On 6 July 2012, the Finnish Supreme Administrative Court ("SAC") issued and published an advance ruling (KHO:2012:56) concerning back-and-forth stock trading. In the ruling, capital losses arising in consequence of trading of shares back and forth within a short period of time were considered nondeductible based on the general tax avoidance provision in Article 28 of the Finnish Act on Assessment Procedure.
The SAC justified the application of the tax avoidance provision by the fact that the seller repurchased stocks corresponding to the ones sold immediately after the selling. Furthermore, another ground for the ruling was the substantial amount of the capital losses arisen in consequence of the trades compared to the actual profit potential in the back-and-forth stock trading. As the justifications mentioned above were fulfilled in the case at hand, the SAC considered that the capital losses arisen in consequence of the stock trades were not deductible from the seller's capital gains in accordance with Article 50 of the Finnish Income Tax Act.
In the case a same amount of corresponding stocks of listed companies were both sold and repurchased during one day. The back-and-forth trades were executed within a short period of time and some of them in practice even at the same time. In addition, the stocks were traded with over EUR 200,000 and the capital losses of about EUR 80,000 were arisen in consequence of the trades. In reality the repurchase prices diverged only slightly from the selling prices.
The recent ruling of the SAC clarifies and confirms the previous practice of the SAC. In a ruling issued in 2004 (KHO 2004 T 178) the SAC regarded the back-and-forth stock trades executed during one day as tax avoidance since the seller was not exposed to actual price risk in the back-and-forth stock trading. In this case the stock trades were concluded in the after-hours market through a contractual trade in which the same stocks were traded between the same parties at the same price. Instead in a ruling issued in 2009 (KHO 2009:53) the SAC considered that income tax consequences of back-and-forth stock trades executed during two consecutive days could not be intervened based on the tax avoidance provision. The SAC based its justifications on the nature of the securities trading and on the fact that the trades in question were executed through a stock exchange as a conventional stock trade instead of a contractual trade.
Based on the case law presented above it may be considered likely that the capital losses arising in consequence of the back-and-forth stock trades are regarded nondeductible due to the general tax avoidance provision, if the profit potential and price risks of the back-and-forth stock trades are low, and especially, if trades are not executed as conventional stock trades through the stock exchange. However, in accordance with the SAC's view, the back-and-forth trades taking place during two consecutive days may be in a normal situation reckoned as typical securities trading and correspondingly capital losses arising may be deducted without intervention of tax avoidance provision.
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