In its Judgment of 18 July 2013 in case C-6/12 P Oy, the Court of Justice of the EU (CJEU) assessed the compatibility with EU State aid rules of the Finnish regime of deduction of tax losses by undertakings subjected to corporate control changes (see a Finnish comment here).
In my view, the most interesting part of the CJEU Judgment in the case lies not with the "boilerplate" analysis of the Finnish tax law provisions but, remarkably, with the not so concealed warning it has sent out to Member States that may be tempted to create 'too soft' tax regimes for companies which activities may have a "particular impact on employment".
Basically, Finnish tax rules allow companies to carry their losses forward up to 10 years after incurring them for the purposes of compensating their benefits and diminishing their tax burden. However, in order to prevent strategic acquisitions of 'bags of losses' within the shields of inactive companies, the Finnish tax code establishes a special regime in case of changes of corporate control. According to the relevant provisions, "losses sustained by a company are not deductible if, during the year in which they arise or thereafter, more than half of the company’s shares have changed ownership otherwise than by way of inheritance or will, or more than half of its members are replaced." However, "the competent tax office may, for special reasons, where it is necessary for the continuation of the activities of the company, authorise the deduction of losses when such an application is made" (emphasis added).
By way of a guidance letter, the Finnish Tax Directorate interpreted the concept of "special reasons" and considered that, inter alia, could include the fact that the company requesting permission to carry fiscal losses forward despite a change of corporate control had "particular impact on employment". Indirectly, this raised the issue whether the granting of such an authorisation based on (non-strictly) tax reasons would meet the selectivity requirement of Article 107(1) TFEU and, consequently, could be challenged under the EU State aid rules.
In a very clear manner (despite the non-binding general tone of the Judgment, where the CJEU claims not to have sufficient information to reach a final position), the CJEU has indicated that:
26 […] the application of an authorisation system which enables losses to be carried forward to later tax years, such as that in question in the present case, cannot, in principle, be considered to be selective if the competent authorities have, when deciding on an application for authorisation, only a degree of latitude limited by objective criteria which are not unrelated to the tax system established by the legislation in question, such as the objective of avoiding trade in losses.27 On the other hand, if the competent authorities have a broad discretion to determine the beneficiaries or the conditions under which the financial assistance is provided on the basis of criteria unrelated to the tax system, such as maintaining employment, the exercise of that discretion must then be regarded as favouring ‘certain undertakings or the production of certain goods’ in comparison with others which, in the light of the objective pursued, are in a comparable factual and legal situation (see, to that effect, C‑107/09 P Commission and Spain v Government of Gibraltar and United Kingdom [2011] ECR I‑0000, paragraph 75). […]30 […] if the competent authorities were to be able to determine the beneficiaries of the deduction of losses on the basis of criteria unrelated to the tax system, such as maintaining employment, such an exercise of that power should then be regarded as favouring ‘certain undertakings or the production of certain goods’ in comparison with others which, in the light of the objective pursued, are in a comparable factual and legal situation (C-6/12 at paras 26 to 30, emphasis added).
In my view, the CJEU has gone out of its way in this case (where it could have simply declined to provide an answer on the basis of the lack of information submitted by the referring court) with the aim of sending out a clear message to the governments of all Member States: if they intend to use (selective) tax measures to prevent negative impacts on employment, they need to obtain approval by the European Commission first.
This is not a revolution and may even have a second order of importance but, in my view, the CJEU has clearly backed the European Commission's efforts to control Member States' measures to (continue trying to) react to the economic crisis and has clearly indicated that corporate taxation cannot be used as a tool for these purposes. We shall see if the message reaches the intended ears...