Third State Migration and Corporate Exit Tax: Fundamental Lack of Member States' Legislation?

Some Member States consider the outbound transfer of the companys place of effective management (POM) to a Third State to be a tax-relevant event, levying an immediate exit tax on the unrealised capital gains. Germany is going to tax a deemed liquidation if a domestic company acquires treaty residence in a Third State (paragraph 3 of article 4 of the OECD Model Tax Convention (OECD-MC)). The existing case law of the Court of Justice of the European Union (CJEU) deals only with the POM transfer to another EU/EEA State. The UK and Ireland apply a similar kind of exit tax when a domestic company becomes a tax resident abroad due to a tax treaty tie-breaker rule. In such a case, the company is deemed to have disposed of and immediately reacquired all of its assets at market value. Based on the CJEU decision in National Grid Indus BV v Inspecteur van de Belastingdienst Rijnmond/Kantoor Rotterdam (National Grid Indus BV) both Member States have recently updated their tax legislation thereby giving some kind of relief if the POM is shifted to another EU/EEA State. However, the relief is substantially restricted if the migrating company has moved its POM to a Third State. On the occasion of the CJEU judgment in National Grid Indus BV, other Member States (for example, Sweden and Spain) have also amended their exit tax legislation thereby giving relief for the company s POM transfer to another EU/EEA State, but principally not for a Third State migration. This article analyses the corporate exit taxation using as background the company s emigration to a Third State by acquiring treaty residence in that State (article 4, paragraph 3 OECD-MC). The main question is whether or not the exit tax rules of the Member States breach the freedom of establishment in regard to such Third State cases. This question has not previously been analysed in the literature on taxation and is not directly answered by existing case law. Another relevant question is whether primary law may constitute an obligation to give relief from corporate exit tax when the emigrating company acquires treaty residence in a Third State. This article will also discuss the possible implications for the national legislation on exit taxation. To analyse and answer these questions the German deemed company liquidation is utilised in order to provide a basic example. In comparison, the British and Irish exit charge for migrating companies will also be discussed, with consideration being given to cases in which the moving company establishes treaty residence in a Third State. [ABSTRACT FROM AUTHOR]