ legal forms, as followed from Überseering.
7.3.2.3 SEVIC System
The case Sevic System1003 dealt with a cross-border merger operation. The Luxembourg company Security Vision Concept
SA wanted to merge with SEVIC Systems AG (‘SEVIC’), a company established in Germany.1004 The merger contract
between the two companies provided for the dissolution without liquidation of the Security Vision and the transfer of
the whole of its assets to SEVIC, without any change in the latter’s company name.1005 The German Amtsgericht rejected
the application for registration of the merger in the commercial registers of companies, as, on the basis of German
company law, only mergers between two domestic legal entities could be registered.1006 The question referred to the
CJEU was whether this difference in treatment1007 infringes on the freedom of establishment.
For the CJEU, the disadvantageous treatment was evident; in German law, there is no provision for registration in the
commercial register of cross-border mergers, unlike what exists for internal mergers. Applications for the registration of
cross-border mergers are generally refused, which means that such a company transformation is not possible when one
of the companies is established in a Member State other than Germany.1008 The Court considered that, in certain
circumstances and under certain conditions, imperative reasons in the public interest (such as protection of the interests
of creditors, minority shareholders and employees, and the preservation of the effectiveness of fiscal supervision and
the fairness of commercial transactions) may justify a measure restricting the freedom of establishment.1009 Nonetheless,
the general refusal of registration in the commercial register of a merger involving a company from another MS,
effectively prevents the realization of the cross-border merger. In the Court’s opinion, such a rule goes beyond what is
necessary to protect the aforementioned reasons in the public interest.1010 The German rule was thus found
disproportional by the CJEU.
1000
See also clarification of Daily mail in: CJEU Überseering (Case C-208/00), par. 70: the Court “concluded that a Member State was able, in case of a
company incorporated under its law, to make the company’s right to retain its legal personality under the law of that State subject to restrictions on the transfer of the
company’s actual centre of administration to a foreign country.”
1001 See Terra and Wattel 2012, p. 512.
1004 See CJEU SEVIC System (Case C-411/03), par. 1.
1007 i.e. Registration in the national commercial register of the merger by dissolution without liquidation of one company and transfer of the
whole of its assets to another company is refused in general in a Member State where one of the two companies is established in another
Member State, whereas such registration is possible, on compliance with certain conditions, where the two companies participating in the
merger are both established in the territory of the first Member State. See CJEU SEVIC System (Case C-411/03), par. 15.
1008 See CJEU SEVIC System (Case C-411/03), par. 20-23.
159
The SEVIC case shows that cross-border mergers fall under the right of establishment. Moreover, on the basis of this
right of establishment, Member States are obliged to allow the registration of the merger of a foreign company into a
domestic company in the national commercial company register, equal to the merger of two domestic companies. Terra
and Wattel1011 argue that refusing registration of the merging of a foreign company into a domestic company impels
foreign acquired companies to be liquidated and re-incorporated under domestic company law, despite the fact that the
‘home’ State (Luxembourg) allows the merging of domestic companies into a foreign legal form without liquidation and
transfer of assets.
7.3.2.4 Cartesio
The Cartesio1012 case dealt with the transfer of a company from a real seat jurisdiction to another State. Cartesio, a
company incorporated under Hungarian law, wanted to transfer its real seat to Italy, leaving its statutory seat in
Hungary. The application for this transfer, which Cartesio filed at the regional Court, was refused, as Hungarian law
does not allow companies incorporated under Hungarian law to transfer their seat abroad while continuing to be subject
to Hungarian law as its personal law.1013 The real seat could only be transferred abroad if the company would first be
dissolved in Hungary, so that it could then be re-incorporated under Italian law.1014 For companies transferring their real
seat within Hungarian borders, this was not required. Cartesio subsequently argued that the requirement to dissolve and
reincorporate in order to be able to transfer its real seat was incompatible with the freedom of establishment.1015
The vital question in the Cartesio case is whether the freedom is to be interpreted as precluding legislation of a Member
State under which a company, incorporated under the law of that Member State, may not transfer its seat to another
Member State whilst retaining its status as a company governed by the law of the Member State of incorporation. The
Court of Justice of the European Union started by reciting the Daily Mail case, in that companies are creatures of
national law and exist only by virtue of the national legislation which determines its incorporation and functioning.1016
In addition, the Court reminded that legislation of MSs varies widely.1017 Taking this into reconsideration, the Court
emphasized that: “a Member State has the power to define both the connecting factor required of a company if it is to be regarded as
incorporated under the law of that Member State and, as such, capable of enjoying the right of establishment, and that required if the company
is to be able subsequently to maintain that status. That power includes the possibility for that Member State not to permit a company
governed by its law to retain that status if the company intends to reorganize itself in another Member State by moving its seat to the territory
of the latter, thereby breaking the connecting factor required under the national law of the Member State of incorporation.”1018 However,
the Court subsequently distinguished between the transfer without reincorporation (the seat of a company incorporated
under the law of one MS is transferred to another with no change as regards the law which governs that company) and
the transfer with reincorporation (a company governed by the law of one MS moves to another with an attendant
change as regards the national law applicable). In the latter situation, the company is converted into a form of company
which is governed by the law of the MS to which it has moved.1019 The freedom of establishment is then restricted if the
destination State allows the transfer to its territory but the departure State requires that it has to wind-up or liquidate
CJEU Cartesio (Case C-210/06).
1013 See CJEU Cartesio (Case C-210/06), par. 24.
1011
1012
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prior to transfer.1020 In the Cartesio case, however, the freedom of establishment was not restricted in such a way, as
Cartesio did not want to reincorporate in Italy but remain a company governed by Hungarian law.1021
To conclude: if a real seat jurisdiction (as Hungary) terminates an entity’s legal existence upon the transfer of its real
seat, there is no longer an entity which can make an appeal to the freedom of establishment. There is one exception in
case the destination State recognizes the legal personality and enables the continuation in a legal form of that State
(cross-border transformation or conversion). In such a situation, the departure State may require an emigrating
company to give up its status as a company under that State’s law, but it would be disproportionate if the departure
State would force the company to dissolve and liquidate.1022 It can then be concluded that the Court will only interfere if
a company wishes to re-incorporate in the host State. In all other cases, the connecting factors determining whether and
how a company is incorporated is part of the fiscal sovereignty of MSs. A departure State, irrespective of whether it is
an incorporation jurisdiction or a real seat jurisdiction, can demand the dissolution of a company transferring its
statutory and/or real seat to another State, without infringing on the freedom of establishment, provided that the
destination State does not continue the company’s legal existence in a national legal form. Following the Daily Mail case,
the Court again permitted restrictions to the freedom of establishment from an outbound perspective, i.e. in the context
of an emigrating company.
7.3.2.5 National Grid Indus
An important CJEU ruling in the context of exit taxation includes the National Grid Indus (NGI) 1023 case. This case
concerned the transfer of the place of effective management of a Dutch B.V. from the Netherlands to the United
Kingdom (UK).1024 Upon emigration in December of the year 2000, the only asset of the company was a receivable
from a group loan of GBP 33 million, containing an unrealized capital (currency) gain of approximately NLG 22
million.1025 At the time, the emigration triggered the Dutch exit tax provision with respect to businesses, i.e. article 8
CITA 1969 in conjunction with art. 16 PITA 1964. This provision provided: ‘‘Benefits derived from the business that have not
yet been taken into account … are included in the profits for the calendar year in which the person on whose behalf the business is run ceases
to derive profits from the business taxable in the Netherlands …”.1026 The tax consequence in the Netherlands was thus
immediate taxation of the unrealized currency gain of NGI, since the company ceased to derive profits taxable in the
Netherlands.1027 The taxpayer challenged the indictment by arguing, amongst others, that he was restricted in its
freedom of establishment.
The Court first examined whether NGI could even make an appeal to the freedom of establishment. This examination
was answered positively, as a company incorporated under the law of a MS whose transfer of the place of effective
management did not affect its status as a company of that MS, can rely on the freedom of establishment for the purpose
of challenging the lawfulness of the imposition of an exit tax.1028 With respect to the lawfulness of this exit tax, the
Court basically argued that there was a discrimination, as businesses transferring their place of effective management
abroad encounter a liquidity disadvantage when compared to businesses who retained their real seat in the
1020
See CJEU Cartesio (Case C-210/06), par. 112.
See CJEU Cartesio (Case C-210/06), paras. 119 and 124.
1022 See also: Terra and Wattel 2012, p. 513.
1023 CJEU National Grid Indus (Case C-371/10)
1024 See CJEU National Grid Indus (Case C-371/10), par. 10.
1025 See CJEU National Grid Indus (Case C-371/10), par. 11-12.
1027 Note that the BV did not cease to exist, since, as discussed, the Netherlands applies an incorporation system (see also: art. 2(4)CITA
1969). However, by virtue of art. 4(3) of the DTC Netherlands-UK, NGI was labeled as resident of the UK after transfer of its place of
effective management. So as from that moment on, the UK was entitled to tax profits and capital gains (art. 7(1) and 13(4) NL-UK).
1021
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Netherlands.1029 This resulted in a restriction of the freedom of establishment.1030 The Court continued by considering
whether this restriction could be justified by overriding reasons in the public interest. In this respect, the Court found
that the (old) Dutch exit provision of article 16 PITA 1969 was firstly justified by the principle of fiscal territoriality
linked to a temporal component. More specifically, a Member State is entitled to charge tax on gains which arose during
the period in which the taxpayer was a resident for tax purposes within national territory.1031 A second justification
which the Court acknowledged was the preservation of the allocation of taxing powers between MSs.1032 With respect
to the proportionality of the Dutch measure, the Court did not consider it to be disproportional if the exit State does
not take value decreases which occur after emigration into account.1033 The only real question concerned the
proportionality of immediate payment. The tax assessment itself was subsequently qualified as being proportional.1034
However, the Court also considered requirement of immediate payment to be disproportional,1035 and ruled that MSs
should give companies who transfer their place of effective management the choice between either immediate or
deferred payment.1036 In case a taxpayer opts-in for deferred payment, the Court argued that MSs can require interest
calculation and the provision of securities.1037
With its ruling in National Grid Indus, the Court seemed to overturn its ruling in the Daily Mail case. The cases were both
essentially the same, as a business wishing to transfer its place of effective management from one incorporation
jurisdiction to another was confronted with an exit tax of some sort. In National Grid Indus, the Court limited the extent
to which MSs could impose these exit taxes, as they restrict the freedom of establishment. However, this only applies to
MSs with an incorporation system. MSs who apply a real seat system will in principle not be ‘confronted’ with the
freedom of establishment as the company is liquidated before transfer, due to which that company cannot make an
appeal to the freedoms. This is, in my opinion, an undesirable outcome; incorporation systems are more liberal in the
context of the internal market but given the Court’s rulings in NGI and Cartesio, incorporation jurisdictions are
‘punished’ as they restrict the freedom of establishment when imposing exit taxes, whereas real seat systems are not
capable of restricting the freedom of establishment in a similar way.1038 The result of NGI is that States with an
incorporation system have to offer emigrating businesses the option between immediate and deferred payment.
When compared to the rulings on exit taxation of individuals, some comments are to be made as well. In National Grid
Indus, the Court ruled that the emigration State (the Netherlands in this case) is not obliged to take into account postemigrational value decreases. This is in line with the principle of fiscal territoriality; a MS which no longer has a right to
tax profits, should not have to take into account value decreases after it has lost all fiscal connection with the company.
In contrast, the Court explicitly stated in the N. case, which dealt with an emigrating individual, that the emigration State
is required to take into account value decreases, even if they occur after emigration. In addition to the difference
between the requirement of having to take into account post-emigrational value decreases, the Court also contradicted
in NGI its ruling in the N. case with respect to the requirement of providing securities. More specifically, in the N. case,
the Court strictly prohibited to requirement of having to provide a security in the form of a bank guarantee. In NGI
however, the Court almost turned 180-degrees; it was argued that a bank guarantee may be required as a security in case
of deferred payment, taking into account the risk of non-recovery of the tax claim.1039
1029
See CJEU National Grid Indus (Case C-371/10), par. 37.
1037 See CJEU National Grid Indus (Case C-371/10), paras 73 and 74.
1038 See in this respect also V-N 2011/67.8 note and Terra and Wattel 2012, p. 517.
1030
162
With respect to the option which was introduced in NGI, it appears that the Court could not decide whether immediate
payment or conditional deferred payment would pose a smaller restriction to the freedom of establishment for
businesses wishing to transfer their tax residence cross-borders. As every case is different, I personally welcome the
Court’s lack of taking a decisive position. Indeed, enterprises can now determine for themselves which of the two
options will be least restrictive in their particular situation. With respect to the two options, I emphasize that immediate
payment will result in a liquidity disadvantage, as the Court also noted in its ruling. However, while creating a cash-flow
disadvantage, it frees the company of the burdensome conditions which may be required in case of deferred payment,
such as the condition of having to provide sufficient securities and the administrative condition of having to trace
transferred assets until they are actually realized. Additionally, the cash-flow disadvantage of immediate payment may be
reduced over time, as no interest will be charged in case of immediate payment. With respect to deferred payment then,
the taxpayer will not have to pay the exit tax immediately, which deliberates it of the cash-flow disadvantage. However,
the aforementioned conditions which have to be met in order to ‘receive’ deferred payment may be equally
burdensome. In this respect, it has been argued in literature that, from a financial point of view, the option of deferred
payment is not very attractive if the deferred exit debt bears interest and requires the provision of securities.1040 Taking
it one step further, it might even be argued that with the strict conditions, new restrictions to the freedom of
establishment have been introduced.1041
7.3.2.6 VALE
The VALE1042-case is the opposite situation of the Cartesio-case. It concerned the cross-border conversion of a
company incorporated under Italian law (VALE Costruzioni S.r.l.) in to a company established under Hungarian law
(VALE Építési kft.). In 2006, the Italian incorporated VALE Costruzioni S.r.l. was, on its own request, removed from
the Italian commercial register as it wished to discontinue its business in Italy and transfer its seat and business to
Hungary.1043 The representatives subsequently incorporated VALE Építési kft (a limited liability company governed by
Hungarian law) and filed an application at a Hungarian Commercial Court for the registration of this company in
accordance with Hungarian law.1044 In this application it was stated that VALE Costruzioni was the predecessor in law
of Vale Építési.1045 However, the application was rejected both by the Commercial Court and in Court of Appeal.
According to the latter “a company which was incorporated and registered in Italy cannot, by virtue of Hungarian company law, transfer
its seat to Hungary and cannot obtain registration there in the form requested… A company which is not Hungarian cannot be listed as a
predecessor in law.”1046 VALE submitted that this order infringes on its freedom of establishment.1047 The Hungarian
Supreme Court referred the case to the CJEU in order to determine whether upon the registration of a company in the
national commercial register a MS may refuse to register the predecessor of a company which originates in another MS
(thus, whether that MS may refuse a cross-border conversion).1048
The Court first reaffirmed settled case-law; the applicable national law determines the incorporation and functioning of
companies.1049 It follows that, in principle, Member States may determine the national law applicable to cross-border
conversions of companies. However, the Court subsequently argued that where national law enables national companies
to convert, but does not allow companies incorporated under the law of another MS to do so, this amounts to a
1040
See for example Terra and Wattel 2012, p. 517.
See also paragraph 7.4.3.
1044 See CJEU VALE (Case C-378/10), paras. 10 and 11.
1049 See CJEU VALE (Case C-378/10), paras. 30 and 31. See also CJEU Daily mail (Case-81/87), par. 19: companies are creatures of
national law and only exist by virtue of national legislation.
1041
163
restriction of the freedom of establishment.1050 With respect to possible justifications for this restriction, the Court
recognized that cross-border conversions pose specific problems, as the consecutive application of two national laws is
presupposed.1051 However, the absence of specific European rules on cross-border conversion issues cannot justify the
infringement on the freedom of establishment. Overriding reasons in the public interest lack in the present case
according to the Court.1052 Consequently, “national legislation which enables companies established under national law to convert, but
does not allow, in a general manner, companies governed by the law of another Member State to convert to companies governed by national law
by incorporating such a company” is considered an unjustifiable infringement on the freedom of establishment.1053
With respect to the conversion procedure, there are no specific rules in secondary EU law. Consequently, the provisions
which enable a cross-border conversion can only be found in national law of the MS of origin and the host MS.1054
These national rules should be applied consistently and equivalently to both domestic companies and companies
governed by the law of another MS.1055 Consequently, the refusal to record VALE Costruzioni in the Hungarian
Commercial register as the predecessor in law, on the ground that it is not a Hungarian company, is incompatible with
the principle of equivalence.1056
In the case Cartesio, the Court distinguished between the transfer without reincorporation (the seat of a company
incorporated under the law of one MS is transferred to another with no change as regards the law which governs that
company) and the transfer with reincorporation (a company governed by the law of one MS moves to another with an
attendant change as regards the national law applicable). In the latter situation, the company is converted into a form of
company which is governed by the law of the MS to which it has moved.1057 In Cartesio, it was provided that from an
outbound perspective, the freedom of establishment is restricted if the home State requires the company to wind-up or
liquidate prior to transfer, provided that the destination state allows such a transfer with reincorporation.1058 In VALE, the Court
focused on the final part of the previous sentence, i.e. on the inbound perspective. Taking into account its ruling in this
case and in Cartesio, it can be concluded that the transfer with reincorporation is fully covered by the freedom of
establishment, both from an outbound and inbound perspective. The same cannot be said in case of a transfer without
reincorporation, at least not from an outbound perspective, as already became clear in the Cartesio case.
7.3.2.7 Commission v. Portugal
In the case Commission versus Portugal1059, the exit taxes in the Portuguese corporate income tax were under consideration.
These exit taxes related to both the transfer of residence and the cessation of (part of) the activity of a permanent
establishment. The European Commission took the view that the Portuguese Republic was not complying with the
freedom of establishment; the Commission did not accept the difference in fiscal treatment of unrealized capital gains
between, on the one hand, a transfer of activities of a company to another Member State and, on the other, similar
transfers within Portuguese territory, and filed an infringement procedure against Portugal.1060 According to the
Commission, the Portuguese provisions would lead to the imposition of a tax on cross-border transfers of company
activities that would be levied earlier or would be of a greater amount than the tax that would be applicable to a
1050
See CJEU VALE (Case C-378/10), par. 36.
See CJEU VALE (Case C-378/10), par. 37.
1055 See CJEU VALE (Case C-378/10), paras 46 and 54-55.
1060 See CJEU Commission v. Portugal (Case C-38/10), paras. 1, 7-10, and 22.
1051
164
company which transfers activities domestically.1061 It is emphasized that the commission does not dispute the MSs
right to tax capital gains that have arisen in its territory as such.1062
With respect to the freedom of establishment, the Court notes that this freedom is not only aimed at ensuring that
foreign nationals and companies are treated in the host MS in the same way as nationals of that State, it also prohibits
the MS of origin from hindering the establishment of a company incorporated under its legislation in another MS.1063 As
such, “all measures which prohibit, impede, or render less attractive the exercise of the freedom of establishment must be regarded as
restrictions of that freedom.”1064 Consequently, the Court argued that it is clear that the Portuguese exit provisions entail
obstacles to the freedom of establishment.1065 These taxes are imposed in case a) a Portuguese company transfers its
place of effective management to another MS or b) a non-resident company transfers assets of a permanent
establishment in Portuguese territory to another MS.1066 As a purely domestic transfer does not result in such taxation,
the difference in treatment, which cannot be explained by an objective difference of the situations, is likely to deter a
company from transferring its activities from Portuguese territory to another MS.1067 With respect to any justifications
of the found restriction to the freedom of establishment and the proportionality, the Court recited its own verdict given
in National Grid Indus, where it held that the freedom of establishment “precludes legislation of a MS which prescribes the
immediate recovery of tax on unrealized capital gains relating to assets of a company transferring its place of effective management to another
MS at the very time of that transfer”. Moreover, the Court argued that “national legislation offering a company transferring its place of
effective management to another member state the choice between, first, immediate payment of the amount of tax and, secondly, deferred
payment of the amount of tax, possibly together with interest in accordance with the applicable national legislation, would constitute a measure
less harmful to freedom of establishment.”1068
The case Commission v. Portugal barely offers any additional insights when compared to what was already decided by the
CJEU in the case National Grid Inuds. Put briefly, the Court considered immediate taxation of unrealized capital gains to
be incompatible with article 49 of the TFEU, “in the case of transfer, by a Portuguese company, of its registered office and its effective
management to another Member State or in the case of transfer, by a company not resident in Portugal, of some or all of the assets attached to
a Portuguese permanent establishment”.1069 It is worth discussing the opinion of A-G Mengozzi with respect to this case, as
the Court merely recited its own ruling given in NGI. The A-G, however, elaborates on some important elements in his
conclusion of 28 June 2012.1070 With respect to for example the calculation of recovery interest in case of deferred
payment, Mengozzi has argued that if, according to the national law, recovery interest is charged in cases in which
taxpayers choose for deferred payment, there is on the basis of the principle of equivalence no reason to not apply these
rules to a company transferring its real seat to another MS. Moreover, when there is no recovery interest charged in case
of deferred payment, a MS cannot charge this recovery interest either to cross-border seat transfers.1071 With respect to
the requirement of having to provide securities, such as a bank guarantee, the A-G has also given his opinion; Mengozzi
believes that these can be required only if there is a genuine and serious risk of non-recovery of the tax claim.1072 In the
conclusive remarks with respect to the case NGI, I already submitted that it is unclear why the CJEU argues that
requiring a bank guarantee is disproportionate in the context of emigrating individuals (i.e. substantial shareholders, see
See CJEU Commission v. Portugal (Case C-38/10), par. 22.
See CJEU Commission v. Portugal (Case C-38/10), par. 21.
1063 See CJEU Commission v. Portugal (Case C-38/10), par. 25.
1064 See CJEU Commission v. Portugal (Case C-38/10), par. 26, with reference to CJEU National Grid Indus (Case C-371/10), par. 36.
1066 See CJEU Commission v. Portugal (Case C-38/10), legal context and par. 27.
1067 See CJEU Commission v. Portugal (Case C-38/10), paras. 27 and 28.
1068 See CJEU Commission v. Portugal (Case C-38/10), paras. 31-32, with reference to CJEU National Grid Indus (Case C-371/10), paras. 73 and
86.
1070 Conclusion A-G Mengozzi 28 June 2012.
1071 See Conclusion A-G Mengozzi 28 June 2012, paras 74-77.
1072 See Conclusion A-G Mengozzi 28 June 2012, par. 82.
1061
1062
165
for example N. case). The Court refers to Council Directive 2010/24/EU of 16 March 2010 concerning mutual assistance
for the recovery of tax claims. In case of the emigration of a business, however, the Court no longer considers the
requirement of a bank guarantee to be disproportionate, while the aforementioned Council Directive applies to business
emigrations similarly. In the case Commission v. Portugal, the question as for the reason of this distinction remains
unanswered.
7.3.2.8 EFTA Court – Arcade Drilling AS
The EFTA Court has also ruled a case in the context of taxation on business migration. The case Arcade Drilling AS1073,
dealt with Arcade, a limited liability company incorporated and registered in Norway. Arcade was confronted with a
liquidation tax after it was deemed to have transferred its place of effective management due to a take-over by the
British company.
At the time being, the Norwegian Limited Liability Companies Act entailed an obligation to dissolve and wind-up a
company if it had relocated its de facto head office from Norway1074.1075 On the basis of the Norwegian Tax Assessment
Act, such a dissolution of a limited liability company would lead to the imposition of a liquidation tax on the
company.1076 After a series of events, the most important of which included the take-over by the British Transocean
Group, Arcade was deemed to have relocated its head office outside Norway. Consequently, it was under an obligation
to liquidate, pursuant to Norwegian company law. As stated, this gave rise to liquidation taxation regardless of whether
the company was actually liquidated.1077 This was a general anti-abuse principle; if only actual liquidation would trigger
the liquidation tax, it would be very easy to evade this tax by not dissolving the Norwegian company after the transfer of
the seat. The liquidation taxation encompassed a definitive assessment of the amount of tax payable. Arcade argued that
the assessment was invalid because the liquidation tax was in contravention of EEA law.1078 The Norwegian Court
turned to the EFTA Court for advice.
