Global Tax Alert (News from EU Competency) | 22 July 2013

EU Court of Justice finds that exceptions to change of ownership rules granting tax loss carry forwards in certain circumstances may not qualify as State Aid

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On 18 July 2013 the Court of Justice of the European Union (CJEU) rendered its decision in the case P Oy.1 The CJEU found that, an exception clause in relation to the reference, hence ”normal,” tax system may satisfy the condition of selectivity as an element of the concept of ”State aid” within the meaning of Art. 107 par. 1 TFEU (Treaty on the Functioning of the European Union). A regime of this kind could be justified by the nature or general scheme of the system. However, if authorities are granted power and discretion to decide upon the application of such an exception clause, such discretion has to obey objective criteria which may not be unrelated to the ”normal” tax system.

Further, it decided that, as far as a tax regime constitutes ”State Aid” and cumulatively evidences the character of ”existing” aid, it continues to be applicable, without prejudice to the competence of the European Commission under Art. 108 par. 3 TFEU.


Finnish tax law provides for a loss carry forward to later tax years. Accordingly, if more than half of all the company's capital is transferred, losses sustained by the company are no longer tax deductible. However, the Finnish provisions provide for an exemption clause which was signed into law before the accession of Finland to the EU. Accordingly, the Finnish tax authorities may grant a waiver to the aforementioned general rule in special circumstances following a prior application by the taxpayer, thus, allowing for offsetting loss carry forwards against the transferee's profits. After having been rejected for such an exception ruling, P Oy appealed the decision before the competent Finnish court which referred the case to the CJEU for a preliminary ruling.


The CJEU began by stating that, in order to identify a certain condition of selectivity pursuant Art. 107 par. 1 TFEU, it is necessary to examine and identify the common, hence ”normal,” tax regime and then determine the exceptional measure. The CJEU then refrained from deciding on this matter in detail because it lacked certain information in this respect.

Further, the CJEU held by citing preceding case law2 that, a measure which constitutes an exception to the application of the general tax system may be justified if the Member State concerned can show that that such measure results directly from the basic or guiding principles in its tax system. A rule of exception which provides for authorities being granted power and discretion in order to determine beneficiaries and conditions in relation to the financial assistance cannot be considered of being general in nature. However, the CJEU stated that, the fulfillment of two conditions would not lead to an exception of this general nature: (i) the authorities' discretionary degree has to be limited solely to objective criteria and (ii) these objective criteria may not be unrelated to the tax system. Exemplarily, the CJEU mentioned the objective of avoiding trade in losses. There from follows, that a discretionary degree which is not limited to objective criteria and which also is not limited to criteria inherent to the general nature of the tax system may not qualify as a reason of justification of such an exception. Clearly, the CJEU held that, an unrelated criterion is the objective to maintain employment.

After giving general remarks with regard to the two different monitoring and supervision procedures applicable pursuant Art. 108 par. 1 and 3 TFEU, depending on the characterization of aid as existing or new, the CJEU held that, to the extent that existing aid is concerned, the aid must be regarded as lawful as long as the Commission has not found that it is incompatible with the internal market. Thus, according to Attorney General Sharpston, under Art. 108 par. 3 TFEU there is no basis for the national court to make any determination on the selectivity issue or seek guidance from the CJEU on how to interpret the state aid rules on selectivity aid if an existing state aid is at issue. Especially, it is left to the Finnish court to interpret the concept of special circumstances which allow for a waiver of the restriction of offsetting loss carry forwards since this question is entirely a matter of national law.

In general, the CJEU would classify the Finnish preferential tax regime at issue as being of “existing” character pursuant Art. 1 par. b (i) Council Regulation No. 659/1999. However, it did leave it to the Finnish court to decide whether the detailed arrangements for the implementation of the preferential tax regime at issue have been amended. If so, the preferential tax regime at issue might be considered as new aid.


Despite variations in certain lines of reasoning, the CJEU basically followed the opinion rendered by Attorney General Sharpston. Applying the aforementioned approach, the CJEU did not directly decide whether the Finnish tax provisions at issue ultimately constitute state aid. Thus, the CJEU did not clarify the understanding of the context between preferential tax regimes and state aid rules for all competent bodies within the tax field, such as national courts, governments and administrations as well as companies and advisors. However, this case again illustrates the growing extent of implications of tax rules in relation to state aid.

Preferential tax regimes, such as the one in place in Finland, can be found in other Member States as well. For example, such a similar provision can be found in German corporate tax law. This provision is currently not only being challenged before the German Constitutional Court but also before the General Court. Despite not being congruent with the case P Oy, there are similarities between both tax provisions at issue. However, it remains to be seen, whether the General Court deciding on the aforementioned pending cases might support its reasoning, at least to some extent, on the CJEU decision in case P Oy.


1. C-6/12.

2. CJEU, C-78/08 – C-80/08 “Paint Graphos and Others.”

For additional information with respect to this Alert, please contact the following:

Ernst & Young Oy, Helsinki
  • Katri Nygård
    +358 207 280 190
Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft, Munich
  • Dr. Klaus von Brocke
    +49 89 14331 12287

EYG no. CM3633