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The European Court of Justice has ruled that member states must be careful not to interfere with freedom of establishment if it wants to place any restrictions on a taxpayer that wants to move to another member state.

Hungarian company Cartesio has lost its appeal to the ECJ on December 16 2008 over its plans to move its operational headquarters to Italy but remain under Hungarian company law. Hungarian law does not allow a company incorporated in Hungary to transfer its operational headquarters to another member state without having paid any taxes associated with the disposal of its assets.

"The Cartesio case gave the ECJ the chance to elaborate on issues raised from other cases. In fact the ruling refers to other cases as often as Cartesio itself," said Tamas Feher, a tax lawyer at CMS Cameron McKenna in Hungary.

The movement of companies from one EU member state to another has been controversial for some time. In the Daily Mail case in 1988 the ECJ concluded that provisions regarding the life and death of a company were determined solely by the member state under whose laws the company was created. It allowed the UK to impose an exit tax on the newspaper if it wanted to move its effective management to another member state

"The reason why tax practitioners have got excited by the Cartesio case is that they hoped the judgement would finally overturn the decision held in the Daily Mail case," said Peter Cussons, a tax partner at PricewaterhouseCoopers in the UK.

The ECJ had already ruled in Lastyrie that an immediate exit tax breaches the European Treaty's freedom of establishment provision. However the UK is unique among EU member states in that it employs a treasury consent procedure for company migration. Because of this, it was thought that the Daily Mail decision may still be applicable.

"The Cartesio ruling has shown that Daily Mail is dead law in the UK," said Cussons. "Paragraphs 112 and 113 of Cartesio say that where a company becomes subject to the law of another member state, any restriction in either the state of incorporation, for an example an exit tax, or in the state to which the principal place of administration is transferred has to be justifiable with regards to the freedom of establishment."

"The Cartesio ruling implies that countries should not be able to impose exit taxes on companies as it may dissuade the company from moving to another member state," said Feher.

Although the judgement in the Cartesio case does not deal with the precise situation in the UK, it is unlikely the European Commission would allow the UK government to levy an exit tax on taxpayers wishing to move.

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