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Exit Taxation in the European Union, Is there really a problem?

Dabija, Vladislav LU (2015) HARN60 20151
Department of Business Law
Abstract
Exit taxes represent an expression of state’s sovereignty by taxing value increases of assets, hidden reserves and any untaxed income that arose on its territory. These taxes are triggered before the state of emigration loses its power of taxation as a result of the transfer to the jurisdiction of another state when an individual or company changes residency. The purpose of exit taxes is to protect tax bases and to prevent the escaping of untaxed revenue.
As the EU is established on the principles of a single market, individuals and companies are guaranteed by TFEU a number of freedoms that cannot be restricted. Due to this fact, Member States cannot levy exit taxes in an unrestrained manner. According to the ECJ, exit taxes are split... (More)
Exit taxes represent an expression of state’s sovereignty by taxing value increases of assets, hidden reserves and any untaxed income that arose on its territory. These taxes are triggered before the state of emigration loses its power of taxation as a result of the transfer to the jurisdiction of another state when an individual or company changes residency. The purpose of exit taxes is to protect tax bases and to prevent the escaping of untaxed revenue.
As the EU is established on the principles of a single market, individuals and companies are guaranteed by TFEU a number of freedoms that cannot be restricted. Due to this fact, Member States cannot levy exit taxes in an unrestrained manner. According to the ECJ, exit taxes are split into two categories. Exit taxes for individuals have to be only in the form of a final tax assessment with an automatic deferral till the realization of the asset including consideration for future value decreases. On the other hand, in the case of exit taxes for companies, only an option between immediate taxation and deferral till realization must be provided. At the same time, Member States can request the payment of interest and guarantees until the tax is paid. Likewise, the tax can also be paid in yearly installment over a period of time without realization.
The levy of exit taxes can also be affected by bilateral tax treaties which are most commonly based on the OECD Model Tax Convention. Tax treaties have an important role in the allocation of taxing powers between Member States, yet unfortunately in the case of exit taxes a number of uncertainties create some difficulties. It is not clear if the OECD Model Convention prescribes the taxation of unrealized capital gains and at the same time the legal issue of treaty override can interfere in such situations. The OECD Commentaries provide contradicting statements in regards to these issues therefore the solution to these problems is a matter of interpretation.
Notwithstanding the aforementioned difficulties, there is nothing that would impede the Member States of the EU to levy exit taxes. The ECJ has acknowledged that Member States have the right to defend their tax base by taxing economic value generated by unrealized capital gains in their territory even if the gain concerned has not yet actually been realized. Additionally, tax treaties based on the OECD Model Convention do not forbid the levy of exit taxes, the state of emigration has the right to tax due to the fact that the tax liability is established when the taxpayer is still a resident. Taking into consideration the aforestated, it can be concluded that there is nothing wrong with the imposition of exit taxes as it is a fair manifestation of the Member States’ tax sovereignty. (Less)
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author
Dabija, Vladislav LU
supervisor
organization
course
HARN60 20151
year
type
H1 - Master's Degree (One Year)
subject
keywords
Exit taxation, Fundamental freedoms, Treaty override, Double taxation
language
English
id
5436075
date added to LUP
2015-06-12 15:55:09
date last changed
2015-06-12 15:55:09
@misc{5436075,
  abstract     = {Exit taxes represent an expression of state’s sovereignty by taxing value increases of assets, hidden reserves and any untaxed income that arose on its territory. These taxes are triggered before the state of emigration loses its power of taxation as a result of the transfer to the jurisdiction of another state when an individual or company changes residency. The purpose of exit taxes is to protect tax bases and to prevent the escaping of untaxed revenue.
As the EU is established on the principles of a single market, individuals and companies are guaranteed by TFEU a number of freedoms that cannot be restricted. Due to this fact, Member States cannot levy exit taxes in an unrestrained manner. According to the ECJ, exit taxes are split into two categories. Exit taxes for individuals have to be only in the form of a final tax assessment with an automatic deferral till the realization of the asset including consideration for future value decreases. On the other hand, in the case of exit taxes for companies, only an option between immediate taxation and deferral till realization must be provided. At the same time, Member States can request the payment of interest and guarantees until the tax is paid. Likewise, the tax can also be paid in yearly installment over a period of time without realization. 
The levy of exit taxes can also be affected by bilateral tax treaties which are most commonly based on the OECD Model Tax Convention. Tax treaties have an important role in the allocation of taxing powers between Member States, yet unfortunately in the case of exit taxes a number of uncertainties create some difficulties. It is not clear if the OECD Model Convention prescribes the taxation of unrealized capital gains and at the same time the legal issue of treaty override can interfere in such situations. The OECD Commentaries provide contradicting statements in regards to these issues therefore the solution to these problems is a matter of interpretation. 
Notwithstanding the aforementioned difficulties, there is nothing that would impede the Member States of the EU to levy exit taxes. The ECJ has acknowledged that Member States have the right to defend their tax base by taxing economic value generated by unrealized capital gains in their territory even if the gain concerned has not yet actually been realized. Additionally, tax treaties based on the OECD Model Convention do not forbid the levy of exit taxes, the state of emigration has the right to tax due to the fact that the tax liability is established when the taxpayer is still a resident. Taking into consideration the aforestated, it can be concluded that there is nothing wrong with the imposition of exit taxes as it is a fair manifestation of the Member States’ tax sovereignty.},
  author       = {Dabija, Vladislav},
  keyword      = {Exit taxation,Fundamental freedoms,Treaty override,Double taxation},
  language     = {eng},
  note         = {Student Paper},
  title        = {Exit Taxation in the European Union, Is there really a problem?},
  year         = {2015},
}