INSIGHT: Exit Taxation—a Look into Slovenia’s Legislative Future

While it is true that direct taxation has not markedly been an object of the EU’s legislative agenda, the new instruments set out by the Council Directive (EU) 2016/1164 of July 2016 “laying down rules against tax avoidance practices that directly affect the functioning of the internal market” (the Anti-Tax Avoidance Directive, ATAD), will have colossal consequences in the field of direct taxation when fully implemented.

One of those instruments is the concept of exit taxation as set out in Article 5 of ATAD. When implemented in Slovenia, it will be featured in Slovenia’s Corporate Income Tax Act (CITA) and will be applicable (if passed) from January 1, 2020 onward.

Before delving deeper, it is important to note that Slovenia’s legislation will most likely not present any sort of exception to the rules of exit taxation (as envisaged in ATAD) as is evident from the planned proposal by the Slovenian Ministry of Finance to the Corporate Income Tax Act update (proposed CITA). Nonetheless it is still prudent to present the proposal as it stands, since variations upon implementation may still exist between different member states, considering that the ATAD is stipulated to be a de minimis (minimum requirement) instrument of legislation, and that direct taxation is by its nature an authentic act of sovereignty, varying from state to state.

An EU Perspective

In order to present a clear summary of the proposed Slovenian legislation and its justification it is necessary to take a look at the EU situation in this regard.

The concept of exit taxation is not an alien one, nor an innovation of the EU, considering that some member states have already implemented at least comparable instruments (see Austria, Germany and the U.K. as examples). Further, exit taxation or comparable measures (to varying degrees) impact the workings of the internal market and have therefore been a subject of decisions by the Court of Justice of the European Union (CJEU). In this regard the CJEU has recognized both the member states’ right to direct taxation and the negative impact this has on one of the EU “four freedoms”; namely, freedom of establishment.

For example, in A Oy (as in National Grid Indus, Verder LabTec, among others) the CJEU put a Finnish measure comparable to exit taxation to a proportionality test, finding that while the measure itself was legitimate, the provision making the tax payable immediately and not upon realization was disproportionate, since it gave preference to equivalent intra-national transactions.

Bearing that in mind, Article 5 of the ATAD states that a taxpayer will be subject to a tax on the unrealized appreciation of assets (hidden reserves) (calculated as a subtraction between the market value of the transferred assets and their value for tax purposes) when moving those assets either through transfer of business, assets or residency, whereby a member state would lose its ability to tax those assets indefinitely and in such a manner that those assets would still be wholly in control of the original owner.

As a direct answer to the objections of the CJEU in Lasteyrie, premature payment of taxes is prohibited, and the taxpayer has the right to either pay the exit tax upon completion of the transaction or to defer the payments in installments over a period of five years.

However, such a deferment is only possible when the transferor transfers its business, assets or residency to either a member state of the EU or a country that is a party to the Agreement on the European Economic Area (EEA). The deferment is immediately overturned if the transferred residency, business or assets are sold, disposed or transferred to a third country, or if the taxpayer files for bankruptcy or fails to act upon an installment of the deferred payment.

Implementation in Slovenia

When implemented, exit taxation will encompass the same types of transactions, and the same possibility of a deferred payment as foreseen by the ATAD, while at the same time:

• defining the calculation formula of unrealized appreciation of assets;
• defining assets; and
• determining special procedural steps in order to achieve deferment of payment.

For a comprehensive analysis it will be useful to show how the concept of exit taxation is going to look after being transposed into the CITA.

Transfers of Assets that are Relevant for Exit Taxation

As mentioned above, the only transfers (either of assets, business or residency) are those where Slovenia will lose its ability to tax the transferred assets, wherein the economic or actual ownership of the transferred assets stays the same.

The proposed CITA stipulates the following examples where such transactions will be subject to exit taxation and where the transferor will be obligated to reveal its hidden reserves:

• the taxpayer transfers its assets from Slovenia to its own permanent establishment in another country;
• the taxpayer transfers its assets from a Slovenian permanent establishment to its own permanent establishment or other place of business in another country;
• the taxpayer transfers its residency to another country (this situation is only relevant in so far as the transfer of residency brings with it the transfer of taxable assets);
• the taxpayer transfers its business to another country (see the above point).

Calculating a Hidden Reserve and its Taxation

As mentioned above, the proposed CITA stipulates that a hidden reserve is calculated as a subtraction between the actual market value of the transferred assets and their value for tax purposes. The difference between the two is therefore an amount (a hidden reserve) that is not evident from the entity’s accounting books since it presents a market value not yet realized.

The value of the hidden reserve is added to a company’s yearly tax base, meaning that it is not taxed separately per se. It must be noted that there is no distinction for tax purposes whether the difference between the actual market value of the transferred assets and their tax value is negative or zero, since in both cases the CITA irrevocably presumes that it is zero. This means that a negative “hidden reserve” may not be used as a form of reducing a company’s annual income tax burden.

Therefore, the calculation formula is as follows:

actual market value of the asset – the asset’s tax value = hidden reserve

whereby:

• the actual market value is the value for which the asset may be sold or exchanged for either assets or securities between two informed and willing parties who are among themselves independent and equal (basically an exchange under conditions of an arm’s length principle);
• the asset’s value for tax purposes is the value allotted to it when calculating its tax burden (usually but not always tax value coincides with the asset’s book value).

It is important to note that not all assets are relevant with regard to exit taxation. Under the proposed CITA only long-term or non-current assets will be relevant when calculating the tax burden, meaning that current assets (convertible assets that are expected to be converted within a year) are irrelevant in this regard.

Moreover, much the same as Article 5(7) of the ATAD, the proposed CITA stipulates that assets that will be returned to Slovenia within a period of 12 months are exempted, to the extent that:

• those assets are connected to financing securities;
• the assets are given as assurance of payment;
• asset transfer takes place in order to meet prudential capital requirements or for the purpose of liquidity management.

Deferment

As explained above, deferment is only possible when a company transfers its assets to either a member state of the EU or a party to the EEA. The deferment period may not exceed five years where the number of installments, the installment payment amount and the longevity of the payment plan is in the hands of the requesting taxpayer. Nevertheless, the first installment is always due 30 days after the taxpayer has submitted its tax return, where the next one is due a year after the previous one has expired.

It should be noted that interest on deferred payments will be added, in the amount of 2% from the deferred payments up to the day that an individual installment is paid.

As mentioned above, the deferment is immediately overturned if the transferred residency, business or assets are sold, disposed or transferred to a third country, or if the taxpayer files for bankruptcy or fails to act upon an installment of the deferred payment.

Planning Points

Exit taxation will be enacted and applied after January 1, 2020. In preparation:

• Always ask yourself if a transfer of a business or residency also incurs the transfer of assets, which will eliminate the original jurisdiction’s ability to levy a tax.

• Calculate in advance the hidden value of the asset to know what the tax burden will be.

• Take into account that while deferment may be an option, payments will accrue additional tax burdens.

Blaž Pate is a Partner and Mihael Pojbič is an Assistant with LeitnerLeitner.

The authors may be contacted at: blaz.pate@leitnerleitner.com; mihael.pojbic@leitnerleitner.com

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners