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A group of UK companies is considering appealing to the European Court of Justice (ECJ) against tax charges imposed on UK businesses that relocate their tax residence to another EU member state on the grounds that this is a breach of European Community Law. The ECJ has already indicated that taxation of capital gains on assets transferred to another Member State infringes the principle of freedom of establishment (de Lasteyrie du Saillant v Ministere de l’Economie, des Finances et de l’Industrie (Case C-9/02) [2005] STC 1722). The ECJ has further suggested that taxpayers are discriminated against by being subject to immediate taxation in their Member State of origin on capital gains not yet realised, if no such taxation occurs in similar domestic situations. The point is that, under current rules, a UK company that shifts its headquarters or board to another country, and in so doing ceases to be UK tax resident, is deemed to have disposed of all its assets at market value and is liable for tax on any gains from this ‘sale’. However, if an individual taxpayer moves to another Member State before selling his assets, his original state of residence is likely to lose the taxing rights on the capital gains which have accrued to those assets but there is no individual exit charge.

Some Member States have attempted to deal with this issue by taxing accrued (but unrealised) gains at the moment of transfer of residence by the taxpayer.

However, if this is done double taxation could arise, for example, if the exit State calculates the capital gains at the moment of deemed disposal at the time the taxpayer leaves the country and the new State of residence taxes the whole capital gain from the acquisition up to the moment of actual disposal.

The government is believed to be in informal talks with the European Commission on exit charges and is consulting with other member states on how to co-ordinate exit charge laws.