ECJ, case C-470/04: Dutch substantial shareholding legislation struck down
Mr. N., sole shareholder of three Dutch ltd.’s, moves from the Netherlands to the United Kingdom in the course of 1997. Pursuant to Dutch income tax regulations, Mr. N. has by that action disposed of his participations and will be taxed on the gains. Mr. N., though, uses the possibility to get a suspension of payment of tax due, for 10 years, by offering sufficient guarantees. In this case, Mr. N. has given in pledge part of the shares at issue. Mr. N. starts a procedure in front of the ECJ to have the gains tax on substantial shareholdings, as well as the pledge, declared incompatible with EC Law.
The first question that arises is whether Mr. N.’s claim should be based on an infringement of the freedom of establishment (Art. 43 EC Treaty) or whether Art.18 EC Treaty, concerning EU citizens’ freedom of movement and residence, applies. The ECJ judges that having a shareholding of 100% in another Member State than the Member State of residence, falls within the scope of the freedom of establishment.
The remainder of the dispute is very similar to the one at issue in the de Lasteyrie du Saillant case (ECJ, 14th of March 2004, C-9/02). The ECJ judges that (i) the immediate taxation of the gains, (ii) the alternative offered to the taxpayer by means of a pledge, (iii) the fact that later depreciations cannot be offset against the amount due, all lead to an infringement of the freedom of establishment.
The Court then applies the rule-of-reason test and states that the need of preservation of allocation of taxation powers between the different Member States is a legitimate aim (making reference to the Marks & Spencer case, 13th of December 2005, C-446/03). Nevertheless, the Dutch substantial shareholding gains tax is not proportionate in light of this aim.
First of all, there are other less restrictive methods available. Council Directive 77/799/EEC of 19 December 1977 concerning mutual assistance allows the authorities of the Member States to request all information necessary, and pursuant to Council Directive 76/308/EEC of 15 March 1976 on mutual assistance for the recovery of claims a Member State may request the assistance of another Member State in the recovery of debts relating to certain taxes, including those on income and capital.
Secondly, depreciations that arise after the transfer of residence must be taken into account, except when these depreciations are already taken into account in the Member State of residence. A system of capital gains tax on substantial shareholdings can only be compatible with EC Law if these two conditions are met.
