The Supreme Administrative Court has issued a ruling based on which the interruption of business-related connection between the parent company and the shares belonging to the fixed assets of a company may lead to a classification of the capital gain derived from the transfer of such shares as taxable nonbusiness- related (personal) income.
Pursuant to section 6 b of the Finnish Business Income Tax Act (24.6.1968/360), certain capital gains derived from transfers of shares by corporate entities are in certain circumstances exempt from tax. According to the provision, the prerequisites for the tax exempt transfer include that the shares that are disposed of shall belong to the fixed assets of the company, the ownership in the target company shall exceed 10% and that it must have lasted uninterruptedly for more than a year. Further, the target company shall not be a real estate company and the selling entity shall not be engaged in venture capital activities. The shares that are sold shall also be shares of a company as defined in Article 2 of the EU Parent-Subsidiary directive or a company residing in a country which has a tax treaty with Finland that is applied to dividends.
In the case of the Supreme Administrative Court 2010:50 a Finnish limited liability company A had sold the shares it held in two other limited liability companies B and C in 2005 and the shares of the companies were accounted as fixed assets in the parent company's balance sheet.
Initially A had rented equipment and machinery for the business activities of B and C and also assisted companies financially due the inadequate financial resources of the companies until the end of 1999. Since then the functions of B and C had developed to the extent that the companies did not need financial support or machinery from A. The CEO of B and C was also a member of the board of directors of A. The business income A had received from 2000 was mainly derived from securities, shares and renting.
Based on the ruling of the Supreme Administrative Court, the shares of B and C possessed by A were considered to be fixed assets until the end of 1999. However, there is no specific legislation related to the significance of the amendment of the type of assets due to changes in the use of purpose. The Supreme Administrative Court stated that as the business-related connection had ceased in 2000 and taking into account both the time-period between the amendment and the share transfer together with the business A being conducted, the shares were not considered to be fixed assets of A and, therefore, the transfer of the shares could not be exempted from tax.
A had also argued that the shares of B and C had been treated as fixed assets of the company since the acquisition of the shares and, thus, the interpretation by the tax authorities could not be changed. The Supreme Administrative Court ruled that since the tax authorities had not provided a written or oral specific statement related to the type of property of the shares, the passive acceptation is not sufficient in terms of protecting the trust of a taxpayer.
To sum up the significance of the ruling, the Supreme Administrative Court seems to have strengthened the prerequisites for characterizing the assets that belong to fixed assets. The ruling is of great importance to several group companies and holding companies as the business-related connection between entities shall exist before the execution of tax exempt transfer of shares accounted as fixed asset as provided in section 6b of the Business Income Tax Act.
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