Finland Tax Alert - 2 January 2012
Change-in-control rules referred to ECJ on state aid grounds
By Outi Ukkola
On 30 December 2011, the Finnish Supreme Administrative Court requested a preliminary ruling from the European Court of Justice (ECJ) as to whether an exception to the forfeiting of tax losses where there has been a change in control of a company constitutes state aid under the EU rules.
Change in control rules and losses
Under Finnish rules, if more than 50% of the shares of a loss-making company are transferred (whether a direct or indirect transfer), the losses are forfeited. It is possible, however, that the tax authorities will grant an exception to this rule in certain cases and allow the loss company to utilize the tax losses despite the change in control. The exception practice has evolved over the years. For example, the practice was well-established until 2008 when some tax offices changed their approach and rejected many applications. The Supreme Administrative Court reconfirmed in 2010 a previous practice where a significant majority of applicants were allowed to utilize their tax losses.
Preliminary ruling request
The case involved a Finnish company (Company P) whose shares were transferred directly and indirectly in 2004, and these transactions resulted in the expiration of Company P’s losses. The company applied for the right to use the tax losses it incurred between 1998 and 2004. The tax office took the position that the company did not have any basis to maintain its losses, and this decision was confirmed by the Helsinki Administrative Court. The company appealed to the Supreme Administrative Court, which then decided to refer the question of state aid to the ECJ.
The Supreme Administrative Court has asked the ECJ to rule on whether the selectivity requirement laid down in article 107 in the Treaty of the Functioning of the European Union (formerly the EC Treaty article 87) creates an obstacle to allow the retention of losses without a notification to the European Commission, or whether the approval mechanism is a justified measure to combat tax evasion. The Court also asked whether the scope of the discretionary powers of the tax authorities to allow the taxpayer to retain the losses has any relevance when considering whether the mechanism is justified.
Notably, the European Commission ruled in January 2011 that Germany’s loss rules that allowed ailing loss companies to carry forward fiscal losses constitutes unlawful state aid.
An ECJ decision that the Finnish rules are considered state aid could have far-reaching or retroactive implications and may require the Ministry of Finance to re-evaluate the future of the Finnish loss regime.