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Possible Impact of Tax Loss Dispensation Procedure
On 30 December 2011, the Finnish Supreme Administrative Court issued a ruling 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 and decided to request a preliminary ruling from the European Court of Justice (ECJ). Taxand Finland discusses the possible outcomes of the preliminary ruling charting the possible alternatives relating to the utilisation of tax losses.
Based on the provision, the tax authorities may grant a dispensation based on which a 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 that the transfer has sound business motives instead.
Argumentation in SAC 2011:118
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.
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 the ECJ issues its ruling regarding the applicability of the dispensation application regulation in the light of the TFEU. 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.
Changes in regulation are possible
It is also possible that the dispensation provision will be amended before the ruling of the 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.
The request for the preliminary ruling to the 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.
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