Legal Alerts/16 Nov 2020

Group Tax Deduction For Cross-Border Tax Losses – New Rules

The Finnish Government has recently issued a proposal for new legislation concerning the tax deductibility of cross-border tax losses. The proposed legislation would allow the so-called final losses of a subsidiary located in the EU/EEA member states to be deducted by a Finnish parent entity, as required by EU law.

The Government bill was submitted to the Parliament in October 2020 and the new legislation is intended to become applicable as of 1 January 2021.


The Finnish legislation concerning group contributions has been applicable only in situations where group contribution is granted between affiliated companies that are both tax residents in Finland. Because the Finnish group contribution rules have not allowed tax deductibility for contributions made to affiliated companies in other EU/EEA member states to the extent that these cover final losses, the European Commission has considered the current group contribution system being in breach of the principle of the freedom of establishment set out in Article 49 of the Treaty on the Functioning of the European Union and Article 31 of the EEA Agreement. Therefore, the proposal on group deduction has now been issued to remedy the infringement.

In our previous legal alert, we discussed in more detail the infringement procedure initiated by the European Commission and the recent Finnish case law concerning the finality of cross-border tax losses. You can find the alert here.

Principal change

If adopted, the proposed legislation would amend the current Finnish tax rules in way that the final tax losses of a foreign subsidiary would become tax deductible for a Finnish parent entity, which brings the Finnish tax regime in line with EU law.

The group deduction scheme would be separate from the Finnish group contribution scheme, but the conditions for group deduction would partly correspond to the conditions set forth in the Finnish group contribution legislation.

The group deduction would, in a similar way as the domestic group contribution, be taken into account in the application of the interest deduction limitation rules.

The scope of application

The proposed group deduction scheme would be applicable between a Finnish parent company and a subsidiary residing in a EU/EEA member state. Financial, insurance, and pension institutions are excluded from the scope of the proposed new legislation.

The main rule would be that the parent company holds at least 90% direct shareholding in the subsidiary. Therefore, the final losses of an indirectly held subsidiary, would not be deductible for the Finnish parent company, unless all of the affiliated companies through which indirect shareholding of at least 90% in the subsidiary is held reside in the same country as the subsidiary. In both cases, only losses that have incurred during the time when the required ownership has existed can be deducted.

The concept of final losses

The definition of final losses in the group deduction legislation would correspond to the definitions set forth in the ECJ decision C-446/03 (Marks & Spencer I) and subsequent EU case law and domestic case law. This means that losses would be considered final if the company has exhausted the possibilities available to utilize the losses in previous or future financial years, and there is no possibility for the losses to be taken into account in the subsidiary’s country of residence or another state by the subsidiary itself or another, either affiliated or third-party, entity.

The proposal includes further criteria for the assessment of the finality of the losses. It is required for losses to be considered as final that the subsidiary has no ongoing or future business operations nor assets. The subsidiary should be placed into liquidation and as a consequence of the proceedings, the subsidiary should end up dissolved.

The losses should also exist under the laws of the subsidiary’s country of residence. Therefore, the losses could not be regarded as final if the right to deduct the losses has lapsed under the tax laws of the subsidiary’s country of residence. Furthermore, the proposed group deduction rules would be tied to the Finnish rules on tax loss carry-forward, including the rules concerning the expiration of losses and ownership changes.

A high standard of proof for the finality of tax losses will be required from the parent entity, as demonstrated by the current EU case law and the Finnish domestic case law. It is expected that the new legislation will become applicable only in rather limited circumstances due to the strict preconditions for the finality of losses.

The amount of deductible final losses

Under the proposal, the amount of deductible final losses is determined based on the Finnish tax laws along with the tax laws of subsidiary’s country of residence. The amount of group deduction may not exceed the taxable business income of the parent company during the fiscal year when the subsidiary is dissolved.

The proposal suggests that the amount of group deduction can be adjusted in retrospect if the subsidiary had engaged in gratuitous or underpriced transfers with affiliated entities. A retrospective adjustment to the group deduction would be also possible where it becomes evident that the final losses could be taken into account in another state or if the subsidiary’s taxable income is reassessed by a final judgement in a way that affects the amount of definitive tax losses.

Further steps

The new legislation is proposed to enter into force on 1 January 2021 and to apply from the fiscal year 2021 onwards. We will continue to closely monitor the legislative process of this proposal and provide updates if necessary.

Borenius’ lawyers are available to assist in addressing any questions you may have regarding the amendment.

Share on LinkedInTweet about this on XShare on Facebook


Additional information

Einari Karhu



Heikki Wahlroos



Eveliina Ilonen

Senior Associate