Analysis for Case C-414/21 /Huang Min

Analysis for Case C-414/21 /Huang Min

  In the case of VP Capital, the Court of Justice of the European Union (CJEU) addressed the issue of whether national tax legislation in Belgium, which treats increases in value of shares as unrealised capital gains after a company transfers its registered office from Luxembourg to Belgium, is compatible with the freedom of establishment as guaranteed by Article 49 TFEU.

1.Issue

VP Capital, originally incorporated in Luxembourg, recorded write-downs on its shareholdings which it deducted from its taxable income, increasing its losses. After transferring its registered office to Belgium, it recovered some of these write-downs but was taxed on them in Belgium because they were not recorded in a separate liability account.  

The Hof van Cassatie (Court of Cassation, Belgium) asked whether the Belgian tax treatment of the recovery of write-downs by a company after transferring its registered office from another Member State (Luxembourg) is compatible with the freedom of establishment under EU law.

VP Capital's case involved the tax treatment of the impairment of shares recorded in the original member state and the appreciation of shares in the new member state after VP Capital transferred its registered office from one EU member state to another. Specifically, VP Capital argued that Belgium should take into account the impairment of its shares recorded in Luxembourg and assess its tax position in Belgium on this basis. However, Belgium may not accept this claim and require it to pay tax on impairment write-offs for shares in Belgium, unless the gain-added portion masked by the impairment write-back is allocated to a liability account that is not available for distribution, and the Luxembourg company has in principle deducted these impairments from its taxable income in Luxembourg but has not actually been able to do so because of the tax loss. Doesthis initiative is compatible with freedom to operate？

2.Rule

According to a joint reading of Articles 49 and 54 of the Treaty on the TFEU, the benefits of freedom of business apply to companies incorporated under the law of Member States and having a registered office, a central administration or a principal place of business in the EU (Judgment of 27 February 2020, AURES Holdings, C-405/18, EU: C: 2020: 127, para. 24). The benefits of this freedom include the right of such a company to transfer its registered office, central authority or principal place of business to another Member State.

One of the purposes of the provisions of EU law on freedom to carry on business is to ensure that foreigners in the host Member State are treated in the same way as nationals of that State (Judgment of 27 February 2020, AURES Holdings case, C-405/18, EU: C: 2020: 127, paras. 27 and 31).

3. Freedom of Establishment

  Article 49 TFEU provides that companies have the right to transfer their registered office within the EU. However, this does not guarantee that such transfers will be tax-neutral.

  The Court noted that disparities in national tax laws may exist, and freedom of establishment does not require Member States to harmonize their tax rules.

4.Application

In terms of the application and interpretation of the law, the court may consider the following aspects: 

Freedom to Engage in Business Interpretation: The Court needs to interpret the provisions of Article 49 of the Treaty on the Functioning of the European Union relating to freedom of practice and determine whether it applies to the specific circumstances of the case. The CJEU highlights comparable analyses for cross-border situations. In assessing the VP Capital case, the court considered the different tax jurisdictions in which VP Capital was at the transfer of the registry office. It thinks:

Different tax jurisdictions: VP Capital There are clear differences in the tax jurisdictions of the former member state (Luxembourg) and the destination member state (Belgium). During the period before transfer the Luxembourg tax authorities worked against VP Capital, while in the period after transfer the Belgian tax authorities took over the tax rights against the company. This means that the company's tax treatment at different time points is not comparable.

Pre-recorded impairment: for VP Capital, it recorded impairment in Luxembourg, during this time Belgium does not have tax jurisdiction, therefore, the company in the transfer of the registration office immediately resume impairment, according to the Belgian tax law processing these interests, failed to enjoy impairment tax incentives, essentially because of the change of its tax jurisdiction.

5. Outcome

  The Court ruled that Article 49 TFEU does not preclude the Belgian tax legislation in question. This means that Belgium can treat the recovery of write-downs by a company that has transferred its registered office as unrealised capital gains, irrespective of whether those write-downs were recorded while the company was a tax resident of Luxembourg.

6.Conclusion

VP Capital The decision in the case demonstrates the complex relationship between the principle of free establishment under the EU legal framework and the tax rights of the member states. Although the company has the right to move freely registered within the EU, the tax impact of the migration may be complicated by the laws of a particular member state, showing the legal and economic factors to consider for transnational operations.The CJEU's ruling emphasizes the principle that while companies have the right to transfer their registered office within the EU, such transfers do not automatically lead to tax neutrality. Each Member State has the right to apply its own tax rules, provided that they do not discriminate against companies exercising their freedom of establishment. In this case, the tax treatment applied by Belgium was found to be permissible under EU law.