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National Grid Indus and Its Aftermath

National Grid Indus and Its Aftermath ec Editorial TAX REVIEW 2013­4 Henk van Arendonk* The decision of the European Court of Justice (ECJ) in the National Grid Indus case (C-371/10) was announced on 29 November 2011. This was followed by Reinout Kok's detailed discussion of the verdict in the EC Tax Review of 2012-4. In contrast to ECJ case law on protective assessments imposed upon emigration,1 the ECJ applied a different approach to enterprises transferring their effective place of management to another Member State. Although the ECJ ruled that a final assessment should be imposed at the time of emigration and the exit state therefore did not have to take account of any subsequent changes in value, the immediate imposition of exit taxes was considered to constitute a disproportionate restriction. The exit state was, therefore, ordered to offer the taxpayer the option of immediate settlement or deferral. In the latter case, the exit state can charge interest, providing this option is also permitted by law in the domestic situation,2 and demand a bank guarantee. The reactions to this judgment showed surprise, or indeed amazement, at the ECJ's decision to adopt an approach to enterprises transferring their place of management abroad that differed from the approach applying in respect of protective assessments. The two situations are not identical, however, and indeed are treated differently in international tax law. In my view, it would be more appropriate, therefore, for the ECJ to review its case law on the protective assessment, certainly insofar as this relates to decreases in value after emigration. A fall in the value of a substantial interest in an enterprise after its place of management has been transferred to another state is a matter for the host state and should indeed no longer result in a reduction in the exit state's protective assessment. However, the parallel drawn by the ECJ between the domestic and crossborder situations and the view that the two situations should be treated the same are incorrect as far as the transfer of a place of management is concerned. * 1 In its judgment in National Grid Indus the ECJ unequivocally opted for the principle of territoriality in the internal market, thereby acknowledging the tax borders of the Member States and also, therefore, their fiscal sovereignty. After this judgment, many people, including Reinout Kok in his ECTR contribution, expected the ECJ to come back on its decision on the right to charge interest and demand a bank guarantee in subsequent case law. The National Grid Indus case was handled by the Grand Chamber of the ECJ, of which the permanent members are the ECJ's president and the presidents of the chambers of five judges.3 The ECJ certainly appreciated the great importance of this case. It was clear from the Commission's Communication of 19 December 2006, COM (2006) 825 final and the infringement procedures subsequently initiated by the Commission, as well as the ECOFIN resolution of 2 December 2008,4 that there was a major difference of opinion between the Council and the Commission on the imposition of exit taxes on enterprises transferring their place of management abroad. It was therefore the ECJ's task to break the deadlock and, in my view, its decision constituted a Solomon's verdict.5 In contrast to its judgment in the Daily Mail case of 27 September 1988 the ECJ decided here to apply Article 49 TFEU rather than Article 54 TFEU and, therefore, to apply the obstacles doctrine. The Grand Chamber set out a pattern in this judgment for all future cases to follow. A number of infringement procedures were known to be in the pipeline at the time, including cases involving Portugal, Spain and the Netherlands. Given the composition of the Grand Chamber, it is logical that the various ECJ Emeritus Professor of Tax Law, Erasmus University Rotterdam. Hughes de Lasteyrie du Saillant case, 11 Mar. 2004, C-9/02 and the N case, 7 Sep. 2006, C-470/04. In matters of procedural law, the ECJ applies the equivalence and effectiveness tests, with priority being given to the former. The Grand Chamber consists of at least nine and at most fifteen judges; this case was heard by eleven judges. Resolution of 2 Dec. 2008 on coordinating exit taxation, OJ EU 2008, C 323/01. On this subject, see my article `National Grid Indus: een salomonsoordeel van het HvJ?' in Maandblad Belastingbeschouwingen, May 2012. EC TAX REVIEW 2013/4 ©2013 Kluwer Law International BV,The Netherlands NATIONAL GRID INDUS AND ITS AFTERMATH chambers consistently took account of the line set out in the National Grid Indus judgment in these later cases.6 The Dutch State Secretary of Finance responded to the judgment of 29 November 2011 by announcing in a decision of 14 December 2011 that he planned to introduce a bill to amend the Collection of State Taxes Act [Invorderingswet] with retroactive effect from the date of the judgment. He stated in his decision that parties would be able to opt to defer exit taxes due on emigration. Those enterprises opting for deferral would, however, have