The ECJ qualifies the exit tax for individuals as an unjustified restriction of the right of establishment provided for in the Agreement on the Free Movement of Persons.
This judgement is the result of a reference for a preliminary ruling from the tax court Baden-Württemberg (14.06.2017, 2 K 2413/15) concerning the interpretation of the Agreement on the Free Movement of Persons between the European Union and Switzerland (AFMP), which was based on a legal dispute between a German national and the respective competent tax authority: Since 2008, the plaintiff had been the managing director of a Swiss resident company in which he held a 50% interest. In 2011, he moved his residence from Germany to Switzerland. The defendant tax authority subjected the increase in value of the shares in the corporation to immediate taxation in Germany at the time of relocation pursuant to § 6 of the Foreign Tax Act (AStG) and § 17 of the Income Tax Act (EStG). The plaintiff could not invoke the possibility of an interest-free deferral pursuant to § 6 (5) AStG, since Switzerland is neither an EU member state nor a state of the European Economic Area - according to the argumentation of the tax authority. In the plaintiff’s point of view, this taxation solely on the grounds of his relocation to Switzerland was contrary to the FMPA, in particular to the freedom of establishment provided for therein. He therefore brought an action before the tax court Baden-Württemberg. Since the tax court had doubts as to the compatibility of the regulations in question with the FMPA, it turned to the ECJ with a reference for a preliminary ruling.
In this respect, the ECJ has considered that the determination of the amount of the tax in question at the time of the relocation to Switzerland is an appropriate measure to ensure the maintenance of the division of taxation powers between Switzerland and the Federal Republic of Germany. However, that objective does not justify making it impossible to defer that tax. Deferral does not mean that Germany waives in favour of Switzerland the power to tax capital gains arising in the Federal Republic during the period of unlimited tax liability. Taking into consideration that Article 27 of the Double Taxation Agreement between Switzerland and Germany provides for a corresponding information exchange clause, according to which Germany could obtain from the Swiss authorities the necessary information on the sale of the shares and the related increases in value, the objective of the effectiveness of a tax control is safeguarded and the refusal to grant a deferral is disproportionate.
To that extent, it is therefore unjustifiable for a German national who has exercised his right of establishment under the FMPA to suffer a tax disadvantage in comparison with other German nationals who retain their residence in Germany or move to another EU or EEA state. While the latter must pay the tax for deferred increases in the value of the shares concerned only at the time of realisation, the former must pay this tax already at the time of relocation without deferral of payment until the shares are sold.
The ECJ recognises this approach as unequal treatment, which constitutes a liquidity disadvantage and is likely to deter the actual use of the right of establishment under the FMPA. The tax provisions at issue in the main proceedings constitute an unjustified restriction of the right of establishment provided for by the FMPA. The ECJ thus concurs with the Opinion of the Advocate General of 27 September 2018, in which an infringement of the Agreement on the Free Movement of Persons was postulated in the immediate taxation of the increase in value, and confirms its assessment as a result.
