March 27th 2018
Many countries levy a so called “exit tax”, which is realised in situations where a country would lose its right to tax assets that are being transferred to another country. The purpose of exit taxes is to collect a tax on such assets before they would be out of reach of the national tax authority.
Currently, Finnish law does not mandate a general exit tax for companies or assets leaving the country. However, there are rules that apply in certain special cases. According to the EU Merger Directive, a merger or the transfer of assets does not usually result in immediate taxes for a company: the Finnish exit tax rules of its Elinkeinoverolaki (EVL, the law relating to the taxation of business income) are based on this directive. The Merger Directive does, however, allow the taxation of profits or capital gains from a permanent establishment resulting from a merger, division, or transfer of assets on certain conditions.
A Finnish company can have a permanent establishment in another EU country, which may get transferred to another company located in the EU. For example, in the recent ECJ case C-292/16, a Finnish limited liability company had transferred its permanent establishment in Austria to an Austrian company via a transfer of business. In such a situation, according to EVL 52e.3 § which the Finnish tax authority applied, the market value of the transferred assets, such as the provisions deducted previously in the taxation in Finland of that permanent establishment, were included in the permanent establishment’s taxable income for the tax year in which the transfer took place. Had the assets been transferred domestically, the principle of continuity would have been applied – this would have resulted in a different outcome, i.e. the unrealised capital gains would not have been recognised as income until the assets had been transferred, which is more convenient than the situation described previously.
The ECJ found that this difference in treatment can act as a deterrent to companies established in Finland wishing to do business in another member state through a permanent establishment. The ECJ considered that this was against the freedom of establishment under Article 49 of the Treaty of the Functioning of the European Union. This indicates that when it comes to exit tax, the Finnish rules need to be revised, as the court stated that the Finnish exit tax rules go beyond what is necessary to preserve the allocation of powers of taxation between the member states. This opinion seems to be in line with previous ECJ case law regarding exit taxation. Article 49 of the TFEU does not restrict the final confirmation of the amount of tax, but levying the tax immediately was considered to be in conflict with the article and the principle of proportionality.
In any case, Finland should renew its exit tax rules when implementing article 5 of the EU Anti Tax Avoidance Directive (ATAD). The deadline for this is 1.1.2020, but considering the current state of the Finnish exit tax rules, the relevant issues should be addressed earlier than this to allow Finland to continue taxing certain assets. It is also worth noting that the ATAD does not solve the issues of EVL 52e.3 §, as it contains mostly exit tax rules that cannot yet be found in Finnish law.