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Lower Court Haarlem rules that exit tax following transfer of place of effective management to UK compatible with freedom of establishment
11/04/2008 @ 06:44
A decision of Lower Court Haarlem of 17 December 2007 (Case No. 06/1645 and 06/1646) was recently published. It concerned the levy of an exit tax as a result of the transfer of the central management and control of a Dutch company to the United Kingdom. Details of the case are set out below.
(a) Facts. The taxpayer (X NV) is part of the Y group, which owns electricity and gas networks in the United Kingdom and the United States. Its shares were held by Y Holding BV. X BV and Y Holding BV constituted a fiscal group for tax purposes. Part of the assets of X BV is a substantial debt claim on its erstwhile ultimate parent company, Y PLC. On 7 December 2000, X BV decided to transfer its place of central management to the UK, in order to avoid the taxation of currency gains on the debt claim as a result of an expected amendment to the Dutch tax law.
X BV had a book year running from 1 April to 31 March. However, following the transfer to the UK, the 2000 book year was terminated on 15 December 2000, and as from that date, X BV commenced with a new book year in the UK. On 15 December 2000, the management board of X BV had its first meeting in London, and by letter of 8 December 2002, the UK tax authorities declared X BV to be resident in the UK as from 15 December 2000. On 21 February 2001, Y Holding BV sold its shares in X BV to Y International Ltd, a company established in the UK. The fiscal group was then terminated.
On 26 March 2002, the taxpayer amended its statutes and X BV resumed a book year from 1 April until 31 March. For the period from 16 December 2000 until 31 March 2002, the taxpayer declared that no tax was due in the Netherlands. The tax authorities ignored the change of the book year and assessed X BV for the period from 1 April 2000 until 31 March 2001 for currency gains and interest derived from the claim on Y PLC. Furthermore, a preserving assessment was issued for the period running from 16 December 2000 until 31 March 2002.
(b) Issues. The issues were:
– whether or not the assessments were justifiably issued because, until 15 December 2000, the taxpayer was a group company, which under Dutch law is not an independent corporate taxpayer, and thereafter was established in the United Kingdom; and
– whether or not the Dutch exit tax is compatible with the freedom of establishment (Art. 43 of the EC Treaty) and the freedom of movement of capital (Art. 56 of the EC Treaty).
(c) Decision. The Court observed that the sole intention behind the change of the book year was to avoid the application of new Dutch tax legislation concerning the taxation of currency gains. This amendment was expected pursuant to a decision of the Dutch Supreme Court of 15 November 2000 in which it was decided that interest and currency gains derived by a group company on a debt claim could be taxed neither at the level of the group company, nor at the level of the parent company of the group. Therefore, the Lower Court held that the change of the book year was only intended to avoid tax. Consequently, the Court decided that the tax administration justifiably ignored the change of the book year as it was mainly based on tax avoidance, and that X BV was subject to exit tax. Finally, the Court noted that the fact that the change of the book year was ignored based on fraus legis to prevent tax avoidance constitutes a sufficiently specific measure to justify the assessments. Consequently, the Court decided that the tax assessments were not incompatible with the freedom of establishment of Art. 43 of the EC Treaty.
Source: IBFD
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