1. Corporate Mobility in the EU: the tax perspective
Prof. Edoardo Traversa
University of Louvain,
Of Counsel (Liedekerke), Brussels
21st European Company Law and Corporate Governance Conference: Crossing Borders, Digitally
September 4 – 5, 2017, Tallinn

2. Meaning and function of corporate seat (residence) for (income) tax purposes
Tax implications of corporate mobility for EU companies and Member States
Current state of European Union law
IV. The way forward

3. I. Meaning and function of residence for (income) tax purposes
Fundamental concept to determine corporate tax liability in domestic income tax systems…
Usually on worldwide income
Exceptions : territorial systems – France
Also for witholding tax obligations imposed on the payor (interests, dividends, royalties, wages, …)
… but not the only connecting factor used to subject companies to taxation
Income attributable to permanent establishment (branches and agents) of non-resident companies
Taxation of payments (dividends, interests, royaties, …) made by residents to foreign companies

4. I. Meaning and function of residence for (income) tax purposes
Great diversity as to the definition of residence
Formal
Place of incorporation (registered office)
As an exclusive criterion : Finland, Ukraine, the United States and -to a lesser extent- Denmark
Substantive
place of (effective) management
Key strategic decisions : e.g. Belgium
Chief executive management : e.g. Germany
central management and control (UK, Ireland)
other : main object of business or ownership (Italy)/ open standard provision (Netherlands)
=> Most countries apply a mixed approach, with a predominance of the substantive criterion

5. Case-by-case analysis : the Belgian example
Criteria's used by the Belgian Ruling Commission
registered office situated in Belgium;
shareholders’ meetings and board meetings held in Belgium;
number of members of the board of directors who are Belgian residents;
Belgian directors qualified to exercise their function as director and the fact that their responsibility is not entirely excluded;
company offices in Belgium;
company’s main bank accounts are kept in Belgium and decisions with respect to those accounts taken in Belgium;
company does not have any establishments abroad;
company has qualified personnel with the necessary abilities and powers to sustainably manage the loan portfolio; and
company employs at least one full-time worker who is a Belgian resident

6. Corporate residence in a cross-border context
Double tax treaties between States
Applicable to residents:
the term “resident of a Contracting State” means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature
Absence of unification of the residence concept
=> Risk of double taxation
Tie breaker rule: a company that is resident of both contracting states under their respective domestic tax laws is a resident of the state where it has its “place of effective management” for the purposes of the tax treaty (OECD Model, Article 4)

7. II. Tax implications of corporate mobility for EU companies and Member States
Legal uncertainty and potential international double taxation (dual residence)
Situation of international groups of companies
the controlling shareholder acts as de facto director towards third parties;
board meetings which are physically held at the registered office but which merely rubber-stamp decisions taken elsewhere;
the strategic management decisions are taken by the board of directors while the actual management will be exercised by senior executive officers;
Digitalization
the board of directors meets by electronic means (telephone, video conference or s)

8. II. Tax implications of corporate mobility for EU companies and Member States
Fraud and avoidance schemes
transfer of seat motivated by double taxation conventions granting exclusive power to the State of residence for certain items of income
Business income in the absence of a permanent establishment
Interest and Royalties
transfer of seat in order to avoid taxation of capital gains on certain assets (see ECJ case-law)
dual non resident companies (see the EU Commission State aid Apple decision of )
letter-box companies with scarce physical presence controlled from abroad used to shelter income that should be taxed elsewhere or to avoid liability in other areas of law
financial disclosure obligations and money-laundering
creditors’ protection
labour and social security regulations

9. III. Current state of European Union law
1. ECJ case-law on freedom of establishment and exit taxes
Daily Mail
de Lasteyrie du Saillant (physical persons)
National Grid Indus
DMC
Other cases
2. Harmonisation
1990 Tax Merger directive
2016 Anti-Tax avoidance directive

