PwC

Tax & Legal

Referral to European Court of Justice: Does expatriate exit taxation (Section 6 Foreign Transactions Act) contravene the terms of the Agreement for the Free Movement of Persons?


On 2 November 2017 the Tax Court of Baden-Württemburg released a press bulletin stating that by a notice dated 14 June 2017 (2K 2413/15), it had referred a question to the European Court of Justice (“ECJ”) with regard to Section 6 Foreign Transactions Act (“FTA”) – expatriate exit taxation. The question referred was whether the expatriate exit tax rule under Section 6 FTA contravened the principle of non-discrimination contained in the Agreement for the Free Movement of Persons between the EU and Switzerland.

The Tax Court of Baden-Württemburg takes the view that the appellant is entitled to rely on the principle of non-discrimination contained in the Agreement for the Free Movement of Persons between the EU and Switzerland. A person who wishes to move to Switzerland may be subject to expatriate exit tax, whereas a person who moves inside Germany would not be. According to ECJ case law, the principle of non-discrimination contained in the Swiss Agreement is comparable to the Fundamental Freedoms of the EU. The principles of freedom of establishment and free movement of labour (and the freedoms in general) prohibit every measure which is aimed at impeding the exercise of a freedom or making it less attractive. According to the Tax Court the charge to expatriate exit tax had “at least a dissuasive effect” on the move from Germany to Switzerland.
Background
Since 2008, the appellant, a German citizen, has been the managing director of a company resident in Switzerland, in which company he holds a 50% interest. In 2011 he moved his (habitual) residence from Germany to Switzerland. The German tax office charged him to expatriate exit tax on the increase in value attributable to his shareholding (so-called hidden reserves). According to the tax office, the removal to Switzerland led to an earlier realisation of income tax on a (potential) sale of his shareholding. No option for a deferral of the tax payment was available in respect of a removal to Switzerland, even though in the case of a removal within the EU, such a deferral should be possible.
Source:
Press release No. 11/2017 of the Tax Court of Baden-Württemburg, dated 2 November 2017.