The Supreme Administrative Court has issued a ruling based on which a transfer of employees does not necessarily hinder the applicability of a granted special permit relating to the right to deduct a company's tax losses (in this case totalling to EUR 558 million), despite a change of ownership.
Pursuant to section 122 of the Finnish Income Tax Act (1535/1992, as amended), if the ownership of more than 50% of a company's shares has changed, as a general rule the possible losses in taxation for that year and the previous tax years can no longer be deducted from the company's taxable income. In calculating the amount of shares that have changed ownership, also such shares are deemed to have changed ownership of which the company owning at least 20% of the share stock of the loss-making company has undergone the above mentioned change in the majority of its shares.
However, the loss-making company may apply from the tax office a permit to maintain the deductibility of the losses. In order for such permit to be granted it is required that special reasons exist and that the losses are necessary for the continuation of the company's activities. The grounds for the special reasons have been established by the tax authority's guidance and in the tax and legal praxis. One of the established criteria for the permit is the particular consequences of the share sale (or other arrangement resulting to the forfeiture of the tax losses) to the regional or national employment situation. The other criteria include, inter alia, changes of generation situations, an MBO, purchase of a passive special purpose vehicle, ownership changes relating reorganization, an intra-group transfer and expanding the operations through a corporate acquisition.
In the case at hand, the employment related consequences were used as one of the arguments for supporting the permit application. The company referred to the amount of persons employed by it and the entire group of companies. More significantly, the company stated that the amount of employees would not be adversely affected by the planned change in the company's ownership, the statement acting in favour of the permit. After the receipt of the permit from the tax office the share sale was carried out. However, soon after that the entire personnel were transferred to a parent company, even though carrying out same functions as previously. The transfer was justified based on that it was feasible to centralize staff relating to real estate investment activities within the entire group of companies. The employment costs were invoiced from the loss-making company to the parent company based on an intra-group service agreement, so the change did not alter the cost structure of the loss-making company. The aggregate amount of employees in the group remained roughly the same as prior to the transfer of the employees to the parent company.
The Supreme Administrative Court ruled that the circumstances were to be regarded as equivalent to the facts presented in the original application for permit, despite the transfer of employees. Thus, the permit previously granted for maintaining the tax losses was still applicable to the changed circumstances. The transfer of employees was regarded as justified means of developing the activities of the group within the limits set in the permit.
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