The transfer of fiscal residence and exit tax in the Dutch and the Italian systems

INTRODUCTION 
 
In the twentieth century arose a phenomenon that led to constant battles between 
the Member States and their taxpayers who are fighting this battle through the 
weapons of the fundamental freedoms: we are talking of the exit taxation.  
The exit taxation was born with the aim of protecting the fiscal sovereignty of the 
States against the ripple effects of the globalization of international markets. 
Although the companies move in order to their business needs (not only, therefore, 
for tax purposes), migration can have a significant impact on open economies and, 
leads to fiscal challenges for many States. 
Before analysis of such phenomenon, in the first chapter will be 
presented an overview of the tax consequences at international and 
Community level as a result of a transfer of a taxpayer from a 
Member State to another; while the second and third chapter will 
address the most important national aspects, together with the 
unique aspects of the jurisdiction of the States that will be the main 
subjects of this paper: the Netherlands and Italy. Only after having 
analyzed the several national aspects of such jurisdictions that 
appear to be crucial for subsequent analysis of the compatibility of 
the Dutch and Italian exit tax regime with European law, we can 
analyze the changing positions taken by the Court through the cases 
submitted to it, regarding the transfer of natural or legal persons and 
issues created by the application of the exit tax. 
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The loss of tax revenue is one of the key concerns of the States. Latent reserves 
and gains which are not taxed since they are generated due to the systematic 
realization principle, are the crucial worries of emigration States. The problem 
arises because these capital gains accumulate and remain latent within the territory 
of the State, but when move untaxed with the taxpayer to the other jurisdiction, 
following emigration, the domestic laws could impede the actual taxation or the 
taxing power of the State could be restricted by tax treaties in the case in which the 
reserves have effective accrued.  
Therefore, treating the emigration as a taxable event, seems to provide an effective 
solution to the fiscal preoccupations of many sovereign countries. 
In this way, the concept of exit taxation tends to the principle of territoriality, which, 
with the international law concept of sovereignty of States, represents a strong 
argument in support of exit taxation. 
In this framework must be considered also the point of view of taxpayer who is 
placed before two problems due to the application of an exit tax; a cash flow 
disadvantage is one of them, since the taxpayer could not have the cash available 
to pay the tax upon migration, because the asset has not been alienated. 
The other problem for the taxpayer is double taxation. This phenomenon arises 
when the taxpayer has not been granted a step-up to fair market value upon 
migration in the host State or has not been granted a credit to offset its tax liability 
in the emigration or immigration State; anyway, following transfer, the taxpayer has 
two jurisdictions lined up, ready to exercise their taxing rights over the same capital 
gain. 
It seems obvious that these issues are likely to dissuade cross-border 
reorganizations and, consequently, this disadvantage implies a different treatment 
between the taxpayers that wishing exercise their freedom of circulation and 
establishment and those that, instead, remain on the territory of the State. The 
Member States have signed a project of Internal Market, that is far different from a 
single market; in fact, if there was a single market there would be no problem to exit 
from a State and enter to another because this move would be a non-problem and 
would be treated in the same manner as a domestic relocation. Since, in practice is 
not as, it is hard to affirm to have a single market. 
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Also in the light of the fact that the taxpayer through the payment of a 
tax upon emigration is certainly not encouraged to transferring cross-
border, the reasons of this tax are clear, and the problem is not its 
existence but concerns its proportionality; in fact, the EU law question 
is: which measure that effectively protects the tax claim of the 
departure State is least obstructive to free movement?  
So, it is important to note that the fiscal coherence and the balanced 
allocation of taxing power, which are a justification for the exit taxes, 
must be balanced with the choose of the measure less obstructive for 
the free of movement and establishment.  
This balance has fluctuated over the years through the several, and 
sometimes contradictories, judgments of the Court of Justice, on the 
basis of national cases submitted to it. 
The case law of the Court shows a distinction between emigration of 
legal entities whose existence depends from domestic legal system, 
and emigration of natural persons that tends to exist regardless of 
any specific national law (even if they need of European nationality in 
order to enjoy of the freedoms of the Treaty). 
Both cases "Hughes de Lasteyrie du Saillant" and "N" are the most 
important pronunciations about the exit tax towards natural persons, 
that represent the first pillars in this matter. 
The recent pronunciation of the Court of Justice in the case "National 
Grid Indus BV" concerns, instead, the transfer of legal persons. 
The case "National Grid Indus BV" is important for several reasons 
but, it is of particular significance the Court's statement according to 
which, there can not be the application of Article 49 of the Treaty, 
which provides for freedom of establishment, all times when the State 
of origin requires the liquidation of companies incorporated under its 
jurisdiction that transferred their seat abroad. 
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In fact, as will be seen in detail in this paper, any State is free to 
choose between the theory of incorporation and the theory of real 
seat, which means that there are States that can impose the 
liquidation of their companies after the transfer. 
In this case (National Grid Indus BV), the Court ruled to determine 
whether the Dutch exit tax is compatible or not with the criteria 
already established by the Court in previous case law and with the 
rules of Treaty on freedom of establishment. 
Such decision of the Court of Justice has been simplified by the fact 
that, in this case, the Netherlands admits the transfer, so the 
company continues to exist; in fact, the Court in its judgment has 
essentially applied the principles found in "Hughes de Lastyrie du 
Sailant" and "N" (although it must be remembered that the latter two 
cases, unlike the case "National Grid Indus", are refer to individuals). 
But the question we must ask is: what happens when the State of 
origin does not allow for the transfer? 
It is important for answered to this question e for observe the 
evolution of the rulings of the Court of Justice on the transfers of tax 
residence, analyze the previous most important cases submitted to 
the judgment to the Court of Justice. 
 
