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Cross-Border Merger Case To ECJ

Finland

The Finnish Supreme Administrative Court (SAC) decided on 7 March 2011 to request a preliminary ruling from the Court of Justice of the European Union (ECJ) regarding whether a Finnish parent company may deduct the final tax losses of its Swedish subsidiary after a cross-border merger. The request therefore relates to the right of establishment within the EU and whether the Finnish tax legislation can be considered discriminatory in this regard, as it does not permit tax deductions in cross-border mergers involving companies from EU-countries. Taxand Finland examines this case where the Swedish subsidiary which was wholly owned by the Finnish parent company had incurred substantial losses over a period of several years.

The case raises questions that are relevant for the development of community law in the single market. The tax losses in question could not be utilised in Sweden because the operations of the Swedish company were shut down and all the other Swedish group companies were unprofitable as well. The tax burden of the Finnish parent company could be substantially reduced if the losses of its Swedish subsidiary could be reduced from the profits of the parent company. The Finnish Central Tax Board had denied the right of the Finnish parent company to deduct the losses of its Swedish subsidiary due to the fact that the losses were calculated in accordance with the Swedish tax legislation and a strict interpretation allows loss deduction only if the losses are calculated in accordance with Finnish tax legislation.

In a comparable situation, if the subsidiary was a Finnish company the tax losses would be transferred to the Finnish parent company. Under community law, the tax treatment should be similar, if situations are similar, provided that there is not an overriding rule of general interest that justifies a different treatment. This is known as the "rule of reason". Therefore, in principle, a cross-border merger should be treated in the same way as a purely domestic merger and the SAC identified a possible breach of the right of establishment.

Taxand's Take


A preliminary ruling by the ECJ is needed to clarify whether final tax losses are deductible in cross-border mergers. The issue can have profound implications on the willingness to acquire companies in the entire EU, even if companies still cannot be purchased for tax purposes alone. The ruling could open up possibilities for cross-border transactions that make sound economic sense, but have up until now been hindered by the risk of an unfavourable tax treatment. Given the scope of economic co-operation and possible applicability of a precedent, the ruling is particularly interesting and relevant for companies operating in Scandinavia. The stance that the ECJ adopts could thus have a large impact in both Finland and Sweden, as preliminary rulings from the ECJ are handled on average in 1.5 years, it will be a while until the issue is clarified.

Your Taxand contact for further queries is:
Janne Juusela
T. +358 9 6153 3431
E. janne.juusela@borenius.com

Taxand's Take Author