The CFE ECJ Task Force has issued an Opinion Statement on the ECJ decision of 16 February 2023 in Case C-707/20, Gallaher Limited, the last UK direct tax case before the CJEU. Gallaher concerns the compatibility of the United Kingdom’s group transfer rules with EU law. Under those rules, sales of assets between resident group members are treated as tax neutral, whereas sales to non-resident group members are taxed immediately.
Following AG Rantos’ Opinion of 8 September 2022, the CJEU found the UK’s group transfer rules to be in line with EU law. In essence, the Court held that only the freedom of establishment under Article 49 TFEU (and not also the freedom of capital movement under Article 63 TFEU) is relevant in respect of national legislation which applies only to groups of companies; that no relevant restriction of the parent company’s freedom of establishment exists where a transfer is taxed irrespective of the residence of the parent; and that the immediate taxation of a realised gain in cross-border sale within the EU is justified and proportionate, even if a comparable domestic sale is treated as tax neutral.
The CFE ECJ Task Force notes that Gallaher, the last UK direct tax case before the CJEU, has provided further clarity on the scope of the fundamental freedoms, the correct comparator in establishing discrimination, and the proportionality of discriminatory taxation of capital gains. In line with established case law, the Court in Gallaher confirmed that exclusively the freedom of establishment – and not also the freedom of capital movement – applies to group taxation regimes, hence excluding third-country situations.
However, in substance, the Court in Gallaher also found the UK’s group transfer rules to be proportionate, although they treated the sales of assets between resident group members as tax neutral, while sales to non-resident group members were taxed immediately. Unlike in the Court’s case law on exit taxation of unrealised gains, a deferral of payment was not deemed necessary for the UK rules to be proportionate, as the cross-border transaction involved a (cash) compensation. Surprisingly, the Court did not explain the relationship to X Holding and Commission v. Germany. Moreover, the Court’s focus on the “realisation” of income, the relationship of Gallaher with established exit tax case law, and the relevance of the concrete ability to pay tax on the level of proportionality opens the door for Member States to treat domestic and cross-border transactions differently.
We invite you to read the statement and remain available for any queries you may have.