Through the analysis of the behavior of the ECJ over the years, 
placed before the several cases submitted to its judgment regarding 
the transfer of individuals or juristic persons, the final objective of this 
thesis is evaluate, with critical eyes, the actual framework of the case 
law of ECJ with regard to exit tax and assess the compatibility of the 
Dutch and Italian exit tax regime with EU law focusing on: limits, 
contradictions, and freedoms guaranteed by the Treaty, that often are 
sacrificed in order to protect the taxing powers of the States. 
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CHAPTER I 
GENERAL DISCUSSION ON THE TAX CONSEQUENCES 
OF A TRANSFER 
 
1. Worldwide taxation versus Territorial taxation, Resident 
versus Non-Resident: the key role of residence 
The term "residence" is ambiguous because its extension changes 
if it is refers to natural persons or legal persons. With regard to 
individuals the residence is one of the ties that links an individual 
to a State, and the concept itself of residence is determined mainly 
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by factual circumstances; this concept identifies the place where 
an individual resides, in fact the residence differs from the 
nationality and domicile. 
With regard to legal persons, the concept of residence is much 
broader than the concept of residence of individuals.  
Define the exact boundaries of the residence is very important for 
the taxation of those who are deemed resident or non-residents; 
we can assert that the tax world is divided into two groups of 
countries. The first group includes countries which implement a 
worldwide taxation system, so residents are taxed on all their 
income, including their foreign source income. In this system it is 
crucial to define the fiscal residence of a company very accurately;  
The State of residence is the one that has the power to levy tax on 
the worldwide profit of corporation, and the company is subject to 
unlimited fiscal liability in that country. 
The second group of counties have adopted a territorial system of 
taxation, which basically means that they tax business income 
only if it is derived from sources within the country. 
Generally, countries that tax income on a territorial basis do not have 
to worry about international double taxation, because the taxation of 
foreign source income can only be levied by the country of source, 
being exempt in the country of residence.  
In contrast, countries taxing income on a worldwide basis have to 
deal with potential double taxation. This is because while the income 
is taxed in the country of residence, it is also almost invariably taxed 
in the country of source: this is a case of double taxation.  
So, why a State adopts the worldwide taxation? The reason is 
twofold: first, if it adheres to capital export neutrality, it wants to 
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guarantee that the home State level of taxation is reached on the 
foreign-source income; and second, every home State in principle 
wants to tax the total ability to pay of its residents. 
Although worldwide taxation at first sight looks burdening the cross-
border position with risks of remaining double taxation, it has one 
important justifying merit serving the objectives of the internal market: 
horizontal cross-border loss relief. 
In fact, it must be observed that requiring home State and source 
State to apply EU-wide (worldwide taxation) with double tax relief for 
both non-resident and residents, it solve three problems
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: 
• to improve the horizontal cross-border loss compensation; 
• to guarantee the correct allocation between resident State and source 
State of personal tax allowances, and this two States would be 
responsible in proportion to the part of the income to which they extend 
their taxing power; 
• to guarantee the correct progression also on the foreign-source part of 
the total income; 
The drawback is a heavy administrative burden for the taxpayer and 
the source State, but the latter it should be able to determine the 
worldwide income and identify the personal circumstances of non-
resident. 
 
At Community level, the residence takes a particularly important role; 
with particular reference to company, the freedom of establishment 
(Article 43 and 48 of the EC Treaty) is a limit to the national laws 
which provide discriminatory treatment. The line of discrimination 
between subjects "domestic" and "foreign", is determined by the 
criteria for determining the residence of companies. 
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