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SAC rules on tax loss carry-forwards
The Finnish Supreme Administrative Court (SAC) has issued a ruling where it commented on the grounds for granting the right to retain tax loss carry-forwards from tax years 2000–2006 after a change in ownership. The decision could mean a more lenient approach to granting the right to retain confirmed tax losses despite ownership changes. Taxand Finland discusses the case which led to this judgment.
The case concerned a mutual real estate company which is a Finnish corporate vehicle, specifically designed to optimise costs and maintain real estate assets. It is structured as a limited liability company, the shares of which entitle it to govern specific premises. Shareholder financing usually takes the form of contributions which are used to cover the running costs incurred by the company as well as its potential investments. The real estate company generally receives no other income besides these contributions, for example rental income is attributed to the shareholders of the real estate company.
In 2007, the shares in the company were sold as part of a larger transaction from a Finnish limited liability company to a Finnish holding company, also structured as a limited liability company. The holding company was owned by a Swedish company which was part of an international group of companies, engaged in investment activities and expanding to Finland.
The company argued that the right to retain confirmed tax losses should be granted since, for example, the transaction was rational business-wise and had specific grounds as stipulated under the guidance issued by the tax authorities. Tax losses were not treated as a commodity and they did not have an influence on the share price of the target, as the value of the portfolio was in the profit potential of the acquired targets and not in the losses confirmed in the target.
The tax office and administrative court denied the right to retain confirmed tax losses. They argued that evaluating the right to retain the confirmed tax losses should be made only by the level of the entity whose tax losses the case concerned, for example the RealCo in this case. Instead they deemed that granting the right to retain confirmed tax losses did not concern the company directly but rather the group of companies it belonged to and its shareholders. Since real estate companies do not usually hire outside personnel directly, the company could not rely on positive employment influence as a specific ground – not even over indirect influence.
The SAC, however, saw that the right to retain tax losses should be confirmed if the entity applying for the right continues its operations after the change of ownership and if business and comparable reasons for retaining the tax losses exist.
Also published in Thomson Reuters' Taxnet Pro, 4 December 2013
The recent decisions of the SAC indicates that tax practice on the right to retain confirmed tax losses could be alleviating as regards confirmed tax losses. This new approach could be applied to real estate companies which in some aspects, for example by not hiring outside personnel directly, differ from other corporate forms.