to pay interest and arrange for a bank guarantee to be issued, while also having to provide an annual statement of their assets and liabilities. My article in Maandblad Belastingbeschouwingen argued in favour of allowing an interest-free deferral period of five years, with exit taxes being able to be paid in five annual instalments, as is currently the case in France and Germany. Although a bank guarantee may still be required during this period, there would no longer be any need for an annual statement. This would limit the costs for enterprises wishing to transfer their place of management abroad, while also assuring the exit state of the income or corporation tax due. During the Dutch Parliament's handling of the bill to amend the above Act, however, a deferral period of ten years was requested and, before making provision in legislation for this option, the State Secretary wants to be certain that such a deferral period is EU-proof. One other aspect that struck me from the judgments announced by the ECJ since National Grid Indus relates to the awarding of costs. The ECJ did not order any payment of costs in the National Grid Indus case, and that seems logical to me. If you compare the situations in the Daily Mail and National Grid Indus cases, they are clearly identical. Based on twenty-five years of legal developments, the ECJ arrived at a totally different judgment in the National Grid Indus case. In its decision of 31 January 2013, however, the ECJ reached a very different conclusion on the payment of costs,7 with the Netherlands being ordered on this occasion to pay the costs of the proceedings. In point 19 et seq., the ECJ commented as follows [translation by the author]: 19. It should firstly be noted that the Kingdom of the Netherlands does not dispute the alleged failure to fulfil obligations. 20. It should also be recalled that, according to settled case law, the question of whether a member state has failed to fulfil its obligations must be determined by reference to the situation prevailing in the member state at the end of the period laid down in the reasoned opinion, and the Court cannot take account of any changes since then (see specifically the judgment of 27 September 2007, Commission v. Spain, C-465/06, point 8 and that of 28 February 2012, Commission v. France, C-119/11, point 35). 21. It follows from this that, upon expiry of the period laid down in the reasoned opinion, the Kingdom of the Netherlands had not taken the requisite measures to fulfil the obligations incumbent upon it pursuant to Article 49 TFEU. 22. In these circumstances, the Commission's action must be considered well-founded. The conclusion in this judgment, therefore, was that the Netherlands had failed to fulfil its obligations and was thus ordered to pay costs. If we examine the judgments referred to in point 20 above, we can see that they all involve situations in which a Member State fails to implement a directive and therefore to comply with its duty of cooperation. In such situations, the ECJ has consistently ruled against the relevant Member State and ordered it to pay costs. The situation here, however, is totally different as it involves the interpretation of a treaty provision, on which the European Commission and the Member States may have a difference of opinion. The Netherlands was unable to fulfil the Commission's wishes by the end of the period laid down in the reasoned opinion and, given the judgment in the National Grid Indus case, was right not to do so. In addition, the view set out in the Commission's Communication of 19 December 2006 should be seen as non-binding, and one that would become binding only if the ECJ were to find in the Commission's favour. ECJ case law, however, shows that the Commission's view has not become binding. Immediately following the National Grid Indus judgment, the Netherlands announced that it would be amending its legislation and in the meantime would comply with the judgment. It would seem to me, therefore, that the Netherlands is EU-proof and cannot be accused of not fulfilling its obligations. Ordering the country to pay costs is, therefore, wholly unjustified. Lastly, it should be pointed out that there have now been several judgments on exit taxes for entrepreneurs. These demonstrate that the ECJ has not adopted the view expressed by the Commission in paragraph 3 of its Communication of 19 December 2006. In other words, this part of the Communication can no longer serve as guidance for the Commission's policy vis-à-vis the Member States. By continuing to instigate infringement procedures and failing to amend its Communication, the Commission simply shows itself to be a bad loser. Good governance means that the Commission, too, has to act in accordance with ECJ case law, certainly now that the ECJ's Grand Chamber has spoken. Portugal, judgment of 6 Sep. 2012, Case C-038/10; Netherlands, judgment of 31 Jan. 2013, Case C-301/11 and Spain, judgment of 25 Apr. 2013, Case C-64/11. This also applies in the cases of Portugal and Spain. EC TAX REVIEW 2013/4 http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png EC Tax Review Kluwer Law International

