Finland: Taxation issues on partial demerger

 

The Applicant in the case was a Finnish holding company “A Oy” which owns shares in hundreds of Finnish real estate companies and housing companies. The real estate properties and the real estate companies owned by it differ in their location, profit and value as well as purpose of use.

 

A Oy planned to transfer, without dissolving, the shares of three real estate companies, with all the related assets and liabilities, into a new company to be established. The shares of the before mentioned real estate companies entitle the owner to the possession of certain business premises in the centre of the city of X.

 

The new company would administer the shares of the real estate companies and it would be entitled to all rental revenues from the real estates. The business activity of the new company would be independent and profit earning.

The Applicant planned a partial demerger so that the assets, liabilities and other responsibilities of its three affiliates located in the city of X, real estate companies Y, Z and V, would be transferred into a new company to be established, leaving another business entity to itself. The companies in question are mutual real estate companies located in the centre of the city of X, whose shares entitle them to business premises located in the centre. The business premises are leased and the combined rental revenue from them is approximately 4,4 million euros per year.

The Central Tax Board deemed in its advance ruling that the objects located in the centre of the city of X form a geographically and organizationally uniform object of lease which can be seen as a business unity as meant in the Business Income Tax Act.

 

The Central Tax Board deemed that should A Oy demerge so that it transfers the shares of real estate companies Y, Z and V, with assets and liabilities, to the company to be established, leaving another business entity to itself, section 52 of the Business Income Act applies to the demerger.

The Authority appealed the ruling of the Central Tax Board to the Supreme Administrative Court, but the Supreme Administrative Court stated as its judgment that the outcome of the advance ruling issued by the Central Tax Board shall not be amended. Advance ruling for tax years 2007-2009.

The Supreme Administrative Court has on the same date also decided on another case concerning partial demerger. In that case it was deemed that a planned transfer of investment capital of a company which, according to its articles of association, practises gardening business and other investment activity, in pursuance of a partial demerger did not form a business unity as meant in the Business Income Tax Act.

Janne Juusela and Niina Pitkäjärvi are lawyers at Borenius.