Legal Alert – The Finnish Supreme Administrative Court Ruling on Tax Loss Carry-forwards
The Finnish Supreme Administrative Court (the SAC) issued a ruling (KHO:2013:178, 19 November 2013) where it commented on the grounds for granting the right to retain tax loss carry-forwards from tax years 20002006 after a change in ownership. The decision could mean a more lenient approach to granting the right to retain confirmed tax losses despite ownership changes.
Generally, tax losses incurred in business may be carried forward for ten years from the tax year the loss has incurred. However, if for example more than half of the shares in a company change ownership due to reasons other than inheritance or will, or if more than half of the companys members have changed; the right to deduct losses is forfeited. However, the right to retain tax losses may be granted if the company can demonstrate that specific grounds for granting the right to deduct losses exist. Additionally, tax losses may not be treated as a commodity. The Finnish tax authorities have issued a separate guidance that stipulates in more detail the facts which could be deemed to present such specific grounds. In tax practice, reference is very often made to the guidance.
The case concerned a mutual real estate company which is a Finnish corporate vehicle, specifically designed to optimise costs and maintain real estate assets. It is structured as a limited liability company the shares of which entitle it to govern specific premises. Shareholder financing usually takes the form of contributions which are used to cover the running costs incurred by the company as well as its potential investments. The real estate company generally receives no other income besides these contributions, for example rental income is attributed to the shareholders of the real estate company.
In 2007, the shares in the company were sold as part of a larger transaction from a Finnish limited liability company to a Finnish holding company, also structured as a limited liability company. The holding company was owned by a Swedish company which was part of an international group of companies, engaged in investment activities and expanding to Finland.
The company argued that the right to retain confirmed tax losses should be granted since, for example, the transaction was rational business-wise and had specific grounds as stipulated under the guidance issued by the tax authorities. Tax losses were not treated as a commodity and they did not have an influence on the share price of the target, as the value of the portfolio was in the profit potential of the acquired targets and not in the losses confirmed in the target.
The tax office and administrative court denied the right to retain confirmed tax losses. They argued, for example, that evaluating if retaining the right to retain the confirmed tax losses should be made only by the level of the entity whose tax losses the case concerned, for example the RealCo in this case. Instead, they deemed that granting the right to retain confirmed tax losses did not concern the company directly but rather the group of companies it belonged to and its shareholders. Since real estate companies do not usually hire outside personnel directly, the company could not rely on positive employment influence as a specific ground not even over indirect influence.
The SAC, however, saw that the right to retain tax losses should be confirmed if the entity applying for the right continues its operations after the change of ownership and if business and comparable reasons for retaining the tax losses exist. Additionally, it is required that the confirmed tax losses are not treated as commodities. The SAC stated that since the change of ownership was independent of the grounds relating to taxation and it was obvious that the tax losses were not treated as commodities during the change of ownership, the RealCo had specific grounds to deduct the losses. A mutual real estate company should not be treated differently compared to other companies, despite its potentially somewhat financial and legal characteristics, for example the fact that it does not employ personnel directly.
The ruling of the SAC indicates that specific grounds may be deemed to exist even though the entity did not present any direct reference to one of the items listed in the guidelines issued by the tax authorities if other criteria are fulfilled.
The ruling referred to above is in line with another ruling of the SAC (KHO:2013:167) as well. While this decision mostly concerned the question of whether the right to deduct losses could constitute forbidden state aid or not, the SAC considered the issue of the specific grounds for granting the right to deduct confirmed tax losses in this case in question. The SAC granted the right to retain the confirmed tax losses as the entity in question continued its business after the change of ownership and since the ownership change was deemed to have business reasons as well. Additionally, the confirmed tax losses were not treated as commodities or they were not otherwise subject to trading. These requirements were deemed to be enough to constitute specific grounds for retaining the confirmed tax losses.
The recent decisions of the SAC indicates that tax practice on the right to retain confirmed tax losses could be alleviating as regards confirmed tax losses. This new approach could be applied to real estate companies which in some aspects, for example by not hiring outside personnel directly, differ from other corporate forms.