The EFTA Court has stated in a new advisory opinion as of 13th September 2017 that it may be a violation of the Freedom of Establishment in EEA law to deny Norwegian companies a tax deduction for group contributions to a group company in an EEA state with a tax loss in that state. One condition is that the loss incurred by the foreign group company is final, and cannot be utilized in the home state in earlier or future periods.
The EFTA Court has made an Advisory Opinion to Borgarting Court of Appeal in a case between Yara International ASA (Yara) and Norwegian tax authorities. The question from the Court of Appeal to the EFTA Court was whether it was a violation of the Freedom of Establishment to deny Yara a tax deduction for group contributions to its Lithuanian subsidiary.
Yara’s Finnish subsidiary acquired the Lithuanian company UAB Lietuva (UAB) from a third party in 2007. In April 2009, UAB sold the totality of its business to a third party. Subsequently, UAB had a tax loss carry forward of approx. NOK 177 million. The same year, Yara bought 100% of the shares of UAB from its Finnish subsidiary, and immediately rendered a group contribution of EUR 16 million (approx NOK 132 mill.). The group contribution was primarily used to pay the company’s intracompany liabilities, whilst the residual (approx. EUR 6.4 million) was placed in a cash pool account. UAB was liquidated January 2010.
The tax office, tax appeal board and Oslo District Court rejected Yara’s claim for a Norwegian tax deduction for the group contribution rendered to UAB, because the Tax Act’s condition that both transferor and recipient must be tax liable in Norway was not fulfilled. The Court of Appeals requested an advisory opinion from the EFTA court, on the question of whether the condition that both transferor and recipient are tax liable to Norway was a violation of the Freedom of Establishment in EEA law.
The findings of the EFTA Court
Yara argued that denying a tax deduction for the group contribution violates the EU Court’s judgement in Marks & Spencer on the permissibility of tax consolidation between group companies in different member states, provided that it is carried out to cover a “final loss” sustained by one of those companies, the so-called “final loss exception”.
For the EU Court’s exception for cross-border tax consolidation of “final loss” to apply, two conditions must be fulfilled:
- The foreign subsidiary must have exhausted the possibilities to claim a deduction for the loss in the home state in the accounting period or previous accounting periods, and
- It must not be possible for the subsidiary, or a third party, to claim the deduction in future periods.
The Government held that the statutory requirement for tax liability to Norway for transferor and recipient is necessary to secure a balanced allocation of taxation rights between EEA states, and the necessity of preventing tax avoidance. They referred to the conclusions from the EU court in Oy AA C-231/05, where a tax deduction for intra-group contributions from a Finnish subsidiary to a UK parent was denied and considered proportional on those grounds.
The EFTA Court found that, when assessing whether the restriction is proportional, there is no reason to distinguish between the different schemes of tax consolidation as loss transfers (“group relief”) in English tax law (cf. Marks & Spencer) and profit transfers (“group contribution schemes”) as in Norwegian and Finnish law (cf. Oy AA). The Court stated that the decisive is whether the restriction in the fundamental freedom is suitable to attain the fulfilment of public interests, such as to “safeguarding the balanced allocation of taxation powers between EEA States”, and whether it goes further than necessary to reach this objective. When the intra-group contribution is made to cover a “final loss” in a foreign group company, the purpose of maintaining balanced powers of taxation cannot justify the restriction.
The Court stated that it is for the national courts to determine whether the loss, in UAB in this instance, is final. Further, the EFTA Court found that it is for the national courts to determine whether the situation could be considered a wholly artificial arrangement, and whether a deduction could be denied on those grounds.
The Court’s opinion
The EFTA Court concluded that it is, as a starting point, not a violation of the Freedom of Establishment to require that transferor and recipient are tax liable to the same member state to render and receive group contributions with tax effect. This provided that the restriction has a legitimate purpose such as to maintain balanced taxation powers between EEA states or to prevent tax avoidance. However, in instances where the tax loss in the foreign subsidiary is final, the Norwegian law go beyond what is necessary and cross-border intra-group contributions with tax effect must be permitted within the EEA.
Link to the decision:
This blogpost is written by Eystein A. Aarseth. Lina K. Smorr og Hilde Thorstad