Exit tax from individuals may violate Article 49 Treaty on the Functioning of the EU. Contrary to the claims made by representatives of the Ministry of Finance, this tax does not, at least, constitute an implementation of Polish national law. Directive 2016/1164 on the prevention of tax avoidance (‘ATAD’).
Date 1 January 2019 the changes to the PIT Act resulting from the amendments entered into force dated 23 October 2018 (Journal of Laws of 2018, item 2193), introducing, among other things, a tax on unrealised profits, imposing a change in the tax residence of natural persons and the transfer of assets to another state, resulting in Poland's fiscus losing in full or in part the right to tax the profits from the sale of these assets (Article 30da(2) PIT Act).
This tax is charged to assets whose value exceeds 4,000,000 PLN (Article 30db(1) PIT Act). It is not a new desire to tax assets, i.e. assets, rather than income, of wealthy individuals in the event of a change in their tax residence.
It is worth noting, however, that over several years, many EU countries have suffered a defeat in the fight against the EU's TEU, which has repeatedly recognised the EU Member States' national legislation on exit tax as contrary to European law (both in the area of taxation of individuals and legal persons).
Polish law in this regard also raises doubts.
Contrary to the claims of representatives of the Ministry of Finance, exit tax in respect of natural persons does not at least constitute implementation of Polish national law Directive 2016/1164 on the prevention of tax avoidance (hereinafter the ‘ATAD Directive’), since the directive covers only legal persons, which is directly due to its content Article 1.
Consequently, the assessment of the compatibility with European law of the Polish tax law on the tax on unrealised profits of individuals will be carried out primarily from the perspective of the EU Treaty on the Functioning of the EU (hereinafter the ‘TFEU’) and the provisions of the ATAD Directive should not be taken into account at all (either from the perspective of an expeditious interpretation or a systemic regulation of the TFEU).
The key provision of the TFEU which Polish legislation may violate is a provision Article 49 TFEU, prohibiting any restriction on the freedom of establishment of citizens one Member State in the territory of another Member State.
This prohibition shall include, in particular, restrictions on the taking up and pursuit of self-employed activities as well as the establishment and management of undertakings, in particular companies, and the establishment of agencies, branches or subsidiaries in the territory of other Member States.
Existing regulations Article 30da – Article 30di The PIT Act (as well as the relevant provisions of the CIT Act) will restrict, and sometimes eliminate, the expansion of Polish companies into foreign markets, which often happens through the transfer of assets to new companies
The taxation of hypotheticals could be said to be virtual profits which a natural person can, but which he does not need to achieve (in the future) if the taxpayer does not dispose of these "profits" and whose actual amount cannot be set priori in practice, represents a significant restriction on freedom of movement and settlement within the EU, as well as freedom of establishment in the EU internal market, as stressed by the ECJ in its judgment of[21] December 2016 (case C 503/14).
The income from hypothetical profits may, in fact, not occur at all or occur at a lower level, inter alia, as a result of a reduction in the tax liability for capital losses generated after the taxpayer has changed residence, which the taxpayer could not do under the jurisdiction of the TEU in the above judgment of regulation of Dutch law.
This fact has become one on the grounds that the above-mentioned provisions of national law of the Netherlands are incompatible with Community law.
Moreover, in the judgment dated 21 December 2016 The EU Court explicitly stated that ‘Article 43 EC (present Article 49 TFEU) should be interpreted as preventing a Member State from introducing a system of taxation on capital gains in the event of a transfer by a taxable person of his place of residence outside that Member State, (...) which makes the granting of a deferred period for payment of that tax subject to the establishment of securities and which does not take full account of the impairment which may occur after the change of residence not taken into account by the host Member State.’ Polish rules on taxation of unrealised gains in the same way as those of the Dutch law applicable to the TEU judgment dated 21 December 2016, are therefore in breach of Article 49 TFEU.
(i.e.
failure to take account of the loss of value of capital gains which may occur after the tax residence of the taxpayer has changed, when calculating income from unrealised profits — Article 30da(7) and (10) the PIT Act, and making the payment of this tax conditional on the establishment of collateral conditional on the payment of this tax – Article 30de(2-4) PIT Act).
In addition, in the case of taxation of so-called unrealised profits, it should be noted that the taxpayer may never sell his assets, which, in the event of a change in his tax residence, will be subject to a sanctioned tax, while the assets of persons who change their residence in Poland will not be subject to that tax.
This difference in treatment between taxpayers of the TEU has repeatedly been considered contrary to Article 49 TFEU.
