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Exit Taxation as an Obstacle to Corporate Emigration from the Spectre of EU Tax Law
Published online by Cambridge University Press: 27 October 2017
Abstract
In this chapter I examine how the cross-border movement of companies may be affected by some tax rules and I consider the impact of EU law on such rules. The examination is in the context of the case law of the Court of Justice and the limited EU direct tax legislation. I assess how these affect the cross-border movement of companies as well as their investment strategies. I conclude by considering whether this is a satisfactory way of dealing with the issues. The contents of this chapter are based on materials available up to 1st March 2011.
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- Research Article
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- Copyright © Centre for European Legal Studies, Faculty of Law, University of Cambridge 2011
References
1 See Kovács, L, ‘European Commission Policy on Exit Taxation’ in Exit Tax: Comparative Analysis in a EU Perspective (Bologna, Studi Tributari Europei, 2009) 4 Google Scholar.
2 There are three exceptions: gains from the alienation of immovable property; gains from the alienation of movable property forming part of the business property of a permanent establishment (when there is also alienation of the permanent establishment); and gains from the alienation of shares deriving more than 50% of their value directly or indirectly from immovable property. These gains tend to be allocated to the State where the immovable property and the permanent establishment are situated (Art 13(1), (2) and (4) of the OECD Model Tax Convention). By contrast, gains from the alienation of ships, aircraft, boats or movable property pertaining to the operation of such ships, aircraft or boats, tend to be taxable only in the State in which the place of effective management of the enterprise is situated (Art 13(3) OECD Model). Gains from the alienation of any other property are taxed in the State of residence of the alienator (Art 13(5) OECD Model). See, generally, Simontacchi, S, Taxation of Capital Gains under the OECD Model Convention, With Special Regard to Immovable Property (The Hague, Kluwer, 2007)Google Scholar.
3 In the OECD Commentary to Art 1 (para 9), there is passing reference to the potentially improper use of tax treaties, as a result of the application of Art 13 OECD Model. The example given is that of an individual ‘who has in a Contracting State both his permanent home and all his economic interests, including a substantial shareholding in a company of that State, and who, essentially in order to sell the shares and escape taxation in that State on the capital gains from the alienation (by virtue of para 5 of Art 13), transfers his permanent home to the other Contracting State, where such gains are subject to little or no tax’.
4 For example, exit taxes on shares and securities.
5 For different types of regimes, see Broe, De’s General Report, ‘The Tax Treatment of Transfer of Residence by Individuals’, Cahiers de droit fiscal International, IFA, vol 87b (The Hague, Kluwer Law International, 2002)Google Scholar. Also see various country reports in IFA, vol 87b, (Kluwer Law International, 2002).
6 See Communication on exit taxation and the need for co-ordination of Member States tax policies, COM (2006) 825 final, 4. This Communication was released on 19 December 2006. Also see Malmer, K, ‘Emigration Taxes and EC Law’, European Union Report at IFA 2002 IFA, vol 87b (The Hague, Kluwer Law International 2002), 88 Google Scholar.
7 See Communication on Exit taxation, above, n 6, 3.
8 This could be the case, eg, if the home State deems the emigrating person to continue to be tax resident or if the home State and the host State claim jurisdiction over gains from the capital gains of a former resident and a resident respectively or if the underlying movable asset remains in the home State.
9 Also see Communication on exit taxation, above n 6, 4–5.
10 For example, if an asset is transferred from a home State that exercises its taxing rights at the moment of transfer, to a host State which values the transferred asset at book value but subsequently taxes any increase in value upon the disposal of the asset, this could lead to double taxation. The reverse would lead to double non-taxation. See Communication on Exit taxation, above n 6, 7.
11 Case C-436/00 X and Y [2002] ECR I-10829. For commentary, see M Nettinga, ‘Denial of Tax Advantages for the Transfer at Undervalue of Shares to Companies in Which the Transferor has a Holding Infringes Arts 43 and 48 and 56 and 58’ (2003) European Taxation, EC Update February 2003 6; Van den Hurk, H and Korving, J, ‘Netherlands: the ECJ’s Judgment in the N Case Against the Netherlands and its Consequences for Exit Taxes in the European Union’, (2007) 61(4) Bulletin for International Taxation 150–58Google Scholar; Burwitz, G, ‘Tax Consequences of the Migration of Companies: A Practitioner’s Perspective’ (2006) 7(2) European Business Organization Law Review 589 CrossRefGoogle Scholar; Schneeweiss, H, ‘Exit Taxation after Cartesio: The European Fundamental Freedom’s Impact on Taxing Migrating Companies’ (2009) 37(6) Intertax 363 Google Scholar.
12 X was the parent company of a group owned by the two Swedish nationals and a Maltese company. Y was a parent company owned by the owners of X.
13 See para 5.
14 See paras 36–38. Where the transferor’s holding in the non-resident company gave them definite influence over the company’s decisions and allowed them to determine its activities, freedom of establishment applied. See para 37.
15 Ibid, para 43.
16 Ibid, para 44.
17 Ibid, paras 53–59.
18 Ibid, para 61.
19 Case C-9/02 Hughes de Laysterie du Saillant [2004] ECR I-02409. For commentary, see Lyons, T, ‘Out with an Exit Charge: Hughes de Lasteyrie du Saillant’ (2004) 6 British Tax Review 589 Google Scholar; Ronfeldt, T, ‘Double Taxation: A Pseudo-Problem in the Taxation of Departing Companies’ (2011) 39(3) Intertax 132 Google Scholar; Valat, A, ‘Preliminary Ruling Requested from the ECJ as to Whether the French Exit Tax is Compatible with Freedom of Establishment’ (2002) 5 Bulletin for International Fiscal Documentation 195 Google Scholar; Docclo, C and Elliot, P, ‘Case Law on Taxation in the European Union—Hughes de Lasteyrie du Saillant’ (2004) 3 EC Tax Review 146 Google Scholar; Kotanidis, S, ‘French Exit Tax Incompatible with Freedom of Establishment’ (2004) 8 European Taxation 375 Google Scholar; O Thommes, ‘French Exit Taxation for Individuals Violates EC Treaty’ (2004) Intertax 343.
