ECJ Tax Ruling Will Allow European Firms To Shop Around, Says PwC

by Jason Gorringe, Tax-News.com, London

18 March 2004

A recent decision handed down by the European Court of Justice (ECJ) in the de Lasteyrie case is likely to mean that in future, European companies can more easily shop around for the most attractive tax rates, according to Peter Cussons, tax partner at PricewaterhouseCoopers.

When Mr de Lasteyrie du Saillant left France in September 1998 to go and work in Belgium, he held securities conferring entitlement to more than 25% of the earnings of a company established in France and subject to corporation tax.

The market value of those securities was then higher than the price at which they were acquired, which meant that Mr de Lasteyrie was subject to immediate taxation on the unrealised (or latent) increase in value of the securities held, in accordance with the provisions of the Code Général des Impôts (General Tax Code) applicable to taxpayers moving their residence for tax purposes outside France.

Although provision is made for suspension of payment under the French tax code, this is not automatic and is subject to strict conditions, namely the setting up of guarantees and designation of a representative in France. Arguing that those provisions both created “inequality of treatment” because they penalised only taxpayers wishing to leave France and were disproportionate to their declared aim of preventing tax avoidance, Mr de Lasteyrie asked the Conseil d’Etat to annul the decree instituting them for excess of powers.

The Conseil d’Etat decided to refer a question to the Court of Justice as to whether French legislation which, in order to avert the risk of tax avoidance, established a mechanism for taxing increases in value where tax residence was transferred abroad, was compatible with the principle of freedom of establishment under the EC Treaty.

In the ruling delivered last Thursday, the ECJ announced that:

"This tax measure, inferring a general intention of tax evasion from the mere transfer of tax residence to another Member State, cannot be justified by imperative reasons in the public interest: it is disproportionate in relation to the objective sought."

Speaking to the Times, Mr Cussons suggested that this verdict removes the tax disincentive for companies to move from one member state to another, and is likely to encourage organisations to shop around for the lowest levels of corporate taxation available within the European Union.

He further predicted that the new European Company, or Societas Europaea, set to come into being as a legal entity in October of this year, will also encourage corporate mobility.

However, at a recent tax planning strategies conference held in Zurich, a panel of leading tax professionals was reportedly unimpressed by the tax implications of the new corporate structure, suggesting that it is unlikely to have many positive or negative implications, as the majority of its provisions are already contained within EU or national legislation.

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