National Grid Indus and Its Aftermath

EC Tax Review , Volume 22 (4) – Jun 1, 2013

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Abstract

ec Editorial TAX REVIEW 2013­4 Henk van Arendonk* The decision of the European Court of Justice (ECJ) in the National Grid Indus case (C-371/10) was announced on 29 November 2011. This was followed by Reinout Kok's detailed discussion of the verdict in the EC Tax Review of 2012-4. In contrast to ECJ case law on protective assessments imposed upon emigration,1 the ECJ applied a different approach to enterprises transferring their effective place of management to another Member State. Although the ECJ ruled that a final assessment should be imposed at the time of emigration and the exit state therefore did not have to take account of any subsequent changes in value, the immediate imposition of exit taxes was considered to constitute a disproportionate restriction. The exit state was, therefore, ordered to offer the taxpayer the option of immediate settlement or deferral. In the latter case, the exit state can charge interest, providing this option is also permitted by law in the domestic situation,2 and demand a bank guarantee. The reactions to this judgment showed surprise, or indeed amazement, at the ECJ's decision to adopt an approach to enterprises transferring their place of management abroad that differed from the approach applying in respect of protective assessments. The two situations are not identical, however, and indeed are treated differently in international tax law. In my view, it would be more appropriate, therefore, for the ECJ to review its case law on the protective assessment, certainly insofar as this relates to decreases in value after emigration. A fall in the value of a substantial interest in an enterprise after its place of management has been transferred to another state is a matter for the host state and should indeed no longer result in a reduction in the exit state's protective assessment. However, the parallel drawn by the ECJ between the domestic and crossborder situations and the view that the two situations should be treated the same are incorrect as far as the transfer of a place of management is concerned. * 1 In its judgment in National Grid Indus the ECJ unequivocally opted for the principle of territoriality in the internal market, thereby acknowledging the tax borders of the Member States and also, therefore, their fiscal sovereignty. After this judgment, many people, including Reinout Kok in his ECTR contribution, expected the ECJ to come back on its decision on the right to charge interest and demand a bank guarantee in subsequent case law. The National Grid Indus case was handled by the Grand Chamber of the ECJ, of which the permanent members are the ECJ's president and the presidents of the chambers of five judges.3 The ECJ certainly appreciated the great importance of this case. It was clear from the Commission's Communication of 19 December 2006, COM (2006) 825 final and the infringement procedures subsequently initiated by the Commission, as well as the ECOFIN resolution of 2 December 2008,4 that there was a major difference of opinion between the Council and the Commission on the imposition of exit taxes on enterprises transferring their place of management abroad. It was therefore the ECJ's task to break the deadlock and, in my view, its decision constituted a Solomon's verdict.5 In contrast to its judgment in the Daily Mail case of 27 September 1988 the ECJ decided here to apply Article 49 TFEU rather than Article 54 TFEU and, therefore, to apply the obstacles doctrine. The Grand Chamber set out a pattern in this judgment for all future cases to follow. A number of infringement procedures were known to be in the pipeline at the time, including cases involving Portugal, Spain and the Netherlands. Given the composition of the Grand Chamber, it is logical that the various ECJ Emeritus Professor of Tax Law, Erasmus University Rotterdam. Hughes de Lasteyrie du Saillant case, 11 Mar. 2004, C-9/02 and the N case, 7 Sep. 2006, C-470/04. In matters of procedural law, the ECJ applies the equivalence and effectiveness tests, with priority being given to the former. The Grand Chamber consists of at least nine and at most fifteen judges; this case was heard by eleven judges. Resolution of 2 Dec. 2008 on coordinating exit taxation, OJ EU 2008, C 323/01. On this subject, see my article `National Grid Indus: een salomonsoordeel van het HvJ?' in Maandblad Belastingbeschouwingen, May 2012. EC TAX REVIEW 2013/4 ©2013 Kluwer Law International BV,The Netherlands NATIONAL GRID INDUS AND ITS AFTERMATH chambers consistently took account of the line set out in the National Grid Indus judgment in these later cases.6 The Dutch State Secretary of Finance responded to the judgment of 29 November 2011 by announcing in a decision of 14 December 2011 that he planned to introduce a bill to amend the Collection of State Taxes Act [Invorderingswet] with retroactive effect from the date of the judgment. He stated in his decision that parties would be able to opt to defer exit taxes due on emigration. Those enterprises opting for deferral would, however, have