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Germany: ECJ on exit taxation – Roma locuta, causa finita?


Christof Letzgus

In National Grid Indus the European Court of Justice (ECJ) recognised the right of an EU member state to assess capital gains taxes on unrealised gains of a corporation resident in the Netherlands which transferred its place of management to the UK. This restriction of the corporation's freedom of establishment had to be proportionate, though, which could limit the right of the member state to immediately collect the tax assessed. In the recent DMC decision, the ECJ took the opportunity to comment on the German exit taxation rules.

Two Austrian GmbHs jointly owned the capital of DMC, a German KG. Both were subject to German corporation tax on their partnership profits. They then transferred their KG interests to the general partner, a jointly owned German GmbH, in exchange for shares issued by that company. This dissolved the partnership. The transaction was at book value, but, in one view, had the effect of converting the inherent gain in the business assets to one in the new shares issued. Under the applicable double tax treaty, Germany had no taxation right for realised gains in these shares. For this reason, the authorities taxed the transaction as though it had been at market value, though they did allow payment to be spread over the next five years. Had the two shareholders been German companies, the transaction would have been accepted at book value, thus effectively deferring taxation of the gain until its actual realisation. In the other view, the transaction had no effect since the assets remained in Germany where any profit on a direct sale would be taxed. The ECJ saw the conclusion from the first view as a restriction on the free movement of capital, which could only be justified by the public interest in maintaining the balance of taxing rights between member states, and only then if the German taxing right on any gain from the assets was in fact excluded and the taxpayer had a payment deferral option against security commensurate with the actual risk of default. However, it was up to the national court to decide whether these conditions were met.

Despite the introduction of a general exit tax rule in 2006, Germany has no consistent exit taxation regime. This exposes the government to ECJ rejection of arguments based on the risk of taxpayer default as being arbitrary. Further enlightenment may come with the next German exit tax case – Verder LabTec.

Christof K Letzgus (


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