Facts of the Case
The case De Lasteyrie du Saillant (C-9/02) concerned an unrestrictedly taxable individual, a French citizen, who emigrated to Belgium for professional reasons in 1998 while holding a substantial shareholding (over 25%) in a French corporation. Under French tax law according to Art. 167a CGI, he was obliged to compulsorily disclose the hidden reserves of this shareholding and face a fictitious taxation of the increase in value, even though the shareholding had not been sold. The question was whether this exit taxation was compatible with the freedom of establishment under Art. 49 AEUV (TFEU).
Examination Scheme of the ECJ
- Scope of Protection of Freedom of Establishment Freedom of establishment prohibits discrimination in both the host state and the state of origin. The ECJ determined that the freedom of establishment opens the scope of protection when a taxpayer moves their residence to another EU member state to work there in a self-employed capacity (primary establishment of a self-employed person in another EU member state). In the De Lasteyrie du Saillant case, this was applicable as the plaintiff moved to Belgium for professional reasons and intended to continue his activities there.
- Impairment of Fundamental Freedom The ECJ examined whether the French regulation constituted an impairment of the freedom of establishment. The taxation of hidden reserves upon moving abroad was such an impairment, as it only occurred when moving residence to another member state. The exit taxation only triggers upon crossing a border. If the residence had been moved within France, no taxation would have occurred. This regulation could deter taxpayers from exercising their right of establishment. The taxation of unrealised income upon moving residence abroad leads to a disadvantage compared to persons who maintain or move their residence within the country. Even the possibility of tax deferral, which is linked, among other things, to the provision of collateral, has a restrictive effect, as the taxpayer cannot use the assets provided as collateral.
- Justification The French government argued that exit taxation was justified by the necessity of effectiveness of fiscal supervision, the principle of territoriality, and the prevention of tax avoidance. The ECJ generally recognised these reasons as legitimate objectives that could justify a restriction of fundamental freedoms. However, the blanket assumption that moving residence always serves the purpose of tax avoidance cannot be justified.
- Proportionality Test Finally, the ECJ examined whether the French regulation was proportionate, i.e., whether it was suitable, necessary, and appropriate to achieve the stated objectives:
- Suitability: The measure was generally suitable for ensuring the prevention of tax avoidance and the effectiveness of fiscal supervision.
- Necessity: The ECJ found, however, that less restrictive measures would have been possible, such as the possibility of a tax deferral until the actual realisation of the hidden reserves.
- Appropriateness: The Court held that the immediate taxation of hidden reserves was disproportionate, as it placed an undue burden on the taxpayer and restricted the freedom of establishment disproportionately.
Possible Solution: Determination of hidden reserves at the time of departure and assessment in the assigned tax notice with interest-free deferral until the next realisation. Control notifications from the state of origin are also possible.
The ECJ ruled that the French exit taxation violates the freedom of establishment, as it was disproportionate and went beyond what was necessary to achieve the legitimate objectives. This decision forced France to adapt its tax regulations to ensure that taxpayers are not discriminated against when exercising their freedom of establishment within the EU.
The ruling in the De Lasteyrie du Saillant case is significant as it demonstrates the limits of the member states' fiscal design autonomy regarding EU fundamental freedoms. In particular, it emphasises the necessity of proportionality of national measures that potentially restrict fundamental freedoms and clarifies that tax measures aimed solely at a relocation of residence to another member state can be problematic in light of EU law.
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Note
**This article serves for general information and was carefully created by the editorial team of Lexo.Tax. Personal tax advice can only be provided within the framework of a membership at Lexo.Tax – and exclusively to the legally permissible extent according to § 4 Nr. 11 StBerG (Tax Consultancy Act).