to pay interest and arrange for a bank guarantee to be issued, while also having to provide an annual statement of their assets and liabilities. My article in Maandblad Belastingbeschouwingen argued in favour of allowing an interest-free deferral period of five years, with exit taxes being able to be paid in five annual instalments, as is currently the case in France and Germany. Although a bank guarantee may still be required during this period, there would no longer be any need for an annual statement. This would limit the costs for enterprises wishing to transfer their place of management abroad, while also assuring the exit state of the income or corporation tax due. During the Dutch Parliament's handling of the bill to amend the above Act, however, a deferral period of ten years was requested and, before making provision in legislation for this option, the State Secretary wants to be certain that such a deferral period is EU-proof. One other aspect that struck me from the judgments announced by the ECJ since National Grid Indus relates to the awarding of costs. The ECJ did not order any payment of costs in the National Grid Indus case, and that seems logical to me. If you compare the situations in the Daily Mail and National Grid Indus cases, they are clearly identical. Based on twenty-five years of legal developments, the ECJ arrived at a totally different judgment in the National Grid Indus case. In its decision of 31 January 2013, however, the ECJ reached a very different conclusion on the payment of costs,7 with the Netherlands being ordered on this occasion to pay the costs of the proceedings. In point 19 et seq., the ECJ commented as follows [translation by the author]: 19. It should firstly be noted that the Kingdom of the Netherlands does not dispute the alleged failure to fulfil obligations. 20. It should also be recalled that, according to settled case law, the question of whether a member state has failed to fulfil its obligations must be determined by reference to the situation prevailing in the member state at the end of the period laid down in the reasoned opinion, and the Court cannot take account of any changes since then (see specifically the judgment of 27 September 2007, Commission v. Spain, C-465/06, point 8 and that of 28 February 2012, Commission v. France, C-119/11, point 35). 21. It follows from this that, upon expiry of the period laid down in the reasoned opinion, the Kingdom of the Netherlands had not taken the requisite measures to fulfil the obligations incumbent upon it pursuant to Article 49 TFEU. 22. In these circumstances, the Commission's action must be considered well-founded. The conclusion in this judgment, therefore, was that the Netherlands had failed to fulfil its obligations and was thus ordered to pay costs. If we examine the judgments referred to in point 20 above, we can see that they all involve situations in which a Member State fails to implement a directive and therefore to comply with its duty of cooperation. In such situations, the ECJ has consistently ruled against the relevant Member State and ordered it to pay costs. The situation here, however, is totally different as it involves the interpretation of a treaty provision, on which the European Commission and the Member States may have a difference of opinion. The Netherlands was unable to fulfil the Commission's wishes by the end of the period laid down in the reasoned opinion and, given the judgment in the National Grid Indus case, was right not to do so. In addition, the view set out in the Commission's Communication of 19 December 2006 should be seen as non-binding, and one that would become binding only if the ECJ were to find in the Commission's favour. ECJ case law, however, shows that the Commission's view has not become binding. Immediately following the National Grid Indus judgment, the Netherlands announced that it would be amending its legislation and in the meantime would comply with the judgment. It would seem to me, therefore, that the Netherlands is EU-proof and cannot be accused of not fulfilling its obligations. Ordering the country to pay costs is, therefore, wholly unjustified. Lastly, it should be pointed out that there have now been several judgments on exit taxes for entrepreneurs. These demonstrate that the ECJ has not adopted the view expressed by the Commission in paragraph 3 of its Communication of 19 December 2006. In other words, this part of the Communication can no longer serve as guidance for the Commission's policy vis-à-vis the Member States. By continuing to instigate infringement procedures and failing to amend its Communication, the Commission simply shows itself to be a bad loser. Good governance means that the Commission, too, has to act in accordance with ECJ case law, certainly now that the ECJ's Grand Chamber has spoken. Portugal, judgment of 6 Sep. 2012, Case C-038/10; Netherlands, judgment of 31 Jan. 2013, Case C-301/11 and Spain, judgment of 25 Apr. 2013, Case C-64/11. This also applies in the cases of Portugal and Spain. EC TAX REVIEW 2013/4

Journal

EC Tax ReviewKluwer Law International

Published: Jun 1, 2013

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