Text of the case: Commission v. Portugal, C-371/10 (6 September 2012)
The case concerns an action brought by the European Commission against Portugal in relation to its exit tax regime.
Under the disputed Portuguese provisions, unrealized capital gains are immediately taxed if they relate to assets of a Portuguese company transferring its registered office and effective management to another EU Member State. Such gains are also immediately taxed when they relate to the assets of a Portuguese permanent establishment (PE) of a non-resident company, when the PE ceases to exist (i.e., the PE’s assets are transferred to the non-resident company) or when such PE assets are transferred out of Portugal.
According to the Commission, the Portuguese exit tax regime is in breach of the freedom of establishment.
The Portuguese exit tax regime also foresees the immediate taxation at the level of the shareholders of a company transferring its registered office and effective management to another Member State, of the difference between the net asset value at that date and the cost of acquiring the corresponding shares.
The CJEU noted that companies transferring their effective management to another Member State suffer a financial disadvantage compared to Portuguese companies that maintain their seat in Portugal, and are thus subject to tax only when capital gains are realized.
This difference in treatment makes establishment in another EU Member State of companies incorporated under Portuguese legislation less attractive.
Similarly, taxation in the case of partial or total transfer to another Member State of the assets of a Portuguese PE of a non-resident company is liable to impede a company from transferring its activities to another Member State. Consequently, the CJEU found that the disputed Portuguese law restricts the freedom of establishment.
Referring to its decision in the National Grid Indus case, the court concluded that giving companies transferring their effective management an option to either settle their tax liabilities immediately, or defer payment of such taxes to such time when the capital gains are realized would be less harmful to the freedom of establishment than the measure in the main proceedings.
The court re-stated its view that under the latter option, EU Member States would possibly be permitted to charge interest on the deferred tax payment, in accordance with the applicable national law.
The court also noted that Portugal has already acknowledged that, were the CJEU to find that its law restricts the freedom of establishment, it would be necessary for its exit tax regime to be amended to allow for the possibility to defer the amount of the tax on unrealized capital gains.
The court further noted that the same conclusion is valid in the case of taxation of unrealized capital gains relating to assets of a Portuguese PE of a non-resident company, which are transferred to another Member State.
The CJEU did not address the alleged restriction of the freedom of establishment as regards the taxation at the level of the shareholders, on the grounds that the Commission’s complaint was inadmissible due to a failure to provide sufficient evidence on this issue.
In a 28 June 2012 opinion, the CJEU Advocate General attempted to clarify the issue of late payment interest by suggesting that it is in accordance with the principle of equivalence for Member States to request late payment interest in the situation of a cross-border transfer only if this requirement is generally applicable for cases of deferred payment. See TaxNewsFlash-Europe: Portugal - Exit tax breaches freedom-of-establishment, concludes CJEU Advocate General
Tax professionals have observed that it is disappointing that the court did not address this position and simply reiterated its comment from the National Grid Indus case.
Read a September 2012 report [PDF 56 KB] prepared by KPMG’s EU Tax Centre: CJEU decisions on exit tax