The Court first examined whether the freedom of establishment was applicable in this case. The Norwegian State, being
a real seat jurisdiction, argued that Arcade cannot plead infringement of its freedom of establishment, as a company
relocating its place of effective management to the UK cannot retain its resident status and must be liquidated.1079
Arcade contended that, as it had never been requested nor forced into liquidation, it maintained its status as a legal
person in Norway.1080 In addition, it was established that Arcade was still operating as a company in Norway and that
no procedure whatsoever had been initiated in order to liquidate it.1081 The EFTA Court found that the freedom of
establishment of the EEA Agreement was applicable to Arcade. As EEA law contains no uniform definition of which
companies may enjoy the right of establishment, the question of whether this freedom applies is a preliminary matter
that can only be resolved pursuant to the applicable national law.1082 In the absence of clear and precise provisions of
national law that a company moving its head office out of Norway must liquidate, and of any decision by the competent
authorities or courts putting the liquidation into effect, Arcade can rely on the freedom of establishment.
The first question which was submitted to the Court, was whether the imposition of a liquidation tax on Arcade was a
restriction of the freedom of establishment. In this case, the imposition of the liquidation tax is a general anti-avoidance
1073
EFTA Court Arcade Drilling AS (Case E-15/11).
It is noted that Norway applies a real seat system, as opposed to an incorporation system.
1075 See EFTA Court Arcade Drilling AS (Case E-15/11), paras. 4-11.
1076 See EFTA Court Arcade Drilling AS (Case E-15/11), paras. 12 and 33.
1077 See EFTA Court Arcade Drilling AS (Case E-15/11), par. 28.
1082 See EFTA Court Arcade Drilling AS (Case E-15/11), paras. 40 and 41.
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principle, rather than a real liquidation. According to the Norwegian State, these general anti-avoidance principles are
applied in the same manner to the taxation of all companies that are deemed to be in avoidance of taxation consequent
to the winding up and liquidation of companies. Arcade, on the other hand, submits that these principles are only
applied to cross-border situations.1083 The EFTA Court could not resolve which of the parties was in its right and left
this to be determined by the Norwegian Court.1084 It, however, made clear that if it was definitively determined that the
tax payable was affected in cross-border situations and not in domestic situations, this would be a restriction to the
freedom of establishment.1085
The second question asked what criteria would be decisive when determining whether the Norwegian regulation in
question pursued an overriding public interest and whether it would be suitable and necessary for the attainment of such
an interest.1086 The EFTA Court stated that the restriction would be permissible if it is aimed at maintaining the
balanced allocation of taxing powers between EEA States.1087 In addition, the prevention of tax avoidance was
recognized as an appropriate and overriding reason in the public interest is well.1088 With respect to the proportionality
question, however, the Court had problems with the immediate payment of tax. It argued that: “immediate payment of tax
relating to unrealized assets and other tax positions may give rise to a significant disadvantage for that company in terms of cash flow and, in
some cases, even force it into liquidation. This problem may be avoided by deferring the recovery of the tax debt until such time as the assets
and other tax positions…are actually realized.”1089 The EFTA Court also argues that national authorities may take certain
measures in order to secure payment of the amount of tax, “provided that there is a genuine and proven risk of non-recovery”.1090
It is argued that this risk is dependent upon the nature and extent of the company’s tax positions, and the sources of
information available regarding this tax positions (through cooperation and exchange of information). When assets are
easy to trace, the Court argues that EEA States could offer a choice to transferring companies between immediate and
deferred payment of the amount of tax. Immediate payment creates a cash flow disadvantage but frees the company of
subsequent administrative burdens. Deferred payment “could possible entail interest in accordance with applicable national
legislation, which necessary involves an administrative burden for the company in connection with tracing the relocated assets”.1091 The Court
notes that the risk of non-recovery increases with the passage of time and should be taken into account, by for example
a measure such as the provision of a bank guarantee. However, it is also noted that in the context of the liquidation of a
company, a bank guarantee may be completely unnecessary if the risk of non-recovery is covered by personal liability of
shareholders.1092
In my opinion, it follows from settled case law that, in principle, only companies transferring their place of effective
management from an incorporation jurisdiction to another State can rely on the protection offered by the freedom of
establishment. The Norwegian system, however, is based on the real seat system. In Cartesio, the CJEU basically argued
that if a real seat jurisdiction terminates an entity’s legal existence upon the transfer of its real seat, there will no longer
be an entity which can make an appeal to the freedom of establishment, with the exception of the destination State
recognizing the legal personality and enabling the continuation in a legal form of that State (cross-border transformation
or conversion). In such a situation, the departure State may require an emigrating company to give up its status as a
company under that State’s law, but it would be disproportionate if the departure State would force the company to
1083
See EFTA Court Arcade Drilling AS (Case E-15/11), par. 61.
See EFTA Court Arcade Drilling AS (Case E-15/11), par. 65.
1089 See EFTA Court Arcade Drilling AS (Case E-15/11), par. 100, with reference to CJEU National Grid Indus (Case C-371/10), paras. 68 and
73.
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dissolve and liquidate.1093 In the Arcade case, the Court argued that as the liquidation was not put into effect clearly (in
the absence of precise national law and a decision of the relevant authority), Arcade AS could rely on the freedom of
establishment. In my opinion, however, the exception formulated in the Cartesio case does not apply; in principle,
companies transferring from a real seat jurisdiction cannot make an appeal to the freedom of establishment, except
when the company is recognized and converted in the destination State. In this case, Arcade was not converted into a
British legal form, but rather, it was taken over by a British company. In addition, Arcade was still operating in Norway
and retained, in its own opinion, its legal status in that State. It could therefore be concluded that the EFTA Court has
approached this case from the perspective of an incorporation system, even though Norway is an incorporation
jurisdiction.1094
It should be noted that the Court gave its judgment, but it cannot be said that this judgment is decisive for the company
Arcade AS; the Norwegian Court will first have to decide on some important questions, such as whether the general
anti-avoidance principles constituting a deemed liquidation apply generally or only apply in a cross-border context. The
second part of the ruling given by the EFTA Court largely concurs with the CJEU’s ruling in the NGI case. The Court
ruled that there is a restriction of the freedom of establishment of the EEA Agreement (i.e. articles 31 and 34 EEA
Agreement, which closely resemble the freedom of establishment of article 49 TFEU). The CJEU and the EFTA Court
both acknowledged the importance of ensuring that the rules in the EU law respectively EEA law are similar to one
another, and that they are applied and explained in a similar manner.1095 The final verdict given in Arcade Drilling AS is,
however, more nuanced than that given by the CJEU in the case National Grid Indus. The EFTA Court argued that when
there is a real and proven risk of non-recovery of the tax claim, States can take ‘certain measures’. It is unclear whether
this means that States do not have to offer the option between immediate and deferred payment, or whether it means
that the option has to be offered but that, in case of deferred payment, States can set stricter conditions. 1096 Whatever
the meaning exactly is, the ruling in Arcade Drilling implies that securities can only be required when they are truly
necessary (thus when there is a real and serious risk of non-recovery).1097 Besides, a strict reading of the EFTA Court’s
ruling would not lead to the conclusion that in case of deferred payment MSs can only calculate interest in accordance
with applicable legislation if assets are not easy to trace and there thus is a serious risk of non-recovery. 1098
7.3.2.9 Commission v. Kingdom of the Netherlands
In the very recent case Commission v. Kingdom of the Netherlands1099, which can be discussed in only a few lines, the EC
asked the Court of Justice of the European Union to establish to whether the Dutch exit provisions with respect to
business emigration (i.e. articles 3.60 and 3.61 PITA 2001 and article 15c and 15d) are compatible with article 49 TFEU.
The Netherlands acknowledged in front of the Court that its exit provisions were disproportional, and that they were to
be amended in accordance with the Court’s ruling in National Grid Indus.1100 Nonetheless, the Court acknowledged the
infringement procedure of the Commission, since the situation has to be judged as it was in July 2010. This was the
moment at which the time limit given in the reasoned opinion1101 of the Commission lapsed.1102 The CJEU came to the
conclusion that the Netherlands did not comply, or failed to fulfill its obligations under EU law, by upholding the
aforementioned exit provisions.
1093
See also: Terra and Wattel 2012, p. 513.
See also: V-N 2012/51.17, note of D.S. Smit.
1097 See EFTA Court Arcade Drilling AS (Case E-15/11), par. 105. It is argued that when, for example, the shareholders can be held liable for
the tax debt of the enterprise, securities should not be required.
1100 See CJEU Commission v. Kingdom of the Netherlands (Case C-301/11), paras. 17 and 18.
1101 In the reasoned opinion, the Commission sets out its position on the infringement and determines the subject matter of any action. The
Member State is requested to comply within a given time limit.
1102 See CJEU Commission v. Kingdom of the Netherlands (Case C-301/11), par. 20.
1094
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In my opinion, this ruling does not offer any additional insights, when compared to the Court’s ruling in NGI. This is
also logical, as it pertained to a period even before National Grid Indus was ruled by the CJEU. However, many had hope
that in this infringement procedure, the Court would benchmark the amended recovery provisions, which were
designated as the core of the exit tax problem in NGI, against the freedom of establishment. In this respect, the Court’s
ruling in Commission v. Kingdom of the Netherlands is somewhat disappointing.
7.3.2.10
Commission v. Spain
On April 25, 2013, the CJEU ruled Commission v. Spain1103, which was yet another procedure initiated by the EC against
the exit tax rules of one of the Member States of the EU, in this case Spain. On the basis of Spanish national law, an
immediate tax is levied on the unrealized gains accrued by Spanish resident companies and permanent establishments
located in Spain of non-residents, when 1) a Spanish resident company transfers its tax residency outside Spanish
territory (without leaving a PE behind to which the assets are attributed), 2) a Spanish PE ceases its activities, or 3)
when a Spanish PE transfers its assets outside Spanish territory. The CJEU held that situations 1 and 3 breach the
freedom of establishment, following its own criteria of earlier judgments (National Grid Indus and Commission v. Portugal).
Again, the Court noted that the Spanish exit tax rules posed an obstacle to the freedom of establishment, but that this
can be justified on the basis of a balanced allocation of taxing powers and the fiscal coherence of national systems.
However, demanding immediate taxation of unrealized gains in case of an exit is disproportional. It was argued that
Spain was entitled to tax the unrealized gain upon exit, but that it cannot collect the tax until the gain has effectively
been realized. Moreover, the Court noted that there are a number of mechanisms in place within the EU that would
enable Spain to collect the tax debt.1104
An interesting detail of this case is that the Netherlands has submitted the following question to the Court during the
hearing of this procedure: is it imaginable that the deferral of payment is restricted to ten or twelve years?1105 Essentially,
the Court is being asked to concretize the interpretation which it has previously given. However, the Court’s decision in
Commission v. Spain did not address relevant issues such as how to determine the moment when the deferred tax can be
collected (thus, when the capital gain is deemed to be realized) or what formal obligations have to be complied with in
the light of the proportionality principle. Therefore, this case does not offer any new insights either.
7.3.3
Is there a general line in CJEU rulings on business migration cases?
7.3.3.1 The broad general line
The very broad general line, which can be found in all cases, is that the freedom of establishment ensures that foreign
companies are treated in the host Member State in the same way as nationals of that State. Moreover, the
1103
CJEU Commission v. Spain (Case C-64/11)
e.g. Directive 2008/55/EC on the mutual assistance for the recovery of claims relating to some levies, duties, taxes, and other measures.
1105 In the EUCOTAX comparative law, it was already discussed that some countries restrict the deferral of payment to five years. For
example, Germany and France offer the option of payment in five annual installments. It is also unclear whether this would pass the
proportionality test of the CJEU. In this context, it is worth mentioning that the EC has started an infringement procedure against Germany
with respect to a certain provision (not an exit tax provision) to which similar options of deferred payment apply. See CJEU Commission v.
Germany (Case C-164/12).The following prejudicial question was asked in this case: “is the national provision compatible with Article 43 EC (or
Article 49 TFEU) if the transferor is entitled to apply for the deferment, on an interest-free basis, of the tax arising as a consequence of revealing the undisclosed
reserves, with the effect that the tax due on the gain may be paid in annual installments, each of at least a fifth of the tax due, provided that the payment of the
installments is secured?” The context is similar to that of exit taxation: unrealized gains and reserves are disclosed (fictitiously) upon the crossborder transfer, and the option of payment in five annual installments is offered to taxpayers. However, as this case has not been ruled yet,
the answer to this question is still unclear.
1104
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aforementioned freedom ensures that the Member State of origin does not hinder establishment in another Member
State of one of its nationals or of a company incorporated under its legislation.1106 This general principle applies to the
cases which were discussed in the context of both emigrating individuals and emigrating companies. There are,
however, important differences between emigrating individuals and emigrating companies. For a detailed discussion, I
refer to paragraph 7.4.1.3.
7.3.3.2 The accessibility of the freedom of establishment
Firstly, the freedom of establishment is not limited to legal entities. In the N. case, the Court argued that a natural
person holding substantial influence over a company’s decisions and activities can also appeal to the freedom of
establishment.1107 When extrapolating this to entrepreneurs, I believe that these individuals can make similar appeals to
this freedom, as they have a substantial influence over a business’ decisions and activities.
With respect to companies, a test has to be conducted prior to examining whether the freedom of establishment applies.
More specifically, the freedom of establishment can only be appealed if there actually is an entity to make such an
appeal. The pre-test then asks whether there is a transfer from a real seat or from an incorporation system. In the latter
case, it is undisputed that companies can make an appeal to the freedom of establishment. In case of the transfer from a
real seat jurisdiction, however, it is in principle not possible to make an appeal to the freedom of establishment. Real seat
jurisdictions are characterized by the requirement of liquidation and winding-up of a company upon transfer, and in
Cartesio, the Court argued that it is a MSs right to determine the rules for companies to be regarded as and remain
incorporated under the law of that MS; in principle, EU law does not interfere with rules of the home State.
Nevertheless, the Court also argued that there is an exemption. In case the destination State recognizes the legal
personality and enables the continuation in a legal form of that State (cross-border transformation or conversion), the
departure State may require an emigrating company to give up its status as a company under that State’s law, but it
would be disproportionate to force that company to dissolve and liquidate. In addition, it follows from the VALE case
that this cross-border conversion ‘enjoys’ the protection of the freedom of establishment from an inbound perspective
as well.
It might be argued that the EFTA Court has introduced an additional exception in the Arcade case, on the basis of
which the freedom of establishment would also be applicable in case of transfers from a real seat jurisdiction. The
EFTA Court argued that as the liquidation was not put into effect clearly (in the absence of precise national law and a
decision of the relevant authority), Arcade AS could rely on the freedom of establishment. In my opinion, the
exception formulated in the Cartesio case does not apply here; in principle, companies transferring from a real seat
jurisdiction cannot make an appeal to the freedom of establishment, except when the company is recognized and
converted in the destination State. In this case, Arcade was not converted into a British legal form, but rather taken over
by a British company. Moreover, Arcade was still operating in Norway and retained, in its own opinion, its legal status in
that State. The second exception, which the EFTA Court introduced, then encompasses a lack of clear and precise
national law as the result of which there is an entity which can make an appeal to the freedom of establishment, even
after it is (deemed to have) transferred. An alternative explanation would be that the EFTA Court has approached this
case from the perspective of an incorporation system, even though Norway is a real seat jurisdiction.1108
Summarizing the current state of affairs with respect to the accessibility of the freedom of establishment: companies
transferring from an incorporation State can make an appeal to the freedom of establishment; companies transferring
from a real seat jurisdiction can make an appeal to the freedom of establishment, provided that 1) it is a transfer with
reincorporation (cross-border conversion), or 2) the company was not clearly liquidated in the real seat jurisdiction.
1106
See CJEU Commission v. Portugal (Case C-38/10), par. 25; and CJEU National Grid Indus (Case C-371/10), par. 35.
1107
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7.3.3.3 Taxation upon the emigration of a business
The question as to the accessibility of the freedom of establishment, which was discussed in the previous subparagraph,
has important implications for the permissibility of the taxation upon the emigration of a business. More specifically,
this permissibility of these exit taxes can only be established when they are imposed by a MS employing an
incorporation system, not when they are imposed by a MS with a real seat system. This creates, in my opinion, an
incentive for MSs to transform their legal system to a real seat system, while the incorporation system is better for the
functioning of the internal market.
With respect to the permissibility of the imposition of an exit tax upon emigration, it is clear that the Daily Mail case is
outdated. In National Grid Indus, the Court overturned its previous ruling in the Daily Mail case; the Court limited the
extent to which MSs could impose these exit taxes, as they restrict the freedom of establishment. As discussed,
however, this only applies to MSs with an incorporation system. After the Court’s ruling in NGI, some MSs argued that
this ruling was an exception and that it should not be considered as generally applicable. The rulings in Commission v.
Portugal and Arcade Drilling AS proved these MSs wrong; the outcome of NGI has overall effect in the context of
emigrating companies.1109
In essence, the aforementioned cases imply that MSs can impose an exit tax upon the emigration of a business, but that
immediate recovery of the tax claim is disproportional. It is now settled case law that MSs have to offer companies the
option between immediate and deferred payment. The Court also established (in NGI) and confirmed (in Commission v.
Portugal and Arcade Drilling AS) that, in case of deferred payment, MSs can set conditions. The exact details of these
conditions, however, have not completely been crystalized in these cases. It is for example unclear whether MSs can
require the provision of securities in general or only when there is real and serious risk of non-recovery. I personally
believe that the latter is true, considering the EFTA Court’s ruling in Arcade Drilling AS, the opinion of A-G Mengozzi
in the case Commission v. Portugal, and the existence of the Mutual Assistance Directive for the recovery of taxes1110 and
the Mutual Assistance Directive for exchange of information1111. With respect to the calculation of interest in
accordance with applicable national law, further clarification of the Court would not be an excessive luxury either. More
specifically, the Court should explain the paraphrase ‘in accordance with national law’ in more detail. Finally, the Court
should also establish to what extent administrative conditions can be required, and, in the context of the Futura case,
what administrative requirements would be disproportional. Having pointed out these general considerations, I will
analyze the Dutch exit tax regime in the light of EU law in the next paragraph, where detailed attention will be paid to
the exact conditions under which an exit tax can be and should be imposed.
7.4 Dutch tax treatment of emigrating businesses in the light of EU law
In this paragraph I will analyze the Dutch exit tax regime in the light of EU law. In the previous paragraphs, the general
‘point of view’ of the Court of Justice of the European Union was set forth by discussing several relevant cases in the
context of exit taxation. These cases can be used as a guideline with respect to the interpretation of EU law, and
specifically, the freedom of establishment.
In chapter 2, the Dutch exit tax provisions have been discussed in detail. It has been discussed that exit taxes can pose
an obstacle to free movement, i.e. the freedom of establishment. In this respect, it is important to note that the CJEU
allows the imposition of an exit tax as such. In National Grid Indus, the Court held exit taxes on emigrating companies
1109
See Lambooij 2013, par. 2.
Council Directive 2010/24/EU.
1110
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compatible with the freedom of establishment, and provided that the exit State does not have to take into account value
decreases which occur after emigration. However, the problem with respect to the Dutch exit provisions lies in the area
of the recovery of the exit tax. More specifically, the immediate recovery was considered disproportional by the CJEU.
Consequently, the Dutch legislator responded with the Bill on the amendment of the Recovery Act 1990. This Bill has
recently been accepted by the House of Representatives and the Dutch Senate, by virtue of which the Law on deferral
of exit taxation is officially in force. In a nutshell, the Netherlands now provides emigrating businesses (both individual
businesses and companies) with the option between immediate and deferred payment of the exit tax claim. In case of
deferral of payment, additional requirements will apply, including the following: a) provision of sufficient securities, b)
payment of recovery interest, and c) provision of an administration, enabling the tax collector to determine to what
extent unrealized capital gains have been realized. Moreover, the Netherlands does not take into account postemigrational decreases in value. Even after the amendments in the area of the recovery of taxation, it is disputable
whether the Dutch tax system with respect to the emigration of a business is completely compatible with the freedom
of establishment.
In this paragraph I will analyze the Dutch tax treatment of emigrating businesses in the light of EU law, distinguishing
between natural persons and legal entities.
7.4.1
The Dutch business-emigration provisions in the light of case law on emigrating
individuals
With respect to the exit tax system, individual businesses and companies are currently treated similar in the Netherlands.
To be exact, the Dutch regime provides for a partial and final settlement provisions with respect to both emigrating
individual businesses and emigrating companies, and the recovery provisions, including the option between immediate
and conditional deferred payment, apply similarly to the two categories. However, it should be emphasized that even
though the subject of taxation, i.e. business income, might be similar in both cases, the object of taxation is not
comparable; with respect to individual businesses a natural person is liable to tax, whereas in case of companies the legal
entity itself is liable to tax. From the case law of the CJEU is follows that the exit tax regime for substantial
shareholders, being natural persons, is judged on different standards than the exit tax regime for companies.1112 The
question then is: should individual businesses, i.e. entrepreneurs, be treated as natural persons, thus along the lines
which the Court set out in the N.-case and in Hughes de Lasteyrie du Saillant, or should these individual businesses be
treated as businesses, following the reasoning of National Grid Indus.
7.4.1.1 Can substantial shareholders be compared to entrepreneurs?
What are exactly the implications of the cases Hughes de Lasteyrie du Saillant and N. for emigrating businesses, from a
Dutch perspective? I discussed these cases in detail in paragraph 7.3.1. Again, I emphasize that both cases dealt with an
emigrating natural person. If these cases are of relevance at all1113, it will most likely be so in the context of emigrating
individual businesses, as a substantial shareholder and an individual entrepreneur are both liable to tax under the
personal income tax (thus under a comparable tax regime).
It should, however, be noted that there are important differences between individual entrepreneurs and substantial
shareholders in the Dutch tax system. Firstly, in the Netherlands we employ a ‘box-system’; the personal income tax
consists out of three income ‘boxes’. The first box sees to income from employment, business profits and income from
primary residence, the second box is made up out of profits (both capital gains and regular income, i.e. dividends) from
1112
See also paragraph 7.4.1.3.
I wrote: if they are of any relevance at all, since the two cases see to emigrating substantial shareholders, to which different provisions
apply than to emigrating entrepreneurs.
1113
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substantial shareholdings, and the third box consists out of income from savings and investments. Profit derived from
an individual business is seen as a source of income in the first box. The tax rate is progressive with a maximum rate of
52%. On the other hand, substantial shareholders are taxed in the second box at a flat rate of 25%. A second important
difference between substantial shareholders and individual entrepreneurs is that a system of preservative tax
assessment1114 is applied to emigrating substantial shareholders, whereas emigrating individual entrepreneurs receive a
regular tax assessment1115 upon emigration.
