The European Court of Justice (ECJ) has on 18 July 2013 issued a preliminary ruling (C?6/12) to the Finnish Supreme Administrative Court (SAC) regarding the dispensation procedure relating to the possibility of use of tax losses despite a qualified change in ownership in a company. SAC issued a ruling on 30 December 2011 in which it decided to request for a preliminary ruling of ECJ on whether the dispensation procedure relating to the possibility of using tax losses after a qualified change in ownership could be deemed as an illegal state aid provided in Article 107(1) of the Treaty on the Functioning of the European Union (TFEU).
Relevant Finnish Law
Section 122(1) of the Finnish Income Tax Act (30.12.1992/1535) provides that losses sustained by a company are not deductible if, during the year in which they arise or thereafter, more than half of the company’s shares have changed ownership otherwise than by way of inheritance or will, or more than half of its members are replaced.
The tax loss dispensation procedure is based on section 122(3) of the Act. Based on the provision, the tax authorities may grant a dispensation based on which the company may deduct the losses despite a qualified change in ownership that would otherwise lead to the forfeiture of tax losses. The dispensation may be granted if the company presents special reasons based on which the deduction of losses is needed from the point of view of continuing the business activities of the company. In addition, the company must show that the tax losses have not been the motive of the transfer in ownership but the transfer has sound business motives instead. Based on the provision, the tax authorities have been able to use discretion when considering whether the prerequisites for granting the dispensation have been fulfilled in the light of court practice and guidance given by tax authorities.
In its ruling, ECJ stated that a tax regime such as that in Finland may satisfy the condition of selectivity as an element of the concept of State aid within the meaning of Article 107(1) TFEU if it were to be established that the reference system, namely the normal system, consists in a prohibition on the deduction of losses in the case of a change of ownership for the purposes of the section 122(1) of the Finnish Income Tax Act, in relation to which the authorisation procedure provided for in the section 122(3) would constitute an exception. In Article 107, any aid granted by a member state or through state resources in any form, distorting or threatening to distort competition by favouring certain undertakings or the production of certain goods is deemed to be incompatible with the internal market.
Such a regime may be justified by the nature or general scheme of the system of which it forms part, but justification is not possible if the competent national authorities, so far as concerns authorisation to derogate from the prohibition on the deduction of losses, have a discretion which empowers them to base authorisation decisions on criteria unrelated to that tax regime. However, ECJ stated that it did not have sufficient information before it to rule definitively on those classifications.
It was also stated that article 108(3) TFEU does not preclude a tax regime such as that provided for in sections 122(1) and 122(3) of the Finnish Income Tax Act, if that regime should be classified as State aid, from continuing to be applied in the Member State which established it because it grants existing aid, without prejudice to the competence of the European Commission under Article 108(3) TFEU. Under Article 108(3) TFEU new aid must be notified to the Commission and may not be implemented until that procedure has led to a final decision.
It is noteworthy that ECJ did not definitively define whether the tax regime in Finland satisfies the condition of selectivity as an element of the concept of State aid within the meaning of Article 107(1) TFEU. ECJ held that in order to classify a domestic tax measure as selective, it is necessary to begin by identifying and examining the common or normal tax regime applicable in the Member State concerned. It is in relation to this common or normal tax regime that it is necessary, secondly, to assess and determine whether any advantage granted by the tax measure at issue may be selective by demonstrating that the measure derogates from that common regime inasmuch as it differentiates between economic operators who, in light of the objective assigned to the tax system of the Member State concerned, are in a comparable factual and legal situation. ECJ stated that such classification presupposes not only familiarity with the content of the provisions of relevant law but also requires examination of their scope on the basis of administrative and judicial practice and of information relating to the ambit ratione personae of those provisions. As SAC had not submitted all that information, ECJ considered that it was unable to adopt a position on that classification.