by Davide Anghileri
The European Free Trade Association (EFTA) Court has clarified when countries subject to the court’s jurisdiction (at present, Iceland, Liechtenstein, and Norway) may deny a tax deduction for an intragroup contribution to a foreign company.
Ruling (E-15/16), issued 13 September, concerns Norway’s intra-group contribution rules, which provide that a contribution will reduce the transferor’s taxable income and be included in the recipient’s taxable income only if both transferor and recipient are liable to tax in Norway.
The court concluded that the Norwegian law does not violate freedom of establishment principles except to the extent that the law applies in cases where the loss sustained by the foreign subsidiary is final.
In such case, the requirements of national law go beyond what is necessary to pursue legitimate objectives, such as the need to safeguard the balanced allocation of taxation powers between EEA States or to prevent wholly artificial arrangements leading to tax avoidance, the court said.
Norway intercompany contribution rules
In 2007 a Norwegian company bought a Lithuanian company through a wholly-owned Finnish subsidiary. In 2009 the Norwegian company bought all the shares of the Lithuanian company from the Finnish subsidiary thus becoming the direct owner of the Lithuanian subsidiary.
Subsequently, the Norwegian company made a contribution (agreed in 2009 and paid in 2010) to the wholly owned company, just before striking it off the Lithuanian company’s register in 2012.
The Norwegian company claimed a deduction for the contribution in its tax return for the income year 2009, which was denied by the Norwegian tax authority under a provision allowing for a deduction in Norway only when both the transferor and recipient of an intra-group contributions is liable to taxation in Norway.
Hence, EFTA court was asked whether this provision was compatible with Articles 31 and 34 EEA, or whether EEA law must be interpreted to mean that, on certain conditions, an exception must be granted from that requirement.
EFTA Court decision
The court found that the Norwegian law constitutes a restriction of the freedom of establishment because it provides a difference in treatment between resident parent companies based on the location of their subsidiary companies. Therefore, it is less attractive for resident companies to establish subsidiaries in other EEA States.
However, this difference in treatment may be justified on the grounds set out in Article 33 EEA or by overriding reasons in the public interest, the court said, provided that it does not go beyond what is necessary to attain it.
The court concluded that, in principle, it is it is contrary to the freedom of establishment to deny a parent company a deduction from taxable profits in an EEA State if final losses are incurred by its non-resident subsidiary.
To have final losses, two conditions must be fulfilled, the court explained. First, the possibly to take in account the losses for the accounting period concerned should be exhausted in the State of residence of the subsidiary. Second, there must be no possibility for the foreign subsidiary’s losses to be taken into account in its State of residence for future periods either by the subsidiary itself or by a third party, in particular where the subsidiary has been sold to that third party
The court also pointed out that the existence of even minimal income precludes the application of the final loss exception.
The court then stated that it is for the national court to assess, on the basis of the criteria mentioned, and in light of the specific facts of the case pending before it, whether the resident parent company has effectively demonstrated that its non-resident subsidiary sustained a loss of a definitive nature, or whether the situation could constitute a wholly artificial arrangement, designed to avoid taxation.
Editors Note: This article was modified on 9/23/2017 to clarify that the court’s decision does not apply to Switzerland.
Davide Anghileri
Davide Anghileri is a PhD candidate at the University of Lausanne, where he is writing his thesis on the attribution of profits to PEs. He researches transfer pricing issues and lectures for the Master of Advanced Studies in International Taxation and Executive Program on Transfer Pricing.
Anghileri, a Contributing Editor at MNE Tax, previously worked as a policy advisor to the Swiss government on BEPS issues.
Davide can be reached at [email protected].
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Although Switzerland is a member of EFTA, it is not a member of the European Economic Area (EEA). The EFTA Court is only competent to rule on the application of EEA law by those EFTA States that are members of the EEA, and hence it does not apply to Switzerland. This should be made clearer in the first paragraph of this article.
Thomas, Thank you so much for your comment. We have made a clarification to this article based on your observation. MNE Tax