Court of Justice rules on deductibility of cross-border tax losses

07/03/13

On 21 February 2013 the ECJ gave a preliminary ruling in a tax dispute between a Finnish company (A Oy) and the Finnish Central Tax Board.  A Oy planned to merge with its loss-making Swedish subsidiary, with the intention that A Oy could thereafter claim tax relief in Finland in respect of the subsidiary's accumulated losses. The Finnish Supreme Administrative Court referred two questions to the ECJ.

The first was whether the principle of freedom of establishment requires a resident parent company, following its merger with its non-resident subsidiary, to be allowed to import that subsidiary's pre-merger losses in circumstances where the deduction would have been permitted if the subsidiary had been resident in Finland. The ECJ ruled that even if there was a difference in treatment vis-à-vis the wholly domestic situation (which was for the national court to assess), the legislation was not in principle incompatible with EU law, since an unlimited right to import losses could be justified on the grounds of the balanced allocation of taxation between Member States, the need to prevent double use of losses, and the need to prevent tax avoidance. The legislation would, however, be disproportionate and therefore incompatible with EU law if it did not allow the parent company the possibility of showing that the subsidiary had exhausted the possibilities of taking the losses into account in its State of residence (the so-called "no possibilities" test set out in Case C-446/03 Marks & Spencer).

The second question was whether any imported losses should be calculated according to the tax legislation of the parent company's State of residence or that of the subsidiary's State of residence. The ECJ did not answer this one way or the other, but held that the calculation rules must not lead to "unequal treatment" compared with the applicable rules in the case of a purely domestic merger.

The judgment is here.