The European Court of Justice on May 21 ruled that freedom of establishment principles do not prevent Germany from imposing tax on the unrealized gain inherent in a German partnership’s assets upon the transfer of the assets to the taxpayer’s foreign permanent establishment. The German law provides for recognition of the gain over a 10 year period.
The case, Verder LabTec GmbH & Co. KG v. Finanzamt Hilden (Case C‑657/13), involved a German limited partnership that transferred intellectual property rights of its permanent establishment in Germany to its Dutch permanent establishment, triggering Germany’s exit tax.
The court concluded that the German tax restricted freedom of establishment because it created a difference in treatment that would likely deter a company incorporated in Germany from transferring its assets to another Member State.
Nonetheless, the court also said that the legislation was objectively justified by overriding reasons in the public interest because the law was needed to preserve the allocation of taxing powers between the member states concerned. Moreover, the court concluded that law was proportional because the tax may be paid over a period of 10 years.
In so concluding the court agreed with the opinion of European Court of Justice Advocate General, Niilo Jääskinen, rendered on February 26.
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