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Supreme Administrative Court Affirms Right to Deduct Tax Losses Despite Change in Company’s Ownership
A recent Supreme Administrative Court ruling decided that a transfer of employees from a recently-acquired loss company (with losses totaling to EUR 558 million) to another company in the acquiring group did not affect the continued availability of a previously granted special permit exempting the loss company from the loss-denial change of ownership rules. Taxand Finland investigates.
Under the Finnish Income Tax Act, as a general rule, if the ownership of more than 50% of a company's shares has been transferred, the company's tax losses for that year and for previous taxation years cannot be deducted in the calculation of the company's taxable income. In calculating the percentage of shares that have changed ownership, a deeming rule deems shares to have changed ownership where more than 50% of the shares of a company owning at least 20% of the shares of the loss company have been transferred.
The loss company may apply to the tax office for a permit to maintain the deductibility of the losses. In order for such a permit to be granted, there must be special reasons and the losses must be necessary for the continuation of the company's activities. The grounds for the special reasons have been established by the tax authority's guidance and in the tax and legal practice.
One of the established criteria for the permit is the particular consequences of the share sale (or other arrangement resulting to the forfeiture of the tax losses) on the regional or national employment situation. Other possible grounds for obtaining the permit include, inter alia, a "change of generation" situation (where the ownership of a company is transferred to a younger generation in accordance with special tax provisions), a management buy-out, a purchase of a passive special-purpose vehicle, an ownership change relating to a re-organisation, an intra-group transfer, and an expansion of operations through a corporate acquisition.
In the case at hand, the employment-related consequences were used as one of the arguments supporting the initial permit application. In its initial application, the company made reference to the number of persons employed by it and the entire group of companies. More significantly, the company stated that the number of employees would not be adversely affected by the planned change in the company's ownership.
After the receipt of the permit from the tax office, the share sale was carried out. However, soon after that, all of the loss company's employees were transferred to the parent company in the acquiring group where they carried out same functions as previously. The transfer of employees was justified based on a need to centralise staff in charge of the real estate investment activities of the entire group of companies. The employment costs were invoiced from the loss company to the parent company based on an intra-group service agreement. As a consequence, the change did not alter the cost structure of the loss company. The aggregate number of employees in the group remained roughly the same as prior to the transfer of the employees to the parent company.
The Supreme Administrative Court ruled that the circumstances were to be regarded as equivalent to the facts presented in the initial application for a permit, despite the transfer of employees. Thus, the permit previously granted for maintaining the tax losses was still applicable to the changed circumstances. The transfer of employees was regarded as justified means of developing the activities within the limits set in the permit.
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