On 31 January 2013, the European Court of Justice delivered its
preliminary ruling in the case concerning A Oy (C-123/11) on
deductibility of non-resident subsidiary's losses in the
context of a cross-border merger. The request for a preliminary
ruling under Article 267 TFEU from the Finnish Supreme
Administrative was made on 7 March 2011 (for reference,
see Legal Alert – Cross-border Merger Case to ECJ, 31 March
2011).
Currently, the Finnish Income Tax Act provides that, in the
context of a merger, the receiving company has the right to deduct
from its taxable income the loss of the merged company if the
receiving company or its shareholders or the company and its
shareholders together have, from the beginning of the loss-making
year, owned more than half of the merged or divided company's
shares. However, the deductibility of the loss of the merged
company has in practice required that the merged company has been
Finnish resident entity.
In its preliminary ruling, the ECJ ruled that the Finnish
legislation on deductibility of cross-border loss is incompatible
with freedom of establishment if it does not allow the parent
company the possibility of showing that its non-resident subsidiary
has exhausted the possibilities of taking those losses into account
and that there is no possibility of their being taken into account
in its State of residence in respect of future tax years either by
itself or by a third party.
In its judgment, the ECJ ruled that the Finnish legislation goes
beyond what is necessary to attain the objectives of preservation
of the allocation of the taxing power, denying the possibility of
deducting tax losses twice and preventing the risk of tax
avoidance.
In consequence of the judgment, Finnish parent companies may have
the right to deduct non-resident subsidiary's losses in the
context of a cross-border merger provided that the company has
exhausted all the possibilities of taking account of the losses
which exist in the subsidiary's country of residence. The
judgment provides new tax restructuring alternatives for
international groups of companies.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.