Exit taxation and its compatibility with European law

Abstract

The purpose of this thesis is to assess the extent to which the levying of exit taxes by EU Member States, upon the transfer of tax residence of a taxpayer, as well as the cross-border transfer of assets, is compatible with EU law. The study shall give a general overview of the notion of exit taxation, highlighting the perspective of the various stakeholders, namely the European Union, EU Member States and the taxpayer. Due to the lack of positive harmonisation at Union level with respect to direct taxes, the Court of Justice of the European Union plays a key role in establishing a balance between individual state's interests, Union principles and taxpayers' rights. It may be concluded that exit taxation, is not, in principle, contrary to EU law. It is the timing and method of application of these taxes that has caused concern from an EU law perspective. Whilst the CJEU has repeatedly condemned the imposition of an immediate exit tax upon relocation of a taxpayer to another Member State, it has on several occasions recognised the legitimacy of the principle of taxation of the basis on territoriality. The CJEU acknowledged that states should have a right to tax gains arising within their territory. However, the taxation of unrealised gains is criticised. It is for this reason that case-law suggests that MS should offer a deferral in payment until realisation, of the tax assessed at the moment of relocation. This deferral, established through case-law, together with a step-up in the host state, as has been sanctioned by EU institutions and implemented by a number of Member States, seems to be the ideal solution which would ensure a balanced allocation of taxing rights through crystallisation of values at the moment of the relocation and would safeguard the states' respective taxing rights. It would, moreover, reduce the cash-flow issue for relocating taxpayers and minimise the risk of double taxation.