10. ECJ case-law on freedom of establishment and exit taxes
Preliminary remark : interaction between company law and tax law
the seat transfer is inadmissible from a corporate perspective and leads to liquidation of the company
The liquidation tax is not a real “exit tax”, but a logical consequence of liquidation. Such liquidation tax is in principle not prohibited by EU law
the seat transfer is admissible from a corporate perspective:
In such case, it has to be determined whether the transaction, which is permissible from a corporate law perspective, is not prohibited from a tax law perspective

11. Taxation of capital gains
a Member State has the right to tax individuals and companies on their capital gains
such taxation is typically not levied at the moment of the actual accrual of the gains, but at the moment such gains are realized.
the Member State thus grants an implicit deferral of taxation on the capital gains until the moment such capital gains are realized

12. Taxation of capital gains and transfer of seat
when a taxpayer relocates from a Member State to another Member State, the home Member State loses its taxing power on capital gains (taxable in the State of residence – OECD MODEL, Art. 13)
this is not only true for capital gains that will accrue in the future, but also for capital gains that were not realized while the taxpayer was subject to the taxing power of the host state
in order to avoid losing taxing power, the home state will include a fiction in its national legislation: capital gains are deemed to be realized prior to the moment the taxing power is shifted to the other Member State

13. C-81/87 Daily Mail [1988] Facts Discussion Daily Mail PLC
UNITED KINGDOM (incorporation doctrine) Central administration Consent tax administration THE NETHERLANDS
Facts:
Daily Mail PLC was a company established pursuant to the laws of England and Wales. The company was planning to move its central administration to the Netherlands, without losing its legal personality and status.
Tax driven:
Plan to realize considerable capital gains in the Netherlands, without being subject to UK capital gains taxation.
Obstacle:
Relocation was permissible by company law, but Daily Mail had to obtain the consent of the tax authorities.
The tax authorities were only willing to grant such consent if Daily Mail realized at least part of its capital gains in the UK prior to the relocation.
CJEU:
§19: “unlike natural persons, companies are creatures of the law and, in the present state of Community law, creatures of national law . They exist only by virtue of the varying national legislation which determines their incorporation and functioning”
§29: “[the freedom of establishment] confers no right on a company to transfer its central management and control to another Member State ”
 Daily Mail puts itself outside the scope of the TFEU
 Remarkable: this transaction was permissable from a corporate law perspective.
Daily Mail PLC
Daily Mail PLC

14. C-371/10 National Grid Indus [2011]
Facts
Discussion
THE NETHERLANDS (INCORPORATION DOCTRINE) Real seat EXIT TAX UNITED KINGDOM (INCORPORATION DOCTRINE)
Facts:
BV established in accordance with the laws of the Netherlands contemplating to move its real seat (including place of effective management) to the UK without losing its legal personality and status as a Dutch BV.
Relocation was permitted by Dutch company law.
Obstacle:
At the moment of the relocation, the BV had to pay a tax on the non- realized capital gains (in casu, currency gain on a intragroup claim).
Court of Justice:
Exit taxes on companies fall inside the scope of the freedom of establishment. They constitute a restriction thereof and thus need to satisfy the rule of reason to be permissible.
Contrast with Daily Mail [1988] and Cartesio [2008]
Justified?
See next slide.
National Grid Indus BV
National Grid Indus BV

15. No tax neutrality in cross-border EU cases
“the Treaty offers no guarantee to a company covered by Article 54 TFEU that transferring its place of effective management to another Member State will be neutral as regards taxation. Given the relevant disparities in the tax legislation of the Member States, such a transfer may be to the company’s advantage in terms of tax or not, according to circumstances […]”.
“Freedom of establishment cannot therefore be understood as meaning that a Member State is required to draw up its tax rules on the basis of those in another Member State in order to ensure, in all circumstances, taxation which removes any disparities arising from national tax rules […]”.