Having observed these difference, I will again focus on the similarities. First, the tax treatment is the same. With respect
to both substantial shareholders and entrepreneurs, a tax is imposed by the emigration State on unrealized gains of
emigrating individuals, where such gains are not taxed in a purely domestic situation. Secondly, there are important
similarities between the emigrating substantial shareholder and the individual entrepreneur: both are natural persons and
they are both liable to tax under the personal income tax. Moreover, in the Dutch tax system, substantial shareholders
have to hold a shareholding in a company of at least 5%. This means that a substantial shareholder essentially is a quasientrepreneur. It follows that he distinction between a substantial shareholder, an individual business (entrepreneur), and
a business carried on by a legal entity (company) is, thus, a gradual distinction.1116
7.4.1.2 Court’s rulings on individuals applied to individual businesses
Assuming that entrepreneurs can be compared to substantial shareholders, the Court’s ruling in the case Hughes de
Lasteyrie du Saillant would imply that the emigration provisions (exit taxes) on individual businesses (i.e. articles 3.60 and
3.61 PITA 2001) are incompatible with the freedom of establishment, since these provisions encompass mechanisms
for taxing as yet unrealized increases in value (equal to the French provision under scrutiny in the case Hughes de Lasteyrie
du Saillant). At this point, it should be noted that after the ruling of the CJEU in Hughes de Lasteyrie du Saillant, the Dutch
government amended its regime for emigrating substantial shareholders, by cancelling the security requirement which,
up until then, applied to such emigrations.1117 The Court’s ruling in Hughes de Lasteyrie du Saillant was straightforward but
not very detailed. The Court did not elaborate on what elements exactly it considered to be incompatible with the
freedom of establishment. This was, however, further specified in the N. case. In this case, the Court basically allowed
the imposition of a preservative assessment on emigrating substantial shareholders, provided that there is no immediate
collection of the tax. In addition, tax collection has to be postponed until actual realization of the gain, and in the
meanwhile, MSs cannot require the provision of guarantees With respect to emigrating businesses, there is, as said, no
system of a preservative tax assessment but a regular tax assessment system, which in principle has to be paid
immediately.1118 When applying the Court’s ruling to emigrating individual businesses then, the Dutch exit regime is
incompatible with EU law. The Court also argued that the exit State has to take into account any reductions in value
which arise after emigration of the taxpayer, unless these reductions are taken into account by the other State. In the
context of emigrating individual businesses, the Netherlands does not take into account any reductions in value which
arise after emigration either. Applying the ruling in N. as if substantial shareholders are completely equal to individual
entrepreneurs, then this would be a disproportional and unallowable restriction of the freedom of establishment of
emigrating individual businesses.
1114 Under this system, payment is extended for 10-years, and if after this period no shares have been disposed of, the tax claim on the
taxpayer is waived.
1115 A regular tax assessment, regularly, implies immediate payment and after 10 years, the claim is not waived.
1116 This view has also been expressed by Essers, See Kamerstukken I - Stenogram vergadering 23 april 2013, p. 11.
1117 See for example CJEU N. v. Inspecteur (Case C-407/04), par. 14.
1118 This was amended in response to NGI. See the elaborate discussion elsewhere in this thesis.
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7.4.1.3 Should individual businesses be treated as individuals or as businesses?
As discussed, the CJEU did not rule any cases on the migration of a business carried on by natural persons. In the
previous section, I’ve shown how the cases which have been ruled in the area of individuals transferring their residence
to another State might be applied to emigrating individual businesses. When this approach is chosen, thus, when
applying the Court’s rulings on natural persons (substantial shareholders) to individual businesses (entrepreneurs), the
conclusion would be that the current tax treatment of individual businesses in the Netherlands is incompatible with the
However, when focusing on the subject of taxation, i.e. business income, the Court’s ruling in National Grid Indus might
be applicable to individual businesses (see also paragraph 7.3.2.5.). When comparing the Court’s rulings in the cases
National Grid Indus respectively N., as these cases both dealt with the Dutch tax system, it is clear that the Court uses
different standard for individuals when compared to legal entities. As for the comparison between, on the one hand,
emigrating individuals and, on the other hand, emigrating companies, they are similar in the sense that, in both
situations, exit taxes are justified as they are aimed at ensuring the balanced allocation of taxing power. As for the
proportionality, the Court also found, in both situations, that immediate payment is not allowed under the freedom of
establishment. There are, however, also important differences between the two situations. Firstly, in the context of
emigrating individuals (substantial shareholders), the Court prescribed automatic and (in principle) unconditional
deferral of payment. In the context of emigrating companies, however, the deferral of payment is not granted
automatically, but taxpayers have to opt-in for this. Secondly, in National Grid Indus (which was ruled in the context of
an emigrating company) the Court ruled that the emigration State is not obliged to take into account post-emigration
value decreases. This is in line with the principle of fiscal territoriality; a MS which no longer has a right to tax profits,
should not have to take into account value decreases after it has lost all fiscal connection with the company. In contrast, the
Court explicitly stated in the N. case that the emigration State is required to take into account value decreases, even if
they occur after emigration. Thirdly, in addition to the difference between the requirement of having to take into
account post-emigrational value decreases, the Court is also not consistent in its treatment of individuals respectively
companies with respect to the requirement of providing securities. More specifically, in the context of emigrating
individuals the Court strictly prohibited to requirement of having to provide a security in the form of a bank
guarantee.1119 In the context of emigrating companies, however, the Court almost turned 180-degrees; it was argued that
a bank guarantee may be required as a security in case of deferred payment, taking into account the risk of non-recovery
of the tax claim.1120
To summarize: where the Court set out a very taxpayer-friendly line of reasoning in N. this was all turned in National
Grid Indus. It might be posed that the new line which the Court took in National Grid Indus also applies to emigrations of
natural persons as from that moment forward, as the Court re-considered its previous rulings. This would imply no
automatic deferral of payment, no requirement to take into account post-emigrational value decreases for emigration
States, and securities provisions and interest calculation in case of deferral, for both individuals and legal entities.
However, this position is, in my opinion, wrong, as the Court ruled Spain v. Commission1121 after it ruled National Grid
Indus. In the case Spain v. Commision, which dealt with an emigrating individual, the Court re-established its reasoning
previously ventilated in N. and Hughes de Lasteyrie.1122 Thus, the observation that the Court seems to use different
standards for individuals when compared to legal entities, still holds.
The reasons for using different standards for individuals, respectively, legal entities (companies) is not explained by the
Court. Remember, the N case and National Grid Indus both concerned the Dutch tax system. I can then think of three
See CJEU Hughes de Lasteyrie du Saillant (Case C-9/02), par. 68. and CJEU N. v. Inspecteur (Case C-407/04).
See CJEU National Grid Indus (Case C-371/10); CJEU Commission v. Portugal (Case C-38/10); and EFTA Court Arcade Drilling AS
(Case E-15/11).
1121 See CJEU Commission v. Spain (Case C-269/09).
1119
1120
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reasons for differentiating between the two situations. The first is the difference in nature between a natural person and
legal entity. If this is the actual reason why the Court discriminates between the two, then individual businesses are to be
treated similar to shareholders, as both are natural persons. A second reason could be the difference in the object of
taxation, i.e. business income and income derived from a substantial shareholding. However, I wonder how big the
nature in the object of taxation truly is. A substantial shareholder can influence the decisions and actions of a company,
and is therefore considered a quasi-entrepreneur. Moreover, in both cases, the source of the income lies in business
activities. The third reason might be found in the difference between the tax assessment system employed in the
Netherlands in the situation of emigrating substantial shareholders on the one hand, and that of emigrating businesses
on the other.1123 More specifically, in case of emigrating substantial shareholders a system of preservative tax
assessments is used. Under such a system, the tax debt will be waived after ten years, provided that in the meanwhile the
taxpayer has not performed any ‘forbidden’ legal acts (such as selling its shares). I therefore believe that, from both a
legal and economical perspective, the tax debt is not definitive upon the emigration of the taxpayer, as it is also possible
that there will eventually be no tax debt. With respect to emigrating businesses, a regular tax assessment system is
applied rather than a preservative system. This means that the claim will not be waived in the course of time.
Consequently, it can be argued that the tax debt is definite upon the emigration of the taxpayer. It can also be argued
that, with reference to the fiscal connection with the taxable person, the principle of fiscal territoriality is not similarly
applicable to emigrating substantial shareholders and emigrating companies. More specifically, a system of preservative
tax assessment in the context of emigrating substantial shareholders will not lead to the emigration State losing all fiscal
connection with an individual. When the difference in the tax assessment system is the actual reason for the Court to
discriminate between shareholders and companies, then individual businesses ought to be treated similar to companies,
as in these cases a regular tax assessment system is applied. I am, however, not sure how to interpret the Court’s ruling
in the case Commission v. Spain, which dealt with a ‘regular’ natural person, in this context. Indeed, in this case, there was
no system of a conservative tax assessment either, and still the Court followed its rulings with respect to substantial
shareholders.
To conclude, there are important differences with respect to the standards which the CJEU maintains when assessing
the compatibility of the exit provisions with the freedom of establishment. Especially the proportionality of national exit
tax rules is interpreted differently for, on the one hand, substantial shareholders and, on the other, companies. In
addition, there is no case law from the CJEU on individual businesses. So where do individual businesses fit in? The
possible reasons for the previously cited cases leading to different outcomes most likely lies in the system of the law.
Essentially, the method of taxation for substantial shareholders differs notably from the method of taxation on business
income. Therefore, I believe that individual businesses are to be treated as companies, and that the National Grid Indus
ruling applies to individual businesses. Nonetheless, I agree with Essers that this does not mean that the way National
Grid Indus is currently translated to Dutch law is correct. The Dutch legislator should try to equalize the tax treatment in
case of emigration of different persons (either natural or legal).1124 This also has to be placed in the context of the Bill
on the amendment of the Recovery Act 1990, which I will discuss and analyze in the next paragraphs.
7.4.2
The Dutch business-emigration provisions in the light of case law on emigrating
companies
In the case National Grid Indus1125 the Court recognized the restrictive influence on the freedom of establishment of the
Dutch exit taxes imposed on emigrating businesses. However, the imposition of an exit tax was considered appropriate
to attain the aim of ensuring the preservation of the allocation of taxing power between MSs.1126 Additionally, the Court
I emphasize that the difference between natural persons and legal entities cannot be a reason for the observed difference, as emigrating
businesses in the personal sphere are taxed as natural persons, yet, from a procedural fiscal perspective, treated as emigrating companies.
1124 This view has also been expressed by Essers, See Kamerstukken I - Stenogram vergadering 23 april 2013, p. 11.
1123
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did not consider it to be disproportionate if the exit State does not take value decreases, which occur after emigration,
into account.1127 The only real question concerned the proportionality of immediate payment. In this context, the
imposition of the tax assessment itself was considered to be proportional1128 but the immediate payment was considered
to be disproportional.1129 Consequently, the Court ruled that MSs are obliged give companies who transfer their place of
effective management the choice between either immediate or deferred payment.1130 The Dutch legislator responded to
this by introducing the Bill on the amendment of the Recovery Act 1990, which has now been implemented by the Law
on deferral of exit taxation.1131 The Bill and the Law have been discussed in paragraph 2.9. The Dutch legislator is of the
opinion that the Dutch exit provisions are now fully compatible with EU law.1132 I believe this is disputable, an opinion
which is shared in literature. In the next section, I will discuss some comments on the amended Recovery Act.
7.4.3
Comments on the amended Recovery Act
It is the question whether the amendments of the Recovery Act are satisfactory. In literature, many comments have
been given to the amendments. Basically, it is possible that even after the amendment the Dutch exit provisions are still
incompatible with EU law. I this paragraph, I will review the most important comments which have been provided in
literature with respect to the amended Recovery Act.
Firstly, the Bills Commission of the Netherlands Order of Tax Advisors (NOB)1133 has reviewed the Bill / Law on the
amendment of the Recovery Act. The Netherlands Order of Tax Advisors applauds the amendments as such, since the
decision of the CJEU in National Grid Indus requires that Dutch tax law is adjusted. However, some comments are made.
In addition, scholars have scrutinized the Bill / Law as well. The most comments deal with the strict conditions which
apply when a taxpayer opts-in for deferred payment. It is emphasized that the Law on deferral of exit taxation now
offers the option between immediate and deferred payment. In case of emigrating substantial shareholders, however, the
Dutch tax system offers automatic deferral of payment. The fact that the deferral is optional seems to make the
legislator believe that all sorts of conditions and requirements can apply.1134 The most important conditions include: a)
provision of sufficient securities, b) payment of recovery interest, and c) provision of an administration, enabling the tax
collector to determine to what extent unrealized capital gains have been realized. I will discuss the most important
comments with respect to the requirements, and some more general comments.
7.4.3.1 Provision of sufficient securities
First of all, it can be asked whether the requirement of providing securities is allowed from an EU law perspective. The
Court provided in the NGI case that securities can be required in accordance with national law.1135 In comparable
national situations, however, no securities have to be provided in the context of a tax claim on unrealized gains.
Moreover, as the Court put forward, “Directive 2008/55, in particular Articles 5 to 9, provides the authorities of the Member State
of origin with a framework of cooperation and assistance allowing them to actually recover the tax debt in the host Member State”.1136 By
virtue of cooperation and assistance, MSs should be able to collect the tax debt, which would make the requirement of
providing securities superfluous.1137 As Lambooij put forward, the Court emphasized in recent exit tax case law that
1127
CJEU National Grid Indus (Case C-371/10), par. 56.
CJEU National Grid Indus (Case C-371/10), par. 52.
1131 Act of 14 May 2013, amending the Recovery Act 1990 (Law on deferral of exit taxation).
1132 See for example Kamerstukken II, 2012/13, 33 262, nr. 5 and Kamerstukken I, 2012/13, 33 262, nr. C.
1133 Commissie Wetsvoorstellen van de Nederlandse Orde van Belastingadviseurs (NOB).
1134 See aslo: Lambooij 2013, par. 3.
1137 See van den Broek 2012, par. 6.3.
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MSs can use the mechanism provided for under the Directives on mutual assistance for recovery.1138 “The cooperation
mechanisms existing at EU level between the authorities of the Member States are sufficient to enable the Member State of origin to recover
the tax debt in another Member State”.1139 The Court has admitted that these instruments for cooperation may not always
function in an efficient and satisfactory manner in practice, but that this does not justify a restriction of the fundamental
freedoms.1140 Lambooij concludes that the requirement of having to provide securities is probably not acceptable in the
light of EU law.1141
It has been argued by A-G Mengozzi that securities can be required only if there is a genuine and serious risk of nonrecovery of the tax claim.1142 In addition, the ruling of the EFTA Court in Arcade Drilling implies that securities can only
be required in case they are truly necessary (thus when there is a real and serious risk of non-recovery).1143 This was also
the conclusion of the Confederation Fiscale Europeenne (CFE).1144 According to the CFE, the possibility raised by the
Court in NGI, that is some circumstances (as the ones of the NGI case) it may be appropriate to require the payment of
a bank guarantee for the purpose of obtaining deferral is a deviation from its previous case law.1145 Consequentially, the
proportionality of bank guarantees as a tool to secure the effective recovery of tax is to be regarded as an exceptional
situation, which will have authority only in cases that are particularly difficult to trace.
As of January 1, 2013, the Dutch policy with respect to security-provisions in cases of long-term deferral arrangements
has been eased for domestic situations. The Dutch State Secretary of Finance has put forward that the requirement of
having to provide securities in case of emigration will follow this amended policy. This implies that the determination if,
and to what extent, securities will have to be provided will be left to the Dutch Tax Authority. This will thus be judged
on a case-by-case basis. In some cases this may also mean that no securities will be required.1146 The risk of nonrecovery of the tax claim will be leading in this respect. The Dutch Tax Authority will take into consideration elements
such as whether the taxpayer annually meets his filing and payment obligations, the nature of assets of the business
(volatile and easily transferable or fixed), and so on. All these considerations will be published in the Recovery guideline,
in order to prevent ‘random’ execution of the discretionary competence of the Tax Authority.1147 In my opinion, it is
positive that the requirement of having to provide securities is somewhat ‘lighter’ than it originally seemed. However, it
is still possible to comment this lighter version. For example, van Sprundel has put forward that the execution costs for
the Dutch Tax Administration will rise, as the securities which are to be provided will have to be judged on a case-tocase basis, and will be different from case to case. Also, in his opinion, this is a prelude to discussion with the Dutch
Tax Authority.1148 I believe that the requirement of having to provide securities has to be assessed individually in every
single case. It is noted that this will increase the administrative burden for the Dutch Tax Authority, but this will prevent
disproportional treatment. The Netherlands law currently measures up to this, as the Dutch Tax Authority will establish
the required securities on a case-by-case basis. In my perspective, the Dutch Tax Authority can require the provision of
securities only in those cases where this is needed as a tool to secure effective recovery of the tax. Thus, when there is a
real and serious risk of non-recovery, securities can be required.1149 What, then, constitutes a real and genuine risk of
non-recovery? In my opinion, such a risk will, for example, exist when the cooperation mechanisms at the EU level
1138
See Lambooij 2013, par. 8.
See CJEU Commission v. Spain (Case C-269/09), par. 68, with reference to National Grid Indus, paragraph 78.
1140 See CJEU Commission v. Spain (Case C-269/09), par 72.
1141 See Lambooij 2013, par. 8.
1142 See Conclusion A-G Mengozzi 28 June 2012, par. 82
1143 See EFTA Court Arcade Drilling AS (Case E-15/11). See also: V-N 2012/51.17, note of D.S. Smit. It is argued that when, for example,
the shareholders can be held liable for the tax debt of the enterprise, securities should not be required.
1144 Confederation Fiscal Europeenne – Opinion Statement of the CFE on Case C-371/10, march 2013.
1145 See Confederation Fiscal Europeenne – Opinion Statement of the CFE on Case C-371/10, march 2013, par. 31, with reference to De
Lasteyrie, par. 47, and N., par. 51.
1146 See also Kamerstukken I - Stenogram vergadering 23 april 2013, p. 7 and p. 10.
1147 See Kamerstukken I - Stenogram vergadering 23 april 2013, p. 7
1148 See van Sprundel 2012, p. 915.
1149 Compare Conclusion A-G Mengozzi 28 June 2012 and EFTA Court Arcade Drilling AS (Case E-15/11).
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between the Netherlands and the immigration State do not function properly,1150 when assets are particularly difficult to
trace1151, and/or when the shareholders cannot be held liable for the tax debt of the enterprise1152.
7.4.3.2 Administrative requirements
The Netherlands Order of Tax Advisors observed some disputable elements with respect to the administrative requirements
in the amendment of the Recovery Act 1990. In order to obtain the deferred payment, the Dutch tax collector will
require (amongst others) that the taxpayer provides its fiscal balance sheet and the profit and loss account. These
accounts have to be set up in accordance with Dutch tax law. In addition, other necessary data will have to be provided,
enabling the tax collector to determine to what extent unrealized capital gains have been realized. With respect to the
requirement to submit the annual accounts (based on Dutch standard), the Order argues that this is incompatible with
the Futura case1153, as it follows from this case that administrative requirements can only be imposed to the extent that
this is truly necessary. In the NOB’s opinion, the requirement to submit a fiscal balance sheet and profit and loss
account which are based on Dutch tax law is disproportional. These accounts contain many data which are completely
irrelevant for determining to what extent unrealized capital gains have been realized. The Order argues that the
requirement to submit other necessary data which will enable the tax collector to determine the extent of realization is
sufficient, in the light of the Futura case.1154 Van den Broek has also argued that for the purpose of effective control of
the Tax Administration, only relevant data has to be submitted. The requirement to submit an entire fiscal balance sheet
and profit and loss account is, in his opinion, disproportional and, as such, incompatible with EU law.1155 In line with
this, van Sprundel argued that the administrative requirements are too strict, and incompatible with the Futura case.
Moreover, van Sprundel notes that the requirement to submit a fiscal balance sheet and profit and loss account should
be codified in Dutch tax law.1156 The Dutch legislator disagrees with the comments, and counters the arguments by
providing that, as was stated in the explanatory memorandum to the Bill, realization will not only take place in case of
alienation but also in case of depreciation.1157 Consequently, in order to establish the extent to which unrealized gains
have been realized, it is required that the aforementioned accounts are submitted, set-up in accordance with Dutch
standards. However, the Dutch legislator immediately weakens the position it takes here, by providing that, in practice,
there is room for consultation with respect to the necessity of providing the accounts in the particular case.1158
I agree with the Netherlands Order of Tax advisors that the administrative requirement should only extend to data
which are necessary for determining the extent of realization. If realization takes place in case of depreciation as well, as
contended by the Dutch legislator, then this should be covered by the provided data. Requiring irrelevant data is in my
opinion incompatible with EU law. The question as to what does constitute relevant data should be answered in the
particular case.1159 Again, I believe that the presence and functioning of cooperation mechanisms at the EU level, in
particular the Mutual Assistance Directive for exchange of information, should be taken into account in every single
case.
1150
Compare Lambooij 2013.
Compare Confederation Fiscal Europeenne – Opinion Statement of the CFE on Case C-371/10, march 2013
1152 Compare V-N 2012/51.17, note of D.S. Smit.
1153 CJEU Futura (Case C-250/95).
1154 See NOB Commentary Law on deferral of exit taxation, p. 3.
1155 See van den Broek 2012, par. 5.
1157 See Kamerstukken II, 2012/13, 33 262, nr. 5, p. 9, and Kamerstukken II, 2011/12, 33 262, nr. 3, p. 5.
1159 As the Dutch Tax Authority will also have to establish the extent to which securities are required, this will not lead to an additional
administrative burden.
1151
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7.4.3.3 Calculation of recovery interest
The third requirement in case of deferred payment relates to the calculation of interest. With respect to the amount over
which payment is deferred, recovery interest is charged as from the time that the payment term of the tax assessment
expires.1160
The Dutch Order of Tax Advisors argued that nowhere in NGI it reeds that MSs can charge recovery interest. Other
authors also have problems with the calculation of recovery interest. Kemmeren argues that this is the most striking
element of the proposed Bill. The requirement to pay recovery interest is disproportional in his opinion, and
consequently, the business exit tax system is still inconsistent with the freedom of establishment.1161 Van Sprundel
argues that the calculation of recovery interest is not illogical as such, but that it does not follow automatically from the
case NGI.1162 In NGI, the court considered that MSs can charge ‘interest in accordance with the applicable national
legislation.1163 It is argued by the aforementioned that this implies that a ‘regular’ tax interest (heffingsrente up until 1
January 2013, and as from that moment forward belastingrente)1164 is allowed, but that MSs cannot charge recovery
interest in addition, as, in the opinion of the NOB, the CJEU was referring to the interest on the amount of exit tax, not
the interest on the deferred payment.1165 Moreover, the Order notes that by the calculation of recovery interest a new
obstacle to the freedom of establishment is introduced. Indeed, in a purely domestic situation the imposition of a tax is
deferred until unrealized gains, reserves, and goodwill are actually realized, without any interest being charged. In
addition, with respect to emigrating substantial shareholders, no recovery interest is charged either.1166 Van den Broek
has expressed similar concerns. In his opinion, the charging of recovery interest is simply incompatible with the
freedom of establishment.1167 He argued that the CJEU seems to demand that in the area of recovery of taxation, crossborder seat transfers are to be treated the same as domestic transfers. Consequently, the CJEU condemned the
immediate recovery of exit taxes, since this would lead to a cash-flow disadvantage in cross-border situations. Charging
recovery interest would subsequently lead to an interest-disadvantage when compared to domestic situations, where no
recovery interest is charged over unrealized gains. Van den Broek concludes that the Netherlands does not provide the
Dutch tax treatment to cross-border transfers.1168 Moreover, the European Commission considers that charging interest
for late payment is intrinsically discriminatory, since resident taxpayers are asked to pay tax only without interest.1169
The Dutch legislator argued in the explanatory memorandum to the Bill that the calculation of recovery interest is
regular practice in cases in which payment is deferred in the Netherlands.1170 And as the CJEU decided in NGI that MS
can charge interest in accordance with the applicable national legislation, the Dutch State Secretary of Finance does not
share the objections of the NOB. A-G Mengozzi has also provided his opinion with respect to the calculation of
recovery interest, in response to the case Commission v. Portugal.1171 He argued that if according to the national recovery
law recovery interest is charged in cases in which taxpayers choose for deferred payment, there is, on the basis of the
principle of equivalence, no reason to not apply these rule to a company transferring its real seat to another MS. This
See article 28(1) of the Recovery Act 1990 and Kamerstukken II, 2011/12, 33 262, nr. 3. The proposed Bill does not include a particular
1164 As from January 1, 2013, the interest rules of the Dutch Tax Authority have been changed. The ‘old’ heffingsrente (charging interest) has
been replaced by a belastingrente (tax interest). The interest rate of the tax interest is now aligned with the legal interest on trading transaction
for the corporate income tax, and with the legal interest on non-trading transactions for the personal income tax. As was the case before
January 2013, the recovery interest continues to exist next to the general or regular interest. See Belastingdienst (Dutch Tax Authority) –
Belastingrente.
