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Supreme Administrative Court Grants Carrying Forward Losses
On 27 April 2010 the Supreme Administrative Court ruled that a Finnish subsidiary, whose foreign parent company was acquired by another foreign group after the Finnish subsidiary was acquired by a Swedish group company, had presented sufficient special grounds for carrying forward the tax losses of the Finnish company despite the indirect and direct changes of ownership. Taxand Finland analyses the ruling and identifies examples when the tax authorities may grant exceptions to the forfeiture of tax losses.
According to general principle, tax losses of a Finnish entity may be carried forward and off set against income in the same source for the next ten fiscal years. However, the right to carry forward a tax loss is forfeited if:
1. more than 50 per cent of the shares in the loss-making company have changed ownership during the year in which a loss is recorded or thereafter
2. a corresponding majority share transfer has taken place in a company owning at least 20 per cent of the shares in the loss-making company
The purpose of these provisions is to prevent trading with tax losses. Tax authorities may grant exceptions to the general rule, such as special grounds and when it is necessary for the continuation of the company's business activities. Recently the approach of the authorities and administrative courts in determining whether special grounds / exceptions should be granted has become stricter and more difficult to predict. Based on existing guidelines and on the tax and legal praxis, exceptions may be granted for example in the following cases:
- change of generation
- sale of a special purpose vehicle ("shelf company")
- intra-group restructuring
- insolvency related reorganisation
- restructuring with regional or national positive effects for employment
- sale of shares in a publicly listed company
- business expansion through acquisitions
- restructuring related to listing on a stock exchange
In the case mentioned above, the local administrative court stated that none of the said grounds had been fulfilled in the initial indirect change of ownership, pursuant to which the tax losses were deemed to be forfeited. The taxpayer argued that the restructuring was carried out for genuine business purposes, that the market position of the company improved following the ownership change and that the restructuring allowed for the development and expansion of the company's business activities. Furthermore, the amount of losses was not insignificant for the company and the carry forward of losses necessary for the continuation of the company's activities. In addition, there was no indication that the tax losses were regarded as part of the acquisition target. The Supreme Administrative Court considered the grounds presented as being sufficient for retaining the tax losses.
The Court's decision can be interpreted as alleviating the existing practice for the taxpayers' benefit. The Supreme Administrative Court treated both transactions as a whole and interpreted the established exception grounds more liberally than in previous cases. Corporate transactions with genuine business purposes typically include aspects that the Supreme Administrative Court consider relevant in its discretion concerning retention of the tax losses despite changes of ownership.
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