On 18 July 2013, the European Court of Justice ruled (C-261/11) that the Danish rules entailing an immediate levy of exit taxes on and collection of such taxes from corporate taxpayers when assets and liabilities are transferred cross border constitute an infringement of EU freedom rights.
Recently, Danish exit tax rules have been challenged in infringement proceedings on two different fronts: For individuals as well as corporate taxpayers. Even though Denmark has continuously defended its exit tax rules, the outcome with regard to the corporate exit tax rules was expected, not least following the ruling in the National Grid Indus case (C-371/10). The infringement proceedings concerning individual taxpayers are still pending.
The provisions scrutinised in the corporate exit tax case against Denmark imply that a transfer of assets or liabilities within the company to a permanent establishment or a head office outside Danish territory is treated as a sale of the asset or liabilities at market value at the time of the cross-border transfer. The exit tax is levied on the taxpayer immediately, without any possibility under current law of deferring the tax payment until the assets are actually disposed of.
The judgment is in line with the cases having been decided until now. Member States are allowed to have rules triggering taxes on unrealised capital gains from cross-border corporate migrations or cross-border asset relocation, but the systems must be designed in a way allowing for the tax payments to be suspended until the assets are actually disposed of in order to avoid disproportional cash flow disadvantages.
In addition, the Danish case includes one new aspect: Responding to a Danish argument, the European Court of Justice stated that, whereas the general rule in respect of all assets and liabilities is that the collection of capital gains tax must be deferred until the gains are actually realised by the company, the Member States are, however, not bound to await collection of the deferred taxes until actual realisation of the gain if the asset is of a type not normally intended for sale (typically intangible assets with a limited protection period). The Member States may set up rules whereby the collection of taxes after the cross-border transfer is triggered by something other than a sale. The Court, however, does not elaborate on the content of this criterion, which therefore currently remains unclear.
The Danish Ministry of Taxation has not commented on the consequences of the judgment for the existing Danish exit tax rules, and it therefore remains to be seen in which way the Danish rules will be amended to align them with EU law.
Due to the immediate, direct effect of the ruling on current Danish exit tax rules, corporate taxpayers should already now investigate the possibility of seeking a refund of exit taxes already paid under the current regime due to full or partial exits from Denmark in connection with restructurings, cross-border mergers, closure of Danish branches, etc.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