20 The taxpayer held either directly or indirectly with members of his family, securities conferring entitlement to more than 25% of the profits of a company subject to corporation tax and established in France.
21 Case C-9/02, above n 19, para 42, citing Case C-251/98 Baars [2000] ECR I-2787, para 28 and case law cited therein.
22 Case C-9/02, para 43.
23 Ibid, para 45.
24 Ibid, para 46.
25 Ibid, para 46.
26 The taxpayer had to lodge a specific application for deferment at the same time as making the latent capital gains declaration. Failure to meet this time-limit meant that deferment was forfeited. The taxpayer also had to designate a tax representative with power to represent him vis-à-vis the tax authorities. Furthermore, he was under an annual obligation to send the tax authorities a statement of changes in the (unrealised) capital gains in question. Any delay in doing so could have lead to forfeiture of the deferment. See paras 36–38 of Advocate General’s opinion.
27 Ibid, para 47.
28 Ibid, para 50.
29 Ibid, para 51.
30 Ibid, para 63.
31 Ibid, para 64.
32 Ibid, para 65. As the Court noted, such finding was supported by the fact that the French tax system did not tax realised increases in value subject to taxation in the country to which the taxpayer transferred his tax residence. This meant that realised increases in value, including the part of them acquired during the taxpayer’s stay in France, were entirely taxed in that country. See para 66.
33 Ibid, para 68.
34 Case C-470/04 N case [2006] ECR I-7409. For commentary, see Van den Hurk and Korving, above n 12, 150; Zuijdendorp, B, ‘The N Case: The European Court of Justice Sheds Further Light on the Admissibility of Exit Taxes but Still Leaves some Questions Unanswered’ (2007) 16(1) EC Tax Review 5 Google Scholar; De Kort, J, ‘The European Court of Justice on the Dutch Levy upon Emigration of a Substantial Participation Holder in a Corporation’ (2007) 25(12) Intertax 713 Google Scholar; van den Hurk, H, Weening, G and Korving, J, ‘ECJ rules on Dutch Exit Tax’ (2006) 34(11) Intertax 575–76Google Scholar.
35 As the Court clarified, where a Union national lived in one Member State and had a shareholding in the capital of a company established in another Member State which gave him substantial influence over the company’s decisions and allowed him to determine its activities, as is always the case where he holds 100% of the shares, that could fall within the freedom of establishment. Case C-470/04, ibid, para 27.
36 Ibid, para 39.
37 Ibid, para 35.
38 Ibid, para 37.
39 Ibid, para 37.
40 Ibid, para 38. Also see Advocate General’s opinion, para 79.
41 Ibid, para 41. The use of this justification on a stand-alone basis was rather novel at the time. In Case C-446/03 Marks & Spencer [2005] ECR I-10837, this justification was to be considered together with two other grounds (preventing double relief of losses and preventing tax avoidance). See para 51. However, in subsequent cases, it was held that this was not a cumulative requirement. The first case was the N case, followed by Case C-231/05 Oy AA [2007] ECR I-6373, paras 51–60 and Case C-379/05 Amurta [2007] ECR I-9569, paras 57–59. See Panayi, C HJI, ‘Reverse Subsidiarity and Cross-border Loss Relief: Can Member States be Left to their own Devices?’ (2010) 55(3) British Tax Review 267, 278 Google Scholar; Isenbaert, Mathieu, EC Law and the Sovereignty of the Member States in Direct Taxation, Doctoral Series, vol 19, (Amsterdam, IBFD, 2010) 543–44Google Scholar.
42 Ibid, para 46.
43 Zuijdendorp, n 34 above, 5, 11.
44 Another argument made by the Advocate General to show the coherence of the Dutch rules was that in addition to the tax liability for emigrating taxpayers with substantial shareholdings, the rules provided a corresponding step-up for immigrating taxpayers at the time of immigration. According to the Advocate General, this method was consistent with the principle of territoriality because it took account only of the profit which had risen during the period of residence within the territory. See para 107. The Court of Justice did not address this point. However, the argument could not succeed and double taxation would not be avoided if the host State did not allow or provide for such a step-up. For example, the UK/Netherlands tax treaty did not impose such a step-up obligation. See O Gutman, ‘Cartesio Oktato es Szolgaltato bt—the ECJ Gives its Blessing to Corporate Exit Taxes’ (2009) British Tax Review 385, 390; Zuijdendorp, above n 34, 5, 11.
45 Ibid, para 47.
46 Ibid, para 49.
47 Council Directive 76/308/EEC of 15 March 1976 on Mutual Assistance for the Recovery of Claims Resulting from Operations Forming Part of the System of Financing the European Agricultural Guidance and Guarantee Fund and of Agricultural Levies and Customs Duties and in Respect of Value Added Tax and Certain Excise Duties [1976] OJ L73/18. The directive was recently repealed by Council Directive 2010/24/EU of 16 March 2010 concerning mutual assistance for the recovery of claims relating to taxes, duties and other measures [2010] OJ L84/1. This new directive will come into force on 1 January 2011.
48 Council Directive 77/799/EEC of 19 December 1977 concerning mutual assistance by the competent authorities of the Member States in the field of direct taxation and taxation of insurance premiums. Following a proposal by the Commission (COM(2009)) on 15 February 2010, ECOFIN adopted a directive aimed at strengthening administrative cooperation in the field of direct taxation so as to enable the member states to better combat tax evasion and tax fraud. This directive will come into force on 1 January 2013. See Council of Europe Press Release, 6554/11, PRESSE 27, Brussels, 15 February 2011.
