The Finnish Supreme Administrative Court has on 30 December 2011
issued a ruling (SAC 2011:118) regarding the dispensation procedure
relating to the possibility of use of tax losses despite a
qualified change in ownership in a company. In the ruling SAC did
not issue a final resolution but with votes 5–2 instead
decided to request a preliminary ruling from the European Court of
Justice (ECJ).
The currently applicable tax loss dispensation procedure is based
on section 122(3) of the Finnish Income Tax Act (30.12.1992/1535).
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 the ruling of SAC, the majority stated that the current
dispensation procedure may be against Article 107 of the Treaty on
the Functioning of the European Union (TFEU) concerning state aid.
In the article, 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. According to the majority, should the position of the
companies which received a dispensation in the tax loss
dispensation procedure be compared with the companies which were
refused a dispensation, the dispensation procedure including the
discretion element can be deemed such state aid incompatible with
the internal market as stated in Article 107 of the TFEU.
By contrast, according to the opinion of the minority, evaluation
of the questions relating to state aid in the case at hand would
not be compatible with domestic legislation, and EU law would not
require ex officio evaluation of the possible state aid character
of the tax loss discretion provision, either. The minority
justified its view by the unnecessity of the ex officio evaluation
in the light of principles of reciprocity and efficiency. In
addition, the lack of legal certainty and consistency of the legal
practice relating to the application of dispensation provision were
seen by the minority to be against the request for a preliminary
ruling from ECJ.
Dispensation practice after the ruling
As a consequence of the request for the preliminary ruling, SAC
will not solve any applications for amendment regarding
dispensation applications before ECJ issues its ruling regarding
the applicability of the dispensation application regulation in the
light of the TFEU. The average handling time of ECJ is
approximately 1.5 years. The ruling may lead in difficulties in
receiving a dispensation, and in the case of an appeal, receiving
the decision may be postponed for several years.
From taxpayers' point of view, the worst alternative would be
the legal uncertainty to continue for several years, during which
the treatment of dispensation applications in tax authorities and
administrative courts is not functioning as planned. This would
lead to a drastic weakening of the possibilities of the use of tax
losses dated in the beginning of the 21st century in case a change
in ownership has occurred. This may affect both the number of
mergers and acquisitions and the feasibility of investments and
ownership restructurings.
Changes in regulation are also possible
However, it is also possible that the dispensation provision
will be amended before the ruling of ECJ will be issued. The
dispensation system may be totally abolished, as a consequence of
which the confirmed tax losses would be forfeited only if the tax
losses exceeded the time limitations set for carry forward of tax
losses or if a company having tax losses was acquired only to
utilise the tax losses. In the latter case, intervention in the
acquisition lacking business purpose could be executed with the
general anti-avoidance provision. In our understanding, this kind
of alternative would require the smallest amount of administrative
duties and harm least the development and rationalisation of the
business operations of the loss-making companies. This kind of
procedure is applied in several EU member states.
Alternatively, the government could attempt to codify the current
dispensation-related case law and administrative guidance in the
regulation level, which would lead to the abandonment of the
discretion element of the tax authorities. A major risk present in
this alternative is that most of the special reasons required for
granting the dispensation are subject to interpretation, the
applicability of the special reasons depends on the relevant
conditions of the company in question.
Conclusions
The request for the preliminary ruling to ECJ made by SAC drastically affects the use of tax losses from previous years if qualified changes in ownership of the loss-making entity have occurred. Furthermore, the uncertain regulation situation strongly affects the tax planning possibilities. Receiving dispensations can become more difficult and issuance of the final rulings may be postponed for several years. Due to the requested preliminary ruling, the amount of uncertainty relating to the amount of utilisable losses in changes in ownership will increase significantly. Attorneys at law Borenius Ltd is glad to help in evaluating the amount of utilisable tax losses and charting the possible alternatives relating to the utilisation of tax losses from previous years both before and after the change in ownership.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
