CJEU Case C-231/05, AA Oy Finnish Corporate Contribution System Antti Lehtola

Agenda Background of the case What is this case about? Case in CJEU Ruling of CJEU Future of group taxation in EU

Background – the law in Finland Finnish corporate contribution system gives group of companies a possibility to even out taxes between group of companies Most important criteria for corporate contribution system: - Parent company holds at least nine tenths of the capital of the subsidiary - Both companies (transferee and the transferor) have to be finnish Background/ Case/ CJEU/ Ruling/ Future

Background – Articles & Directive EU tax law takes priority over tax treaties and domestic tax law Article 49 – Freedom of establishment Article 63 – Free movement of capital Directive 90/435/EEC – objective is to exempt dividends and other profit distributions paid by subsidiary companies to their parent companies from withholding taxes and to eliminate double taxation Background/ Case/ CJEU/ Ruling/ Future

What is this case about? AA Ltd, a company established in UK, indirectly holds 100% of the shares in finnish AA Oy AA Ltd is making losses, unlike AA Oy which is making profit AA Oy wants to make a tax deductable intra- group financial transfer to the parent company in UK in order to secure its financial position Background/ Case/ CJEU/ Ruling/ Future

What is this case about? All other criteria for making a tax deductable intra-group financial transfer are met except that the transferee (receiving company) is not finnish Keskusverolautakunta (Central tax comission) gives preliminary decision that the transfer is not tax-deductible expense of the transferor KHO (Supreme administrative court) referred this case to the Court of Justice for preliminary ruling Background/ Case/ CJEU/ Ruling/ Future

Case in CJEU Parties in the case: AA Oy The court (Grand Chamber) Advocate general: J. Kokott 2 agents from each government of: Finland, Germany, Netherlands, Sweden, United Kingdom and from the comission of European Communities Background/ Case/ CJEU/ Ruling/ Future

Case in CJEU KHO asks CJEU to find out if finnish corporate contribution system is acceptable in the light of articles 49 and 63 and with directive 90/435 Finnish goverment: The purpose of intra-group financial transfers is to remove tax disadvantages when operating as a group of companies Since legislation like that concerns only relations within a group of companies, it primarily affects the freedom of establishment (article 49) Background/ Case/ CJEU/ Ruling/ Future

Case in CJEU Concerning directive 90/435, it should be noted that the case concerns the first taxation The question referred must be therefore be answered in the light of article 49 alone If member state can freely apply different treatment in basis of location of the company, that would deprive Article 49 Background/ Case/ CJEU/ Ruling/ Future

Case in CJEU German, Netherlands, Swedish and United Kingdom Governments argue that the position of companies located in different member states are not comparable.. They argue that a distinction should be drawn between companies principally or partially taxed in Finland and companies that are not subjected to tax in Finland Background/ Case/ CJEU/ Ruling/ Future

Case in CJEU German and Swedish Governments: Member state cannot influence the tax treatment of the transferee and cannot prevent a situation where the transfer made is not taxed at all United Kingdom Government: Finland does not tax the income of non-resident parent companies, and it is not required to allow the Finnish subsidiary the set-off arising from the parent company´s losses. The parent company can carry the losses forward to another financial years in UK Background/ Case/ CJEU/ Ruling/ Future

Case in CJEU Still a different treatment between group companies in other countries and group companies in same country constitutes an obstacle to the freedom of establishment A restriction on the freedom of establishment is permissible only if it is justified by overriding reasons in the public interest Background/ Case/ CJEU/ Ruling/ Future

Case in CJEU Finnish, German, Netherlands and United Kingdom Governments and the Comission of the European Communities argue that the finnish system of intra-group financial transfer is justified by the need to ensure the coherence of the tax system concerned and by the allocation of taxation powers between member states, the fear of tax avoidance and the principle of territoriality Background/ Case/ CJEU/ Ruling/ Future

Case in CJEU If deducting a transfer made in favour of a company with its establishment in another member state would amount to allowing taxpayers to choose freely the member state where their incomes would be taxed If transferee is not taxed from the transfer, the profits may escape taxation altogether Business might be organized in such way that income would be taxed in other member state at a lower rate than in Finland or not taxed at all Background/ Case/ CJEU/ Ruling/ Future

Case in CJEU Risk of purely artificial arrangements (Finnish system of intra-group transfers does not require the transferee to have suffered losses) The principal that transfer can be deducted from taxable income only in the same member state is able to prevent these artificial practices Background/ Case/ CJEU/ Ruling/ Future

Ruling The finnish corporate contribution system restricts the freedom of establishment Taxing rights are based on domestic tax law Need to safeguard the taxing power of member states and to limit tax avoidance Finnish corporate contribution system is not in conflict with freedom of establishment Background/ Case/ CJEU/ Ruling/ Future

Future of group taxation in EU Harmonized tax system? CCCTB (Common consolidated corporate tax base) - Operating income would be calculated with harmonized formula - Tax incomes would be divided to member states where the company is operating, based on revenue, number of employees and assets Background/ Case/ CJEU/ Ruling/ Future