Bendt Knutssøn
vs.
The Danish Ministry of Taxation
No general setting aside of taxation scheme containing elements which were in contravention of EU law
On 15 August 1998, Bendt Knutssøn's (B) full tax liability in Denmark ceased when he moved to France. At the time of moving, B was the principal shareholder of a limited liability company, which was wound up on 2 December 1998 in a solvent liquidation. In the 1998 income year, B was made liable to pay tax on an unrealised capital gain on the shares in the company, as, pursuant to section 13a of the Danish Capital Gains Tax Act then in force, capital gains on shares owned at the time of moving was subject to taxation to the same extent as if the shares had been disposed of at this time. The taxation scheme entitled the Ministry of Taxation to grant a respite in respect of the tax payment, on the condition that the tax payer furnished security and paid a tax surcharge. B stated that the demand for security, which the Ministry of Taxation acknowledged as being in contravention of Article 43 of the EC Treaty on the freedom of establishment, was one of the reasons behind his decision to dispose of the shares by winding up the company.
Before the Supreme Court, B claimed that the Ministry of Taxation should recognise that his share income for the 1998 income year should be reduced by an amount corresponding to the unrealised capital gain, submitting that section 13a of the Capital Gains Tax Act then in force was in contravention of Article 43 of the EU Treaty on the freedom of establishment. The Ministry of Taxation made a claim for dismissal.
The Supreme Court gave judgment in favour of the Ministry of Taxation.
Referring to the case law of the European Court of Justice, the Supreme Court held that the taxation scheme pursuant to section 13a of the Capital Gains Tax Act then in force pursued a general interest objective and was appropriate achieve this objective. The fact that the otherwise lawful taxation scheme comprised certain elements which went beyond what was necessary to achieve the objective, and which were, thus, in contravention of EU law, could not lead to the entire scheme being set aside; rather, only the elements which were in contravention of EU law could be set aside. This assessment must be upheld, although the taxpayer chose to dispose of the shares, in this case by liquidation, to avoid furnishing security and paying a tax surcharge. Whether or not the taxation scheme involved other disadvantages – e.g. in relation to restructuring and succession – could not lead to another result in respect of B's tax liability, as he had, according to the information received, not been affected by such possible disadvantages.
The High Court had reached the same conclusion.