49 Ibid, paras 53–55.
50 As regards the costs, the deposit of company shares by way of security may have reduced confidence in the solvency of their owner, to whom less favourable credit conditions might have applied. Ibid, para 57. The Court also added that where a Member State made provision for the payment of interest on arrears where a guarantee demanded in breach of national law was released, such interest was also due in the case of an infringement of EU law. It was for the national court to assess, in accordance with the guidelines provided by the Court of Justice and in compliance with the principles of equivalence and effectiveness, whether the Member State was liable on account of the damage caused by the obligation to constitute such a guarantee. Ibid, para 67. The decision of the Court of Justice was confirmed by the Dutch Supreme Court when the case went back to it. Mr N was compensated for the cost of providing the guarantee but the preliminary tax assessment stayed intact, with the caveat that future decreases in value of the shares would be taken into account, upon collection. See H Raad, 20 February, 2009, no 07/12314, V-N 2009/11.9. Also see C Bornhaupt, ‘Dutch Supreme Court Upholds Exit Tax on Shareholder’, Tax Analysts, 11 March 2009; D Weber and Fortuin, A, ‘Case Law—The Netherlands, UK’ (2009) 3 EC Tax Review 138 Google Scholar.
51 See Communication on Exit taxation, above n 6.
52 Ibid, 5.
53 Ibid.
54 Ibid, 7.
55 Ibid. Also see suggestions made at Seminar L: Corporate emigration and immigration, IFA 63rd Congress in Vancouver, reproduced in report from Prof Wim Wijnen, TNS Online, 9 September 2009 (IBFD database).
56 Communication on Exit taxation, above n 6, 5–7.
57 Ibid, 7.
58 IP/06/1829, issued on 19 December 2006.
59 Council Resolution 16412/08 of 2 December 2008.
60 This is defined as any operation whereby a taxpayer subject to corporation tax or a natural person engaged in a business ceases to be subject to corporate or personal income tax in a Member State (the exit State) while at the same time becoming subject to corporate or personal income tax in another Member State (the host State); or transfers a combination of assets and liabilities from a head office or a permanent establishment in the exit State to a permanent establishment or a head office in the host State.
61 See para B.
62 See para C.
63 See para D.
64 See para E.
65 See para F.
66 IP/08/1362, issued on 18 September 2008. Under Swedish law, an exit tax is levied on unrealised capital gains, and deductions made for the untaxed reserves if the company is no longer taxable in Sweden upon a change of the seat or place of effective management or in case a permanent establishment ceases its activities in Sweden or transfers its assets to another Member State. The Commission considered that such provisions are likely to dissuade companies from benefiting from the freedom of establishment and, as a result, these Swedish provisions consti tute a restriction to it. For commentary on the Swedish legislation, see Mutén, L, ‘Exit Taxes in Sweden’ in Exit Tax: Comparative Analysis in a EU Perspective (Bologna, Studi Tributari Europei, 2009)Google Scholar.
67 IP/08/1813, issued on 27 November 2008. Under Portuguese law, in case of the transfer of seat and place of effective management of a Portuguese company to another Member State or in case a permanent establishment ceases its activities in Portugal or transfers its Portuguese located assets to another Member State the taxable base of that financial year will include any unrealised capital gains in respect of the company’s assets whereas unrealised capital gains from purely domestic transactions are not included in the taxable base. Also, the shareholders of the company that transfers its seat and place of effective management abroad are subject to tax on the difference between the company’s net assets (valued at the time of the transfer at market prices) and the acquisition cost of their participation. The Commission considered that such immediate taxation penalises those companies that wish to leave Portugal and Spain or transfer assets abroad, by introducing less favourable treatment for them, compared to companies which remain in the country or which transfer assets domestically. This is incompatible with freedom of establishment and the corresponding provision of the EEA Agreement.
68 IP/08/1813, issued on 27 November 2008. Under Spanish law, when a Spanish company transfers its residence to another Member State or when a permanent establishment ceases its activities in Spain or transfers its Spanish located assets to another Member State, unrealised capital gains must be included in the taxable base of that financial year, whereas unrealised capital gains from purely domestic transactions are not included in the taxable base. The Commission has also referred Spain because of its exit tax on individuals who cease to be tax resident in Spain. IP/09/431, issued on 19 March 2009. Under Spanish law, a taxpayer who transfers his residence abroad has to include any unallocated income in his tax declaration for the last tax year in which he is still considered a resident taxpayer. He is, therefore, taxed on such income immediately, contrary to those taxpayers that maintain their residence in Spain. The Commission considered that such immediate taxation penalises those who decide to leave Spain, compared to those who remain in the country, contrary to Arts 18, 39 and 43 EC and the corresponding provisions of the EEA Agreement. For commentary on the Spanish legisla tion, see Clavijo, A Sanz, ‘The European Commission’s Infringement Cases about Spanish Exit Taxes Provisions for Individuals and Companies’ (2010) 38 6/7 Intertax 371 Google Scholar; Jiménez, A and Carrero, J Calderón, ‘Exit Taxes and the European Community Law in the light of Spanish Law’ in Exit Tax: Comparative Analysis in a EU Perspective (Studi Tributari Europei, 2009)Google Scholar.
69 IP/09/1460 of 8 October 2009.
70 See M Dahlberg, ‘Sweden Enacts New Exit Tax Rules for Companies’, Tax Analysts (17 November 2009), 2009 WTD 219.
71 IP/10/299 of 18 March 2010.
72 IP/10/1565 of 24 November 2010.
73 See IP/11/78 of 27 January 2011. The Commission had previously sent a letter of formal notice to the Irish Authorities in November 2009.
74 See analysis in Zimmer, F, ‘Exit Taxes in Norway’ (2009) 1 World Tax Journal 115 Google Scholar.
75 In Case C-371/10 National Grid Indus BV (not yet reported), the Dutch referring court asked whether a company incorporated under the laws of a Member State, which transferred its real company seat to another Member State, could invoke freedom of establishment if a final settlement tax was imposed by the first Member State in respect of that transfer. If that was the case, the court also questioned if it was contrary to freedom of establishment for the final settlement tax to be applied without deferment and without the possibility of taking subsequent decreases in value into consideration or whether this could be justified by the necessity of allocating the power to impose taxes between the Member States. The referring court also asked if the answer would differ if the final settlement tax related to a (currency) profit which accrued under the tax jurisdiction of the Netherlands and that profit could not be reflected in the host Member State. For commentary, see Kemmeren, E, ‘The Netherlands: Pending Cases Filed by the Netherlands Courts: The National Grid Indus (C-371/10) and Feyenoord (C-498/10)’ in Lang, M et al (eds), ECJ-Recent Developments in Direct Taxation 2010, Series on International Tax Law, vol 67 (Wien, Österreich, Linde Verlag Wien, 2011) 57–85Google Scholar.
76 For example, s 185 TCGA 1992 imposes a deemed disposal of assets on company ceasing to be resident in UK. Assets situated in the UK, and which relate to a trade carried on by a continuing UK permanent establishment, are excluded from the charge (s 185(4) TCGA 1992). There are also provisions for deferral of tax where the company transferring its resi dence is a 75% subsidiary of a UK-resident company (s 187 TCGA 1992). For commentary, see Goldberg, D, ‘The Ordinary and Extra-ordinary Power of the European Court of Justice’, VI (2007) 2 GITC Review 17 Google Scholar; Airs, G, ‘The UK’s Corporate Exit Charge and the EC Treaty’ Tax Journal, Issue 852, 9 (11 September 2006)Google Scholar; Marrani, D, ‘Contribution to the Student of “Exit Tax” in the UK’, in Exit Tax: Comparative Analysis in a EU Perspective (Studi Tributari Europei, 2009)Google Scholar. Cf Gutman, above n 45. Other legislative provisions have raised concern as well. See s 859 Corporation Taxes Act 2009 which imposes deemed realisation at market value of assets ceasing to be chargeable intangible asset. Within the loan relationships and the derivative contracts regimes, there are also rules for companies ceasing to be UK resident (see s 333 CTA 2009 and s 609 CTA 2009 respectively).
77 This appears to be the approach of the Commission. See, eg, Commission Communication, n 6, 5: ‘The Commission is of the opinion that the interpretation of the freedom of establishment given by the ECJ in de Lasteyrie in respect of exit tax rules on individuals also has direct implications for [Member States’] exit tax rules on companies’. The Commission also refers to the fact that the judgement was written in terms of ‘taxpayer’, rather than referring merely to taxation on individuals. It also refers to the fact that the Hughes de Lasteyrie case was cited in Case C-411/03 Sevic Systems AG [2005] ECR I-10805, a case concerning the cross-border merger of companies. See above fn 9 of Commission Communication, 5. Similar arguments were made by former Commissioner L Kovács in his article, see above, n 1.
78 This theory is commonly referred to as ‘siège statuaire’ in France or ‘Gründungstheorie’ in Germany. Countries such as the USA, the UK, Ireland, Switzerland, Denmark and the Netherlands subscribe to this theory. Furthermore, a number of common law jurisdictions which were formerly British colonies, eg, Cyprus and Malta, adhere to the incorporation theory. See Rammeloo, S, Corporations in Private International Law: A European Perspective (Oxford, Oxford University Press, 2001) 10 Google Scholar; Drury, R, ‘The Regulation and Recognition of Foreign Corporations: The “Delaware syndrome”’ (1998) 57(1) Cambridge Law Journal 165 CrossRefGoogle Scholar; Drury, R, ‘Migrating companies’ (1999) 24(4) European Law Review 354 Google Scholar; C HJI Panayi, ‘Corporate Mobility under Private International Law and European Community Law: Debunking Some Myths’ (2009) Yearbook of European Law 123, 125–27.
79 In this chapter, administrative seat, centre of administration, actual centre of administra tion, head office and real seat are used interchangeably. They refer to the place where most, if not all, of the important functions and operations of a company are concentrated.
80 Certain reservations may apply for reasons of general interest or on the basis of abuse of law. See E Wymeersch, ‘The Transfer of the Company’s Seat in European Company Law’ (March 2003) ECGI-Law Working Paper No 08/2003, 9.
81 Such companies have been coined as pseudo-foreign corporations or quasi-foreign companies or formally foreign companies. For example, in the UK, non-incorporated companies with significant presence through a place of business or a branch, have to register in the Companies Registry and are under certain reporting obligations to ensure that minimum infor mation is provided to persons dealing with them. Prentice, D, ‘The Incorporation Theory—The United Kingdom’ (2003) 14 European Business Law Review 631 Google Scholar. Similar rules apply in the Netherlands. See Wymeersch, E, ‘The Transfer of the Company’s Seat in European Company Law’ (2003) 40 Common Market Law Review 661, 662Google Scholar; Ebke, W, ‘The ‘Real Seat’ Doctrine in the Conflict of Corporate Laws’ (2002) 3 International Lawyer 1015, 1029Google Scholar; Ebke, W, ‘The European Conflict-of-Corporate-Laws Revolution: Überseering, Inspire Art and Beyond’ (2005) 16(1) European Business Law Review 9, 15Google Scholar; Latty, E, ‘Pseudo-foreign corporations’ (1995) 65 Yale Law Journal 137 CrossRefGoogle Scholar.
82 The theory is commonly referred to as ‘Sitztheorie’ in Germany, ‘siège réel’ or ‘siège social’ in France. For example, Germany, France, Italy, Spain, Portugal, Greece and Belgium subscribe to the real seat theory. See analysis of some ‘real seat’ countries in ch 4 pt III in Rammeloo, above n 78. Also see analysis in Wymeersch, above n 81.
83 The non-recognition of foreign companies which have their centre of administration in another jurisdiction is a very severe sanction of the real seat theory. Non-recognition is sometimes mitigated by international conventions entered into by States, usually on a bilateral basis, which take precedence over their national rules. See, eg, Art 25(5) of the Treaty of Friendship, Commerce and Navigation of 29 October 1954, which broadly allows companies set up according to the laws of one contracting State to be recognised in the territory of the other contracting State. Attempts at promoting multilateral versions of such conventions have not been very successful. See, eg, proposals of the League of Nations in 1929, the Draft Treaty of the Hague Conference on the Mutual Recognition of the Legal Personality of Companies 1956, the Institute of International Law Rules, the Council of Europe Convention on the Establishment of Companies 1966, and the EC Convention on the Mutual Recognition of Companies. See, generally, Drury (1998) above n 78, 181–82 and Drury (1999) above n 78, 360; Carruthers, J and Villiers, C, ‘Company law in Europe—Condoning the continental drift?’ (2000) 11 European Business Law Review 91, 97CrossRefGoogle Scholar; Rammeloo, above n 78, 181–83.