For example, in the judgment dated 21 December 2016 (case C 503/14) The CJEU stressed that ‘the different treatment which, in the field of capital gains taxation, a taxable person who moves his place of residence outside Portugal to a taxable person who retains his place of residence in that territory constitutes a restriction on the freedom of movement of workers and of establishment within the meaning of Article 45(49) TFEU’.
The similar view of the EU Court also expressed in its judgment dated 11 March 2004 (reference no. C-9/02), Recognising French rules introducing taxation of unrealised profits of natural persons in the event of a change in their tax residence as contrary to European law, and in the judgment dated 7 September 2006 (case C 470/04).
The mere fact of such taxation of the taxpayer's virtual profits, which may never be achieved or achieved, but at a lesser rate, lies in a manifest contradiction with the foundations of the EU (free movement of persons and capital).
Already in judgment dated 11 March 2004 The CJEU considered that ‘the loss of tax revenue by a Member State due to a change in the residence of a taxpayer to another Member State where the tax system is different and can be more favourable to that taxpayer cannot in itself justify restrictions on freedom of settlement’.
In that judgment, the TEU considered that the French legislation providing for taxation of unrealised profits in the event of a change in the tax residence of natural persons was aimed at obstructing the movement and settlement in other EU countries rather than at countering tax abuse.
The TEU judgments on the non-compliance with European law of Member States' national rules on taxation of unrealised profits of legal persons also merit attention.
These judgments remain in some connection with the taxation of so-called unrealised profits of natural persons, given that, in the field of taxation of unrealised profits at corporate level, national legislators of the Member States may rely on regulation Article 5 The ATAD Directive (which, however, makes it highly inept, as evidenced by the extensive case law of the TEU), should, under the national legislation of a Member State in the field of corporation tax, conflict with European law, all the more so in similar cases concerning individuals and their taxation in the event of a change of tax residence or transfer of assets to another Member State.
For example, in the judgment dated 6 September 2012 (case C 38/10)The TEU found the provisions of Portuguese tax law contested by the European Commission to be contrary to Article 49 The TFEU because those provisions ‘establish obstacles to the freedom of establishment since, in the case of the transfer by a Portuguese company of its registered office and of its actual management to another Member State and in the case of a partial or total transfer to another Member State of assets situated in the territory of Portugal of a permanent establishment of a company not resident in Portugal, that company shall be financially penalised in relation to a similar company which is active in the territory of Portugal.’ The similar view of the CJEU was also presented in the judgment dated 23 January 2014 (reference no.
C-164/12) concerning Germany, dated 18 July 2013 (reference no. C-261/11) concerning Denmark and dated 23 November 2017 (case C 292/16) concerning Finland.
In the last of the above judgments, the CEU considered the Finnish tax law to be contrary to Article 49 The TFEU, while stressing that ‘different treatment may discourage companies established in Finland from doing business in another Member State through a permanent establishment and therefore constitutes a restriction on freedom of establishment.’
Existing regulations Article 30da – Article 30di The PIT Act (as well as the relevant regulations of the CIT Act) will limit, and sometimes eliminate, the expansion of Polish companies into foreign markets, which often happens through the transfer of assets to new companies.
This in turn will weaken the competitive positions of Polish entrepreneurs on foreign markets in a discriminatory way, which may also violate the provisions Article 18 TFEU (no discrimination including taxation, citizens and businesses) one Member State in the territory of other Member States.
The above provisions of the PIT Act create in practice a property tax, which is detached from the real economic situation of the taxpayer and from the revenue it receives.
The taxpayer will often have to sell out assets in order to satisfy the claims of the taxus, especially taking into account the fact that according to the disposition Article 30da(14) PIT law tax on unrealised gains must be paid within the time limit 7 days (which, under the current case law of the TEU, will in itself with the highest probability be considered disproportionate).
In conclusion, the TEU case law on the taxation of unrealised profits of legal persons confirms the non-compliance of national rules of Member States for the same reasons as the same case law on natural persons, which only strengthens the above argument. Taking into account the number of judgments passed in this regard and the number of EU Member States whose national legislation has been considered to be in breach of fundamental EU principles (Spain, France, Finland, Portugal, Netherlands, Germany, the United Kingdom, Denmark), the existence of a uniform and established case law line of the TSEU, which should be an obvious signal de lege ferenda at the address of the Polish legislature, which, while maintaining manifestly unconstitutional and contrary to Community law, exposes itself to another dispute with the European Commission and a very highly probable failure before the TEU.
Author:
Dr. Rafał Nawrot Managing Partner in charge of the Department of Tax Advisory. From 2011 acts as Managing Partner At Russell Bedford Poland. He is a doctor of legal science, a graduate of the Faculty of Law and Administration of the University of Warsaw. He specializes in tax law and legal restructuring.