The Finnish Supreme Administrative Court (SAC) decided on 31 January 2011 (KHO:2011:10) to ask for a preliminary ruling from the Court of Justice of the European Union (ECJ) concerning the question whether a tax-neutral share exchange can be completed between a company residing in an EU country and a company residing in the European Economic Area (EEA) (such as Norway, Iceland and Liechtenstein). Despite a previous positive ruling by the Finnish Central Tax Board, it is therefore currently unclear whether acquisitions can be made or whether group structures may be reorganized through tax-neutral exchanges of shares, when the either the target or the acquiring company is located in Norway, Iceland or Liechtenstein but the other one is in EU.
The Council Directive 2009/133/EC (the Merger Directive) provides for a possibility to carry out tax neutral share exchanges between companies being tax resident in EU member states, provided such companies are subject to general corporate taxation in that country and have certain specified company forms. An "exchange of shares" means an operation whereby a company acquires a holding in another company such that it obtains a majority of the voting rights in that company (or, holding such a majority, acquires a further holding), and in exchange issues securities to the shareholders of the acquired company. A cash payment not exceeding 10 % of the nominal value of the issued shares is allowed. The Directive is implemented in Finnish domestic tax law so that tax-neutral share exchanges are allowed equally for domestic and EU companies. Thus, companies residing in EEA countries (not belonging to EU) seem to fall outside the scope of the Directive and the Finnish domestic law provisions concerning tax-neutral share exchanges.
In the case at hand, the Finnish limited liability company A Oy initially asked from the Central Tax Board whether it could exchange tax-neutrally the shares it owned in the Finnish company C Oy with the shares in the Norwegian company B AS (an "aksjeselskap"), so that B AS would become the sole owner of C Oy. A Oy would receive approx. 6% of the shares in B AS. It was apparent that should the transferring and the receiving companies be resident within the EU, the requirements in the domestic law would be met and therefore, no income tax consequences should result due to the exchange of shares. As the other company was nevertheless tax resident in Norway (which is not a member of the EU), it was clear that the domestic rules on tax-neutrality were not directly applicable.
However, taking into account Norway's position as a member of the EEA, the Central Tax Board ruled (55/2008) that the provisions concerning the freedom of establishment in the EU Treaty and in the EEA Treaty necessitated the domestic tax law to be interpreted so that also exchanges of shares with Norwegian companies can be completed tax-neutrally.
Following an appeal by the Tax Recipients' Legal Services Unit, the SAC analysed the situation further. Articles 49 and 63 of the EU Treaty forbid any constraints against the freedom of establishment and the free movement of capital, and the corresponding provisions are included in the Articles 31 and 40 of the EEA Agreement. Based on the EEA Agreement, ECJ is competent to interpret the EEA Agreement if the provisions in both treaties are equivalent (as it was investigated to be in this case).
Ruling from the ECJ is needed to clarify whether exchanges of shares with Norwegian companies could be ruled out by the mere fact that the tax neutrality was allowed by a Directive which does not bind countries outside the EU. Should this not be sufficient, the ECJ would need to take into account that restrictions to the basic freedoms have only exceptionally been approved, if a legitimate objective or an overriding reason in the general interest capable of justifying such a restriction has occurred without going beyond what is necessary to attain it. As avoidance of tax evasion and the need to safeguard the effectiveness of fiscal supervision have in some cases been approved as such overriding reasons also with regard to the EEA Agreement, the question remains whether e.g. combating tax evasion could justify the restrictions to the basic freedoms in the case at hand. However, as Finland and Norway have concluded an agreement concerning exchange of information in tax matters, the ECJ will need to evaluate whether an efficient exchange of information could annul such justification grounds.
The preliminary ruling by the ECJ may in average be expected within 1.5 years. The ruling by the ECJ may have significant impact on the tax treatment of crossborder transactions involving parties from the EU and countries like Norway, Iceland, and Liechtenstein.
The ECJ preliminary ruling is highly anticipated also from the EEA and Norwegian perspective. A discussion paper was published early 2010 by the Norwegian Ministry of Finance, aimed at further alignment of Norwegian Tax law to the EEA Agreement. The paper suggested new legislation allowing tax-neutral cross-border mergers within the EEA/EU. As a consequence, the long lasting application procedure for tax-neutral share exchange was deemed unnecessary by the Ministry and was suggested to be discontinued. A further paradox was the suggestion for new legislation allowing tax-neutral share exchanges applicable on shares in companies resident outside the EEA.
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