In its judgment of 18 July 2013 the Court of Justice of the European Union (CJEU) held that the Danish rules on exit taxation of cross-border transfers of assets within a company are contrary to EU law. New Danish legislation must be expected. Companies that have already suffered exit taxation should consider claiming repayment.
Background
Under Danish tax law, a transfer of assets internally within a company, e.g. to a permanent establishment outside Denmark to the effect that the assets are no longer subject to Danish tax, is regarded as a sale and is taxed as if the assets had been sold in the year of transfer. A transfer of assets between a company's different establishments within Denmark is not taxed.
The judgment
In its judgment of 18 July 2013 (case C-261/11 - Commission v Denmark, not yet available in English) the CJEU held that the Danish rules on cross-border transfers of assets within a company are contrary to EU law, cf. Article 49 TFEU on the freedom of establishment, reaffirming its position in e.g. National Grid Indus (case C-371/10), where the CJEU held exit taxes triggered by a company's transfer of its seat of management to another EU Member State to be in breach of Article 49.
Denmark had defended the Danish rules by arguing that the National Grid Indus decision only applies to financial assets that are disposed of or intended to be disposed of after the cross-border transfer. However, the CJEU did not agree and established that the principle set out in National Grid Indus is not limited to such assets.
Immediate exit taxation when assets are transferred is likely to deter a company from transferring its activities from Danish territory to another Member State and constitutes a restriction on the freedom of establishment within the meaning of Article 49 TFEU.
According to the CJEU, Denmark is allowed to tax capital gains attributable to the period of time when the assets were subject to Danish tax jurisdiction and to fix the amount of tax at the time of the transfer. However, the immediate recovery of tax on unrealised capital gains on assets transferred is disproportionate. This applies irrespective of whether the assets are actually realised after the transfer or not.
The CJEU clarifies that the possibility that an asset may never be sold will not necessarily result in the asset never being subject to Danish tax. Notably, Denmark may use another trigger for taxation than the actual sale. Therefore, Denmark can still tax assets that are not intended to be realised. However, the trigger for such taxation must constitute a measure less harmful to the freedom of establishment than immediate recovery of the Danish tax at the time of transfer.
Protective action
It remains to be seen whether Denmark will indeed adopt legislation using another trigger for taxation than actual disposal in order to tackle situations where assets such as intangible assets are not realised after a transfer out of Denmark. Judging from Denmark's argumentation in the case, it very likely will. Clearly, Denmark enjoys some margin of discretion in this respect, but any new rules need to carefully observe the principle of proportionality.
However, article 49 TFEU has direct effect and the Danish courts must therefore disregard any provision of national law not in compliance with article 49. Thus, the new judgment offers protection against the current Danish exit tax scheme and any companies that have already been taxed on cross-border transfers of assets should consider claiming repayment of such taxes.
Unfortunately, the judgment does not clarify if deferred payment of exit taxes combined with interest will be considered proportionate. However, it is doubtful that Denmark would be able to claim interest retroactively without clear basis in Danish legislation.
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