New CJEU case law on final losses and required changes related to cross-border group contributions in Finland
The Court of Justice of the European Union (CJEU) has rendered two judgements on 19 June 2019 on cross-border loss relief concerning the compatibility of Swedish tax legislation with EU law. In Sweden, the current legislation allows cross-border loss relief with certain conditions, the details of which are clarified by the CJEU’s judgements – the first judgement concerning a merger, and the second cross-border group contributions with liquidation. Also Finland will bring its rules on tax deductibility of group contributions in line with EU law. In Finland, making group contributions to a company residing in another EEA State has not been possible in any circumstances which resulted in the European Commission launching infringement procedure against Finland earlier this year.
The CJEU’s decisions
Both CJEU decisions concern the Swedish parent company’s right to deduct the losses of its non-resident subsidiary, in Memira Holding (C-607/17) in connection with a cross-border merger-absorption of a directly owned German subsidiary, and in Holmen (C-608/17) with liquidation of a Spanish sub-subsidiary owned via a Spanish subsidiary.
In its landmark decision Marks and Spencer (C-446/03) rendered in 2005, the CJEU ruled that deduction of losses sustained by a foreign subsidiary has to be allowed in a group relief system of a Member State in case the losses can be considered as final. In the Memira Holding and Holmen decisions the CJEU confirmed in line with the Marks and Spencer decision that the losses cannot be considered as final in case they can be taken into account by a third party in the state of residence of the subsidiary. For the losses to be deductible, the parent company has to demonstrate that the losses cannot be taken into account economically by transferring them to a third party for example following a sale of the subsidiary for a price that would include the tax advantage represented by the future deductibility of the losses.
In the Holmen decision, the CJEU held also that the Swedish legislation disallowing the application of a cross-border group relief in the event of final losses of a foreign subsidiary is against EU law if all the intermediate companies between the parent company applying for a group relief and the sub-subsidiary sustaining the losses are established in the same Member State, as was the case with Holmen.
Finland to amend its group contribution legislation
The European Commission sent a letter of formal notice on 7 March 2019 to Finland asking it to amend its legislation on group contributions to allow deductibility of group contributions made to affiliated companies in other EU/EEA states to the extent that these cover final losses. As a result, Finland will renew its group contribution legislation. This legislative project is now mentioned also in the Government Programme published on 6 June 2019. The new legislation should be retroactive to avoid further litigation in this respect.
Finland’s legislative amendment should bring also the Finnish group contribution legislation in line with the CJEU’s case law on the deductibility of final losses. However, as demonstrated by the CJEU’s Holmen and Memira Holding decisions, the concept of final losses set out in the Marks & Spencer decision still raises questions after almost 14 years since the decision was rendered.