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Germany: German taxation on transfer of assets to an EU-located permanent establishment compatible with the freedom of establishment

In its judgement of 21 May 2015, the European Court of Justice decided that a tax legislation of a Member State which, in the case of a transfer of assets from a company located within the territory of that Member State to a permanent establishment of that company located within the territory of another Member State, provides for the disclosure of unrealised capital gains pertaining to those assets which have been generated within the territory of that first Member State the taxation of such capital gains and the staggered recovery of the tax relating to those gains over ten annual instalments is compatible with the freedom of establishment (Article 49 TFEU).

Subject of the main proceedings was the German Verder LabTec GmbH & Co. KG that transferred assets from Germany to a permanent establishment in the Netherlands. The German tax authorities disclosed unrealised capital gains and permitted a staggered recovery of the tax relating to those gains over ten years. Such disclosure and taxation would not take place in relation to similar transfers within the national territory, since those unrealised capital gains are not taxed until they have actually been realised. This difference in treatment constitutes a restriction on freedom of establishment within the meaning of Article 49 TFEU.

The court had to evaluate whether a staggered recovery of the amount of tax by ten annual instalments may be a proportionate measureto attain the legit objective of preserving the allocation of taxation powers between the Member States. In a former decision the European Court of Justice held that a recovery of tax on unrealised capital gains spread over five annual instalments instead of immediate recovery was a proportionate measure to attain that objective (judgement of 23 January 2014, C-164/12). Therefore a staggered recovery of tax on unrealised capital gains over ten annual instalments can only be considered as a proportionate measure.

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