On February 21st 2013, the ECJ ruled that the domestic law which
precludes the use of tax carried forward losses of a merged company
by the surviving merging company in the case of a cross-border
merger while allowing such use in the case of a domestic merger is
not contrary to the principle of freedom of establishment unless
such domestic law does not give the opportunity to the surviving
merging company to demonstrate that the use of the tax carried
forward losses is not possible in the country of the merged company
and to take these into account in the State of residence of the
surviving merging company.
In the case at hand, a Finnish company, A, was the sole
shareholder of a Swedish company, B, which was carrying on its
activities in Sweden. B ceased its activities since it was
loss-making. A envisaged a merger with B. Upon the merger, all
assets and liabilities of B should be transferred to A. Neither a
subsidiary nor a permanent establishment would be kept in Sweden
thereafter. A requested from the tax authorities the right to use
the tax carried forward losses of the Swedish company, as provided
by Finnish domestic law. The tax authorities rejected its request
because the losses were recognised under Swedish law and therefore
out of the scope of the provision of the Finnish law allowing, in
case of merger, the deduction of the tax losses of the merged
company at the level of the surviving merging company.
The ECJ stated that the fact that a merger operation is
motivated solely by tax considerations and that the companies
concerned are in fact attempting by that means to evade their
national legislation is not in itself capable of making the
principle of freedom of establishment inapplicable.
The difference in treatment between two resident companies in
case of a domestic or a cross-border merger is against the
principle of freedom of establishment unless such difference in
treatment is justified by an overriding public interest reason.
In light of the Marks & Spencer case law, the Court
confirmed that the difference in treatment is justified if it
preserves the right to tax of the Member State, prevents the risk
of double use of tax losses and the risk of tax avoidance. However,
it must be verified that the legislation at stake does not go
beyond what is necessary to achieve the essential part of the
objectives pursued. It will be the case if the possibilities to use
the tax losses in the Member State of the merged company have been
exhausted. The merging company shall demonstrate before the
national jurisdiction that all possibilities for the use of the tax
losses have been exhausted.
Addressing the second question, the Court concluded that the
rules for calculating the non-resident merged company's losses
for the purpose of being taken over by the resident merging company
in a cross-border merger must not constitute an unequal treatment
compared with the rules of calculation which would be applicable if
the merger were with a resident merged company.
This decision does not have a direct impact on Luxembourg
legislation but confirms the existing EU case law on the use of tax
carried forward losses.
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.
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