The European Commission has taken firm and prompt action against exit tax. Deloitte's Marie-Helene Hoffmann and Dirk Maskow report on the latest developments of an issue begun after the European Court of Justice found the French exit tax provision contrary to EU law.

Exit tax is the commonly used name for tax levied on unrealised gains of a taxpayer leaving his country of residence for another. Appreciated assets being taxed upon emigration within Europe, are generally shares in closely held corporations or limited companies held by taxpayers who have been tax residents in the country they are leaving for a number of years, ranging from five to ten.

Several countries in Europe, namely Austria, Denmark, France, Germany and the Netherlands have such provisions. Moreover, tax treaties between EU member states commonly address and regulate the right of exit taxation, the latest example being the new Germany/Austria Treaty.

Nevertheless, firm and prompt action by the European Commission against the exit tax signifies its days are counted.

Act I: The de Lasteyrie du Saillant case (ECJ, C-9/02)

On 12 March 2004, the European Court of Justice rendered its decision in the du Saillant case, finding the French exit tax provision contrary to EU law, as anchored in Article 52 of the EC Treaty, guaranteeing freedom of establishment to all EU citizens.

Mr de Lasteyrie du Saillant had left France for Belgium in 1998, after having resided in France for five years and still holding, together with family members, shares representing a 25 percent participation in a French company.

The French tax authorities sought to tax the unrealised appreciation of the shares under the rationale of preventing tax evasion. Du Saillant filed an appeal against the French Ministry of Finance's decision and the case was referred to the European Court of Justice.

Representatives of the Danish, Dutch and German governments, not too surprisingly, testified in support of the French Republic's position, while the Portuguese government and the European Commission sided with the plaintiff. The Court upheld EU law principles and ruled in Du Saillant's favour.

Act II: The European Commission takes action with Germany first in line

On 19 April, the European Commission formally requested that Germany abolish its exit tax. Germany has two months to respond. Failure to do so in an acceptable manner will result in a referral to the ECJ.

One must note that Germany has in the past acted speedily to change its tax law to comply with a EU ruling. Confronted with the European Court's ruling that taxing cross border wage earners earning more than 90 percent of their family income in Germany as non residents, a quite unfavourable regime, was discriminatory under EU law, Germany rewrote its income tax code to grant the benefits of resident taxation in such cases.

The Commission also made it known that it is currently reviewing similar exit tax provisions in other EU member states.

Marie-Helene Hoffmann (mhoffmann@deloitte.de) and Dirk Maskow (dmaskow@deloitte.de) work for Deloitte in Germany.