On 29 November 2011, the Court of Justice of the European Union (the "CJ") ruled on National Grid Indus BV (case C-371/10). The CJ holds that a tax charge on unrealised capital gains upon transfer of the place of effective management of a company is not precluded by the freedom of establishment. No deduction has to be allowed for any decrease in value of assets after the date of emigration. However, the company transferring its place of effective management should be provided the choice between immediate payment of the tax due and deferral of payment until the capital gains are actually realised. The CJ limits the practical effect of its judgment by stating expressly that Member States may charge interest on deferred payment of exit charges and may request the emigrating taxpayer to provide security for the deferred tax payment.

National Grid Indus BV (the "Company") held a receivable from an affiliated company. After the GBP strengthened against the Dutch guilder, the receivable held an unrealised currency exchange gain of approximately NLG 22 million. In December 2000, the Company transferred its place of effective management to the United Kingdom. Because of that transfer, a corporate income tax assessment was imposed on the Company in respect of such unrealised currency exchange gain (the "Exit Tax"). This assessment was immediately due and payable.

In its ruling the CJ had to answer the question whether the Dutch legislation underlying the Exit Tax was in conflict with the freedom of establishment pursuant to the EU-treaty (the Treaty).

The CJ held that the Exit Tax restricts the freedom of establishment. If the Company had transferred its place of effective management within the Netherlands, an Exit Tax would not have been imposed. In such a situation hidden reserves would have only been subject to tax to the extent actually realised.

Subsequently, the CJ held that such restriction was in principle justified by the need to maintain a balanced allocation of taxing powers between Member States. The Netherlands did not have to give up its tax claim on the unrealised gain as a result of the transfer of the Company’s place of effective management.

The CJ further held that it was proportionate to tax the unrealised gain at the time of transfer of the place of effective management. In deviation from the N-case, the CJ held that the Netherlands did not have to take into account any decrease in value after such time. The United Kingdom has the exclusive right to tax the Company’s profits as of the emigration date and, consequently, it is for the United Kingdom to take into account any subsequent value changes.

With respect to the date of payment of the Exit Tax the CJ held that the Netherlands should provide for a measure that offers a company that transfers its place of effective management the choice between immediate payment of the Exit Tax and a system of (interest bearing) deferral of such tax until the date of realisation. The Netherlands may ask for security, as provided for in its national law, for instance in the form of a bank guarantee.