Thursday, June 30, 2005

Emigration fiction clause of Dutch inheritance tax not incompatible with free movement of capital

Advocate General (AG) Léger rendered his opinion in Case C-513/03 (van Hilten case). A preliminary ruling from the European Court of Justice (ECJ) was requested by the Court of Appeal of 's-Hertogenbosch on 5 November 2003. The final judgment is expected later this year or beginning of 2006.

A bit of backround: Dutch nationals who die or make gifts within 10 years of emigrating from the Netherlands are deemed to be still resident (“extended residence”) for purposes of gift and inheritance tax. in the Netherlands Non-Dutch nationals are not subject to this rule and are accordingly subjected to a less burdensome tax regime. Although this rule was declared by a lower court to be in breach of the freedom of capital movement under the EC Treaty as regards emigration within the EU, the question has arisen in the Van Hilten case whether the same would apply in the case of emigration outside the EU (Switzerland in this case). Both cases (EU/EU and EU/Third countries) are pending on the Supreme Court.

Basically, although the EU “freedoms” provided for under the EC Treaty are generally only applicable with regard to cross-border activity between member states, the freedom of capital movement, in certain circumstances, can also apply as regards cross-border activity between a member state and a third state. In view of the uncertainties surrounding this issue, the Dutch lower Court referred the matter to the ECJ for a preliminary ruling. The preliminary questions questioned whether the principle of freedom of movement of capital might also be invoked against the Dutch inheritance tax in the event of a Dutch national emigrating to a non-EU Member State, in this case Switzerland.

In a rather complex and somewhat surprising opinion the AG held that Art. 3 ITA (“extended residence” fiction) is not incompatible with Art. 73B(1) of the EC Treaty (currently art. 56). It rests to be seen if the same issue, but as regards emigration within the EU, will be solved in the same way. I hope to further expand on this issue soon. Till then au revoir.

Deloitte has published a good summary of the AG opinion. Click here to read it.


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