1167 Van den Broek 2012, par. 7.
1168 Van den Broek 2012, paras. 7 and 9.
1169 See also: CJEU 6 September 2012, Case C-38/10, Commission v. Portugal, opinion A-G Mengozzi, paras 73-77
1171 See CJEU 6 September 2012, Case C-38/10, Commission v. Portugal, opinion A-G Mengozzi, paras 74-77.
1160
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implies also that when there is no recovery interest charged in case of deferred payment in a national context, a MS
cannot charge this recovery interest either to cross-border seat transfers. Following the reasoning of A-G Mengozzi, the
Dutch State Secretary of Finance would be right, since in a purely domestic context recovery interest is charged in cases
in which payment is deferred. But, as Kemmeren argued, this requirement cannot be based on the CJEU’s ruling in
NGI, since the Court only referred to the calculation of interest on the amount of exit tax itself.1172 This view is shared
by van Sprundel, who puts forward that the requirement to calculate recovery interest does not automatically follow
from NGI.1173
To conclude, the Court used a very cryptic formulation in its case law with respect to this requirement. It was argued
that payment can be deferred “possibly together with interest in accordance with the applicable national legislation”1174. The Court
lacks giving a proper interpretation and explanation of this requirement. According to Lambooij, there are two possible
ways of interpreting the Court’s magical formula.1175 The first interpretation is that given by A-G Mengozzi and also by
the Dutch State Secretary of Finance: it is logical that there will have be a compensation in the form of interest, as there
is an outstanding tax debt which will only be collectable in the future. Without charging interest, the State treasury
would be at a disadvantage. With respect to the moment as of which the interest is calculated, this reasoning would
justify the charging of interest as of the moment of departure (indeed, from that point in time, payment is deferred).1176
This is also the approach currently taken by the legislator: with respect to the amount over which payment is deferred,
recovery interest is charged as from the time that the payment term of the tax assessment expires.1177 A completely
different interpretation of the Court’s vague formulation of the calculation of interest has been provided by, amongst
other, van Sprundel, the Netherlands Order of Tax Advisors, and van den Broek. The EC, for example, considers that
charging of interest for late payment is intrinsically discriminatory since resident taxpayers are asked to pay tax only
without interest.1178 When the company would not have emigrated, the tax would not have been assessed definitively (as
there would be no realization), and, consequentially, the State treasury would not have suffered any interest disadvantage
either. With respect to the moment as of which the interest is calculated, this reasoning would justify the charging of
interest as of the moment of actual realization. Lambooij is an advocate of this second approach.1179 The fact that the
tax is assessed definitively upon emigration should be seen as a separate event of the calculation of recovery interest.1180
Recovery interest should only be charged when it is charged in comparable domestic situations, that is, the moment at
which a collectable tax assessment is imposed after actual realization of the gains.1181 Essers also believes that it would be
more proportional to start the calculation recovery interest the moment of actual realization, as from that moment
onwards the tax can actually be collected. He argues that if the other approach is taken, thus when recovery interest is
charged immediately from the moment of emigration onwards, the option between immediate and deferred payment is
not a real option. Indeed, a taxpayer might as well take a bank loan upon emigration in order to pay the exit tax claim
immediately, and pay the interest on the loan.1182 I personally find this argument is very convincing. One might wonder
if this really was the intention of the Court of Justice of the European Union. As, amongst others, Kok argues, if the
CJEU allows MSs to calculate recovery interest, the disadvantage of immediate recovery in terms of is cash flow would
effectively not be diminished. Indeed, this only makes the disadvantage in terms of cash flow visible.1183
See Kemmeren 2012, p. 36 and CJEU National Grid Indus (Case C-371/10), par. 73.
See van Sprundel 2012, p. 915.
1175 See Lambooij 2013, par 7.
1178 See also: CJEU 6 September 2012, Case C-38/10, Commission v. Portugal, opinion A-G Mengozzi, paras 73-77
1179 See lambooij 2013, par. 7.
1180 Compare to the system of conservative tax assessments in the context of emigrating substantial shareholders,
1182 See Kamerstukken I - Stenogram vergadering 23 april 2013.
1183 See Kok 2012, par. 3.3.
1172
1173
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To summarize: under the current proposal, recovery interest is charged as from the time that the payment term of the
tax assessment expires.1184 In my opinion, emigrating businesses have no option between immediate and deferred
payment, as both entail the disadvantage of having to pay interest, one way or another. Also, as Lambooij, the European
Commission, van den Broek, and others have put forward, in a purely domestic situation recovery interest is charged as
of the moment of realization, thus, when the tax can actually be collected. Therefore, there is a discrimination with
respect to the timing of the interest calculation, as a consequence of which emigrating businesses are at a disadvantage
when compared to businesses who maintain their residence in the Netherlands. In my opinion, this discrimination is not
justified by a reason in the public interest. The way in which the Netherlands currently charges recovery interest in cases
of payment deferral of exit tax claims is, therefore, incompatible with the freedom of establishment. The cash flow
disadvantage is not taken away, only made visible.1185 I believe that recovery interest can be charged, but that the
calculation of this interest can only be started at the moment of actual realization, as from that moment onwards the tax
can actually be collected. This treatment would be comparable to the domestic situation.
7.4.3.4 Scope of the Law on deferral of exit taxation
The NOB discussed that it was unclear whether the amendments of the Recovery Act 1990 would also apply to the
(assumed)1186 immediate payment resulting from the internal transfer of asset components from a Dutch PE to the
enterprise located outside the Netherlands.1187 The Dutch legislator clarified this issue; with reference to the case
Commission v. Portugal, it was explained that the option for deferred payment also applies to internal asset transfers from a
Dutch PE to the head office in another EU/EEA-State.1188 The same unclearness was observed by the Order with
respect to the cross-border conversion of legal entities. The Dutch legislator confirmed that the option for deferred
payment will also apply in this context.1189 In addition, the Order of Tax Advisors noted that the scope of the Law on
deferral of exit taxation is limited to the EU/EEA, and acknowledged that, in principle, third countries do not have to
be included. However, in the context of emigrating substantial shareholders and pensions, the rules for deferred
payment do apply to third countries (under the condition of providing securities). The Order of Tax Advisors wondered
why the legislator differentiates between the emigration of businesses and the aforementioned situations.1190 With
respect to this limited scope, the Dutch legislator responded that the purpose of the amendments of the Recovery Act is
to achieve alignment between Dutch tax law and the CJEU’s ruling in National Grid Indus. And by virtue of the Court’s
ruling, MSs are only obliged to offer the option of deferred payment to businesses emigrating to EU/EEA-States. In
addition, the Dutch State Secretary of Finance argues that the background of the deferral arrangements for businesses,
respectively emigrating substantial shareholders and pensions, is different, and consequently, he sees no reason to
expand the scope of the proposed amendments to the Recovery Act.1191
In my opinion, the scope of the Law on deferral of exit taxation is not incompatible with EU law. As argued by the
legislator, the Netherlands is only required to offer the option of deferred payment with respect to transfers within the
EU/EEA. Nonetheless, it goes safe to say that it would be preferable in the light of European and global mobility to
See article 28(1) of the Recovery Act 1990 and Kamerstukken II, 2011/12, 33 262, nr. 3. The proposed Bill does not include a particular
1185 It should be noted that, when talking about a cash flow disadvantage, it might be argued that emigration can also include a cash flow
advantage. More specifically, when the immigration State provides a tax base step-up, this will result in higher depreciation costs. In cases,
this can be an advantage. See also Kok 2012, par. 3.3.
1186 I placed the word assumed before the immediate payment, since the tax treatment upon the internal asset transfer from a Dutch PE to a
foreign head office is an open ended question. See paragraph 3.5.2.2. for a detailed discussion.
1187See NOB Commentary Law on deferral of exit taxation, p. 1.
1188 See Kamerstukken II, 2012/13, 33 262, nr. 5, p. 7. It is thus assumed that such a transfer would trigger an exit tax. For a discussion with
respect to this question, I refer to paragraph 4.6.
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expand the scope of the Law.1192 Moreover, the argument given by the Dutch State Secretary of Finance that the
background of the deferral arrangements for emigration substantial shareholders and pensions differ from those for
businesses, makes no sense for me. Indeed, the deferral arrangements regarding businesses leave more room for the
Dutch Tax Authority to set conditions and enforce control, as deferral is only granted in case a taxpayer opts-in for this
and meets the required conditions (such as the provision of securities, which can be ‘custom made’), whereas this is
automatic, and consequently, more difficult to control with respect to shareholders and pensions.
7.4.3.5 Termination of the deferral of payment
Another category of comments of the NOB included the deferral of payment itself. On the basis of the Law on deferral of
exit taxation, the deferral of payment will be terminated in case the taxpayer no longer resides in an EU/EEA State.1193
The Order wondered whether Dutch law, the law of the exit State, or the law of the destination State should be applied
in determining whether the place of residence has been transferred.1194 The Dutch legislator, again, clarified this issue.
As it is a deferral facility stemming from Dutch law, the place of residency is to be determined according to Dutch
standards.1195 Moreover, as follows from the Law on deferral of exit taxation, the deferral arrangement is terminated in
case the provided securities are no longer sufficient.1196 The Order asked the Dutch State Secretary of Finance to clarify
whether this provision is ‘all-or-nothing’ in nature. More specifically, will the entire deferral of payment be terminated,
or will it only be terminated to the extent in which the provided securities are no longer sufficient. In the opinion of the
NOB, the first option (all-or-nothing) would be disproportional.1197 In its response, the Dutch State Secretary of
Finance dismissed the all-or-nothing option. It is only necessary to terminate the deferral to the extent in which there is
a recovery risk for the Netherlands. With respect to the tax debt still covered by sufficient securities, there will be no
such risk.1198 I believe that, all in all, the Netherlands system with regard to the termination of deferral of payment is
proportional (that is, if the conditions as such are accepted).
7.4.3.6 Payment in ten annual installments
The Court has ruled in its cases that immediate payment is disproportional. Member states should offer the option
between immediate and deferred payment to emigrating businesses. It is however unclear at which moment the tax
claim can be collected. Generally, it is believed that the tax cannot be collected until the gain has effectively been
realized.1199 However, the Netherlands offers the option of payment in ten annual installments as an alternative to
deferred payment until actual realization. There are also States, such as France and Germany, where it is possible to pay
the exit tax claim in five annual installments without additional requirements (such as security provision and calculation
of interest). What, then, constitutes a proportional exit tax system? The Netherlands has submitted a question in this
sense to the CJEU in the case Commission v. Spain1200. More specifically, the Netherlands asked whether it is imaginable
that the deferral of payment is restricted to ten or twelve years.1201 The Court did, however, not provided an answer to
this question. In the case Commission v. Portugal1202, the German government asked to the Court whether offering
1192
Especially in respect to countries with which the Netherlands has concluded a DTC, I believe that the option between immediate and
deferred payment should be offered, as in these cases and information exchange clause will be in force, similar to the cooperation
mechanisms at a European level.
1193 See the proposed article 25a(2) section a, Recovery Act 1990.
1196 See the proposed article 25a(2) section c, Recovery Act 1990.
1199 See also CJEU Commission v. Spain (Case C-64/11).
1200 CJEU Commission v. Spain (Case C-64/11).
1201 In the EUCOTAX comparative law, it was already discussed that some countries restrict the deferral of payment to five years. For
example, Germany and France offer the option of payment in five annual installments. It is also unclear whether this would pass the
proportionality test of the CJEU.
182
companies the opportunity of annual payments of the exit tax debt, may constitute a measure which is appropriate and
proportionate.1203 However, the Court again did not answer this question in this case. In this context, it is also worth
mentioning that the EC has started an infringement procedure against Germany with respect to a certain provision (not
an exit tax provision) to which similar options of deferred payment apply.1204 The following prejudicial question was
asked in this case: “is the national provision compatible with Article 43 EC (or Article 49 TFEU) if the transferor is entitled to apply
for the deferment, on an interest-free basis, of the tax arising as a consequence of revealing the undisclosed reserves, with the effect that the tax
due on the gain may be paid in annual installments, each of at least a fifth of the tax due, provided that the payment of the installments is
secured?” The context is similar to that of exit taxation: unrealized gains and reserves are disclosed (fictitiously) upon the
cross-border transfer, and the option of payment in five annual installments is offered to taxpayers. However, as this
case has not been ruled yet, the answer to this question is still unclear. The Dutch State Secretary of Finance has argued
in this respect that eventually, this is up to the Court to decide. As for now, the Dutch legislator simply abides the
preconditions posed by the Court’s ruling in National Grid Indus.1205
Lambooij has put forward that, in the end, the proportionality benchmark of the Court is subjective. It is not possible to
generalize what is and isn’t proportional to all situations of all MSs. He argues that the Court might eventually take the
stand, for the purpose of simplicity and practicability, that payment in equal annual terms is allowed. It is, however,
noted that this can pose a restriction to the freedom of establishment, as there is no guarantee that the company will
have the liquidities to pay the annual term of the exit tax debt.1206 I also believe that a system of payment in equal
installments will be incompatible with the freedom of establishment. The Court considered the exit tax systems of
several States with respect to emigrating businesses disproportional on the basis that immediate payment would lead to
a cash-flow disadvantage when compared to purely domestic situations. In Commission v. Spain, the Court suggests that
Spain is entitled to tax unrealized gains upon exit, but that it cannot collect the exit tax until the gains has effectively been
realized.1207 If effective realization is to be interpreted as actual realization, similar to the system with respect to emigrating
substantial shareholders, I believe that a system of payment in equal annual installments would still be disproportional,
although less disproportional than obligatory immediate payment, as it does not seek to join the moment of actual
realization. Moreover, the cash flow disadvantage on the basis of which the current exit tax rules with immediate
payment were held incompatible with EU law can still exist under a system of payment in annual installments, although
this disadvantage will not be as big as when payment of the tax due is required immediately.
7.4.4
Conclusion: compatibility of Dutch exit tax regime with EU law
In the previous analysis, I have given my own interpretation in regards to the compatibility of the current Dutch exit tax
system with EU law. To conclude: the Netherlands tax system with respect to the emigration of a business is not fully
compatible with EU law, where the problem ultimately lies in the fact that recovery interest is currently being charged as
of the time that the payment term of the tax assessment expires (thus, before actual realization).1208
7.5 EUCOTAX Comparative law
Analyzing the different national tax law systems of the EUCOTAX countries, it became clear that all States use different
rules and systems with respect to the recovery of the exit tax claim.1209 These systems have been discussed in paragraph
See also : Conclusion A-G Mengozzi 28 June 2012, par. 68.
See CJEU Commission v. Germany (Case C-164/12).
1205 See also Kamerstukken I – Stenogram 23 april 2013, p. 8.
1207 See Commission v. Spain (Case C-64/11).
1208 For the ‘long version’ of this conclusion I also refer to paragraph 7.7.
1209 See also chapter 2.
1203
1204
183
2.9.B, where these systems were divided into four main categories. I will briefly recapitalize the systems in this
paragraph, and I will analyze which of these systems are, and which aren’t compatible with EU law.
7.5.1
As discussed in paragraph 2.9.B, Austria offers taxpayers the possibility to request for deferred payment of the exit tax
claim.1210 This option for deferral of payment is limited to EU/EEA States. Decreases in value which occur after
emigration are deductible in Austria, provided that the immigration State does not grant such a deduction.1211 With
respect to the conditions under which the deferral is granted, the following was noted: no interest payments relating to
the deferred payment have to be made by the taxpayer, and collaterals or securities will not be required. Austria relies
completely on the mutual assistance and recovery directives and considers securities unnecessary. Lastly, the Austrian
option for deferred payment is of a preservative nature; after ten years the tax claim will be waived. In my opinion, the
Austrian system is minimally obstructing with respect to European business mobility from an outbound perspective, and
in this respect ‘internal market friendly’. The Austrian system is also fully compatible with European Union Law.1212 The
fact that the option of deferred payment only applies with respect to transfers to other EU/EEA States is also
compatible with EU law. In the light of global business mobility, however, it would be preferable to include third
countries.
Italy has amended its exit tax recovery provisions as of 1 January 2013, in response to the Court’s ruling in National Grid
Indus.1213 Emigrating businesses can now ask for deferral of payment of the exit tax due. A future decree, however, will
have to define the exact conditions with respect to for example interest.1214 We will have to await this future decree in
order to determine the extent to which the Italian exit tax will be compatible with EU law.
In Sweden, emigrating businesses can apply for a tax deferral in certain cases. Unlike the other States, Sweden already
introduced this option in its law as of January 1 2010. Five criteria need to be fulfilled in order to receive the tax
deferral.1215 In my opinion, the Swedish provisions are still incompatible with EU law, as they clearly discriminate
between residents and none residents; only Swedish companies can be granted a tax deferral (see criterion 1). With
respect to the conditions under which this deferral of payment is granted, there are no requirements such as the
provision of securities or interest payment. As an “administrative” requirement, it is noted that the business has to
renew its application for tax deferral every year.1216
1210 See Pinetz 2013 (Austria), p. 43, with reference to § 6 N 6 letter b of the Austrian Income Tax Act. Letter b grants a deferral for the tax
recovery. With the option for each individual asset; see also Income Tax Directive 2000, GZ BMF-10203/0299-VI/6/2008 from
16.06.2008, m.no. 2517a.
1211 See Pinetz 2013 (Austria), p. 44, with reference to § 295a Federal Fiscal Code.
1212 Austria does not require interest calculation or the provisions of securities. Doing so would be incompatible with EU law in the context
of Austria. More specifically, in National Grid Indus, the CJEU allowed MS to ask for the provision of a security and to calculate interest, if
this would also apply in a domestic case of deferral. However, in Austria there are no such requirements in purely domestic context either,
so it would be an infringement of the fundamental freedoms if interest or securities were implemented into the Austrian exit tax provision
without changes to national procedural provisions for the comparable domestic situation.
1213 See Trabattoni 2013 (Italy), who argues that on the basis of D.L. 1/2012, two new commas have been added to Art. 166 T.u.i.r. (2quater and 2-quinquies), according to which a business transferring its residence in a white listed State that offers assistance in the collection
of taxes, is allowed to ask a payment deferral.
1214 See Trabattoni 2013 (Italy), with reference to V. Russo, Exit taxes e diritto comunitario: quale “modello” compatibile?, not published
yet, D. Smit, The National Grid Indus Case: a Pirrhic Victory?, in Studi Tributari Europei, 2012, 1, p 24-25
1215 1) the taxable entity is unlimited liable to tax in Sweden, 2) the exit tax has been triggered due because income from a business
completely or partially ceases to be taxed in Sweden due to a tax treaty or because assets are transferred from one part of a business which is
taxable in Sweden to part of the same business which is exempted from Swedish taxation due to a tax treaty, 3) the tax treaty has been
concluded with another EU/EEA State, 4) the asset is included in a business in another EU/EEA State, and 5 ) the business that is taxed in
another country has not ceased to exist. See also paragraph 2.9.B.
1216 See Lim 2013 (Sweden), p. 21 with reference to Chapter 63, section 14 of the TPA.
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7.5.2
Option between immediate payment and payment in 5 annual installments
France and Germany generally require immediate payment of the entire amount of exit tax due. In case of a transfer to
another EU/EEA state, there is a deemed disposal of assets type of exit tax, where it is possible pay this exit tax in five
annual installments. In case a taxpayer opts-in for payment in five installments, there are in Germany no additional
requirements such as the provision of securities and interest calculation, but administrative requirements may apply. In
France, it is unclear what the exact requirements are (with respect to security provision, interest calculation, and so on),
as this rule was recently introduced in January 2013. It is, however, clear that there is an administrative obligation for the
taxpayer in order to allow the tax authority to establish that the assets are still part of the taxpayer’s business. With
respect to the compatibility with EU law, it is unclear whether this French and German system poses an infringement to
the freedom of establishment. Strictly taken, both states do not offer the option between immediate and deferred
payment until actual realization. On the basis of National Grid Indus, I believe that these systems would then have to be
considered incompatible with EU law, as the Court considers immediate payment to be disproportional. The German
legislator, however, seems to believe that the option of payment in five annual installments will pass the proportionality
test of the CJEU. In this context, it is worth to mention that the European Commission started an infringement
procedure against Germany for a provision to which similar “deferral” options apply. In this case, the following
question is asked: “is the national provision compatible with Article 43 EC (or Article 49 TFEU) if the transferor is entitled to apply
for the deferment, on an interest-free basis, of the tax arising as a consequence of revealing the undisclosed reserves, with the effect that the tax
due on the gain may be paid in annual installments, each of at least a fifth of the tax due, provided that the payment of the installments is
secured?”1217 It follows that, unfortunately, we cannot make a final statement concerning the compatibility of the German
and French exit tax system with respect to EU law, as the ECJ has not given its final verdict in this case. However, I
believe that a system of payment in equal annual installments is disproportional (although less disproportional than the
obligation to pay the tax due immediately) as it does not seek to join the moment of actual realization. Moreover, the
cash flow disadvantage on the basis of which the current exit tax rules with immediate payment were held incompatible
with EU law, can still exist under a system of payment in annual installments.
7.5.3
No option
In Belgium, the transfer of a company’s place of effective management will result in a deemed liquidation, where a tax
is imposed on all latent capital gains and reserves. As a general rule, this tax is due immediately; Belgium does not offer
emigrating businesses the option between immediate and deferred payment. This is distinguished from the possibility of
deferred taxation (which is offered when assets and reserves can be allocated to a Belgian PE). The focus here is on the
recovery of taxation, after an exit tax has been imposed. And as said, Belgium does not offer the option of deferred
payment. Consequently, the Belgian exit tax system is clearly incompatible with EU law, based on the Court’s ruling in
NGI.
7.5.4
Recovery of tax is irrelevant
Hungary and Poland do not impose an exit tax as such. Thus, there is nothing to benchmark against the freedom of
establishment. Businesses emigrating from the U.S. have no access to the freedom of establishment. Moreover, the U.S.
does not impose a real exit tax either. With respect to all these States, the proportionality of the recovery provisions is
completely irrelevant.
7.5.5
Summary
The table below summarizes the different recovery systems of the EUCOTAX countries:
Exit tax recovery and compatibility with EU law
1217
CJEU Commission v. Germany (Case C-164/12).
185
Austria
Belgium
France
Germany
Hungary
Italy
Netherlands
Poland
Sweden
USA
Option between immediate and deferred payment (not automatic). No interest calculation, no
securities. Rely on mutual assistance directive. Only within EU/EEA States. Fully compatible with
EU law.
No deferral; pay immediately incompatible with EU law
When a (fictitious) PE is left behind in France there is no immediate taxation. In all other cases,
option between immediate taxation or payment in five annual terms.
Immediate exit tax. In some cases possibility to pay in five installments.
infringement procedure
started by EC, possibly incompatible with EU law
No exit tax nothing to benchmark against freedom of establishment
As of 2012, there is deferral of payment, but the conditions are still unclear. Compatibility with EU
law remains uncertain until then.
Option between immediate and deferred payment (not automatic). In case of deferred payment the
following conditions apply: interest calculation, recovery interest, and provision of an administration.
Alternative: pay in ten annual installments. Strict conditions may pose new restrictions to EU law
(possibly incompatible)
No exit tax nothing to benchmark against freedom of establishment
Option between immediate and deferred payment (not automatic). No collateral, no interest. Renew
application for tax deferral every year. Option for deferred payment only applies to resident
taxpayers discriminatory provision which might be incompatible with EU law.