84 Members of such company may also become personally liable for its debts.
85 See Rammeloo, above n 78, 15 and ch 4(III)(i) and C HJI Panayi, n 78, 128–30.
86 This is often mitigated if the host State applies the doctrine of renvoi and the home State applies the incorporation theory. If that is the case, the real seat State (ie the host State) would allow a company to have its registered office in another State (ie the home State), as long as that home State adopts the incorporation theory. See Rammeloo, above n 78, 12; Mucciarelli, F, ‘Company “Emigration” and EC Freedom of Establishment: Daily Mail Revisited’ (2008) 9 European Business Organization Law Review 267, 282CrossRefGoogle Scholar.
87 These issues can be broadly summarised in the following table which is based on Table 1 of the Commission’s impact assessment but substantial amendments have been made by the author. See Commission Staff Working Document, Impact Assessment on the Directive on the cross-border transfer of registered office, SEC(2007) 1707, Brussels, 12 December 2007, 9–10.
88 See, eg, the Convention on Mutual Recognition of Companies and Legal Persons [1969] EC Bull Supp 2, negotiated by the then six Member States and drafted on the basis of ex Art 293 EC. This Convention did not show any preference for either the incorporation or the real seat theories and was never ratified. See C HJI Panayi, above n 78, 137 ff.
89 In the early 1990s, the KPMG European Business Centre in Brussels had published the ‘Study on Transfer of head office of a company from one Member State to another’ (Luxembourg, Office for Official Publications of the European Communities, 1993). This study contained proposals for two draft directives; namely, the Draft Directive on the Transfer of the siège réel of a company from one Member State to another without dissolution (while remaining subject to the law of the State of incorporation) and the Draft Directive on the Transfer of the official registered address of a company from one Member State to another without dissolution (with consequent change of the proper law of the company).
Also see the Commission’s work on a draft Directive which was never officially proposed: Doc No XV/D2/6002/97 dated 22 May 1997 and Doc No XV/D2/6002/97-EN REV.2 dated 11 June 1997. In the preamble to this draft Directive, re-produced in Rammeloo, above n 78, 296, it was assumed that the transfer of the registered office or of the de facto head office (ie the administrative seat) from one Member State to another involved the exercise of the right of establishment, which EU law should make possible in practice.
90 See eg, the first draft Directive in the KPMG study (Draft Directive on the Transfer of the siège reel, above n 89) which was based on the incorporation theory and allowed the transfer of the administrative seat without dissolution. See also the second draft Directive (Draft Directive on the Transfer of the official registered address of a company, above n 89) which was based on the real seat theory but allowed the transfer of the registered office together with the administrative seat, without dissolution. Also see the Commission’s work on a draft Directive (above n 89) which allowed companies to transfer their registered office or de facto head office to another Member State without having to wind-up but with a concomitant change in the applicable law. This draft Directive only dealt with the transfer of registered office. In all these proposals, safeguards were incorporated to prevent forum shopping, minority shareholders, employees, creditors and holders of other rights. For further information and criticism of these instruments, see C HJI Panayi, above n 78, 139–45.
91 For example, the Convention on Mutual Recognition of Companies and Legal Persons mentioned in n 88 above was never approved as the Netherlands had refused to ratify it, having switched at the time from the real seat theory to the incorporation theory. The KPMG study with its draft Directives (see above n 89) was never adopted by the Commission, as perhaps, it did not agree with its bifurcated approach. Neither did the Commission’s work on a draft Directive (see above n 89) have much success. Even though the High Level Group of Company Law Experts urged the Commission to adopt a proposal in this area, being an issue of high priority (see Report of the High Level Group of Company Law Experts on a Modern Regulatory for Company Law in Europe, Brussels, 4 November 2002, 101), the Commission never made a formal proposal, doubting the economic advantages for legislative intervention following the findings of the impact assessment. See Commissioner McCreevy’s speech at the European Parliament’s Legal Affairs Committee, 3 October 2007, Speech/07/592.
92 See Motion for a European Parliament Resolution in Report with recommendations to the Commission on the cross-border transfer of the registered office of a company (2008/2196(INI)), dated on 29 January 2009 (A6-0040/2009). Parliament approved the resolution by a vote of 608 to 51 with 13 abstentions and cross-border company migration was identified as one of the crucial elements in the completion of the internal market. See para B.
93 See para C. There were provisions for the protection of the rights of minority shareholders, employees and creditors. See paras E–F.
94 Council Reg (EC) 2157/2001 on the Statute for European Company (SE) [2001] OJ L204/01. See Art 8.
95 Directive 2005/56/EC of 26 October 2005 on cross-border mergers of limited liability companies, [2005] OJ L310/1.
96 The Societas Europaea is recognised as a public limited company formed under the national law of the Member State in which it is registered. Art 10 of the Societas Europaea Reg.
97 See, generally, M Bouloukos, ‘The European Company (SE) as a Vehicle for Corporate Mobility within the EU: A Breakthrough in European Corporate Law?’ (2007) European Business Law Review 535; Sasso, L, ‘Societas Europaea: between Harmonization and Regulatory Competition’ (2007) 4 European Company Law 158 Google Scholar; Drinhausen, F and Nohlen, N, ‘The Limited Freedom of Establishment of an SE’ (2009) 1 European Company Law 14 Google Scholar.
98 Art 7 of the Societas Europaea Reg. Head office is thought to be synonymous with administrative/real seat though this is not expressly stated in the Reg. Member States may, in fact, require that the registered office and head office of the Societas Europaea are situated in the same place.
99 The Societas Europaea can be obliged either to re-establish its head office in the Member State in which its registered office is situated or to transfer the registered office as set out under Art 8.
