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ECJ rules on the dispensation procedure of tax losses
On 18 July 2013, the European Court of Justice (ECJ) issued a preliminary ruling (C‑6/12) to the Finnish Supreme Administrative Court (SAC) regarding the dispensation procedure relating to the possibility of use of tax losses despite a qualified change in ownership in a company. Taxand Finland investigates the background to this ruling.
The ECJ ruling comes after SAC issued a separate ruling on 30 December 2011 in which it decided to request consideration on whether the dispensation procedure relating to the possibility of using tax losses after a qualified change in ownership could be deemed as illegal state aid provided in Article 107(1) of the Treaty on the Functioning of the European Union (TFEU).
Section 122(1) of the Finnish Income Tax Act provides that losses sustained by a company are not deductible if, during the year in which they arise or thereafter, more than half of the company’s shares have changed ownership otherwise than by way of inheritance or will, or more than half of its members are replaced.
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.
In its ruling, ECJ stated that a tax regime such as that in Finland may satisfy the condition of selectivity as an element of the concept of ‘State aid’ within the meaning of Article 107(1) TFEU if it were to be established that the reference system, namely the ‘normal’ system, consists in a prohibition on the deduction of losses in the case of a change of ownership for the purposes of the section 122(1) of the Finnish Income Tax Act - in relation to which the authorisation procedure provided for in the section 122(3) would constitute an exception. In Article 107, 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.
It is important to note that the ECJ also stated that article 108(3) TFEU does not preclude a tax regime, such as that provided for in sections 122(1) and 122(3) of the Finnish Income Tax Act, if that regime should be classified as ‘State aid’, from continuing to be applied in the Member State which established it because it grants ‘existing’ aid, without prejudice to the competence of the European Commission under Article 108(3) TFEU. Under Article 108(3) TFEU new aid must be notified to the Commission and may not be implemented until that procedure has led to a final decision.