No access to freedom of establishment
7.6 Dutch tax treatment of immigrating businesses in the light of EU
law
In the Netherlands, immigrating businesses are granted a step-up in tax base. This means that upon the commencement
of their liability to tax in the Netherlands, immigrating business are required to draft an opening balance on which their
entire capital (all assets and liabilities) is valued at fair market value. I believe that the Netherlands applies the correct
treatment by providing a tax base step-up to immigrating businesses for two reasons. First, businesses which immigrate
to the Netherlands receive equal treatment as entities which become liable to tax in a purely domestic situation; in both
cases, the total profit concept requires the drafting of an opening balance. Secondly, the Netherlands is consistent in its
treatment; where upon the emigration of a business an exit tax is imposed on unrealized gains, a tax base step-up to fair
market value is provided upon the immigration of a business.1218
Nonetheless, I want to highlight two issues in the context of the immigration of a business and EU law. The first issue
deals with the question whether not providing immigrating businesses with a tax base step-up is incompatible with EU
law, more specifically with the freedom of establishment. Secondly, it is often assumed that the fair market value will be
higher than the book value. It should, however, be noted that it is possible that the revaluation from book value to fair
market value essentially turns out to be a step-down, as will be the case when the fair market value lies below the book
value. When a ‘devalued’ asset increases in value in the period after immigration, and the taxpayer subsequently decides
to sell this asset, the Netherlands will impose a tax whereas there is no actual profit made, from an economic point of
view. The question then is, is a tax base step-down compatible with EU law? I will analyze these two issues in the next
sub-paragraphs.
1218
See also: Terra and Wattel 2012, p. 514.
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7.6.1
Not providing a step-up incompatible with EU law?
Not granting a tax base step-up to immigrating businesses would discourage companies to transfer their place of
management to an immigration State, as not allowing a step-up results in a (latent) tax claim over gains that already
accrued outside the territory of that State. This is disadvantageous, both for the immigrating company and the
immigration State. But does the fact that this treatment is disadvantageous also mean that not providing a step-up
incompatible with EU-law? In December 2008, the Ecofin Council adopted a Resolution in which guidelines are
provided for the coordination of the various exit taxes of different Member States. 1219 In this Resolution, MSs agreed
that the immigration State has to grant a step-up to immigrating businesses, which implies that this state has to accept
the market value of assets and liabilities. This resolution has, however, no binding force. In addition, not all States
currently provide a tax base step-up to immigrating businesses. One might therefore wonder whether not granting
immigrating businesses with a tax base step-up is an infringement of Union law.
Thus, MSs are currently not obliged to grant a tax base step-up upon immigration, as the Resolution of the Ecofin has no
binding force and the CJEU has not yet explicitly taken a position with respect to the requirement of a granting a stepup to immigrating businesses. Consequently, there are States who choose not to do so. If States don’t provide an
immigrating business with a tax base step-up, the historical book value will be activated on the balance sheet in the
destination State. If, eventually, the immigrated company is ceased or emigrates again, the consequence will most likely
involve a tax settlement over a gain which is larger than the gain actually accrued in the immigration State.1220 In
literature, is has been argued that these kinds of consequences of emigration and immigration are not suitable in an
internal market.1221 The question then is, can the CJEU oblige MSs to grant immigrating businesses a step-up upon
immigration with an appeal on the freedom of establishment? As discussed, the freedom of establishment of article 49
TFEU encompasses two elements: market access (the right to take up and carry on activities as a self-employed person
and to set up and manage enterprises) and market equality (the right to treatment as a domestic entrepreneur in the MS
of establishment). Immigration States will generally defend themselves on the basis of the second element, the market
equality. They argue that immigrating businesses are treated equal to businesses transferring inside the States borders, as
an immigrating business will start with existing book (historical) book values and a business transferring in a domestic
context will also continue to apply the historical book values. Consequently, immigrating States are of the opinion that
there is no obstruction.1222
It is argued by van den Hurk, van den Broek, and Korving that, strictly taken, the immigration States are right. In
principle, they treat immigrating businesses equal to domestically transferring businesses. The authors put emphasis on
in principle, since the previous discussion is focused on the wrong aspect. Rather, it should be focused on the
appreciation of assets and liabilities on the opening balance sheet.1223 Moreover, the principle of territoriality is an important
principle to which MSs make regular appeals in the context of Union law compatibility-issues. Van den Hurk, van den
Broek, and Korving, however, remind that the principle of territoriality is a principle which in an ideal internal market
works both ways; where it will prevent tax base erosion for one State, it will prevent over-taxation in the other State.
And according to the authors this is the clue. By not granting immigrating businesses with a tax base step-up, the
immigration State will eventually impose a tax on more than it is rightfully entitled to; i.e. on the total value increase,
rather than the value increase accrued in the immigration State’s jurisdiction. The authors argue that with an appeal on
the principle of territoriality, the CJEU can force MSs to apply a tax base Step-up upon the immigration of a business.
In an ideal situation then, the immigration State ought to deliberate with the emigration State in order to establish the
step-up. More specifically, the final value upon emigration should be equal to the starting value upon immigration. The
1219
Council Resolution OJEU 2008 C323/1.
Since the company will have to settle a tax over the difference between the historical book value and the fair market value upon
subsequent emigration or cessation.
1222 See also van den Hurk, van den Broek, and Korving 2012, par. 4.2.
1220
187
authors conclude that the CJEU should quickly take a final statement with respect to the requirement of granting
immigrating businesses with a tax base step-up.1224
The ruling in the National Grid Indus case also gave rise to the question whether MSs have to grant a step-up to
businesses who become liable to tax in the State due to the transfer of the place of management. Implicitly, the CJEU
seems to suggest that the immigration State is obliged to grant a tax base step-up.1225 In NGI, the Court argued that
“Since, in a situation such as that at issue in the main proceedings, the profits of a company which transfers its place of effective management
are, after the transfer, taxed exclusively in the host Member State, in accordance with the principle of fiscal territoriality linked to a temporal
component, it is also for that Member State, in view of the above-mentioned connection between a company’s assets and its taxable profits, and
hence for reasons relating to the symmetry between the right to tax profits and the possibility of deducting losses, to take account in its tax
system of fluctuations in the value of the assets of that company which occur after the date on which the Member State of origin loses all fiscal
connection with the company.”1226 Moreover, the Court continues: “..the tax system of the host Member State will in principle take
account, at the time when the assets of the undertaking in question are realized, of capital gains and losses realized in relation to those assets
after the transfer of the place of management. However, a possible omission by the host State to take account of decreases in value does not
impose any obligation on the Member State of origin to revalue, at the time of realization of the asset concerned, a tax debt which was
definitively determined at the time when the company in question, because of the transfer of its place of management, ceased to be subject to tax
in the latter Member State.”1227 As mentioned, this seems to imply that the CJEU requires the provision of a tax base stepup, as the immigration State should only take into account those value fluctuations which occurred within its own
territory. But how should this really be interpreted? Kok argues that there are three ways of interpreting the Court’s
wording: 1) the Member State has to grant a step-up, 2) the Member State should grant a step-up, or 3) it is up to the
Member State to decide whether or not to grant a step-up. Kok concludes that – for now – the Court did not want to
answer the question whether Member States have to grant a step-up or not, although the Court prefers that MSs grant a
step-up.1228 In my opinion however, there is another way of interpreting the citations. More specifically, a strict
interpretation would imply that the CJEU is only referring to emigrating businesses which are not incorporated under
the law of the exit state and, by virtue of that incorporation system, remain liable to tax as a resident after the transfer of
the place of effective management (as will be the case under the Dutch tax law system). I base this statement on the last
sentence of the first part of the previous citation, more specifically: “… which occur after the date on which the Member State of
origin loses all fiscal connection with the company”.1229 Under the Dutch tax system, an emigrating company will continue
to be a resident taxpayer on the basis of article 2(4) CITA 1969, and consequently, the Netherlands, being the MS of
origin, will not lose all fiscal connection with the company. MSs would then not be obliged to provide Dutch
incorporated businesses with a step-up. I find it hard to believe that this was the Court’s intention. Such a treatment
would also not be consistent with the principle of fiscal territoriality. Therefore, I agree with van den Hurk, van den
Broek, and Korving, that the CJEU should quickly and - more important - unambiguously take a final statement with
respect to the requirement of granting immigrating businesses with a tax base step-up.1230
Ignoring for a moment the question whether the Court ventured its opinion or not with respect to the requirement of
providing a tax base step-up, let’s consider the more essential question: is not granting a step-up a forbidden restriction
to the freedom of establishment? In order to assess this, first, there has to be a comparable situation. As Kok puts
forward, in case of a transfer of management within one country (for example, from Amsterdam to Rotterdam), no
step-up is being granted. Does this then imply that in case of a transfer of the place of management to another country
no step-up has to be allowed?1231 With Kok, I believe that this is the wrong comparison. Rather, the starting point of
1224
See van den Hurk, van den Broek, and Korving 2012, par. 5.
See also: note to National Grid Indus, V-N 2011/67.8.
1228 See Kok 2012, par. 4.
1229 Bold and underlined by author.
1231 See Kok 2012, par. 4.
1225
188
comparison should be when companies become subject to tax in the destination State. So the tax treatment of start-up
companies or companies who become subject to tax because they no longer fall under the scope of an exemption are
the domestic situations to which the tax treatment of an immigrating business is to be benchmarked. In my opinion, a
difference in treatment of these two would be a restriction of the freedom of establishment from an inbound
perspective, and thus incompatible with EU law, provided that there are no justifications for this different treatment.
Finally, the question of whether or not a step-up has to be provided can also be analyzed from a different perspective,
as ventured by A-G Niessen.1232 The A-G is of the opinion that a national rule poses an obstruction to the freedom of
establishment if under this rule the cross-border transfer of the place of residence will eventually result in a higher tax
debt than when this cross-border transfer would not have taken place. Thus, if the Netherlands would not grant
immigrating businesses a tax base step-up but continue with the historical book values, there will eventually be a higher
tax burden, as upon realization the difference between the fair market value and the (historical) book value will be larger
than when a tax base step-up would have been applied upon immigration. I believe that this would be highly undesirable
in the light of European and global mobility, in line with the analysis of A-G Niessen. However, I do not believe that,
on forehand, this will be an infringement of the freedom of establishment. In the NGI case, the Court ruled that “the
failure of the Member State of origin to take into account, in the dispute in the main proceedings in the present case, decreases in value that
occur after the transfer of a company’s place of effective management cannot be regarded as disproportionate to the objective pursued by the
national legislation at issue in those proceedings.”1233 Not taking into account post-emigrational value decreases can eventually
amount to a higher total tax burden when compared to the situation if the taxpayer would not have transferred crossborders, but is not considered incompatible with the freedom of establishment by the Court in NGI. It is, however, also
noted that the Court argued that the immigration State ought to take into account in its tax system fluctuations in value
of the assets of an immigrated company occurring after immigration, in accordance with the principle of territoriality
linked to a temporal component.1234 In my opinion, this reflects that the Court also believes that a business should be
confronted with the same total tax burden, irrespective of whether or not the business transferred cross-borders.
However, as was discussed above, it is unclear whether on the basis of this ruling, an immigration State is truly obliged to
take into account such value fluctuations. If this is not the case, crossing the border can eventually result in a higher
total tax burden, which would then, at the current stand of CJEU case law, not be considered incompatible with the
To conclude, I believe that Member States are, on the basis of the freedom of establishment, required to grant
immigrating businesses a step-up in base, even though this has not explicitly been dictated by the CJEU. First of all,
with reference to the principle of territoriality linked to a temporal component, MSs should only impose a tax on
income which accrued in that particular jurisdiction. Without the provision of a step-up, immigration States would tax
more than which they are entitled to, which can result in double taxation and consequently an obstruction to business
migration. Secondly, immigrating businesses who become subject to tax in a State, should be treated similar to other
businesses who become liable to tax in that State, i.e. domestic start-up businesses. This would imply that assets and
liabilities are to be recorded on an opening balance sheet at fair market value, and thus a tax base step-up for
immigrating businesses. Finally, I believe that, in principle, a business should be confronted with the same total tax
burden, irrespective of whether or not the business transferred cross-borders, as was discussed by A-G Niessen. If the
cross-border transfer would imply a higher total tax burden, this would be highly undesirable in the light of European
and global mobility. Moreover, on the basis of the principle of fiscal territoriality linked to a temporal component, the
immigration State seems to be required to prevent such from happening.1235
1232
See his conclusion to HR LJN: BY9291, which dealt with the provision of a step-down upon immigration of a substantial shareholder.
1233
189
7.6.2
Tax base step-down
As a final issue, the question whether providing a tax base step-down to immigrating businesses is compatible with EU
law has to be analyzed. Throughout this this thesis, the Netherlands tax treatment upon the immigration of a business,
i.e. the provision of a tax base step-up, has been considered as beneficial treatment for corporate taxpayers. By
increasing the value of assets to the fair market value, businesses are allowed to recognize a lower gain in time. Provided
that businesses are confronted with an exit tax upon emigration, a tax base step-up better corresponds with the
economic reality of the business. In this thesis, it was implicitly assumed that the fair market value would be higher than
the book value. It is, however, also possible that the revaluation from book value to fair market value essentially turns
out to be a step-down, as will be the case when the fair market value lies below the book value. In this case, the method
of revaluation to fair market value can be detrimental to businesses, as it results in a "step-down" in basis. When an
asset is “stepped-down”, the depreciable basis will be below the former book value. Moreover, when such an asset
increases in value in the period after immigration and the taxpayer subsequently decides to sell this asset, the
Netherlands will impose a tax whereas there is no actual profit made, from an economic point of view.
I believe that there are several ways to assess the compatibility with EU law of a tax base step-down. First of all, the
reasoning of A-G Niessen might be applied to this issue, where a national rule poses an obstruction to the freedom of
establishment if, under this rule, the cross-border transfer of the place of residence will eventually result in a higher tax
debt than when this cross-border transfer would not have taken place.1236 This will be the case when an asset is steppeddown upon immigration, but increases in value in the period afterwards. Without thinking about this any further, it
might then be concluded that this national rule poses an obstruction to the freedom of establishment, according to the
reasoning of A-G Niessen.1237
However, I believe the issue should be analyzed further. In my opinion, the Court’s analysis with respect to the
treatment of post-emigrational value decreases can be mirrored to the step-down, as, in my opinion this is essentially an
issue of pre-immigrational value decreases. As a reminder, the Court ruled in the NGI case that emigration States are
not obliged to take into account value decreases that occur after the emigration of a company.1238 Rather, the Court
posed that the immigration State ought to take into account such fluctuations in value, based on the principle of
territoriality linked to a temporal component.1239 Translating this to the situation of pre-immigrational value decreases, I
would say that it is on the basis of the principle of territoriality not up to the immigration State to take such decreases
into account. Indeed, by revaluating assets and liabilities to fair market value, it is ensured that the immigration State will
only take into account those value decreases which accrued within its own jurisdiction, following the principle of
territoriality. If this revaluation is a step-down, I do not believe that this is an infringement of the freedom of
establishment. Applying the ‘rule’ of A-G Niessen, which also seems to be adhered by the CJEU, that a business should
be confronted with the same total tax burden, irrespective of whether or not the business transferred cross-borders, it
would be up to the emigration State to take into account those value fluctuations which occurred during the period in
which the business taxpayer was a resident of that State. This approach is, in my opinion, in accordance with Court’s
ruling in NGI. A mirrored application of the Court’s arguments regarding the requirement to take into account postemigrational value decreases would lead to the following. The failure of the destination Member State to take into
account, decreases in value that occur before the transfer of a company’s place of effective management cannot be
regarded as disproportionate. The profits of a company which transfers its place of effective management are, before the
transfer, taxed exclusively in the Member State of origin. In accordance with the principle of fiscal territoriality linked to a
1236
See his conclusion to HR LJN: BY9291.
Niessen came to this conclusion in the case HR LJN: BY9291, which dealt with an immigrating substantial shareholder. In the
Netherlands, this substantial shareholder was treated as a remigrant and consequently ‘received’ a step-down upon immigration, in
accordance with national law. This case itself is, however, in my opinion not applicable to the situation of immigrating businesses, as it dealt
with a very particular provision in Netherlands law.
1237
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temporal component, it is also for that Member State, in view connection between a company’s assets and its taxable
profits, and hence for reasons relating to the symmetry between the right to tax profits and the possibility of deducting
losses, to take account in its tax system of fluctuations in the value of the assets of that company which occur before the
date on which the Member State of origin loses all fiscal connection with the company.1240 Based on this reasoning, I
believe that the provision of a tax base step-down by the immigration State would be proportional and compatible with
EU law. Moreover, in order to ensure that the taxpayer is not confronted with a higher total tax burden due to the
cross-border transfer, the emigration State ought to take into account pre-immigrational value decreases.
The purpose of this chapter was to assess the extent to which the Dutch tax treatment with respect to business
emigration, immigration, and cross-border asset transfers is compatible with EU law, i.e. the freedom of establishment.
In order to achieve this aim, the freedom of establishment was discussed first. It was argued that, in general, the Dutch
exit tax provisions on businesses represent a restriction to the freedom of establishment. Companies transferring their
place of effective management outside the Netherlands are taxed on an accruals basis whereas in a purely domestic
situation, transferring companies are taxed on a realization basis. This poses a difference in treatment constituting an
obstacle to free movement. Nonetheless, it was argued that in some cases, these restrictions are acceptable. In order to
analyze this in more detail, several cases dealing with business migrations have been discussed.
The very broad general line, which was found in all cases, entails that the freedom of establishment ensures that foreign
companies are treated in the host Member State in the same way as nationals of that State. Moreover, the
aforementioned freedom ensures that the Member State of origin does not hinder establishment in another Member
State of one of its nationals or of a company incorporated under its legislation. With respect to the accessibility of the
freedom of establishment, analyzing case law of the CJEU led me to conclude that companies transferring from an
incorporation State can appeal to the freedom of establishment. In case of the transfer from a real seat jurisdiction,
however, it is in principle not possible to make an appeal to the freedom of establishment. Two exceptions were
discussed. Firstly, in case the destination State recognizes the legal personality and enables the continuation in a legal
form of that State (cross-border transformation or conversion), the departure State may require an emigrating company
to give up its status as a company under that State’s law, but it would be disproportionate to force that company to
dissolve and liquidate. Secondly, when there is no clear and precise national law with respect to liquidation upon
transfer, an appeal to the freedom of establishment is possible, as there will be a legal entity after the transfer to make
such an appeal. It was argued that the question as to the accessibility of the freedom of establishment has important
implications for the permissibility of the taxation upon the emigration of a business. More specifically, the permissibility
of these exit taxes can only be established when they are imposed by a MS employing an incorporation system, not
when they are imposed by a MS with a real seat system, as, in principle, companies transferring from a real seat
jurisdiction cannot make an appeal to the freedom of establishment. I argued that, in my opinion, this difference is
undesirable as it creates an incentive for MSs to apply a real seat system, while the incorporation system is better for the
functioning of the internal market and for European and global mobility.
Regarding the actual issue of exit taxation, then, several cases have been discussed as well. Following the distinction
between natural persons and legal entities, the discussion started with cases regarding emigrating natural persons. First,
it was established that the freedom of establishment is not restricted to legal entities, but that natural persons can also
make an appeal to this freedom, provided that this person can influence a company’s decisions and activities. Next, it
was found, in the context of the emigration of a substantial shareholder, that the CJEU accepts exit taxes of a
preservative nature, provided that there is no immediate collection of the tax; recovery of the tax has to be postponed
1240
Compare to CJEU National Grid Indus (Case C-371/10), paras. 56 and 58, where the Court’s argument has been mirrored to the
emigration State.
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automatically until actual realization of the gain, and MSs cannot require the provision of guarantees. Moreover, it was
argued that in situations such as these, the emigration State is required to take into account post-emigrational value
decreases. With respect to legal entities, several cases were discussed as well. The central case in this context is National
Grid Indus, in which the Court limited the extent to which MSs could impose exit taxes on emigrating companies as they
restrict the freedom of establishment. In essence, MSs can impose an exit tax upon the emigration of a business, but
immediate recovery of the tax claim is considered disproportional. It is now settled case law that MSs have to offer
companies the option between immediate and deferred payment. The Court also established that, in case of deferred
payment, MSs can set conditions. The exact details of these conditions, however, have not completely been crystalized
in the CJEU case law.
Following the differences applied in case law on natural persons, on the one hand, and on legal entities, on the other,
the question was put forward whether entrepreneurs ought to be treated according to the standards applied to natural
persons (i.e. substantial shareholders) or the standards with respect to legal entities. As discussed, the differences are the
following: 1) in the context of emigrating individuals (substantial shareholders), automatic and (in principle)
unconditional deferral of payment is prescribed, whereas in the context of emigrating companies taxpayers have to optin for deferred payment; 2) with regard to emigrating substantial shareholders the emigration State is required to take
into account post emigrational value decreases, whereas MSs are not obliged to do so for emigrating companies; 3) in
the context of emigrating substantial shareholders, MSs are strictly prohibited to require the provision of securities in
the form of a bank guarantee, whereas this was proposed as a conditional requirement in case a corporate taxpayer optsin for deferred payment. In short, there are important differences with respect to the standards which the CJEU
maintains when assessing the compatibility of the exit provisions with the freedom of establishment, where especially
the proportionality test is interpreted differently for, on the one hand, substantial shareholders and, on the other,
companies. Where do individual businesses fit in then? I argued that in my opinion, individual businesses are to be
treated as companies, as the method of taxation with respect to income derived from individual businesses, respectively,
companies is similar, whereas the rules regarding substantial shareholders differ notably.
Having concluded that individual businesses and companies should receive a similar tax treatment, the logical question
follows: what should this tax treatment be? In order to determine this, the Netherlands exit provisions with regard to
emigrating businesses where assessed in the light of discussed EU law. In the case National Grid Indus, the Court
basically allowed the imposition of an exit tax as such, and provided that the exit country does not have to take into
account value decreases which occur after emigration. However, the recovery of the exit tax was considered
disproportional by the CJEU. Consequently, the Dutch legislator responded with the Bill on the amendment of the
Recovery Act 1990, which has now been implemented by the Law of deferral on exit taxation. In the legislator’s
opinion, the Dutch exit tax system is compatible with EU law, based on the CJEU’s ruling in NGI. However, as was
discussed in this chapter, it is disputable whether the Law on deferral of exit taxation is completely compatible with the
freedom of establishment. In this context, I have analyzed the comments in literature and I have given my own
interpretation with regard to the compatibility of the current Dutch exit tax system with EU law.
First, as follows from established case law, it was concluded that the Netherlands can impose an exit tax on emigrating
businesses and that later value decreases do not have to be taken into account. Moreover, regarding the recovery of the
exit tax claim, the Netherlands has implemented the Law on deferral of exit taxation in its national legislation, by virtue
of which emigrating businesses can opt-in for deferred payment of the exit tax claim. In my opinion, the Netherlands
exit tax regime is, in this respect, compatible with EU law. However, the Law on deferral of exit taxation itself contains
some conditions which might infringe on the freedom of establishment. The most important conditions include, as
discussed, a) provision of sufficient securities, b) provision of an administration, and c) payment of recovery interest.
Regarding the first condition it was discussed that, in my opinion, MSs can require the provision of sufficient securities,
but only when there is a real and serious risk of non-recovery. This requires a case-by-case analysis, taking into account,
amongst others, the traceability of assets an the functioning of cooperation mechanisms at the EU level. Secondly, I
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argued that the requirement of the provision of an administration should extend only to data necessary for determining
the extent of realization (also covering depreciation). Requiring irrelevant data is, in my opinion, incompatible with EU
law. The question as to what does and what does not constitute relevant data should be answered in the particular case,
where the presence and functioning of cooperation mechanisms at the EU level should be taken into account. With
respect to the final condition, the calculation of recovery interest, I believe that the calculation of such interest is not
incompatible with EU law, provided that the calculation of this interest will only be started at the moment of actual
realization. Indeed, from that moment onwards the tax can actually be collected. This treatment would be comparable
to the domestic situation. Under the current Law on deferral of exit taxation, however, interest is charged as from the
time that the payment term of the tax assessment expires. Consequently, there is a discrimination with respect to the
timing of interest calculation between the cross-border transfer and the purely domestic situation, which, in my opinion,
is incompatible with the freedom of establishment. It was also argued that under the current rules, emigrating businesses
have no actual option between immediate and deferred payment, as both entail a liquidity disadvantage when compared
to the transfer in a purely domestic situation.
