By Marianna Santamala, Associate, Bird & Bird Attorneys Ltd, Finland
Finland’s Supreme Administrative Court on March 25 ruled in favor of Finnish shareholders and overruled the advance rulings of the Central Tax Board in two disputes relating to the assessment of mergers with US companies.
The decisions may have a wider impact on shareholders located in the European Union, as the Finnish law in question is based on the EU Directive on the common system of taxation applicable to mergers, divisions, transfers of assets, and exchanges of shares concerning companies of different member states.
Both decisions relate to the same parties where two Finnish shareholders, X and Y, owned equally the shares of A Corp, a US company, and B Oy, a Finnish limited liability company. Moreover, B Oy owned a US subsidiary C Corp. The shareholders X and Y had applied for preliminary rulings from Finland’s Central Tax Board regarding two questions, one of which concerned merger without consideration and the other which concerned a merger where the merging company resides in the US.
In the first decision (SAC 2021:35), A Corp was about to merge into C Corp complying with the local corporate and tax laws. Generally, the merger corresponded to a Finnish merger implemented in accordance with the Finnish Limited Liability Companies Act. No merger consideration was intended to be issued.
The Supreme Administrative Court assessed whether the merger could be considered tax neutral as no merger consideration was issued and the merger was not implemented between subsidiaries or sister companies, where merger consideration is generally not required.
As the shareholders directly owned the entire share capital of the merging company A Corp and indirectly the whole share capital of the receiving company C Corp, the Supreme Administrative Court ruled that the merger could be considered tax neutral.
In its reasoning, the Supreme Administrative Court noted that as the ultimate ownership of the merging and receiving companies was the same, not issuing a merger consideration as shares had no practical significance to the receiving company C Corp’s ownership structure. Hence, the merger consideration was not necessary in the case in question, and the merger could be considered tax neutral in the taxation of the Finnish shareholders X and Y.
In the second decision (SAC 2021:36), A Corp was to merge into B Oy without issuing merger consideration. The question was whether a merger that was implemented in accordance with US legislation could be considered tax neutral in the taxation of the Finnish shareholders. The Finnish Limited Liability Companies Act requires that cross-border mergers can only be implemented within the EEA-area.
According to the Supreme Administrative Court, the assessment of whether the merger had been implemented in accordance with the relevant company legislation and could therefore be considered tax neutral in accordance with the Finnish Business Income Tax Act should be made primarily from the merging company’s viewpoint as the merging company ceases to exist after the merger.
Moreover, the Supreme Administrative Court took into consideration the history and purpose of the Finnish Limited Liability Companies Act and assessed that the application of the Limited Liability Companies Act could not be considered as a formal requirement for tax neutrality in mergers. The Supreme Administrative Court overruled the decision and returned the matter to the Central Tax Board to determine whether the merger fulfills the other requirements for tax neutrality.
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Marianna Santamala is an Associate at Bird & Bird Attorneys Ltd, Finland.
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