(May 21, 2015)

On May 21, 2015 the European Court of Justice (CJEU) ruled in Case C‑657/13 Verder LabTec GmbH & Co. KG versus Finanzamt Hilden (ECLI:EU:C:2015:331).

Is it consistent with freedom of establishment under Article 49 TFEU if, upon the transfer of an asset from a domestic to a foreign permanent establishment of the same undertaking, a national rule stipulates that there is a withdrawal for non‑business purposes, with the result that the disclosure of unrealised [capital gains] leads to a profit linked to the withdrawal, and another national rule provides the possibility of spreading that profit in equal proportions over 5 or 10 financial years?

The dispute in the main proceedings and the question referred for a preliminary ruling

·        Verder LabTec is a limited partnership under German law established in Germany. From May 2005 that partnership dealt exclusively with the administration of its own patent, trademark and model rights. By a contract of 25 May 2005, it transferred those rights to its permanent establishment located in the Netherlands.

·        During a tax audit, the Finanzamt came to the view that the transfer of those rights had to take place with disclosure of the unrealised capital gains pertaining to those rights at their arm’s length value at the time of the transfer.

·        However, the Finanzamt considered that those unrealised capital gains, whose value was not in dispute, should not immediately be subject to taxation in full. For reasons of equity, the amount of those unrealised capital gains was, according to the Finanzamt, to be offset by a nominal item of the same value and incorporated in profits on a straight line basis over a period of 10 years.

·        On the basis of the results of that audit, on 17 August 2009 the Finanzamt issued a notice on the separate and uniform determination of bases of taxation for the 2005 tax year. It calculated Verder LabTec’s profit by adding, to the profit realised, the proportional incorporation of the nominal item for that tax year by an amount equal to one tenth of the value of the unrealised capital gains at issue and subtracting the amount for the increase in business tax provision relating thereto.

·        By decision of 19 September 2011, the Finanzamt rejected as unfounded the complaint lodged against that notice of 17 August 2009.

·        Verder LabTec brought an action against that decision before the Finanzgericht Düsseldorf, claiming, in essence, that the tax legislation at issue undermines the freedom of establishment guaranteed by Article 49 TFEU. Verder LabTec believes that the staggered recovery of tax on unrealised capital gains relating to the assets transferred at the time of the transfer of those assets is a disproportionate measure. The recovery of that tax at the time of the realisation of those capital gains would be a less restrictive option.

·        The Finanzamt contends that the action should be dismissed. It is of the view that the tax system at issue is not contrary to European Union law principles and that any infringement on freedom of establishment is justified by overriding reasons in the public interest. In addition, the tax legislation at issue is proportionate since the unrealised capital gains disclosed are not immediately taxed in full.

·        The Finanzgericht Düsseldorf notes that the third and fourth sentences of Paragraph 4(1) of the EStG, as amended by the 2010 tax law, apply to the tax year in dispute, namely 2005.

·        That court considers that the national legislation at issue on withdrawal is contrary to freedom of establishment. Furthermore, it is of the view, in the light of the judgment in National Grid Indus (C‑371/10, EU:C:2011:785), that that legislation cannot be justified since, under the fiscal principle of territoriality, the Federal Republic of Germany is entitled to tax unrealised capital gains generated during the period preceding the transfer of the assets at issue to a permanent establishment located within another Member State. Even if the determination of the amount of the unrealised capital gains at the time of the transfer of the assets at issue could be regarded as a proportionate measure, the recovery of taxes on those capital gains prior to their being realised, notwithstanding spreading such recovery over 5 or 10 years, cannot, in its view, be a proportionate measure.

·        In those circumstances the Finanzgericht Düsseldorf decided to stay the proceedings and to refer the following question to the Court of Justice for a preliminary ruling:

‘Is it consistent with freedom of establishment under Article 49 TFEU if, upon the transfer of an asset from a domestic to a foreign permanent establishment of the same undertaking, a national rule stipulates that there is a withdrawal for non‑business purposes, with the result that the disclosure of unrealised [capital gains] leads to a profit linked to the withdrawal, and another national rule provides the possibility of spreading that profit in equal proportions over 5 or 10 financial years?’

The CJEU ruled as follows:

Article 49 TFEU must be interpreted as not precluding tax legislation of a Member State, such as that at issue in the main proceedings, which, in the case of a transfer of assets from a company located within the territory of that Member State to a permanent establishment of that company located within the territory of another Member State, provides for the disclosure of unrealised capital gains pertaining to those assets which have been generated within the territory of that first Member State, the taxation of such capital gains and the staggered recovery of the tax relating to those gains over 10 annual instalments.

For further information click here to be forwarded to the text of the ruling as published on the website of the CJEU, which will open in a new window.

Did you know that in our section CJEU Rulings we have made a selection of rulings of the CJEU? We have organized these rulings based on the subject they relate to (e.g. Freedom of establishment, Free movement of capital, Indirect taxes on the raising of capital, etc).

Our selection of CJEU Rulings regarding Freedom of establishment can be found here.

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