100 Ibid, Art 64.
101 Council Directive 90/434/EEC of 23 July 1990 on the Common System of Taxation Applicable to Mergers, Divisions, Transfers of Assets and Exchanges of shares concerning Companies of Different Member States, amended by Council Directive 2005/19/EC. The legal basis for this directive was ex Art 44 EC. See, generally, Siems, MM, ‘The European Directive on Cross-border Mergers: An International Model?’ (2004–2005) 11 Columbia Journal of European Law 167 Google Scholar; Ugliano, A, ‘The New Cross-Border Merger Directive: Harmonisation of European Company Law and Free Movement’ (2007) 18(3) European Business Law Review 585 Google Scholar; Hansen, L, ‘Merger, Moving and Division Across National Borders—When Case Law Breaks through Barriers and Overtakes Directives’ (2007) 18(1) European Business Law Review 181 Google Scholar; J Pieper, ‘European Cross-Border Mergers after SEVIC’ (2009) Company Lawyer 1.
102 Pursuant to Art 1(1) of the directive, there can be a merger by acquisition, by creation of new company or by transfer of share capital to a holding company.
103 Companies that can benefit from this directive, are limited liability companies (public or private), formed in accordance with the laws of a Member State and having their registered office, central administration or principal place of business within the Union. See Art 1(2).
104 Ibid, Art 2.
105 Case 81/87 Daily Mail [1988] ECR 5483. For commentary, see Tridimas, T, ‘The Caselaw of the European Court of Justice on Corporate Entities’ (1993) 13 Yearbook of European Law 335 CrossRefGoogle Scholar; Ringe, W-G, ‘Sparking Regulatory Competition in European Company Law—The Impact of the Centros Line of Case-Law and its Conceptof “Abuse of Law”’ in de la Feria, R and Vogenauer, S (eds), Prohibition of Abuse of Law—A New General Principle of EU Law (Oxford, Hart Publishing, 2011)Google Scholar; C Schmitthoff, ‘Daily Mail Loses in the European Court’ (1988) Journal of Business Law 454; S Frommel, ‘EEC Companies and Migration: A Setback for Europe’ (1988) Intertax 409; L Cerioni, ‘The Barriers to the International Mobility of Companies within the European Community: A Re-reading of the Case Law’ (1999) Journal of Business Law 59; Halbhuber, H, ‘National Doctrinal Structures and European Company Law’ (2001) 38 CML Rev 1385, 1390Google Scholar.
106 On company residence under UK tax laws, see, generally, Panayi, C HJI, ‘UK Report’, Ch 22 in Residence of Companies under Tax Treaties and EC Law (EC and International Tax Law Series, vol 5, IBFD, 2009)Google Scholar.
107 Daily Mail, above n 105, para 7.
108 The aim was, after the company had become non-resident, to sell a significant part of its non-permanent assets and to use the proceeds of that sale to buy its own shares. No UK tax would have been levied on these transactions. The Netherlands could only tax capital gains accruing after the transfer of the company’s residence there. Case 81/87 Daily Mail, para 7.
109 Ibid, para 8.
110 Ibid.
111 Ibid, para 24.
112 Ibid, para 19.
113 Ibid, para 20.
114 Ibid, para 21. Furthermore, as the Court noted, (ex) Art 293 of the EC Treaty encouraged, so far as is necessary, agreements between the Member States with a view to securing inter alia the retention of legal personality in the event of transfer of the registered office of companies from one country to another. However, no convention in this area had yet come into force and no directives on the coordination of company law were adopted. Paras 21–22.
115 Ibid, para 23.
116 For the speculation in German scholarship see W-G Ringe, ‘No Freedom of Emigration for Companies’ (2005) European Business Law Review 621, 625; Ebke (2002), above n 81, 1020–21; Halbhuber, above n 105, 1391–94.
117 Ibid, para 24 (emphasis added).
118 Case C-212/97 Centros [1999] ECR I-1459. For commentary, see, inter alia, Wymeersch, E, ‘Centros: A landmark decision in European Company Law’ in Baums, T, Hopt, K and Horn, N (eds), Corporations, Capital Markets and Business in the Law—Liber amicorum Richard M Buxbaum (Deventer, Kluwer, 2000) 629 Google Scholar; W Ebke, ‘Centros—Some Realities and Some Mysteries’ (2000) American Journal of Comparative Law 623; P Omar, ‘Centros Revisited: Assessing the Impact on Corporate Organization in Europe’ (2000) International Company and Commercial Law Review 407; Roth, W ‘Case Note on Centros’ (2000) 37 CML Rev 147 Google Scholar; Xanthaki, H, ‘Centros: Is this Really the End for the Theory of the Siege Reel?’ (2001) 22 Company Lawyer 2 Google Scholar; Adenas, M, ‘Free Movement of Companies’ (2003) 119 Law Quarterly Review 221 Google Scholar; Rammeloo, S, ‘The Long and Winding Road towards Freedom of Establishment for Legal Persons in Europe’ (2003) 10 Maastricht Journal of European and Comparative Law 169 CrossRefGoogle Scholar; Holst, C, ‘European Company Law After Centros: Is the EU on the Road to Delaware?’ (2002) 8 Columbia Journal of European Law 323 Google Scholar; Hansen, J Lau ‘A New Look at Centros—From a Danish Point of View’ (2002) 13 European Business Law Review 85 CrossRefGoogle Scholar; Looijestijn-Clearie, A, ‘Centros Ltd—A Complete U-Turn in the Right of Establishment for Companies?’ (2000) 49 International and Comparative Law Quarterly 622 CrossRefGoogle Scholar.
119 Case C-208/00 Überseering BV v Nordic Construction Co Baumanagement GmbH [2002] ECR I-9919. For general commentary see, inter alia, Gildea, A, ‘Überseering: A European Company Passport’ (2004) 30(1) Brooklyn Journal of International Law 257 Google Scholar; Wooldrige, F, ‘Überseering: Freedom of Establishment of Companies Affirmed’ (2003) 14 European Business Law Review 227 Google Scholar; Cerioni, L, ‘The Überseering Ruling: The Eve of a Revolution for the Possibilities of Companies’ Migration throughout the European Community?’ (2003) 10(1) Columbia Journal of European Law 117 Google Scholar; T Bachner, ‘Freedom of Establishment for Companies: A Great Leap Forward’ (2003) CLJ 47.
