Legal Alerts / 28 Feb 2013

Legal Alert – Finnish Legislation on Deductibility of Cross-border Tax Losses in Breach of EU Law

On 31 January 2013, the European Court of Justice delivered its preliminary ruling in the case concerning A Oy (C?123/11) on deductibility of non-resident subsidiary’s losses in the context of a cross-border merger. The request for a preliminary ruling under Article 267 TFEU from the Finnish Supreme Administrative was made on 7 March 2011 (for reference, see Legal Alert – Cross-border Merger Case to ECJ, 31 March 2011).

Currently, the Finnish Income Tax Act provides that, in the context of a merger, the receiving company has the right to deduct from its taxable income the loss of the merged company if the receiving company or its shareholders or the company and its shareholders together have, from the beginning of the loss-making year, owned more than half of the merged or divided company’s shares. However, the deductibility of the loss of the merged company has in practice required that the merged company has been Finnish resident entity.
In its preliminary ruling, the ECJ ruled that the Finnish legislation on deductibility of cross-border loss is incompatible with freedom of establishment if it does not allow the parent company the possibility of showing that its non-resident subsidiary has exhausted the possibilities of taking those losses into account and that there is no possibility of their being taken into account in its State of residence in respect of future tax years either by itself or by a third party.

In its judgment, the ECJ ruled that the Finnish legislation goes beyond what is necessary to attain the objectives of preservation of the allocation of the taxing power, denying the possibility of deducting tax losses twice and preventing the risk of tax avoidance.

In consequence of the judgment, Finnish parent companies may have the right to deduct non-resident subsidiary’s losses in the context of a cross-border merger provided that the company has exhausted all the possibilities of taking account of the losses which exist in the subsidiary’s country of residence. The judgment provides new tax restructuring alternatives for international groups of companies.

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