Finnish share merger facility not compatible with EEA agreement
The Merger Directive
Companies can be acquired or merged in different ways. One option is the so-called share merger, where an acquirer generally obtains - through acquisition of shares - the majority of the voting rights in an offeree company, against an issuance of its own shares. Although any excess value included in the shares is basically taxed, there are conditions according to which mergers and acquisitions may be tax-free. Technically, companies from different EU member states should be given equal treatment. To this end, the EU Merger Directive has been implemented, which prevents unequal treatment of cross border mergers and acquisitions. One of the regulations of this directive concerns equal treatment of domestic and foreign mergers and acquisitions inside the European Union, and with states with which the European Union has concluded association agreements.
A Oy is a Finnish company that holds 19.7% of the shares in another Finnish company. As part of an exchange of shares A Oy transfers these shares to the Norwegian company B AS, which already holds 80.3% of the shares, in exchange for which A Oy receives shares in the latter company. Under Finnish corporate income tax law, such a transfer is tax-free if the acquiring company is established in Finland or another EU member state. As Norway is not a member of the European Union, but of the European Economic Area, A Oy was not able to invoke the Finnish merger facility. Consequently, the company had to pay tax over the excess value included in the shares. Such payment would not have been required had this involved a transaction with a Finnish company, so the Finnish Supreme Court questioned the compatibility of the Finnish regulation with the EEA agreement.
Judgment European Court of Justice
The European Court of Justice (ECJ) has noted that the Finnish regulation must be tested against the freedom of establishment pursuant to the EEA agreement and it has ruled that the Finnish legislation on share mergers impedes this treaty freedom. Next, the Court has examined whether this impediment is justified due to imperative reasons of overriding public interest. According to the ECJ such justification cannot be found in the need to combat tax fraud and the need to safeguard the effectiveness of tax audits, since Finland and Norway have a treaty on reciprocal administrative assistance in tax cases. According to the ECJ this offers sufficient safeguards for an effective information exchange about the Norwegian company.
Not yet all countries have sufficiently implemented the European Merger Directive in their national legislation, as this ECJ judgment clearly shows. If and insofar as national legislation has not been aligned with the Merger Directive, taxpayers are free to directly invoke this directive (or, as in this judgment, invoke the EEA agreement) and thus opt for a tax efficient merger.
Source: ECJ 19 July 2012, case C-048/11