Case C‑503/14

European Commission

v

Portuguese Republic

(Failure of a Member State to fulfil obligations — Articles 21 TFEU, 45 TFEU and 49 TFEU — Articles 28 and 31 of the Agreement on the European Economic Area — Freedom of movement for persons — Freedom of movement for workers — Freedom of establishment — Taxation of natural persons on capital gains resulting from a share exchange — Taxation of natural persons on capital gains resulting from a transfer of all the assets used in the exercise of a business or professional activity — Exit taxation of individuals — Immediate recovery of taxation — Difference in treatment between natural persons who exchange shares and maintain their residence in the national territory and those who make such an exchange and transfer their residence to the territory of another Member State of the European Union or the European Economic Area — Difference in treatment between natural persons transferring all the assets related to an activity carried out on an individual basis to a company with its head office and effective management in Portugal and those who carry out such a transfer to a company with its head office or its effective management in the territory of another Member State of the European Union or of the European Economic Area — Proportionality)

Summary — Judgment of the Court (Fourth Chamber), 21 December 2016

1. Actions for failure to fulfil obligations—Subject matter of the dispute—Determination during the pre-litigation procedure—Initial complaints set out in greater detail in the application instituting proceedings—Lawfulness

   (Art. 258 TFEU)

2. Freedom of movement for persons—Provisions of the Treaty—Subject-matter—Rules intended to facilitate the pursuit of occupational activities throughout the European Union

3. Citizenship of the Union—Free movement of persons—Freedom of establishment—Restrictions—Tax legislation—Taxation of natural persons on capital gains resulting from a share exchange—Tax deferral in the case of residence on the national territory—Transfer of the residence of the taxpayer to another Member State—Obligation for that taxpayer to include in the category of capital gains, for tax purposes for the year of loss of resident status, the amount which had not been taxed at the time of the share exchange—Equally not permissible under the Agreement establishing the European Economic Area—No justification

   (Arts 21 TFEU, 45 TFEU and 49 TFEU; EEA Agreement, Arts 28 and 31)

4. Freedom of establishment—Restrictions—Tax legislation—Taxation of natural persons on capital gains resulting from the transfer of all the assets used in the exercise of a business or professional activity on an individual basis—National legislation making entitlement to the benefit of the taxation deferral to natural persons conditional on such a transfer being to a resident company—Equally not permissible under the Agreement establishing the European Economic Area—No justification)

   (Art. 49 TFEU; EEA Agreement, Art. 31)

1.  See the text of the decision.

   (see para. 16)

2.  See the text of the decision.

   (see para. 37)

3.  A Member State fails to comply with its obligations under Articles 21 TFEU, 45 TFEU and 49 TFEU and Articles 28 and 31 of the Agreement on the European Economic Area if it adopts and maintains in force legislation according to which, for a taxable person who loses his status as a resident in the national territory, for taxation purposes for the year of such loss of residence status, the amount which, under that legislation, was not taxed when the shares were exchanged is to be reckoned as a capital gain. The obligation of that taxpayer to pay the capital gains tax immediately on the exchange of the shares creates a difference in treatment in relation to taxpayers who continue to reside in the national territory and who are therefore entitled to a deferral of tax on the said capital gains resulting from the exchange of the shares until the subsequent transfer of the shares received at the exchange. This difference in treatment with regard to the time of taxation of the capital gains in question constitutes a cash-flow disadvantage for the taxpayer who wishes to transfer his residence outside the national territory in relation to a taxpayer who maintains his residence in that territory.

   In this connection, the exclusion of a cash-flow advantage in a cross-border situation where it is available in an equivalent domestic situation is a restriction on the free movement of workers and the freedom of establishment.

   That restriction cannot be justified by the need to ensure a balanced allocation of the power to impose taxes.

   It is true that the national legislation at issue is capable of ensuring the preservation of the distribution of the power to impose taxes between the Member States concerned. The final settlement tax levied at the time of the transfer of a residence is intended to subject the unrealised capital gains — which arose within the ambit of that State’s power of taxation before the transfer of that residence — to the Member State of origin’s tax on profits. Capital gains realised after that transfer of the residence are taxed exclusively in the host Member State in which they have arisen, thus avoiding double taxation.

   However, that legislation goes beyond what is necessary in order to achieve that objective insofar as that legislation does not leave the choice to the taxable person who transfers his residence from the national territory to another Member State to opt between, on the one hand, the immediate payment of the amount of the tax on capital gains resulting from an exchange of shares and, on the other hand, the deferred payment of that amount, which necessarily involves an administrative burden for the taxable person, in connection with tracing the transferred assets, and accompanied by a bank guarantee.

   As regards, the justification based on the need to maintain the cohesion of a national tax system, this constitutes an overriding reason in the public interest. In order for an argument based on such a justification to succeed, the existence of a direct link must be established between the tax advantage concerned and the offsetting of that advantage by a particular tax levy.

   Although, in a cross-border situation, the tax advantage granted is offset by a tax levy, since the amount of the tax due is necessarily recovered at the time of transfer of the taxable person’s residence outside of the national territory, this is not the case when the situation is purely internal, since the recovery of the tax on capital gains resulting from an exchange of shares takes place only in the eventuality of a definitive disposal of the shares received during that exchange, that alleged link between the tax advantage granted to the taxable person and tax treatment of that advantage is not certain.

   (see paras 43-45, 56, 57, 60, 62, 64, 65, 94, operative part 1)

4.  A Member State fails to fulfil its obligations under Article 49 TFEU and Article 31 of the Agreement on the European Economic Area where it adopts and maintains in force legislation, which reserves entitlement to the tax deferral provided for by that provision to natural persons who transfer all the assets used in the exercise of a business or professional activity on an individual basis to a company which has its head office or effective management in the national territory.

   Such a tax system results in a cash-flow disadvantage for a taxable person who transfers all the assets in question to a company with its head office or effective management outside the national territory, compared to a taxable person who transfers the same assets to a company with its head office and effective management in the national territory, and thus constitutes a restriction on the exercise of the right of establishment.

   Such a restriction cannot be justified by the need to guarantee economic continuity based on necessity of making the benefit of tax deferral subject to certain requirements for the transferee company in respect of registration of the transferred assets, compliance with which cannot be ensured, in the absence of measures of harmonisation, with regard to companies whose head office or effective management is in the territory of another State, since they are under the jurisdiction not of the Member State from where the transfer took place, but of the State of residence.

   Even if the requirement for a transferee company to have its head office and effective management in the national territory is therefore ultimately intended to ensure that the Member State from where the transfer took place can tax the capital gains in question, that objective cannot justify the different treatment of natural persons, depending on whether they transfer all the assets in question to a company with its head office and effective management in the national territory or to a company with its head office or effective management in the territory of another State, since such an objective may be ensured without the need to distinguish between a purely internal situation and a cross-border situation. Thus, such a restriction on freedom of establishment is disproportionate to that objective, and is therefore prohibited by Article 49 TFEU and Article 31 of the EEA Agreement.

   (see paras 84, 89-91, 93, 94, operative part 2)