Aside from the conditions which apply in case payment is deferred, some other issues were discussed. First, regarding
the limited scope of the Law on deferral of exit taxation, I argued that, in my opinion, this is not incompatible with EU
law. As argued by the legislator, the Netherlands is only required to offer the option of deferred payment with respect to
transfers within the EU/EEA. However, I believe that in the light of European and global mobility it would be
preferable to expand the scope of the option of deferral to transfers to non-EU/EEA States. If necessary, and in line
with the adhered case-by-case approach, I believe that the Dutch Tax Authority could possibly set stricter conditions in
case of emigrations to non EU/EEA States. Secondly, it was discussed that the Netherlands currently provides the
option of payment of the exit tax claim in ten annual installments as an alternative to immediate payment. It was argued
that, in my opinion, a system of payment in equal terms is incompatible with the freedom of establishment, as it is not
guaranteed that the exit tax claim has effectively been realized upon collection. However, if such a system is employed
as an optional alternative to a system which is compatible with EU law, I do not believe that this will result in any
problems. All in all, I came to the conclusion that the Netherlands tax system with respect to the emigration of a
business is not fully compatible with EU law, where the problem ultimately lies in the fact that recovery interest is
currently being charged as of the time that the payment term of the tax assessment expires (thus, before actual
realization).
Regarding the other EUCOTAX countries, it was noticed that the Netherlands is not the only country that amended its
national law in response to CJEU case law. In assessing the compatibility with EU law of the different countries’ exit tax
systems, four categories were distinguished, three of which were actually relevant. The first category encompasses those
countries who offer emigrating businesses the option between immediate and deferred payment. The Austrian system
was especially marked in this respect, as this system is not only fully compatible with EU law, but also very ‘internal
market friendly’ in the sense that no conditions apply under deferred payment. The second category sees to those
countries who offer the option between immediate payment and payment in five annual installments. It has been
discussed that such a system is, in my opinion, incompatible with EU law, as recovery of the exit tax claim is not
postponed until actual realization. The third category, made up out of one country (Belgium), requires immediate
payment of the exit claim. This system is clearly incompatible with the freedom of establishment, as follows from the
NGI case.
In addition to the compatibility of the Dutch tax treatment upon emigration with EU law, the compatibility of the tax
treatment upon immigration has been assessed as well. It was concluded that, in my opinion, Member States are on the
basis of the freedom of establishment required to grant a step-up in base to immigrating businesses, even though this
has not explicitly been dictated by the CJEU. First of all, I noted that without the provision of a step-up, immigration
States would tax more than which they are entitled to on the basis of the principle of fiscal territoriality. This can result
in double taxation and consequently an obstruction to business migration. Secondly, it was discussed that immigrating
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businesses who become liable to tax in a State, should be treated similar to other businesses who become liable to tax in
that State, i.e. domestic start-up businesses. This would imply that assets and liabilities are to be recorded on an opening
balance sheet at fair market value, and thus a tax base step-up for immigrating businesses. Finally, I argued that a
business should be confronted with the same total tax burden, irrespective of whether or not the business transferred
cross-borders. If the cross-border transfer would imply a higher total tax burden this will obstruct European and global
mobility, which can be an infringement of the freedom of establishment.
Finally, the question of the compatibility with EU law of a tax base step-down was analyzed. Mirroring the reasoning of
the CJEU with regard to post-emigrational value decreases, I concluded that the provision of a tax base step-down by
the immigration State would be proportional and compatible with EU law. Moreover, in order to ensure that the
taxpayer is not confronted with a higher total tax burden due to the cross-border transfer, I argued that the emigration
State ought to take into account pre-immigrational value decreases.
international tax neutrality?, the element of EU law has been addressed in this chapter. All in all, the Netherlands system
has been improved after the introduction of the Law on deferral of exit taxation. Nonetheless, it can be concluded that
further improvements would be preferable in the light of EU law, where these improvements particularly relate to the
conditions of deferred payment of the exit tax debt.
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8.
THE DUTCH ‘EXIT TAX SYSTEM’ 2.0
Up until this point, I have analyzed the Netherlands tax system in the light of European and global mobility and capital
import neutrality (throughout this thesis), tax conventions (chapter 6), and EU law (chapter 7). In the current chapter,
focus will be on improving the current system. First, the current system will be reviewed briefly, highlighting those
problematic elements which require improvement.1241 After this, I will propose the Dutch exit tax system 2.0, taking
into consideration the possible alternatives and the systems employed in other EUCOTAX countries. It is noted that
within the framework of EU law and the benchmark of capital import neutrality, I will search for a liberal system,
fostering European and global mobility.
8.1 Synopsis: current Netherlands tax system
In the following table, the current Netherlands system with respect to inbound and outbound business transfers is
stripped to positive and negative elements, through which it will become clear that in the light of European and global
mobility, the Netherlands exit tax system can be improved.1242
Mobility1243
CIN
EU law
Emigration and cross-border asset transfers
Exit taxes1244
Conditions of deferred payment
- Securities1245
- Administration1246
- Recovery interest1247
-/+
+
+
+
+
-/-/-/-
+
+
-/-
+
+
?
+
+
+
1248
Immigration
Revaluation to fair market value (generally step-up)
In the following paragraphs, these elements will be explained further.
8.1.1
European and global mobility and capital import neutrality
In the chapters 2, 3, and 4, the current Netherlands tax system with respect to the emigration and immigration of a
business and with respect to cross-border asset transfers has been benchmarked against the normative framework. The
most important implication of the benchmark against the normative framework is that the Netherlands’ source country
entitlement has to be preserved on the basis of CIN, but that this should be done so in a minimally obstructive manner
in order to enable European and global mobility to flourish. Against the background of this general consideration, it has
1241
Please note that I will not review the problems in detail, as this has already been done in the previous chapters.
The DTC-element of the analysis has been left out of this overview, as the only issue considered was whether the imposition of an exit
tax can amount to treaty override. The assessment of exit taxation in the light of DTCs did not provide any further guidance with respect to
the conditions of deferral, the tax treatment upon immigration, etc. Indeed, DTCs do not contain any particular provisions regarding the
emigration and immigration of a business.
1243 Both European and global mobility
1244 In case of emigration and in respect to some situations of cross-border asset transfers.
1245 In the current exit tax system, this will be judged on a case-by-case base. See Kamerstukken II, 2012/13, 33 262, nr. 5, p. 9.
1246 In practice, there is room for consultation with respect to the necessity of providing the accounts in the particular case. This implies a
case-by-case approach. See Kamerstukken II, 2012/13, 33 262, nr. 5, p. 9.
1247 With respect to the amount over which payment is deferred, recovery interest is charged as from the time that the payment term of the
tax assessment expires. See article 28(1) of the Recovery Act 1990 and Kamerstukken II, 2011/12, 33 262, nr. 3. The proposed Bill does not
include a particular provisions with respect to the recovery interest.
1248 What is ‘in accordance with national legislation’?
1242
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been noted that exit taxes are required to satisfy CIN and protect MSs fiscal sovereignty. However, there may be
alternatives to exit taxes which are less obstructive to European and global mobility, while still satisfying CIN. This will
be assessed in paragraph 8.2. With respect to the current tax treatment upon emigration, the requirement of having to
pay recovery interest in case of deferred payment of the exit tax claim should be eliminated from the Netherlands tax
system with regard to the emigration of a business. Indeed, this requirement creates a serious obstruction to European
and global mobility, and goes beyond what is needed to prevent loss of the Netherlands source country entitlement. On
the contrary, the other requirements are needed to secure the Netherlands source country entitlement, but only to a
limited extent. More specifically, securities will be required when there is a risk of non-recovery, and an administration is
required only to the extent that this is necessary to determine the extent of realization. Regarding the Netherlands tax
treatment upon immigration, no problematic issues have been found. The provision of a tax base step-up ensures that
CIN is satisfied, and fosters European and global mobility. Problematic issues have, however, been found with respect
to cross-border asset transfers, the biggest issue being the lack of clear and decisive legislation due to which profits
which accrued within the Netherlands jurisdiction might escape without taxation. A teleological interpretation could
possibly solve the problem of profits possibly leaving the Netherlands jurisdiction without taxation.
8.1.2
DTCs
The most important question in the context of DTCs is whether the Netherlands exit tax system with respect to
businesses constitutes treaty override. As discussed, treaty override arises when a country infringes on the good faith
principle by unilaterally appropriating taxing rights which were previously given up by concluding a DTC. Having
analyzed case law and literature, I believe that the Netherlands exit provisions stipulating a disposal of assets upon
emigration do not amount to treaty override, as there is no infringement of the good faith principle. First of all, the
nature of the income (i.e. business income) is not changed by virtue of the emigration provisions regarding businesses.
Secondly, the exit provision are aimed at taxing the increases in value which relate to the period that the business
taxpayer was a resident of the Netherlands. Therefore, the Netherlands has a rightful taxing right. Finally, the exit tax is
not incompatible with the provisions of the DTC itself. It follows that there are no particular problematic issues
regarding the current Netherlands exit tax system in the light of DTCs. There is no infringement of the good faith
principle; the Netherlands merely imposes a tax on reserves, unrealized gains and goodwill, which came to existence
during the period in which the business was a resident taxpayer, which is not prevented under DTCs.
8.1.3
EU law
The current Netherlands tax system has extensively been analyzed in the light of EU law. With respect to the emigration
of a business and the exit tax which can be imposed in some situations of cross border asset transfers, I believe that all in all,
the current Netherlands tax treatment is not fully compatible with EU law, where the problem ultimately lies in the fact
that recovery interest is currently being charged as of the time that the payment term of the tax assessment expires
(thus, before actual realization). Regarding the other conditions which apply in case of deferred payment, i.e. the
provision of securities and an administration, I believe that the current Netherlands tax treatment, where a case-by-case
approach is taken, will prevent disproportional outcomes, and is thus compatible with EU law. Regarding the tax
treatment upon the immigration of a business, I believe the Netherlands tax system is fully compatible with EU law.
Upon the immigration of a business, the Netherlands revaluates the taxpayer’s capital to fair market value. Generally
this will imply the provision of a step-up, but in some cases this can result in a tax base step-down. In my opinion,
Member States are, on the basis of the freedom of establishment, required to revalue the assets and liabilities of a
businesses to fair market value upon the immigration of that business, even though this has not explicitly been dictated
by the CJEU. In case the immigration State fails to do so, I believe that the principle of territoriality will be disrespected,
that there will be a difference in treatment between the immigrating business and the purely domestic situation, and that
the immigrating business might be confronted with a higher total tax burden as a result of having transferred his
business cross-borders. This would lead, as I concluded, to an infringement of the freedom of establishment.
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8.2 Alternatives and possible solutions for exit taxes
Exit taxes and the problems surrounding these taxes are a popular topic in literature. As such, several authors have
proposed alternatives or solutions to the current system of exit taxation. In addition, the European Commission has
analyzed the problems as well, and also discussed some solutions. In this paragraph, these alternatives and solutions will
be outlined. Solutions such as the ‘abolition of exit taxes’1249 without introducing an alternative, will not be discussed, as
these are, in my opinion, realistic nor desirable.1250 It should be noted that some of these solutions were proposed in the
context of emigrating substantial shareholders. However, as previously discussed, the problem is essentially the same for
emigrating businesses: in both cases, a tax is imposed by the emigration State on unrealized gains of emigrating persons,
where such gains are not taxed in a purely domestic situation. It should also be noted that I will focus on alternatives
and solutions which are currently ‘known’. Nonetheless, a ‘mix’ of these systems can possibly also lead to a satisfying
outcome.
8.2.1
Compartmentalization systems
8.2.1.1 Residence-based compartmentalization
As an alternative for the current system of exit taxation in the Netherlands, Kemmeren introduced a system of
residence-based compartmentalization, which, in his opinion, would be EU-proof.1251 In such a system, the exit State
would not impose a tax assessment upon emigration, but rather establish the amount of income over which it wishes to
retain taxing rights in an appealable decision1252. Subsequently, this amount of income will be allocated to the emigration
State; the rest of the income will be allocated to the destination State.1253 Taxation will take place upon actual realization
of the income, through which cross-border cases are treated equal to purely domestic cases.1254 Decreases in value
which occur after emigration are to be taken into account by the emigration State if the income over which the taxation
was secured is not part of the taxable base in the immigration State.1255 Moreover, in case the taxpayer emigrates on to a
non-EU/EEA-State or State with which the emigration State has concluded a DTC, this will be qualified as a taxable
event and there will be a tax settlement.1256 A final characteristic of Kemmeren’s system is the requirement of adequate
mutual assistance so that the tax claims can actually be recovered. The system of residence-based compartmentalization
proposes has important advantages. Firstly, the appealable decision serves the legal certainty of both the emigrating
taxpayer and the departure State, as it prevents disputes in the course of time with respect to the amount of income.
Secondly, an appealable decision differs from the imposition of a regular tax assessment in that the appealable decision
will not give rise to a tax debt.1257 Thirdly, the system of residence-based compartmentalization does not require that the
national tax law systems of MSs are harmonized.1258 Finally, the proposed system will most likely not give rise to double
(non)taxation.
1249
See for example Führich 2008, par. 4.1.
The benchmark of CIN, for example, requires that the source country entitlement is protected, by virtue of which exit taxes are
required.
1251 See Kemmeren 2005, par. 8.
1252 In Dutch: voor beroep vatbare beschikking.
1253 Kemmeren argues that for the allocation of the taxing rights, MSs can make use of DTCs, multi-lateral tax treaties, or an European
regulation, where Kemmeren himself prefers the latter as this instrument is binding for both MSs and taxpayers, and has direct effect. See
Kemmeren 2005, par. 8.2.
1254 See Kemmeren 2005, par. 8.2.
1256 See Kemmeren 2005, par. 8.4. It is argued that the ‘fence’ which, in the current system of exit taxation, is placed around every MS will
be shifted to the borders of the EU/EEA or convention partners.
1250
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8.2.1.2 Succeeding-residency compartmentalization
Advocate General Wattel has discussed a compartmentalization system in the form of ‘succeeding-residencycompartmentalization’ (in Dutch: opvolgend-inwonerschap-compartimentering) in his conclusion to the case HR BNB
2013/94.1259 The A-G argues that temporal compartmentalization of tax latencies would make a settlement upon the
transfer of the real seat abundant, as the Dutch tax claim is retained for gains which are realized after emigration but
which accrued during the period in which the taxpayer was a resident of the Netherlands.1260 As there will only be taxation
upon actual realization, the Netherlands has to postpone taxation. The emigrating business will leave a fictitious PE
behind in the Netherlands, in which the tax latencies are placed.1261
Wattel has discussed the feasibility of such a system from both a national law and a treaty law perspective. With respect
to national law, Wattel is of the opinion that a succeeding-residency-compartmentalization system is not impossible,
given the current case law of the Dutch Supreme Court. More specifically, in past cases, the Dutch Supreme Court has
applied a causal allocation of business profits (as opposed to allocation based on actual realization), even when tax
treaties were applicable.1262 From a treaty law perspective, Wattel argues that neither the profit allocation article itself
(article 7 OECD MC) nor the commentary are conclusive with respect to the (im)possibility of a causal attribution of
results to a jurisdiction, if realization takes place in a succeeding jurisdiction. It is therefore possible to attribute realized
profits on the basis of the principle of causality (instead of the realization principle). Under this approach, the jurisdiction
in which the results accrued, not in which the results are actually received, will have a taxing right over those results.1263
As discussed, under a system of temporal compartmentalization, there would be no exit tax settlement upon emigration.
However, it is required to maintain a proper administration in order to ascertain and follow the co-emigrated unrealized
gains in transferred assets.1264
Having put forward his idea of succeeding-residency compartmentalization, Wattel susbsequently disregards it, as the
Dutch legislator has taken another course of action with the introduction of the Law on deferral of exit taxation.
Additionally, it is argued that a system of compartmentalization will necessarily have to be accompanied by many rules,
which implies that the introduction of this system is a task of the legislator, not of the Court.1265
8.2.1.3 Compartmentalization system Bundesfinanzhof
Remarkably, the German Bundesfinanzhof did interfere with what Wattel considers to be a task of the legislator, as this
Court proposed and applied a compartmentalization system in a particular case.1266 This case concerned an entrepreneur
who moved his residence and transferred his business from Germany to Belgium. More specifically, the entrepreneur
had a PE and his entire business in Germany, and subsequently moved his residence and transferred his business to
Belgium. This case and the ruling of the BFH were also discussed and criticized in a conference on ‘recent tax treaty
case law’.1267 It was argued that the issue pivoted around whether or not the German tax authorities were allowed to tax
such transfers. Generally, transfers of assets, of the entire enterprise, or of place of residence are generally regarded as
taxable events. In addition, it is argued that ‘legislators are deadlocked’, as EU law prescribes that there should be not
taxation upon such transfers, whereas there should be no taxation after such transfers either on the basis of treaty
1259
See Conclusion A-G Wattel 28 August 2012.
See Conclusion A-G Wattel 28 August 2012, par. 8.0.2.
1261 See Conclusion A-G Wattel 28 August 2012, par. 8.0.2.
1262 See Conclusion A-G Wattel 28 August 2012, par. 8.0.3. The cases which he uses as an example are related to benefits which are realized
or come to existence after the taxpayer left the Netherlands, but which are attributable to the period in which there was liability to tax in the
Netherlands.
1263 See Conclusion A-G wattle 28 August 2012, par. 8.0.6.
1264 See Conclusion A-G wattle 28 August 2012, par. 8.0.5.
1265 See Conclusion A-G Wattel 28 August 2012, paras. 1.3 and 8.0.8.
1266 See Bundesfinanzhof of 28 October 2009, I R 99/08.
1267 This conference was organized by the European Tax College at Tilburg University on 20 October 2010. See also the report of this
conference: Smit and Peters 2011.
1260
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law.1268 Eventually, the German Court (BFH) found a way to deal with this. The Court ruled that there may be no
taxation, not even a tax assessment with deferral of payment, upon the transfer of an asset, when there is no explicit,
sufficient and detailed legislation concerning the tax treatment in such as case. It can therefore be concluded that the
German Court fully respects the limitation posed by EU law (no taxation upon emigration). With respect to the
limitation posed by treaty law, the Court did not see an unsolvable limitation; it ruled that after assets have been
transferred, Germany keeps its taxing right by virtue of a system of compartmentalization. More specifically, upon any
later realization (after emigration) of unrealized gains and reserves, Germany has a taxing right to the extent that the
realized income is attributable to the former business activities carried on in German territory. Especially this final part
of the ruling of the BFH was discussed during the aforementioned conference. It was argued that the Court’s decision
breaks two connections. Firstly, the time link between the presence of a PE and the attribution of profits to that PE is
broken, where it was argued that such a break goes beyond the OECD standards. Secondly, the link between an asset
and the profits that are derived from this asset is broken, as “the assignment of an asset to a permanent establishment does not
imply that all asset-related inflows, outflows, capital gains and capital losses are attributable to that permanent establishment”.1269 In my
opinion, these criticisms reflect that the implementation of a compartmentalization system will be a rather complex
operation, especially in the light of DTCs. I therefore agree with A-G Wattel that if a compartmentalization system is to
be introduced, provided that this is a feasible alternative for the current exit tax system, the development of such a
system is a task of the legislator, not of the Court.
8.2.2
A trade system for exit claims
According to Wattel, exit taxes are highly unfeasible in an internal market, where taxpayers should be able to transfer
themselves and their capital without being faced with a tax settlement when there is no actual realization of income.1270
Wattel subsequently argues that taxation should be related to realization, not to crossing the border of a tax jurisdiction.
However, for as long as tax jurisdictions remain fragmented alongside national borders within the EU, the jurisdiction
in which the claim is accrued will be a different one than the jurisdiction of realization. According to Wattel, there are
four options to overcome this problem:1271
1. Abolition of the fragmented fiscal jurisdictions.1272 This requires a community tax administration who is authorized to
follow and tax latencies, and to subsequently divide the tax revenues according to an allocation formula amongst
the Member States involved. This alternative for exit taxation implies federalization of direct taxation, which is a
definite no go in the context of fiscal sovereignty (one of the key values of my normative framework).
2. Grant the other Member State access to the national tax jurisdiction (a form of droit de poursuite fiscale).1273 This requires
that the one State acquires powers within the jurisdiction of the other State. Wattel rejects this alternative, as MSs
will not be very willing to implement such a system.
3. Mutual assistance and recovery between Member States.1274 According to Wattel, this is the conventional approach to solve
the problem of the incompatibility of exit taxation with the European internal market. In the context of exit taxes,
the Court argued more than once that there was a discrimination, resulting in a restriction of the freedom of
establishment.1275 As a justification for this restriction, MSs often put forward the fiscal coherence of the tax
system. Wattel argues that this justification depends on the plausibility of the argument of the exit State that after
emigration there will be insufficient possibilities to realize its tax claim. And by virtue of the mutual assistance and
recovery directives within the EU, this argument will be increasingly less likely to succeed. In 2002, Wattel predicted
See also: Smit and Peters 2011, par. 2.3.2.
Smit and Peters 2011, par. 2.3.2.
1270 Wattel 2002, par. 4.
1271 Wattel 2002, par. 4-6.
1272 Wattel 2002, par. 4.
1273 Wattel 2002, par. 4.
1274 Wattel 2002, par. 5.
1275 See for example: CJEU Hughes de Lasteyrie du Saillant (Case C-9/02), paras. 45 and 46; CJEU N. v. Inspecteur (Case C-407/04), par. 39; and
CJEU National Grid Indus (Case C-371/10), paras 48 and 49.
1268
1269
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4.
that in the future the immediate tax settlement and the requirement to provide securities would no longer be
allowed. In the world we live in nowadays, Wattel seemed to have made a correct ‘guess’, at least with respect to the
first element, as MSs are required to grant emigrating businesses the option between immediate and deferred
payment.1276 At the time, it was also argued by Wattel that, as a consequence, MSs would have to establish a system
of tracing claims, in order to track their own and each-others tax claims in the tax jurisdictions of one-another. The
administrative difficulties of implementing such a system are not to be used as an excuse by MSs.
Co-emigration of the tax claim.1277 The tax claim will follow the emigrating resident from one jurisdiction to the other.
Wattel argues that for a proper functioning of the internal market, the solution to the problem of exit taxation will
have to be lifted to an inter-State level, as this is the level at which the problem is caused in the first place. Put
briefly, the immigration State would have to ‘buy’ the tax claim of the emigration State, by virtue of which the tax
claim co-emigrates with the emigrating taxpayer. Wattel proposes the instrument of an EU-directive, in which MSs
are required to mutually determine the value of the tax claim, taking into account all relevant facts and
circumstances, chances and eventualities.1278 The ‘original’ book value in the departure State will be the ‘new’ book
value in the immigration State. The departure State will not have to deal with any realization after emigration, as it
has collected its tax claim by selling it to the immigration State. Wattel also argues that a system of macro-clearing
would make this system more feasible; not every tax claim has to be settled separately, but States can net the coemigrated tax claims annually. Moreover, if a taxpayer emigrates to a third country, the State who is the owner of
the tax claim at that moment is free to impose an exit tax to the extent that this will not infringe on the free
movement of capital.
This fourth option is preferred by Wattel. This option encompasses, in short, a trade system for tax claims. A similar
system was put forward as a solution for the current problems in the area of exit taxation1279 was proposed by Peters1280.
Peters roots for a system of trading exit claims which resembles the system proposed by Wattel, however, with
immediate clearing. In this system, the claim will be mutually settled between the emigration- and immigration State,
after which the immigration State can fully tax the gains realized by the taxpayer (upon actual realization). All in all, both
States get their ‘piece of the pie’, or their fair share. In addition, the taxpayer will not be confronted with any taxation,
tax-related issues, and the restrictions which are related to such taxation, for as long as there is no realization.1281 Other
benefits of this system include the following: it guarantees that the taxpayer can exercise its treaty freedoms without
restrictions, it will lead to the realization of the claim of the State on who’s territory the gains accrued, and it is relatively
simple. The claims will be settled immediately after emigration, so that there is no need to follow the claims for many
years and over multiple borders, nor will it be necessary to extensively exchange information between States.1282 Peters
is, however, skeptical with respect to the political feasibility of this system.1283
8.2.3
Matching tax payment to tax advantage (step up and depreciation)
It has been argued by Terra and Wattel1284 that the disadvantage of having to pay tax on unrealized gains in company
assets in the exit State may be compensated by the advantage of a corresponding increase in the depreciation basis for
tax purposes in the immigration State. An increase in the depreciation basis will lead to more deduction of annual
profits, and consequently to a lower taxable profit in the new home State. More specifically, it is argued that “If the
1276
For emigrating substantial shareholders, Wattel was correct with respect to both requirements. See for example the Courts’s rulings in
the N. case (Case C-407/04).
