On 26 February 2015 the Advocate General of the European Court of Justice (ECJ) issued an opinion on an issue concerning a particular type of exit tax and the EU principle of freedom of establishment.

The Financial Court of Düsseldorf referred a question to the ECJ for a preliminary ruling on 12 December 2013. In the case of Verder LabTec GmbH & Co KG v Finanzamt Hilden the ECJ was asked if it is consistent with the principle of freedom of establishment if, when an asset is transferred from a domestic to a foreign PE of the same legal entity, a national rule establishes that there is a withdrawal for non-business purposes with the result that the disclosure of hidden reserves leads to a profit on the withdrawal; where another rule in domestic law gives the possibility to distribute that profit equally over five or ten financial years.

Article 49 of the Treaty on the Functioning of the European Union (TFEU) prohibits restrictions on the freedom of establishment of nationals of a member state in the territory of another member state. This includes any restrictions on setting up agencies, branches or subsidiaries. The issue therefore concerned the extent to which the exit tax set up as described in the question referred to the ECJ was a restriction on the freedom of establishment.

The Advocate General’s opinion given on 26 February 2015 was that the freedom of establishment under Article 49 of the TFEU does not prevent national rules requiring disclosure of hidden reserves contributing to taxable profits on the transfer of an asset from a domestic establishment to a foreign PE of the same entity, where another domestic law provides for the possibility to spread the income equally over ten financial years.

The ECJ will take into account the opinion of the Advocate General when reaching a decision on the issue but is not obliged to follow the Advocate General’s opinion.