by Davide Anghileri
The European Court of Justice (ECJ) on November 23 ruled that Finland may not immediately tax a resident’s capital gains derived from the transfer of a non-resident permanent establishment to a company that is also non-resident, which resulted in a transfer of assets.
The provision is contrary to freedom of establishment (article 49 TFEU), the court ruled, noting that in an equivalent situation involving only domestic companies, such capital gains would not be taxed until the disposal of the transferred assets.
Finland’s exit tax
The case, (C-292/16), involved the 2006 transfer of assets by a Finnish company through the transfer of a permanent establishment in Austria to an Austrian company. The Finish tax authority claimed that capital gains arising from this transaction should be taxed immediately under Finland’s exit tax provisions.
The Finnish administrative court (Helsingin hallinto-oikeus) concluded that article 10(2) of Council directive 90/434/EEC (Mergers Directive) allows the taxation of capital gains in a situation at issue. However, the directive does not determine the point in time at which that taxation is to take place, the court observed.
Therefore, the referring court asked the ECJ whether, by providing for the taxation of the capital gains in the tax year in which the transfer of assets takes place, whereas in an equivalent national situation the taxation does not take place until the income is realised, that is, the transferred assets are disposed of, the legislation constitutes a restriction of freedom of establishment.
If that is the case, the Finnish court asked whether the legislation may be justified by an overriding reason of the public interest in connection with the distribution of powers of taxation between the Member States and, if so, whether it is proportionate to that objective.
Holding
The ECJ said that, in the legislation at issue, immediate taxation of gains and collection of tax applies only when a non-resident permanent establishment is transferred to a company that is also non-resident.
Hence, there is an impediment to freedom of establishment that may deter companies established in Finland from exercising an economic activity in another Member State through a permanent establishment.
The ECJ, then, pointed out that national legislation, such as that at issue in the main proceedings is appropriate for ensuring the preservation of the allocation of powers of taxation between the Member States, since the transfer, in the course of a transfer of assets, of a non-resident establishment to a company that is also non-resident has the consequence of depriving the Member State of any link with that establishment, and hence of its power to tax the capital gains relating to the assets of the permanent establishment after the transfer.
However, the ECJ concluded that legislation goes beyond what is necessary to attain the objective of preserving the allocation of powers of taxation between the Member States because it does not give the resident company the choice of deferred payment of that tax.
Davide Anghileri
Davide Anghileri is a PhD candidate at the University of Lausanne, where he is writing his thesis on the attribution of profits to PEs. He researches transfer pricing issues and lectures for the Master of Advanced Studies in International Taxation and Executive Program on Transfer Pricing.
Anghileri, a Contributing Editor at MNE Tax, previously worked as a policy advisor to the Swiss government on BEPS issues.
Davide can be reached at [email protected].
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