1277 Wattel 2002, par. 6.
1278 The installation of an arbitrage commission will help in solving possible issues with respect to for example valuation of the tax claim.
1279 In this case: in the context of emigrating substantial shareholders.
1280 See Peters 2007, paras. 7.4 and 7.5.
1281 See Peters 2007, par. 7.4.
1282 See Peters, 2007, par. 7.5.
1283 See Peters 2007.
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unrealized gains taxed by the exit State and the step up provided in the immigration state match, and if the average (remaining) depreciation
period for assets matches the period of exit tax installment payments in the exit State, then the tax payments in the exit State and the tax
advantage in the immigration State will roughly cancel each other out.”1285 Terra and Wattel do not go into the details with respect
to the instrument which should be used for such a ‘matching’ system. It is clear that the emigration and immigration
State will have to be forced to mutually come to an agreement with respect to the appreciation of the fair market value
and subsequent new book value, the depreciation period and the period of installment payments. In addition, the system
of Terra and Wattel requires that the destination State is obliged to grant a step-up to immigrating businesses. As
discussed, this is currently not the case; MSs agreed on providing immigrating businesses a tax base step-up in the
Ecofin Council resolution of 2 December 20081286, but the CJEU has not yet enforced this obligation in its case law.1287
In the opinion of Terra and Wattel1288, the right of establishment requires the immigration State to grant a step-up if it
also does so in comparable domestic situations1289, and to be consistent; if it taxes the unrealized gains upon emigration,
it should also grant a step-up upon immigration.
8.2.4
Coordinated solutions proposed by the European Commission
In December 2006, the European Commission published two important communication documents. The first
concerned the coordination of Member States’ direct tax systems in the Internal Market.1290 In this document, the EC
pleas for a high level of coordination of individual MSs direct tax systems, which implies 1) removing discrimination and
double taxation, 2) preventing inadvertent non-taxation and abuse, and 3) reducing the compliance costs associated with
being subject to more than one tax system.1291 The second document was on exit taxation and the need for coordination of Member States’ tax policies.1292 In this document, the Commission recognized the problematic effect of
exit taxes on cross-border movement, and consequently urged MSs to coordinate their exit tax policies. A number of
ways to ensure coordination and to resolve mismatches are suggested by the EC. They include:
1. The emigration State could give a credit for immigration State taxation.1293 It is argued by Kavelaars1294, that this
option closely resembles the current system of exit taxation. In his opinion, there are two possibilities:
a. There is a fictitious alienation upon emigration in the departure State. This State has a taxing right upon
actual realization in the host State, and will give a tax credit for the tax levied over the realized gains by that
host State. Moreover, the host State will have to give a tax base step-up.
b. The departure State determines that the liability to tax as a non-resident taxpayer is expanded to assets
which are alienated in the host State, but for which the departure State had a taxing right up until the
moment of emigration. The immigration State will either have to provide a tax base step-up or a tax credit
for tax levied by the exit State.
2. The two States could agree to divide the taxing rights on the gains, e.g. by splitting it up according to the period
that the taxpayer was a resident in the respective MSs.1295 This may require changes to the current DTCs. Possible
decreases in value are to be taken into account by either State.
3. The host State could be required to allow a step-up based on the market value established in the home State.1296
This option is largely the same as the solution posed by Terra and Wattel discussed in the previous paragraph.
Terra and Wattel 2012, p. 514.
Council Resolution OJEU 2008 C323/1 .
1289 Where the authors define comparable domestic situations as for example situations in which a non-taxable entity becomes taxable and
must draw up an opening balance sheet.
1290 EC COM(2006) 823 final.
1291 See EC COM(2006) 823 final, par. 2.1.
1292 EC COM(2006) 825 final.
1293 See EC COM(2006) 825 final., p. 5.
1294 See Kavelaars 2007, par. 2.
1295 See EC COM(2006) 825 final., p. 5.
1296 See EC COM(2006) 825 final., p. 7.
1285
1286
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Thus, with respect to European coordination, there are roughly two ‘flavours’:1297
1. Emigration at fair market value: the exit State will establish the tax claim at the moment of emigration, but will not
collect the tax until actual realization. The immigration State will provide a tax base step-up, taking the fair market
value established by the exit State as the starting value. Moreover, the immigration State will notify the exit State
when the asset is realized (alienated), and if necessary, will assist in the recovery of the exit tax.
2. Emigration at book value: the exit State will agree to emigration at the book values and the immigration State will take
over the book values. Upon realization (alienation) of assets, the immigration States will tax the difference between
the fair market value (sales price) and book value. The emigration and immigration State can agree to divide the
taxing rights ‘pro rata temporis’ (in proportion to the length of time in which the taxpayer was a resident of each
respective State).
8.3 The Dutch exit tax system 2.0
Regarding the immigration of a business it has been argued that, in my opinion, MSs should be obliged to grant a tax
base step-up to immigrating businesses. However, as the focus is on the Netherlands system in this section, I note that
the Netherlands already grants such a step-up. Consequently, no particular problematic issues have been found from an
inbound perspective i.e. regarding the immigration of a business to the Netherlands. Therefore, I will focus on the
outbound perspective, i.e. the Netherlands exit tax system. This pertains to the emigration of a business taxpayer and
some cross-border asset transfers. I want to propose two alternatives for the current Netherlands tax system regarding
exit taxation. In the first alternative, I will take the current Netherlands system as a given fact. Under this tax system, the
cross-border transfer of a business taxpayer or of assets can trigger an exit tax in the form of a deemed disposal.
Subsequently, I will focus on which improvements can be made with respect to the current system, without requiring
any drastic changes (such as, for example, amending DTCs or implementing an entire new system in national law). This
alternative can be seen as a more practical solution to the problems which have been found. In the second alternative, I
will focus on a system which will go beyond this, a new system. This will be a liberal system, fostering European and
global mobility.1298
8.3.1
Improving the current system
The overall parameters of this thesis, i.e. the normative framework and EU law, dictate the improvements which are to
be made to the current Netherlands exit tax system. As discussed, the DTC-parameter does not require improvement,
as the current exit tax system does not amount to treaty override. For the evaluation of the current Dutch exit tax
system, I refer to the table in paragraph 8.1.
8.3.1.1 Deferral of payment?
Taking for granted the current system of exit taxation in which the emigration of a business taxpayer or, alternatively,
the cross border transfer of assets, yields a deemed disposal of assets and in which the tax is assessed immediately upon
emigration (transfer), the first question is whether payment of this exit tax claim should be immediate or deferred. As
discussed, by requiring immediate payment of the exit tax claim, the Netherlands will tax the unrealized income before
actual realization. In a purely domestic situation, however, taxation would wait until actual realization. This difference in
treatment poses an obstacle to mobility, since these taxes can seriously hinder taxpayer’s ability to move to another
state. A tax is imposed on something which is not there yet, and, as a result, the taxpayer has to pay cash which he or
she may not have. Requiring immediate payment thus results in a cash-flow disadvantage and in a discriminatory
1297
1298
See also Zuijdendorp 2010.
This goal is in line with the overall EUCOTAX Wintercourse theme 2012-2013.
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treatment between the cross-border and the purely domestic situation. It has also been discussed that after the
introduction of the Law on deferral of exit taxation, the obstruction which exit taxes pose to European business mobility
has been reduced; immediate payment is no longer required within the EU/EEA. This implies that a transferring
business taxpayer is not confronted with a liquidity disadvantage when compared to a purely domestic situation.
Therefore, deferral of payment should be preferred (not taking into consideration the ‘ifs and buts’ regarding the
provision of securities; these will be dealt with later).
As said, the Netherlands system currently offers the option between immediate and deferred payment. This does,
however, not mean that we are there yet. I refer to the following two questions: 1) should deferral of payment be an
option of should it be granted automatically, and 2) should deferral of payment (whether optional or automatic) be
limited to transfers to EU/EEA States, or should it also apply to transfers to non-EU/EEA States? Starting with the
latter question, the answer is quite simple; the current limitation regarding the deferral of payment is not incompatible
with EU law. Nonetheless, as I strive to improve European and global mobility, the deferral of payment should not be
restricted to EU/EEA States in my opinion.1299 Moreover, in regards to emigrating substantial shareholders and
pensions, the deferral of payment is also applied ‘globally’. I argued that there is no justification for applying different
rules and that under the current deferral arrangements, CIN can also be satisfied when the deferral of payment applies
to transfers to non-EU/EEA States. It has been proposed that, if necessary, the Dutch Tax Authority can set stricter
conditions. But there is in my opinion no reason to disallow deferral of payment in case of these transfers.1300 I
therefore believe that the current system can be improved by extending the scope of the Law on deferral of exit taxation
to non EU/EEA States. Regarding the first question then, I do not have any problems with the fact that the deferral of
payment is optional, rather than automatic. In my opinion, it is not truly obstructive or problematic that a taxpayer has
to request for deferral, as long as it is possible to defer the tax claim in the first place. An option also implies that
taxpayers can decide for themselves which alternative would lead to the most beneficial outcome in their particular
situation. Additionally, in the light of safeguarding the Netherlands source country entitlement, I believe that optional
deferral should be preferred over automatic deferral, as it leaves room for the Dutch Tax Authority to establish, in every
individual case, the risk of non-recovery and the particular requirements which are subsequently needed to prevent that
the Netherlands tax claim will be lost. The optional deferral is, thus, in line with the benchmark of CIN, and in this
respect I do not believe that the Netherlands system will be improved if the deferral of payment would be applied
automatically.
8.3.1.2 Conditions of deferral
The improved system should contain optional deferral of payment, which applies not only to transfers to EU/EEA
States, but also to transfers to non-EU/EEA States. Having established this, we arrive at the question under which
conditions payment will be deferred. Currently, the conditions require the provision of securities and of an
administration, and the calculation of recovery interest. As these conditions have been discussed, analyzed, and
criticized in detail I will try to be brief.
With respect to EU law, I believe that the current Netherlands tax treatment is not fully compatible with the freedom of
establishment where the problem ultimately lies in the fact that recovery interest is currently being charged as of the
1299
Especially in respect to countries with which the Netherlands has concluded a DTC, I believe that the option between immediate and
deferred payment should be offered, as in these cases and information exchange clause will be in force, similar to the cooperation
mechanisms at a European level.
1300 As discussed in paragraph 7.4.3.4, the argument given by the Dutch State Secretary of Finance that the background of the deferral
arrangements for emigration substantial shareholders and pensions differ from those for businesses, makes no sense for me. Indeed, the
deferral arrangements regarding businesses leave more room for the Dutch Tax Authority to set conditions and enforce control, as deferral
is only granted in case a taxpayer opts-in for this and meets the required conditions (such as the provision of securities, which can be
‘custom made’), whereas this is automatic, and consequently, more difficult to control with respect to shareholders and pensions.
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time that the payment term of the tax assessment expires (thus, before actual realization). Regarding the other
conditions, the current system can be improved slightly. Under the current system, the Dutch Tax Authority will
establish the required securities on a case-by-case basis, which, in my opinion, is positive. It is noted that this will
increase the administrative burden for the Dutch Tax Authority, but that it will prevent disproportional outcomes with
respect to individual cases. More specifically, the Dutch Tax Authority can and should require the provision of securities
only in those cases where this is needed as a tool to secure effective recovery of the tax, thus when there is a real and
serious risk of non-recovery. In its case-by-case analysis, the Tax Authority should take into account, amongst others,
the traceability of assets and the functioning of cooperation mechanisms at the EU level. In the light of legal certainty, I
believe it would be preferable if the Dutch State Secretary of Finance would provide some general guidelines regarding
the situations in which and to what extent securities are required. These guidelines can then be applied by the Dutch
Tax Authority to the individual case. Secondly, the requirement of the provision of an administration should extend
only to data necessary for determining the extent of realization (also covering depreciation). Requiring irrelevant data is,
in my opinion, incompatible with EU law. The question as to what does and what does not constitute relevant data
should be answered in the particular case, where the presence and functioning of cooperation mechanisms at the EU
level should be taken into account.
With respect to the normative framework, the outcome is quite similar. In case payment is deferred, some conditions may
apply on the basis of CIN in order to protect the tax base of the emigration State. For example, when there is a risk of
non-recovery the emigration State might risk losing its source country entitlement, which would require the provision of
securities. Also, an administration will have to be provided in order to determine the extent of realization of income to
which the emigration State, i.e. the Netherlands, is entitled. However, CIN does not require the calculation of recovery
interest as of the time that the payment term of the tax assessment expires, as the Netherlands source country
entitlement would also be preserved if no such interest is calculated. Moreover, as the calculation of recovery interest
might diminish the advantage (in terms of cash flow) of not having to pay the exit tax immediately upon emigration, not
charging recovery interest would be highly preferable in the light of European and global mobility.
8.3.1.3 Settlement provisions
Finally, I want to briefly highlight an additional element of the current Netherlands exit tax system which can be
improved, apart from the issue regarding the deferral and conditions. More specifically, it has been addressed in this
thesis that the exit settlement provisions are not conclusive; as has been discussed in the context of the interim transfer
of asset components and the case HR BNB 2013/94, a strict interpretation of the final settlement provision can, in
some cases, possibly lead to accumulated profits leaving the Dutch territory without taxation. In such cases, a
teleological interpretation of the final settlement provision is required. Indeed this provision is meant to ensure that all
benefits derived from a business should be included in the taxable profit. Therefore, I believe that the Netherlands
system can be improved by amending the exit settlement provisions, so that they will read as they are meant to be
interpreted. This implies that the settlement provisions should be rephrased, making clear that these are triggered in case
the Netherlands can possibly lose its taxing right with respect to profits which accumulated in the Netherlands, and not
only when the Netherlands loses all attachments with regard to a taxpayer (as is the case under the current final
settlement provision).
8.3.1.4 Conclusion
In the light of EU law and the normative framework, the current Netherlands exit tax system can be improved by
offering businesses who are confronted with an exit tax settlement (irrespective of whether it concerns a transfer to
EU/EEA or non-EU/EEA States) the option between immediate and deferred payment. In case of deferred payment
additional conditions can apply, to the extent that these are needed to safeguard the Netherlands source country
entitlement. The Netherlands Tax Authority shall determine, on the basis of general guidelines, whether and to what
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extent securities are required in the particular case and which administrative requirements will apply. Recovery interest
can be charged, but only as from the moment of actual realization, not from the time the payment term of the tax
assessment expires onwards as this is incompatible with EU law and not required in order to preserve the Netherlands
source country entitlement. Finally, the Netherlands system can be improved by rephrasing the settlement provisions. It
would be advisable to articulate the actual purpose and scope of the final settlement in the wording of the exit
provisions, so that these will be triggered in all situation in which the Netherlands might risk losing its tax claim on
profits which accumulated within the Dutch jurisdiction and not only when the Netherlands loses all attachments with
regard to a taxpayer.
8.3.2
Introducing a new system
There is room for improvements regarding the current Netherlands exit tax system. Indeed, the mere fact that there is
fictitious deemed disposal of assets upon the moment of emigration (or, alternatively, cross-border asset transfer),
triggering an exit tax settlement, is obstructive for European and global mobility. In my opinion, there should be a more
liberal system, fostering European and global mobility. In this paragraph, I will discuss this alternative system. First of
all, it is noted that this system has to measure up to the following criteria:
- The two pillars of the normative framework, i.e. European and global mobility, on the one hand, and fiscal
sovereignty, on the other, where CIN ensures that the territorial sovereignty is safeguarded.
- EU law, i.e. the freedom of establishment.
- DTCs; I require the new system to be compatible with currently existing DTCs, as, in my opinion, it would be highly
unfeasible to amend all DTCs.
Several alternatives to the current Netherlands exit tax system have been discussed. The question is, which one of these,
or which elements of these alternatives, can be employed in order to create a system which can satisfy the criteria set out
above.
First of all, the compartmentalization systems were discussed. Kemmeren introduced a system of residence-based
compartmentalization.1301 Under Kemmeren’s reasoning, the current system of exit taxation is unsatisfactory. Upon
migration, the tax debt is established immediately; only payment can be deferred. The burden of having to pay this fixed
debt is still obstructive, especially taking into account the fact that later occurring value decreases are not taken into
account, where, had the business not emigrated, these value decreases would have lowered the tax debt. Kemmeren
argues that upon emigration, an appealable decision will be imposed, rather than a tax assessment. In this way, no
immediate tax debt will arise. Moreover, Kemmeren’s system is limited to EU/EEA-States. In the light of the criteria of
global mobility, this last element makes Kemmeren system unfeasible for me. I also wonder to what extent an appealable
decision is truly sufficient in order to prevent the Netherlands from losing its source country entitlement. This is of
importance, as I believe that a compartmentalization system will only work when the Netherlands does not lose its
taxing right after emigration, as has been discussed in paragraph 4.6.2.2.1302 This logic is also reflected in the
compartmentalization system proposed by A-G Wattel. The A-G argued that under ‘his’ system, the income accrued
within the Netherlands jurisdiction should be conserved upon emigration and allocated to a fictitious PE, which is left
behind in the Netherlands. In my opinion, this fictitious PE is required in order to retain a taxing right in the
Netherlands. Otherwise, a compartmentalization system which sees to the temporal element of taxation (i.e. taxation
upon actual, later realization) cannot be employed. Taking this into account, I believe that a compartmentalization
system is not as simple of a solution as it seems. Especially the fact that a compartmentalization system requires the
1301
See Kemmeren 2005.
This argument has been derived from analyzing case law. On the basis of HR BNB 2013/114 I believe that a temporal
compartmentalization system might be applied by the Court if after the transfer the Netherlands can still enact its taxing right over the
assets which have been transferred. If, however, the Netherlands might risk losing its tax claim on profits which accumulated within the
Dutch jurisdiction as, after the application of the DTC, the taxing right over these profits will no longer be allocated to the Netherlands, a
teleological interpretation of the final settlement provision is preferred by the Court, on the basis of HR BNB 2013/94.
1302
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taxpayer to maintain a proper and extensive administration makes me wonder whether such a system will truly lead to a
better result when compared to the improvements applied to the current system of exit taxation. Moreover, as a
compartmentalization system requires some nexus between the emigration State and the emigrant, such as a fictitious
PE, I believe that this system can also obstruct mobility. The current system of exit taxation essentially sorts the same
effect as what compartmentalization systems are aimed at, that is, to postpone taxation until actual realization while
properly allocating the taxing rights between the States involved. All in all, I do not believe that a compartmentalization
system is ‘the’ solution for the current exit tax problem(s). It might entail some benefits when compared to the current
system of exit taxation, but I do not believe that these benefits offset the fact that the legislator has to introduce and
entirely new system, when, as shown in paragraph 8.3.1, we can also come a long way by applying some improvements
to the current system of exit taxation.
Turning back to a system of exit taxation, I have also reviewed some of the alternatives which actually build on the
current system of exit taxation. The matching system of Terra and Wattel, for example, takes the exit tax as a starting
point. The disadvantage of an exit tax should, in such a system, be neutralized in the immigration State.1303 MSs are thus
obliged to grant a tax base step-up to immigrating businesses. As discussed, I think that in general this is a good starting
point. With regards to the Netherlands tax system, however, this bears no influence. The beneficial element of the
system proposed by Terra and Wattel is that there will be an exact matching between the appreciation of the fair market
value. This does require coordination. In my opinion, this can be added as an improvement to the current system, but it
will not lead to the introduction of an entire new system. The system is still characterized as the flavor ‘emigration at fair
market value’.1304
The alternative is ‘emigration at book value’. A system employing this alternative is the trade system for exit claims.1305 As
exit taxes are highly unfeasible in an internal market, Wattel argues that taxation should be related to realization, not to
crossing the border of a tax jurisdiction. As a solution to this problem, Wattel introduces a system under which the exit
tax claim co-emigrates with the emigrating resident. The emigration State will ‘sell’ its exit claim to the immigration
State, by which the departure State will immediately collect its tax claim. The original book value will be maintained after
emigration. The immigration State can fully tax the gains upon actual realization. Following the discussion of Peters1306
and Wattel1307, I believe that there are multiple benefits to this system: 1) both the emigration and the immigration State
get what they are entitled to on the basis of the principle of territoriality as it will lead to the realization of the claim of
the State on who’s territory the gains accrued, 2) the taxpayer will not be confronted with any tax-related issues upon
emigration (provided that there is no actual realization), 3) this system guarantees that the taxpayer can exercise its treaty
freedoms without restrictions, which is very positive in the light of European mobility, and 4) it is relatively simple as
the claims will be settled immediately after emigration, so that there is no need to follow the claims for many years and
over multiple borders, nor will it be necessary to extensively exchange information between States. In my opinion, this
system almost measures up to all criteria set with respect to the desirable alternative. More specifically, the system is
fully compatible with EU law; the taxpayer will not be confronted with any tax related issues and is completely
unrestricted in its freedom of establishment. Moreover, the system does not require any amendments to current DTCs
and will not amount to treaty override. It will, however, require some coordination instrument, such as an EU-directive.
Also, CIN is satisfied with respect to the emigration and the immigration State, as both States get what they are entitled
to on the basis of the principle of territoriality. Indeed, the system will lead to the realization of the claim of the State on
who’s territory the gains accrued, ensuring preservation of State’s source country entitlement. The only ‘negative’
element of this system of co-emigration of the exit tax claim is that it is limited to EU/EEA States under the current
proposal of Wattel and Peters. In the light of European and global mobility it would obviously be better if the system
See also Zuijdendorp 2010.
1305 See Wattel 2002.
1306 See Peters 2007.
1307 See Wattel 2002.
1303
1304
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would also apply to transfers to non EU/EEA States. However, a system of co-emigration of the exit tax claim requires,
as discussed, some cooperation mechanism. Given the current state of affairs, I do not believe in the feasibility of such a
mechanism at a global level, although this would eventually be desirable.
To conclude, if we were to completely revise the current Netherlands exit tax system, the system of co-emigration of the
exit tax claim would, in my opinion, be the best alternative. I am aware of the fact that I have not created my ‘own’
system, but why reinvent the wheel? The system of co-emigration is, in my opinion, superior to the current system and
to the other alternatives. It fully ensures CIN in the sense that MSs source country entitlement is safeguarded, and, thus,
MSs fiscal sovereignty is not harmed. In addition, taxpayers are not pulled into a country’s problem of having to secure
a tax claim. Indeed, this is the responsibility of the State in question, not of an emigrating taxpayer. The emigrating
taxpayer can ‘enjoy’ its freedom of establishment without any obstructions. The limitation to global mobility remains
problematic due to the lack of coordination mechanisms, but this is not different under the current Netherlands system
of exit taxation.
This chapter pivoted around the improving or reinventing the current system of exit taxation. Indeed, as was revised at
the beginning of this chapter, the Netherlands tax system with regards to business migration contains some issues which
are problematic in the light of EU law and the normative framework. Also, it was noted that, in my opinion, MSs should
be obliged to grant a tax base step-up to immigrating businesses. However, as the Netherlands already grants such a
step-up, no particular problematic issues have been found regarding the immigration of a business to the Netherlands.
Therefore, the focus in the Netherlands tax system 2.0 was on the Netherlands exit tax system pertaining to the
emigration of a business taxpayer and some cross-border asset transfers.
