Under Spanish corporate taxation law, unrealised capital gains form part of the basis of assessment for the tax year, where the place of residence or the assets of a company established in Spain are transferred to another Member State, or where a permanent establishment ceases to operate in Spain. Noteworthy, those capital gains do not have any immediate consequences in terms of taxation if those operations are carried out within Spanish territory, so such legislation could be a discriminatory measure and an obstacle to the freedom of establishment in that it puts the companies which have exercised that freedom at a cash-flow disadvantage. Consequently, the Commission brought an action for failure to fulfill obligations against Spain before the Court of Justice.

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In today’s judgment, the Court states, first, that the taxation of unrealised capital gains on assets assigned to a permanent establishment which ceases to operate in Spain does not amount to a restriction on the freedom of establishment. That taxation does not result from a transfer of the place of residence or of the assets of a company resident in Spanish territory to another Member State, but merely from a termination of its activities. Consequently, it is a purely domestic situation and not one of unequal treatment which falls within the freedom of establishment.

By contrast, the immediate taxation of unrealised capital gains on the transfer of the place of residence or of the assets of a company established in Spain to another Member State amounts to a restriction on the freedom of establishment. The Court considers that, in such cases, a company is penalised financially as compared with a similar company which carries out such transfers in Spanish territory, in respect of which capital gains generated as a result of such transactions do not form part of the basis of assessment for corporate taxation until the transactions are actually carried out. That difference in treatment is likely to deter a company from transferring its activities from Spanish territory to another Member State.

However, the Court takes that view that  Spain could preserve its powers in taxation matters by means of measures which are less harmful to the freedom of establishment. It is possible, for example, to request payment of the tax debt following the transfer, at the point at which the capital gains would have been taxed if the company had not made that transfer outside of Spanish territory.  Thus, the right to the freedom of establishment does not preclude capital gains generated in a territory from being taxed, even if they have not yet been realised. By contrast, it does preclude a requirement that  tax be paid immediately.