News & Views

Can Finland Discriminate Bank Branches Against Subsidiaries?

1 December 2016

Author: Ossi Haapaniemi

The Supreme Administrative Court (SAC) recently ruled that the tax losses of the Finnish branch of a UK bank will not be transferred in the merger of the UK bank into its UK sister bank.

Had it been a Finnish subsidiary, this would not have been an issue at all. As a legal merger is a "universal succession", it is normally not treated as a change in the ownership of the subsidiaries.

Even if the merger was to be treated as a change in the ownership of the subsidiary, the audience may recall the P Oy Case C‑6/12 of the European Court of Justice (ECJ). In fact, in the Finnish system companies may request permission from the tax authorities to utilise the tax losses in case there has been an over 50% change in the ownership, and in group-internal transfers the permission is in practice always granted. Furthermore, following the P Oy Case and the discussion on the selectivity and illegal state aid, the permission is almost always granted in all cases where the company continues its operations and the tax losses are not deemed to be "traded".

There may have been many (including at least a few of the judges) who thought that the SAC should not have referred the P Oy Case to the ECJ, but they did it anyway. But what was their opinion now? In fact, the SAC stated that there is no doubt that the case does not need to be referred to the ECJ. In Finnish:

"Unionin tuomioistuimen oikeuskäytännöstä ilmenee, että velvollisuutta tehdä Euroopan unionin toiminnasta tehdyn sopimuksen 267 artiklassa tarkoitettu ennakkoratkaisupyyntö ei ole silloin, jos kansallisessa tuomioistuimessa ei esiinny todellista epäilyä unionin tuomioistuimen olemassa olevan oikeuskäytännön soveltamismahdollisuudesta asiaan tai jos on täysin selvää, miten unionin oikeutta on kyseisessä tilanteessa asianmukaisesti sovellettava.


Asiassa ei ole tullut esille sellaista kysymystä, jonka johdosta ennakkoratkaisupyynnön esittäminen olisi edellä mainittu huomioon ottaen tarpeen."

The SAC does not explain which ECJ cases make it clear that the case does not need to be referred to the ECJ. The taxpayer had referred to various ECJ cases including the following:

The ECJ had stated already in C-270/83 Commission v France (avoir fiscal) that "the fact that the tax rules in question are unfavourable to the branches and agencies of foreign insurance companies indirectly restricts the freedom which insurance companies based in other Member States must have to establish themselves in France either through a subsidiary or through a branch or agency. It constitutes an inducement to choose to set up a subsidiary so as to avoid the disadvantage resulting from the refusal to grant the benefit of the shareholders' tax credit".


In Case C-18/11 Philips Electronics UK Ltd,. the ECJ stated that "the freedom to choose the appropriate legal form in which to pursue activities in another Member State serves, inter alia, to allow companies having their seat in a Member State to open a branch in another Member State in order to pursue their activities under the same conditions as those which apply to subsidiaries (Case C-253/03 CLT-UFA [2006] ECR I-1831, paragraph 15)". 


In Case C-522/14 Sparkasse Allgäu, Advocate General Maciej Szpunar commented that "the freedom to choose the legal form in which the relevant operator pursues activities in another Member State is especially crucial in the banking sector" and that "starting the business operations of a credit institution in another Member State in the form of a subsidiary is thus a completely different financial effort than setting up a branch in another Member State".

How can it thus be clear that bank branches may be treated less favourably than subsidiaries in Finland?

Maybe the P Oy Case will again provide an answer. In said case the ECJ practically stated that they were not able to decide on the state aid issue, because even if it was a case of state aid, it was a state aid that had existed already when Finland joined the European Union. Thus, it would be up to the European Commission to investigate this matter and potentially initiate an infringement procedure against Finland.

It is possible that the SAC thought that there is an easier solution as in the P Oy Case. P Oy finally got the permission to utilise the tax losses and the Finnish practice was changed so that the selectivity was not an issue anymore. In fact, perhaps the SAC was of the view that the Finnish branch should just request permission from the Finnish tax authorities to utilise the losses, as this is what a Finnish subsidiary could do. If no permission would be granted, the SAC could then refer the case to the ECJ in the second round if the European Commission did not do it first.