120 Case C-167/01 Kamer van Koophandel en Fabrieken voor Amsterdam v Inspire Art Ltd [2003] ECR 1-10155. Looijestijn-Clearie, A, ‘Have the Dikes Collapsed? Inspire Art a Further Breakthrough in the Freedom of Establishment of Companies’ (2004) 5 European Business Organization Law Review 389 Google Scholar; H-J de Kluiver, ‘Inspiring a new European Company Law?’ (2004) European Company and Financial Law Review 121; M Rehberg, ‘Inspire Art — Freedom of Establishment for Companies in Europe between ‘Abuse’ and National Regulatory Concerns’ (2004) European Legal Forum 1.
121 Centros, above n 118, para 17.
122 Ibid, citing Case C-79/85 Segers [1986] ECR 2375, para 16.
123 Ibid, para 18 (emphasis added).
124 Ibid, para 24. This was to be assessed by national courts, case by case, taking account of abuse or fraudulent conduct on the basis of objective evidence. Ibid, para 25.
125 Ibid, para 26.
126 Ibid, paras 27–30. As the Court noted, the ‘right to form a company in accordance with the law of a Member State and to set up branches in other Member States [was] inherent in the exercise, in a single market, of the freedom of establishment guaranteed by the Treaty’, ibid. The fact that company law was not completely harmonised in the Union ‘was of little consequence’. Ibid, para 28.
127 It was argued that the restriction was justified on the basis of protecting public or private creditors by paying a minimum share capital. Public creditors were protected against the risk of seeing the public debts owing to them become irrecoverable since, unlike private creditors, they cannot secure those debts by means of guarantees. All creditors were protected by anticipating the risk of fraudulent bankruptcy due to the insolvency of companies whose initial capitalisation was inadequate. Ibid, para 32. This argument failed. The practice in question was not such as to attain this objective because, if the company had conducted business in the UK, then its branch would have been registered in Denmark, even though Danish creditors might have been equally exposed to risk. Ibid, para 35.
128 Ibid, para 38.
129 As the Court of Justice pointed out in para 23, Überseering could not be entitled to rights or be subject to obligations. In order to have legal dealings, it had to dissolve itself and reincorporate in a way enabling it to acquire legal capacity under German law.
130 Ibid, para 82.
131 Ibid, para 87.
132 Ibid, para 88.
133 Ibid, para 89.
134 Ibid, para 90.
135 Ibid, para 92.
136 Ibid, para 93.
137 Wet op de Formeel Buitenlandse Vennootschappen (Law on Formally Foreign Companies) of 17 December 1997 (WFBV).
138 Art 2 WFBV.
139 Inter alia, the company had to indicate the status of formally foreign company in all its documents, it had to comply with the minimum share capital rules applicable to Dutch limited companies and it had to produce and publish annual accounts, Arts 3–5 WFBV.
140 The directors of the company would be jointly and severally liable with the company for all the legal acts carried out in the name of the company during their directorship.
141 Ibid, paras 95–8. As the Court noted, this was inherent in the exercise, in a single market, of the freedom of establishment as guaranteed by EU law, para 138. See also point made by Advocate General Alber in that the abstract and general possibility of abuse was not sufficient to justify restrictions to freedom of establishment.
142 Ibid, para 103, citing Case C-208/00 Überseering [2002] ECR I-9919, para 62.
143 Ibid, para 100.
144 Ibid, para 101.
145 Case C-210/06 Cartesio [2008] ECR I-09641. See Deak, D, ‘Outbound Establishment Revisited in Cartesio’ (2008) 6 EC Tax Review 250 Google Scholar; L Cerioni, ‘The Cross-Border Mobility of Companies within the European Community after the Cartesio ruling of the ECJ’ (2010) Journal of Business Law 311; Petronella, V, ‘The Cross-border Transfer of the Seat after Cartesio and the Non-portable Nationality of the Company’ (2010) 21(2) European Business Law Review 245 Google Scholar; Erk, N, ‘The Cross-border Transfer of Seat in European Company Law: A Deliberation about the Status Quo and the Fate of the Real Seat Doctrine’ (2010) 21(3) European Business Law Review 413 Google Scholar; Szydlo, M, ‘The Right of Companies to Cross-border Conversion Under the TFEU Rules on Freedom of Establishment’ (2010) 7(3) European Company and Financial Review 414 Google Scholar; Borg-Barthet, J, ‘European Private International Law of Companies after Cartesio’ (2009) 58(4) International & Comparative Law Quarterly 1020 Google Scholar; Johnston, A and Syrpis, P, ‘Regulatory Competition in European Company Law after Cartesio’ (2009) 34(3) European Law Review 378 Google Scholar; Gerner-Beuerle, C, ‘The Mysteries of Freedom of Establishment after Cartesio’ (2010) 59(2) International & Comparative Law Quarterly 303 CrossRefGoogle Scholar.
146 Case C-210/06 Cartesio. Ibid, para 104, citing para 19 of the Daily Mail case.
147 Case C-210/06 Cartesio, para 105, citing para 20 of the Daily Mail case.
148 Ibid, para 110 (emphasis added).
149 Ibid, para 111.
150 Ibid, para 112.
151 Ibid, para 119.
152 Ibid, para 124. It was also noted that Union legislation such as the Societas Europaea Reg and the European Cooperative Society Reg could not be applied mutatis mutandis on the facts of this case. Ibid, paras 116–20.
153 That is of a company that wishes to reincorporate in the host State.
154 In fact, the Court has repeatedly avoided making it a disputed issue whether either connecting factor is in breach of EU law by asserting that the EU Treaties have not introduced a rule of preference.
155 It is submitted that this should be checked both as regards the transfer of administrative seat of a company in a real seat State or an incorporation State, and the transfer of registered office in a real seat State or an incorporate State. Even though Cartesio applied only to the situation where the administrative seat was to be transferred from a real seat State, it is unlikely that protection would be limited to real seat Member States and not incorporation Member States.
