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ECJ Rules In Favour Of Finnish Intra-Company Tax Rules

by Ulrika Lomas, Tax-News.com, Brussels

20 July 2007


The European Court of Justice has backed Finnish tax rules which state that a resident company is not permitted to deduct intra-group transfers to a parent company registered in another EU member state from its taxable income.

While the judges found that subsidiaries of foreign parent companies receive less favourable tax treatment than that enjoyed by the subsidiaries of Finnish parent companies, and that therefore the law constituted a restriction on the freedom of establishment, they went on to rule that such arrangements could be used purely to avoid tax, and that there were "overriding" public interest reasons for supporting the Finnish legislation.

The case centred on Oy AA, a Finnish company which was a subsidiary of the parent company AA Ltd, which has its main establishment in another Member State. Oy AA wished to make a cross-border intra-group financial transfer in favour of AA Ltd, but the Finnish Central Tax Commission deemed that such a transfer could not be regarded as an expense deductible from the taxable income of Oy AA. The company challenged the decision in the Supreme Administrative Court, which asked the ECJ to rule on the matter.

Ruling in favour of the Finnish government, the ECJ said that the possibility of transferring the taxable income of a subsidiary to a parent company with its establishment in another Member State "carries the risk that, by means of purely artificial arrangements, income transfers may be organised within a group of companies towards companies established in Member States applying the lowest rates of taxation or in Member States in which such income is not taxed".

The Court concluded that it considers that the Finnish legislation "pursues legitimate objectives compatible with the treaty and justified by overriding reasons in the public interest".


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