1. KHO:2014:159 32E29000 European and international tax law Court case
Virpi Lehtonen, Riikka Walldén, Elif Önder

2. Case details Tax year 2010 Company A Oy Estonia G-B +7 other countries
Finnish resident
Estonia
- PE
- no paid taxes
G-B
+7 other countries
-PE
- taxes paid
Tax paid in Finland from income of all the 9 PE’s
In this case there were 3 parties: Konserniverokeskuksen verotuksen oikaisulautakunta (Rectification board), Veronsaajien oikeudenvalvontayksikkö (Tax Recipients’ legal services) and Company A Oy.
FI: Yhtiö Oy on yleisesti verovelvollinen yhtiö Suomessa. Yhtiöllä on yhteensä 9 muuta ulkomaista kiinteää toimipaikkaa, joista yhtiö on saanut liiketuloa vuonna Näiden toimipaikkojen yhteenlaskettujen tulojen mukaan yritys on maksanut veroa Suomessa vuonna Tämän lisäksi veroa on maksettu myös muiden toimipaikkojen valtioissa, lukuun ottamatta Isoa-Britanniaa ja Viroa.
EN: In this case there is a Company A ltd (Company A Oy) which is a resident in Finland. Company A has also 9 permanent establishments (PE’s) abroad that have been profitable in Company A had incomes from 9 PE’s and it has paid taxes in 2010 from all of those incomes in Finland. However, taxes have also been paid in 7 other countries that Company A has PE’s. From PE’s located in Great Britain and Estonia, incomes have been taxed only in Finland.

3. Case details
In 2010 Company A hasn’t paid taxes in Estonia nor in G-B although
it has PE’s in both countries;
business income from both countries is taxable income by the law
both PE’s have been profitable that tax year.
In Estonia taxes haven’t been paid because of the different corporate tax system
According to Estonia’s corporate tax system a foreign company that has PE’s in the country are subjects to income tax only in respect of all distributed profits
Company A didn’t distribute profits from Estonia to its shareholders in 2010
In G-B taxes haven’t been paid because Company A has deducted its previous years losses from its 2010 incomes
Taxes in G-B did not realized in 2010

4. Case details
From Company A’s application Rectification board accepted to tax base all 9 PE’s positive incomes when calculating maximum credit amount
Elimination of International Double Taxation Act 4 § paragraph 3
Law must be interpreted in such a way that when calculating the maximum amount of tax credit as an income from a foreign state, there should be taken into account also such taxable incomes that may in principle become taxable incomes abroad although the foreign state tax is not, for example due to foreign tax loss carry-over, specifically performed during that fiscal year, in which case the income is taxed only in Finland.
Taxable income over 738 million EUR / Credit over 191 million EUR
Tax Recipients’ legal services unit took the issue to Administrative Court
Elimination of International Double Taxation Act (4 § paragraph 3) should be interpreted into taking account only those taxable incomes from which Company A has already paid final tax or corresponding pre-tax to that foreign states tax authorities (Act 2 §). Profits from G-B and Estonia should be excluded.
Taxable income over 682 million EUR / Credit over 177 million EUR
Case based on: How to interpret the Elimination of International Double Taxation Act (4 § paragraph 3). Rectification board accepted all 9 countries to tax base when calculating maximum credit. Tax Recipients’ legal services unit took the issue to Administrative Court by appealing that Elimination of International Double Taxation Act (4 § paragraph 3) indicates that only those countries should be approved which has been paid taxes to both countries (double-taxation in resident and in PE’s state) so profits from G-B and Estonia should be excluded.
Rectification boards’ credit included pre-tax € and dividends and interest withholding taxes of €. TOTAL: €.
Elimination of International Double Taxation Act (1552/1995)= Laki kansainvälisen kaksinkertaisen verotuksen poistamisesta
foreign tax loss carry-over= ulkomainen tappiontasaus
corresponding pre-tax= vastaava ennakkovero

5. Administrative Court’s decision
Dismissed appeal regarding profits from Estonia
Appealing to 4 § paragraph 3 on grounds of only profits that are taxable in both countries should be accounted for
Profits from G-B are accepted when calculating the maximum credit for taxes paid abroad
Both Company A and Tax Recipients’ legal services unit requested for leave to appeal to Supreme Administrative Court

6. Handling in Supreme Administrative Court
Leave to appeal was granted to both parties
Company A’s appeal to Supreme Administrative Court
Demands: Decision should be dismissed insofar as decision states incomes from Estonia should exclude when calculating credit base for maximum amount of tax credit and that decision made by Rectification board should be executed.
Grounds: As Administrative Court stated in their decision “When taxes from incomes sourced in Estonia have finally been paid, company could seek rectification (hakea oikaisua).” According to Company A this proves taxes that need to be paid in Estonia are such taxes which should be credited based on Elimination of International Double Taxation Act.
Purpose of Elimination of International Double Taxation Act is to eliminate double taxation and in another words that certain income should be taxed only once. Only because tax from income sourced to Estonia will become taxable in a different year is meaningless. Law doesn’t require that in order to become a subject of double taxation, assessment should be made viewing paid taxes only within one certain year.

7. Handling in Supreme Administrative Court
Tax Recipients’ legal services appeal from Administrative Court’s decision
Demands: Maximum amount of tax credit should be circa 177 million and incomes sourced to G-B should not be included to credit base.
Grounds: Elimination of International Double Taxation Act section 4 paragraph 3 states that when calculating maximum amount of credit base for income coming from foreign states should only be taken into account such taxable incomes that have been factually taxed in source country within that same tax year than tax has been paid also in Finland.
Tax Recipients’ legal services states that double taxation doesn’t apply if previously stated doesn’t fully fulfil. If into maximum amount of tax credit can be accounted such foreign countries incomes which aren't factually taxed before admitting credits, taxes might not come taxable in the source country at all.

8. Supreme Administrative Court’s decision
Supreme Administrative Court annuls (kumoaa) Administrative Courts decision from Estonia’s part and dismisses (hylkää) Tax Recipients’ legal services appeal
Supreme Administrative Court issued that profits from Estonia are to be included in the company’s profits when calculating the maximum credit base for taxes paid abroad (Credit over 191 million EUR)
Supreme Administrative court stated that it is relevant in this case 1) if the incomes are taxable in Finland and 2) if paying taxes from income that originates to source country is mandatory by the law, however the obligation to actually pay the tax can be e.g. postponed due to the features of the local tax system

9. Implications to (and from) the case
The method of calculating the tax credit
The credit method vs the exemption method
In this case the credit method: The bigger the calculated income from abroad compared to income in total -> the bigger the credit
Impact of losses
Changes in the Act on Elimination of International Double Taxation in 2010
Moving from per country –method to overall –method
The credit may be carried forward for five years instead of former one year
Profits taxable in Finland vs. obligation to actually pay the tax in the local tax system
Finnish entities have now better possibilities to avoid double taxation

10. Sources
KHO:2014: html
Elimination of International Double Taxation Act
HE 197/
A&S NewsHighlights 11/2014, p. 4