156 See Clavijo, A Sanz, ‘The European Commission’s Infringement Cases about Spanish Exit Taxes Provisions for Individuals and Companies’ (2010) 38(6) Intertax 371, 373 Google Scholar; Dourado, P and Pistone, P, ‘Looking Beyond Cartesio: Reconciliatory Interpretation as a Tool to Remove Tax Obstacles on the Exercise of the Primary Right of Establishment of Companies and other Legal Entities’ (2009) 37(6) Intertax 342 Google Scholar; Pietro, C di, ‘Exit Tax: Fiscal Territoriality and Company Transfer’ in Exit Tax: Comparative Analysis in a EU Perspective (Bologna, Studi Tributari Europei, 2009)Google Scholar.
157 See eg, Lord Loreburn’s discussion in De Beers Consolidated Mines Ltd v Howe [1905–1906] 5 TC 198.
158 This was introduced in ss 64 and 66 Finance Act 1988. Under the statutory test, as from 15 March 1988, a UK incorporated company is deemed to be resident in the UK for tax purposes.
159 See, generally, C HJI Panayi, ‘UK Report’, above n 106.
160 It is, of course, always possible for the company to be wound up and to have its assets transferred to a new company incorporated abroad. This, however, would lead to adverse tax consequences, the loss of the identity of the company and the disturbance of its financial arrangements, both internal and external to the company. As a result, some companies opt for a much more cumbersome and expensive procedure in order to achieve immigration without jeopardising their corporate continuity: that of a private Act of Parliament. A typical private Act authorises the transfer of the relevant company’s registered office from the UK to another country. It authorises the English registrar of companies to strike off the company’s name from the register and to treat it as not being subject to the provisions of the UK Companies Acts. Usually, the receiving jurisdiction enacts general or special legislation to permit to facilitate the immigration of such companies from the UK. For further analysis and examples of com panies that proceeded this way, see Lewis, D, ‘Corporate Redomicile’ (1995) 16(10) Company Lawyer 295–99Google Scholar.
161 A similar argument is made by Kemmeren, in his discussion of the National Grid case. See n 75, 168.
162 See question raised by Dourado and Pistone, whether the effectiveness of an EU national’s tax rights should fully depend on the solution of problems involving the harmonisation of company law. See Dourado, A and Pistone, P, ‘Looking Beyond Cartesio: Reconciliatory Interpretation as a Tool to Remove Tax Obstacles on the Exercise of the Primary Right of Establishment of Companies and Other Legal Entities’ (2009) 37(6) Intertax 342, 343 Google Scholar.
163 See, inter alia, Case C-264/96 ICI plc v Colmer [1998] ECR I-4695, Case C-9/02 Hughes de Lasteyrie, above n 19, Case C-196/04 Cadbury Schweppes and Cadbury Schweppes Overseas [2006] ECR I-7995; Case C-524/04 Test Claimants in Thin Cap Group Litigation Order [2007] ECR I-2107.
164 Case C-9/02, above n 19, para 51.
165 See eg, Centros, above n 118, paras 16–18 and 29–30; Inspire Arte, paras 95–98.
166 See Council Directive 76/308/EEC, repealed by Council Directive 2010/24/EU, above n 47.
167 Under the old version of the Mutual Assistance Directive, the directive applied to all claims relating, inter alia, to taxes on income and capital (see Art 2(g) of 76/308/EEC). This would normally include capital gains and corporation tax as well. Request for recovery had to indicate ‘the name address and any other relevant information relating to the identification of the person concerned’ (see Art 7(3(a) of 76/308/EEC). Therefore, an emigrating company could be such a person. Under the new version of the Mutual Assistance Directive, in force from the 1 January 2012, again the directive applies to claims relating, inter alia, to all taxes and duties of any kind levied by or on behalf of a Member State (see Art 1(a) of 2010/24/EU. It is evident that companies are included in the concept of a debtor/addressee of instrument. See eg, paras 5, 12 of the Preamble, Art 3(c)(ii) where companies are expressly included in the definition of ‘persons’, Art 6, Art 11(2)(a), Art 20 on costs etc.
168 This is another argument why Cartesio ought not apply in the exit tax context. At the very least, the restrictive effects of such exit taxes ought to be considered and not hide behind Cartesio’s pre-emption test.
169 One could also point to the solution adopted under the Merger Directive, n 101. For specific reorganisations, this directive provides for deferral of taxes in the Member State of the dissolving company for qualifying transfers of assets and stock that are taken over by a permanent establishment of the receiving company in the Member State of the transferring/acquired company. As these assets and stock are attributed to the permanent establishment in the Member State of the transferring/acquired company, then there is no loss of taxing jurisdiction. See Art 5 of the Council Directive 90/434/EEC of 23 July 1990 on the Common System of Taxation Applicable to Mergers, Divisions, Transfers of Assets and Exchanges of Shares concerning Companies of Different Member States, amended by Council Directive 2005/19/EC.
170 As held in Wielockx, the principle of fiscal cohesion has to apply to one and the same person by a strict correlation between deductions and taxation. If there is an underlying tax treaty, then fiscal cohesion is shifted to another level: that of the reciprocity of the rules appli cable between the two contracting States to the tax treaty. See Case C-80/94 Wielockx [1995] ECR I-2493, paras 25–26. Even if fiscal cohesion was accepted in such circumstances, it would still not succeed, as most tax treaties follow the OECD Model and as such confer an exclusive right to tax capital gains arising from movable property to the State of residence. The original State of residence (ie the home State) is not given any right to tax gains accruing until the date of emigration. See also De Broe, above n 5, 75, Malmer, above n 6, 87–89.
171 See eg, Case C-336/96 Gilly [1998] ECR I-2793; Case C-376/03 D [2005] ECR I-5821; Case C-446/03 Marks & Spencer [2005] ECR I-10837; Case C-231/05 Oy AA [2007] ECR I-6373; Case C-265/04 Bouanich [2006] ECR I-923; ACT Group Litigation case; Case C-170/05 Denkavit; Case C-414/06 Lidl Belgium [2008] ECR I-3601; Case C-157/07 Krankenheim [2008] ECR I-8061.
172 If exit taxes are seen as levied immediately before the transfer of residence of a company and as such are construed as a domestic tax not involving the tax treaty’s allocation choices, then again, this would appear to be a unilateral exercise of taxing powers. See analysis in Part II above.