Exit tax on individuals may infringe Article 49 of the Treaty on the Functioning of the European Union

On 1 January 2019, amendments to the Act of 26 July 1991 on personal income tax[1], resulting from the amendment of 23 October 2018[2], entered into force.

They introduced, among other things, the so-called tax on unrealised gains, imposed when an individual changes tax residence or transfers assets to another country and the Polish tax authority consequently loses all or part of its right to tax gains from the disposal of those assets[3].

The tax applies to assets whose value exceeds 4,000,000 in Polish zlotys[4]. The idea of taxing the assets—rather than the income—of wealthy individuals when they change tax residence is not new.

Over the past decade or so, several EU countries have lost cases before the Court of Justice of the European Union, which has repeatedly held national exit-tax rules to be contrary to EU law, both for individuals and legal persons.

Introduction

Contrary to the claims of representatives of the Ministry of Finance, the exit tax on natural persons does not at least constitute an implementation into Polish national law Directive 2016/1164, laying down rules to prevent tax avoidance practices which have a direct impact on the functioning of the internal market[5] (hereafter, the ATAD Directive), since the directive covers only legal persons, which is clearly due to its content Article 1. Consequently, the assessment of compliance with European law of Polish tax law on tax on unrealised profits of individuals will be made primarily from the perspective of the Treaty on the Functioning of the European Union[6] (Further to the TFEU), and the provisions of the ATAD Directive should not be taken into account at all (either from the perspective of a targeted 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.

Exit tax from natural persons in the context of the case-law of the CJEU

The taxation of hypotheticals could be said to be virtual profits that a natural person can but does not have to achieve (in the future) if the taxpayer does not dispose of these "profits" and whose actual amount cannot be established in practice a priori constitutes 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 CSF in its judgment of 7 September 2006[7] , 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 cited above, in the case C-470/04, 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 profits in the same way as in the case of solutions to Dutch law referred to in the above judgment of the TEU of 7 September 2006, 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) u.p.d.o.f., and making the payment of this tax subject to the establishment of collateral conditional on the payment of instalments — Article 30de(2-4) u.p.d.o.f.).

In addition, it should be noted, in the case of taxation of so-called unrealised profits, that the taxpayer may never sell his assets at all, which, in the event of a change in his tax residence, will be subject to a sanctioned tax which will not be subject to assets of persons who change their residence in Poland.

This difference in treatment between taxpayers of the TEU has repeatedly been considered contrary to Article 49 TFEU. For example, in the judgment of 21 December 2016[8] The CJEU stressed that "the different treatment which the tax treatment of capital gains...

is subject to 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’.

A similar view of the EU Court also expressed in its judgment of 11 March 2004[9] , Recognising the 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 cited above, 7 September 2006[10]. The mere fact of such taxation of the taxpayer's virtual profits, which he may never achieve or achieve, but at a lesser level, is in clear contradiction with the foundations of the EU (free movement of persons and capital).

Already in the aforementioned judgment of 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 CJEU 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 preventing tax abuse.

The judgments of the TEU on the non-compliance with European law of the national regulations of the Member States concerning the taxation of unrealised profits of legal persons deserve 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 of 6 September 2012[11] The TEU found the provisions of Portuguese tax law contested by the European Commission to be contrary to Article 49 Since these provisions ‘establish obstacles to the freedom of establishment since, in the case of the transfer of the Portuguese company’s registered office and its effective 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, such a company shall be financially penalised in relation to a similar company remaining in the territory of Portugal’.

A similar view of the CJEU was also presented in the judgment of 23 January 2014[12] concerning Germany, 18 July 2013[13] concerning Denmark and 23 November 2017[14] concerning Finland. In the last of these judgments, the TEU found 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’.

The current provisions of Articles 30da30di of the Personal Income Tax Act (as well as the corresponding provisions of the Act of 15 February 1992 on corporate income tax[15]) will restrict and sometimes even prevent Polish companies from expanding into foreign markets, which often involves transferring assets to new companies. This, in turn, will weaken the competitive position of Polish businesses in foreign markets in a discriminatory manner and may also infringe Article 18 TFEU, which prohibits discrimination—including tax discrimination—against the citizens and businesses of one Member State in the territory of other Member States.

The above regulations of u.p.d.o.f. in practice create a property tax which is detached from the real economic situation of the taxpayer and from the income it receives. The taxpayer will often have to sell out assets to satisfy the claims of the tax, especially given the fact that according to the disposition Article 30da(14) u.p.d.o.f.

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).

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