EXIT TAXATION AS A MEASURE AGAINST TAX AVOIDANCE IN THE EUROPEAN UNION

Abstract

Tax fraud and evasion undermine the functioning of democratic societies, distort economic decision-making, and erode the trust between citizens and governments. Tackling this issue is critical to safeguarding public trust, ensuring the functioning of the European Union’s single market, and promoting economic stability. Tax fraud limits the capacity of European Union states to raise the funds they need, implement economic and social policies, and sustain public services. The repercussions include potential cuts in public services and a slower economy. Tax fraud has several main consequences: a) economic consequences, b) Inequity and unfairness, c) trust erosion for the law and public institutions, d) criminal activity, and e) global implications. Changes in the registered office of companies are a common occurrence in a globalised market, and such changes are significant not only from the perspective of company law but also from a tax law standpoint. Furthermore, an exit tax is a means of preventing artificial relocations aimed at obtaining tax benefits in other tax systems with a lower tax burden. Such practices raise many questions related to the principle of fairness, freedom of establishment, and the distribution of states’ taxing rights. Therefore, the European Union adopted the Council Directive (EU) laying down rules against tax avoidance practices that directly affect the functioning of the internal market, which regulates the rules related to exit taxation. This paper analyses the rules related to exit taxation. In the case of exit taxation, it is proposed that where a taxpayer moves assets or its tax residence out of the tax jurisdiction of a state, that state taxes the economic value of any capital gain created in its territory even though that gain has not yet been realised at the time of the exit. It is therefore necessary to specify cases in which taxpayers are subject to exit tax rules and taxed on unrealised capital gains which have been built into their transferred assets. In order to compute the amounts, it is critical to fix a market value for the transferred assets at the time of exit of the assets based on the arm’s length principle. It is also necessary to allow the receiving state to dispute the value of the transferred assets established by the exit state when it does not reflect such a market value. In those situations, taxpayers should have the right to either immediately pay the amount of exit tax assessed or defer payment of the amount of tax by paying it in instalments over a certain number of years, possibly together with interest and a guarantee.