I proposed two alternatives for the current Netherlands tax system regarding exit taxation. In the first alternative, I took
the current Netherlands system as a given fact. Under this tax system, the cross-border transfer of a business taxpayer
or of assets can trigger an exit tax in the form of a deemed disposal. Subsequently, the focus was on which
improvements could be made with respect to the current system, without requiring any drastic changes (such as, for
example, amending DTCs or implementing an entire new system in national law). This alternative can be seen as a more
practical solution to the problems which have been found. Secondly, I focused on an alternative which went beyond
this, an entirely new.
With respect to the first, i.e. the improvement of the current system, it was noted that in the light of EU law and the
normative framework the current Netherlands exit tax system can be improved by offering businesses who are
confronted with an exit tax settlement, irrespective of whether it concerns a transfer to EU/EEA or non-EU/EEA
States, the option between immediate and deferred payment. It was argued that automatic deferral of payment is required
nor desirable. In case a taxpayer opts in for deferred payment additional conditions can apply, to the extent that these are
needed to safeguard the Netherlands source country entitlement. It was proposed that in these situations, the
Netherlands Tax Authority shall determine on the basis of general guidelines whether and to what extent securities are
required in the particular case, and which administrative requirements will apply. Regarding the calculation of recovery
interest, it was concluded that this interest can be charged, but only as from the moment of actual realization and not
from the time the payment term of the tax assessment expires onwards, as this is incompatible with EU law and not
required in order to preserve the Netherlands source country entitlement. Apart from the issue regarding the deferral
and conditions it was also argued that the Netherlands system can be improved by rephrasing the settlement provisions.
It should be clear and indisputable that these are triggered in case the Netherlands can possibly lose its taxing right with
respect to profits which accumulated in the Netherlands, and not only when the Netherlands loses all attachments with
regard to a taxpayer (as is the case under the current final settlement provision).
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With respect to the second, i.e. the introduction of a new system, it was argued that if we were to completely revise the
current Netherlands exit tax system, the system of co-emigration of the exit tax claim would, in my opinion, be the best
alternative. This system is superior to the current system and to the other alternatives. First of all, it was discussed that
the system fully endorses States’ fiscal sovereignty. Indeed, CIN is satisfied with respect to the emigration and the
immigration State, as both States get what they are entitled to on the basis of the principle of territoriality. The system
will lead to the realization of the claim of the State on who’s territory the gains accrued, ensuring preservation of State’s
source country entitlement. In addition, taxpayers are not pulled into a country’s problem of having to secure a tax
claim. As discussed, this is the responsibility of the State in question, not of an emigrating taxpayer. It was noted that as
a consequence, the system is fully compatible with EU law; the taxpayer will not be confronted with any tax related
issues and is completely unrestricted in its freedom of establishment. The only ‘negative’ element of this system of coemigration of the exit tax claim is that it can possibly only be applied to transfers to EU/EEA States as this system
requires some cooperation mechanism. It was noted that, given the current state of affairs, I do not believe in the
feasibility of such a mechanism at a global level, although this would ultimately be desirable.
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SUMMARY AND CONCLUSIONS
How does the Netherlands tax system with respect to business migration impact on European and global
mobility, and what should be the impact in the light of tax conventions, EU law, and international tax
neutrality?
This research question has been guiding throughout my thesis. In order to formulate an answer to the research question,
I have analyzed the different elements of this question separately, distinguishing between a descriptive and a normative
element. All the findings will now be put together.
International tax neutrality
First of all, the concept of international tax neutrality was converted in to an appropriate benchmark, in order to achieve
the goal of enhancing European and global mobility while respecting States’ fiscal sovereignty. The benchmark of
capital import neutrality (CIN) was found to be the best approximation of international tax neutrality in this respect. As
discussed, CIN and fiscal sovereignty go together perfectly. CIN ultimately implies source based taxation, and when
CIN is applied to the subject of business migration, it is required that MSs will not lose their fiscal sovereignty, i.e. their
source country entitlement. It follows that only those restrictions which are truly necessary to protect this source
country entitlement can impede on European and global mobility. The following question was subsequently raised: how
do exit taxes measure up to this and what tax treatment should be applied to an emigrating or immigrating business?
Emigration of a business
The element of exit taxation was discussed first. The tax which is levied upon the emigration of a business is commonly
called an exit tax. Exit taxes only apply to persons moving their tax residence abroad and they serve to secure certain tax
claims with respect to unrealized yet accrued income. In a purely domestic situation, tax latencies which represent
unrealized income are, in general, only taxed upon actual realization. This difference in treatment poses an obstacle to
free movement, i.e. the freedom of establishment. It was found that in the national law systems of most countries,
emigration provisions, i.e. provisions dictating the imposition of an exit tax, can be found. Focusing on the Netherland
tax system regarding the emigration of a business, the discussion started with setting forth some important distinctions,
i.e. the distinction between individual businesses and legal entities, the distinction between residents and non-residents,
and the distinction between the incorporation doctrine (which is applied by the Netherlands) and the real seat doctrine.
After this foundation was in place, the concept of residency and the concept of emigration were further analyzed. It was
noted that resident business taxpayers can lose their status as a resident in many ways, one of which is emigration.
Emigration was subsequently defined as the situation in which a business carried on in the Netherlands ceases to be a
resident taxpayer, due to the fact that the tax residence is transferred abroad. However, the importance of the concept
of emigration is marginal. Indeed, an emigration does not necessarily trigger an exit tax provision, and the exit tax
provisions can also be triggered without there being an emigration. In the discussion of residency, specific attention was
also paid to the influence of DTCs as the residency status might be changed or lost due to the effect of a DTC. The
essential question then is, when are the exit provisions in the Netherlands tax law triggered? First, the emigration
provisions with respect to both individual businesses and companies are quite similar; in both cases, Dutch law provides
for a partial and final settlement (articles 3.60 and 3.61 PITA 2001 and articles 15c and 15d CITA 1969). The partial
settlement provisions regulate the transfer of asset components or part of the business abroad, combined with the
simultaneous or subsequent emigration of the taxpayer. The final settlement provisions are broader in scope; emigration
is not required (non-resident taxpayers) and they also apply to the transfer of the entire business. The final settlement
provisions in fact constitute a safety net, and they only apply with respect to benefits which have not already been taken
into account for other reasons. The consequence of the settlement provisions being triggered is an exit tax, where the
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company will be taxed as if it disposed of its assets for a compensation corresponding to fair market value. There is,
thus, a tax claim without there being an actual realization. It was argued that exit provisions obviously have a hindering
effect on business mobility. Logical question: is this compatible with EU law? I briefly hinted on EU case law in which
the Court allowed the imposition of an exit tax as such, but condemned the requirement of immediate payment of the
exit tax debt. Consequently, the Dutch legislator introduced the Law on deferral of exit taxation, under which
emigrating businesses are currently offered the option between immediate and deferred payment. Attention was paid to
the contents and scope of this law, the conditions of deferred payment, and other miscellaneous characteristics of the
current Dutch exit tax system (such as the treatment of post emigrational value decreases). Also, some procedural
obligations regarding the emigration of a business have been analyzed from the perspective of the Netherlands. Finally,
the normative framework was applied to the Dutch tax treatment on business emigration. It was argued that exit taxes
are undesirable in the light of European and global mobility, but that, on the basis of CIN, they are required for the
preservation of the source country entitlement on income which accrued in the Netherlands jurisdiction. Under a
system of exit taxation, some obstruction to business mobility has to be accepted in order to safeguard MSs fiscal
sovereignty.
Immigration of a business
As there is no emigration without immigration and vice versa, the third chapter dealt with the counter side of
emigration, i.e. immigration. More specifically, the Dutch tax treatment upon the immigration of a business, as well as
the tax treatment applied in other EUCOTAX countries has been described, analyzed and evaluated. Focusing on the
Netherlands tax treatment, similar topics were discussed as those which passed the review in the context of emigration,
starting with establishing how a business can become a Dutch resident (distinguishing between natural persons and legal
entities). Immigration of a business is not a taxable event as such in the Netherlands. However, it was discussed that a
central issue upon immigration is how capital (assets and liabilities) are valued and whether or not a step-up is granted to
immigrating businesses. It was argued that States can roughly follow two different approaches with respect to the
valuation of assets upon immigration; States can ‘take over’ the original book value used in the emigration State or
States can value the assets of an immigrated business at fair market value, which means that a tax base step-up from
original book value to fair market value is granted. In the Netherlands, a step-up is provided to immigrating businesses,
irrespective of their origin. One precondition was applied to this; a tax base step-up will only be provided when assets
and liabilities have not already been valued for Dutch tax purposes. Moreover, it was also noted that in some cases, a
step-up might also be granted in the absence of an immigrating business. This will be the case when the Netherlands
acquires a taxing right after a transfer or transformation of a taxpayer which it previously did not have. Similar to the
discussion regarding the emigration of a business, some procedural issues of immigration were discussed as well. Finally,
the Netherlands tax treatment on immigrating businesses was held against the background of the normative framework.
It was argued that in the light of European and global mobility the provision of a tax base step-up is required.
Additionally, with regard to fiscal sovereignty, it was also noted that the provision of a tax base step-up should be
preferred.
Cross-border asset transfers
Business migration is not limited to the emigration and immigration of a business. Cross-border asset transfers in socalled PE-situations are an important element of business mobility. In this regards, the Netherlands tax treatment on
these kinds of transfers was considered in chapter 4. First, some basic elements such as the different types of PEs (the
general PE, the agent PE and the building PE) and the meaning of the term permanent establishment under
Netherlands tax law and under DTCs were discussed. Subsequently, it was noted that the preferred method in the
Netherlands for PE profit allocation is the functionally separate entity approach (the direct method). As a result, the PE
is treated as if it is an independent part of the enterprise, and it deals with other parts of the business at arm’s length.
Next, the impact of asset transfers of tangible assets between the head office and a PE and the tax treatment applied by
the Netherlands to such transfers were discussed. Regarding the transfer of assets from the Netherlands head office to a
PE, it was argued that a distinction has to be made between the permanent and the temporary transfer of assets, based
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on the servitude criterion. If the asset is not subservient to the PE after the transfer, this will be considered a temporary
transfer. On the basis of the ‘rent-rental analogy’, the head office will charge an at arm’s length rent to the PE which is
included in the Netherlands taxable profit of the head office. If the asset is subservient to the PE after the transfer, the
economic ownership will have transferred. On the basis of the ‘buy-sale analogy’, the transferred assets are activated at
fair market value on the balance sheet of the PE, implying that the Netherlands (as a residence state) will have to
provide a lower exemption resulting in the gradual ‘realization’ of transferred assets. After this, the Netherlands tax
treatment regarding transfers from a Dutch PE to a foreign part of the taxpayer’s business were analyzed. Lacking clear
legislation, it was noted that the tax treatment is in principle ‘unknown’. By applying case law of the Dutch Supreme
Court I’ve provided my interpretation of the tax treatment which should be applied in these situations. Regarding the
situation where assets are transferred permanently from a Netherlands PE to a foreign part of a limited resident
taxpayer’s business, it was argued that this transfer is a non-event from a tax perspective as the independence fiction
does not apply. Subsequently, it was discussed that a teleological interpretation of the final settlement provision will
most likely be required in order to prevent the assets from escaping the Dutch jurisdiction without taxation. Regarding
the situation where assets are transferred from a Netherlands PE to a foreign part of a non-resident taxpayer’s business,
I provided two possible options. Under the first option, the transfer would amount to the alienation of assets on the
basis of the independence fiction. The total profit concept would apply and the gain would be included in the taxable
profit. Under the second option, the transfer would not lead to the alienation or realization of transferred assets, as
these assets remain within the same taxpayer’s worldwide business. Consequently, the total profit concept does not
apply. Nonetheless, I argued that on the basis of case law, an exit tax settlement (following a teleological interpretation)
will be in order. It was finally argued that, all in all, the Netherlands emigration provisions are not adequate to preserve
the Dutch tax claim in all situations.
Alternative methods of business migration
In addition to emigration, immigration, and cross-border asset transfers, the concept of business migration also extends
to cross-border mergers, divisions and conversion. These have been discussed as ‘alternative’ methods of business
migration. Regarding the cross-border merger and division, it was noted that the possibility of a cross-border merger has
only been introduced a few years ago in the Dutch civil law system. Currently, this cross-border merger is only possible
for limited liability companies. I argued that on the basis of the freedom of establishment, I believe that other legal
forms should also be allowed to merge. In regards to tax law, a cross-border merger has been possible for a longer time.
The current Dutch rules in the CITA 1969 with respect to (cross-border) mergers and divisions were discussed.
Generally, similar to the Dutch exit provisions, both the merger and the division are deemed as an alienation of (part of)
a business. This means that, in principle, a tax claim will have to be settled. However, as discussed, it is possible to
transfer the book value to the acquiring entity, provided that certain conditions (i.e. the standard requirements) are met.
The most important requirement in a cross-border context is that later taxation should be secured. It was noted that
without leaving behind a PE in the Netherlands, this requirement shall not be met. As a consequence, an exit tax will
have to be settled. In addition to the merger/division, cross-border conversions were discussed as well. The crossborder conversion is the legal act in which a company governed by the law of one State (the state of origin, also called
the outbound State) is converted into a company governed by the law of another State (the destination State, also called
the inbound State). With respect to company law, it was noted that in Dutch national law the possibility of a cross-border
conversion is currently missing. Nonetheless, I argued that in my opinion, the Netherlands has to accept both inbound
and outbound conversions on the basis of EU law (i.e. the freedom of establishment). Regarding the tax law aspects of
the cross-border conversion, it was discussed that there are 1) non-regulated conversions, which are not accompanied
by a liquidation settlement, but to which the regular emigration tax treatment will than apply in cross-border situations,
and 2) regulated conversions, in which the converted legal entity is deemed to be liquidated but where the taxpayer can
request for application of the conversion facility. Overall, it was concluded that the Netherlands company law is in some
situations unsatisfactory in the context of fostering European and global mobility, as cross-border mergers and
conversions are not always possible. However, as the focus of this thesis is on the Netherlands tax system, the only
obstacle found with respect to business mobility lies in the fact that in some situations an exit tax will be imposed.
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DTCs
If a business taxpayer emigrates, transfers assets cross-borders, or conducts any alternative method of business mobility,
this can result in the imposition of an exit tax. It is generally assumed that Netherlands will lose its tax claim after
emigration or alternative transfers. Indeed, tax treaties allocate taxing rights to the country of residence. Under the exit
tax system applied by the Netherlands, the specific fact which triggers taxation is treated as a domestic event, i.e. a
fictitious alienation upon emigration. The central question then is, is this permissible under DTC or does this amount to
treaty override? This question has been analyzed in chapter 6. First, the rules for the allocation of taxing rights under
DTCs were discussed, where article 7 and article 13 of the OECD MC were considered relevant. Under article 7, the
place of residency on the moment of realization will, in principle, determine to which country taxing rights are allocated.
Under article 13, the taxing right is, in principle, allocated to the State in which the property (immovable property or
business capital of a PE) is located. It was argued that for the purpose of article 13 the legal act of alienation both
encompasses the real alienation (which will lead to actual realization of gains) and the fictitious alienation (by which
gains are deemed to have been realized). With respect to treaty override then, it was first assessed what this actually
means. Treaty override arises when a country infringes on the good faith principle by unilaterally appropriating taxing
rights which were previously given up by concluding a DTC. In order to establish whether the Netherlands exit tax
system amounts to treaty override, both case law and literature were discussed and analyzed. It was concluded that the
Netherlands exit provisions stipulating a disposal of assets upon emigration do not amount to treaty override, as there is
no infringement of the good faith principle. First of all, the nature of the income (i.e. business income) is not changed
by virtue of the emigration provisions. Secondly, the exit provision are aimed at taxing the increases in value which
relate to the period that the business taxpayer was a resident of the Netherlands. Finally, the exit tax is not incompatible
with the provisions of the DTC itself. The Netherlands merely imposes a tax on reserves, unrealized gains and goodwill,
which came to existence during the period in which the business was a resident taxpayer, which is not prevented under
DTCs.
EU law
DTCs are only a part of the international tax law framework. Another very important part is European Union law. In
the seventh chapter, it has been assessed to what extent the Dutch tax treatment regarding business emigration,
immigration, and cross-border asset transfers is compatible with EU law, i.e. the freedom of establishment. In order to
achieve this aim, the freedom of establishment was discussed first. It was argued that, in general, the Dutch exit tax
provisions on businesses represent a restriction to the freedom of establishment. Companies transferring their place of
effective management outside the Netherlands are taxed on an accruals basis whereas in a purely domestic situation,
transferring companies are taxed on a realization basis. This poses a difference in treatment constituting an obstacle to
free movement. However, it was argued that in some cases, these restrictions are acceptable. In order to analyze this in
more detail, several cases dealing with business migrations have been discussed. It was found that when analyzing the
accessibility of the freedom of establishment, the permissibility of these exit taxes can only be established when these
taxes are imposed by a MS employing an incorporation system, not when they are imposed by a MS with a real seat
system, as, in principle, companies transferring from a real seat jurisdiction cannot make an appeal to the freedom of
establishment.
Regarding the actual issue of exit taxation several cases have been discussed. It was argued that the CJEU applies
different standards with respect to natural persons, on the one hand, and legal entities, on the other. In the context of
the emigration of a substantial shareholder (natural person), that the CJEU accepts exit taxes of a preservative nature,
provided that there is no immediate collection of the tax; recovery of the tax has to be postponed automatically until
actual realization of the gain, and MSs cannot require the provision of guarantees. Moreover, it was argued that in
situations such as these, the emigration State is required to take into account post-emigrational value decreases. With
respect to legal entities, several cases were discussed as well. The central case in this context is National Grid Indus, in
which the Court limited the extent to which MSs could impose exit taxes on emigrating companies as they restrict the
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freedom of establishment. In essence, MSs can impose an exit tax upon the emigration of a business, but immediate
recovery of the tax claim is considered disproportional. It is now settled case law that MSs have to offer companies the
option between immediate and deferred payment. The Court also established that, in case of deferred payment, MSs can
set conditions. The exact details of these conditions, however, have not completely been crystalized in the CJEU case
law. Given the discrimination applied by the Court between emigrating substantial shareholders (natural persons), on
the one hand, and companies, on the other, I argued that in my opinion, individual businesses (natural persons, i.e.
entrepreneurs) are to be treated as companies, as the method of taxation with respect to income derived from individual
businesses, respectively, companies is similar, whereas the rules regarding substantial shareholders differ notably.
The logical question follows: what should this tax treatment be? As discussed, it is settled case law that the imposition of
an exit tax as such is basically allowed and that the exit country does not have to take into account value decreases
which occur after emigration. However, the recovery of the exit tax was considered disproportional by the CJEU. The
Dutch legislator has now implemented the Law of deferral on exit taxation. In the second part of chapter seven, it has
been assessed whether this new Law means that the Netherlands exit tax system is compatible with EU law. All in all, I
came to the conclusion that the Netherlands tax system with respect to the emigration of a business is not fully
compatible with EU law, where the problem ultimately lies in the fact that recovery interest is currently being charged as
of the time that the payment term of the tax assessment expires (thus, before actual realization). Regarding the other
EUCOTAX countries, it was noticed that the Netherlands is not the only country that amended its national law in
response to CJEU case law. In assessing the compatibility with EU law of the different countries’ exit tax systems it was
also noted that most countries’ systems are probably still not compatible with EU law.
In addition to the compatibility of the Dutch tax treatment upon emigration with EU law, the compatibility of the tax
treatment upon immigration has been assessed as well. It was concluded that, in my opinion, Member States are on the
basis of the freedom of establishment required to grant immigrating businesses a step-up in base, even though this has
not explicitly been dictated by the CJEU. It was also noted that the provision of a step-up can, in practice, turn out to
be a step-down. I argued that this would be compatible with EU law.
Research question and conclusion
At this point, the Netherlands tax system has been analyzed in the light of European and global mobility and capital
import neutrality (throughout this thesis), tax conventions (chapter 6), and EU law (chapter 7). This implies that all
elements have been recaptured and it is possible to answer the research question, which reads How does the Netherlands
tax system with respect to business migration impact on European and global mobility, and what should be the impact in the light of tax
conventions, EU law, and international tax neutrality? For the purpose of this conclusion, I will first answer all elements of
this question in a systematical, yet brief manner. After this, I will shortly review the solutions which have been posed in
chapter 8 in order to improve the impact of the current system on European and global mobility.
Two ‘aspects’ of the Netherlands tax system are to be distinguished: 1) upon the immigration of a business, the
Netherlands will provide tax base step-up and 2) the emigration of a business, the cross-border transfer of asset (in some
cases), and other methods of outbound business migration can amount to the imposition of an exit tax.
1. Step-up
In the light of European and global mobility it has been assessed that the Netherlands tax system with respect to
immigrating businesses is minimally obstructing. The Netherlands applies the same tax treatment to the immigration of
a business and the foundation of a purely domestic business.
- In the light of EU law, it was argued that even though this has not explicitly been dictated by the CJEU, it appears
that MSs are on the basis of the freedom of establishment required to grant a step-up in base to immigrating
businesses. And even if this would not be required, the Netherlands system is still fully compatible with EU law.
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-
With regard to the question of ‘what should be’, the current Netherlands tax treatment does not need to be
changed.
In the light of capital import neutrality, the answer is similar. As discussed, CIN requires that MSs will eventually
impose a tax on those value increases which accrued within their own jurisdiction, no more and no less. By
providing a tax base step-up, over-taxation by the immigration State will be prevented. CIN thus requires the
provision of a step-up, as a consequence of which the Netherlands tax treatment with regard to immigrating
businesses does not need to be changed.
2. Exit tax
Crossing the border implies that a tax will have to be settled on something which isn’t realized yet. In a purely domestic
context, taxation will wait until actual realization. European and global mobility of businesses can only truly be
unobstructed when the tax treatment of businesses transferring cross-borders and businesses transferring within one
nation is equal.
- In the light of tax conventions, it has been noted that the impact of the Netherlands exit tax system is currently
acceptable, as there is no infringement of the good faith principle. The what should be question is therefore less
relevant, as no improvements are needed.
- In the light of EU law, it has been argued that exit taxes pose an obstacle to free movement, but that this would not
be disproportional if a taxpayer can pay the exit tax claim upon actual realization. In the light EU law, some
obstruction to mobility is, therefore, acceptable. It has been discussed that the current Netherlands tax system is,
apart from the element of the calculation of recovery interest, compatible with EU law. Answering the question of
what should be the impact of the current Netherlands exit tax system on European and global mobility in the light
of EU law, then requires that this element is amended or eliminated.
- In the light of capital import neutrality, it was noted that exit taxes are required for the preservation of the
Netherlands’ source country entitlement. Similar to EU law, obstructions to mobility are therefore permitted in the
light of CIN. However, it was also noted that the element of the calculation of recovery interest goes beyond what
is needed to protect this source country entitlement. Therefore, answering the question of what should be the
impact of the current Netherlands tax system on European and global mobility in the light of CIN results in the
same answer as that provided in the light of EU law.
To answer the research question: the impact of the Netherlands exit tax system is obstructing to European and global
mobility, and in the light of EU law and international tax neutrality (CIN), this impact can and should be improved so
that European and global mobility is enhanced. The impact of the Netherlands tax system with respect to immigrating
businesses is not at all problematic in the light of European and global mobility and does not require amendments.
Following this analysis, recommendations for improving the current Netherlands tax system have been discussed. All
the problems which have been revealed throughout the analysis conducted in this thesis have been put together in order
to find a better system, enhancing European and global mobility. After having revised the Netherlands tax system’s
current impact in the light of 1) European and global mobility and capital import neutrality, 2) DTCs, and 3) EU law, I
proposed two alternatives for the current Netherlands tax system regarding exit taxation, taking into account
dominantly EU law and the benchmark of CIN. In the first alternative, I took the current Netherlands system of exit
taxation as a given fact and subsequently proposed some improvements, the most important ones being amending the
policy with respect to the calculation of recovery interest and rephrasing the settlement provisions. In the second
alternative, a new system of co-emigration of the exit tax claim was proposed. This system will be minimally obstructive
to European mobility and fully compatible with EU law and the benchmark of CIN.
214
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Emigration and immigration of a business

Transcription

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