Legal Alerts/28 Nov 2017

Legal Alert – Finnish Tax Provisions on Tax Neutral Asset Transfer Conflicting with EU Law

The Court of Justice of the European Union (CJEU) has interpreted Finnish tax legislation in light of EU freedoms in its recent judgment given on 23 November 2017 in case C-292/16. The Court found that the Finnish exit tax legislation applicable to transfers of assets is against the freedom of establishment, which cannot be justified by overriding reasons of the public interest recognised by EU law. Therefore, the provisions of the Finnish Business Income Tax Act (BITA) concerning transfers of assets are incompatible with EU law and should be amended.

Case background

In this case, a Finnish limited liability company transferred its Austrian permanent establishment to an Austrian company and received in return shares in that company, which fulfilled the requirements of the EU Merger Directive. However, in accordance with the prevailing domestic provisions in the BITA, the company was taxed on the capital gains resulting from the asset transfer.

After the Finnish Board of Adjustment rejected the company’s claim for adjustment, the company appealed to the Administrative Court. In its appeal, the company argued that the taxation in question constitutes an obstacle to the freedom of establishment, since in a comparable domestic situation taxation would not take place until the company’s capital gains have been realised. The Administrative Court referred the question to the CJEU for a preliminary ruling.

CJEU’s judgement

The CJEU first stated that the particular Finnish exit tax provision under the BITA was based on Article 10(2) of the Merger Directive. However, the Merger Directive does not contain provisions determining the period when the collection of tax on capital gains is to take place. Therefore, the Member States have to lay down such provisions in compliance with EU law.

The CJEU considered that under the Finnish exit tax legislation, taxation of capital gains occurs in the year when the transfer has been made only if a resident company transfers a non-resident permanent establishment as an asset transfer to a non-resident company. It should be noted, however, that in an equivalent national situation capital gains would not be taxed until they have been realised. Therefore, the CJEU found that such a difference in treatment may deter companies established in Finland from exercising an economic activity in another Member State through a permanent establishment, and is therefore an impediment to the freedom of establishment.

The CJEU stated that the Finnish exit tax legislation goes beyond what is necessary to attain the objective of preserving the allocation of powers of taxation between the Member States. As a result, the CJEU found the Finnish exit taxation, which does not allow the deferred collection of tax, to be against the freedom of establishment.


Resulting from the CJEU’s judgement, the freedom of establishment precludes the application of the Finnish exit tax legislation on transfers a non-resident permanent establishment in so far as that legislation does not allow the deferred collection of the tax. In other words, the exit tax legislation under the BITA should not be applied within the EU, and therefore tax collection should be deferred until capital gains are realised.

The rule of law under the judgment is applicable to prior years as well and taxpayers may be entitled to tax refunds if the exit tax legislation has been applied on group reorganizations within EU.

Borenius’ lawyers are available to assist in addressing any questions you may have regarding this legal alert. Please feel free to contact any of the Borenius attorneys listed in this alert or those with whom you usually work.

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Additional information

Einari Karhu