16. Equality of treatment with domestic transfers
«the situation of a company incorporated under the law of that Member State which transfers its place of management to another Member State is similar to that of a company also incorporated under the law of the former Member State which keeps its place of management in that Member State» In order to determine whether a restriction exist, a comparison need to be made between (i) a mere internal relocation (e.g. Brussels to Antwerp), and (ii) a cross-border relocation (e.g. Tallinn to Brussels) In case taxation of the cross-border situation is higher or earlier, a relocation is made less attractive, and the freedom of establishment is thus restricted

17. Is the restriction justified?
“The transfer of the place of effective management of a company of one Member State to another Member State cannot mean that the Member State of origin has to abandon its right to tax a capital gain which arose within the ambit of its powers of taxation before the transfer (…). The Court has thus held that, in accordance with the principle of fiscal territoriality linked to a temporal component, namely the taxpayer’s residence for tax purposes within national territory during the period in which the capital gains arise, a Member State is entitled to charge tax on those gains at the time when the taxpayer leaves the country (…). Such a measure is intended to prevent situations capable of jeopardising the right of the Member State of origin to exercise its powers of taxation in relation to activities carried on in its territory, and may therefore be justified on grounds connected with the preservation of the allocation of powers of taxation between the Member States” (para. 46)

18. Proportionality Requirements:
The domestic rule needs to be appropriate to realize the aim and may not go further than necessary.
An immediate payment of the exit tax goes further than strictly necessary. There are less restrictive means to satisfy the State financial interests.
Home state must grant a deferral of payment until the effective realization, but
Home state may determine the amount of the tax at the moment of the relocation to the other Member State, and does not need to take into account capital losses that may occur once the company has left its jurisdiction
Home state may require as an alternative to immediate payment an annual declaration, interest payment and a bank guarantee

19. C-164/12 DMC Beteiligungsgesellschaft [2014]
Deferral?
“by giving the tax payer the choice between immediate recovery or recovery spread over a period of five years, the legislation at issue in the main action does not go beyond what is necessary to attain the objective of the preservation of the balanced allocation of the power to impose taxes between Member States”
Bank Guarantee?
“Such a requirement cannot, as a matter of principle, be imposed without prior assessment of the risk of non-recovery”
Interest?
Germany did not charge interest
See also C-261/11, Commission v. Denmark [2013] (§ 36-37)

20. III. Current state of European Union law
Harmonisation
1990 Tax Merger directive (now Directive 2009/133/EC)
2016 Anti-Tax avoidance directive

21. Directive 2009/133/EC of 19 October 2009
The benefit of the tax neutrality regime is limited to cross-border mergers pursuant to which the absorbing company maintains a permanent establishment in the country of the absorbed company and to transfer of seat of SE and SCE
No exit taxation only if no cross-border transfer of assets
No rule on the exit tax which could be levied in case of a cross-border transfer of assets
Does the requirement of a permanent establishment constitute a restriction to the freedom of establishment ?

22. Anti-tax avoidance Directive 2016/1164 of 12 July 2016
For the first time, a comprehensive regime of exit taxation is provided for by European law after previous failed attempts
Communication of 19 Dec from the Commission on Exit taxation and the need for co-ordination of Member States’ tax policies, COM(2006) 825 final
Council Resolution of 2 December 2008 on coordinating exit taxation
In line with CJEU case law, the exit tax could be deferred and paid in instalments over five years
Also cover potential entry tax: the market value which has been determined for the exit tax purposes is to be accepted by a transferee Member State as the tax value of an asset, unless this does not reflect its market value

23. IV. The way forward
Further harmonisation of company law instruments does not impact the tax implications of mobility of companies
Tax aspects of corporate mobility are addressed at the EU level from a tax avoidance perspective
Coherence with internal market principles
Abolition of « exit » taxes on capital gains or other tax obstacles is unlikely without further harmonisation

24. IV. The way forward Three alternatives Light harmonisation :
Extension of the Merger tax directive to all transfers of seat?
Tax provisions in company law instruments
Ad-hoc instrument
Pros and cons
Fully-fledged harmonisation : Common consolidated corporate tax base
Proposals of COM(2016) 685 (base) and COM (2016) 683 (consolidation) – relaunch of the 2011 initiative
EU corporate tax, with dual rate system and shared revenues

25. Thank you for your attention
Prof. Dr. Edoardo Traversa Professor of Tax Law, Faculty of Law and Criminology Head of the Institute of European Studies
Catholic University of Louvain Tél. 32 (10) |