Exit Tax for Companies in Finnish Law and the ECJ Case C-292/16

Many countries levy a so called “exit tax”, which is realised in situations where a country would
lose its right to tax assets that are being transferred to another country. The purpose of exit
taxes is to collect a tax on such assets before they would be out of reach of the national tax
authority.

Currently, Finnish law does not mandate a general exit tax for companies or assets leaving the
country. However, there are rules that apply in certain special cases. According to the EU Merger
Directive, a merger or the transfer of assets does not usually result in immediate taxes for a
company: the Finnish exit tax rules of its Elinkeinoverolaki (EVL, the law relating to the taxation
of business income) are based on this directive. The Merger Directive does, however, allow the
taxation of profits or capital gains from a permanent establishment resulting from a merger,
division, or transfer of assets on certain conditions.

A Finnish company can have a permanent establishment in another EU country, which may get
transferred to another company located in the EU. For example, in the recent ECJ case C-292/16, a
Finnish limited liability company had transferred its permanent establishment in Austria to an
Austrian company via a transfer of business. In such a situation, according to EVL 52e.3 § which
the Finnish tax authority applied, the market value of the transferred assets, such as the
provisions deducted previously in the taxation in Finland of that permanent establishment, were
included in the permanent establishment’s taxable income for the tax year in which the transfer
took place. Had the assets been transferred domestically, the principle of continuity would have
been applied – this would have resulted in a different outcome, i.e. the unrealised capital gains
would not have been recognised as income until the assets had been transferred, which is more
convenient than the situation described previously.

The ECJ found that this difference in treatment can act as a deterrent to companies established in
Finland wishing to do business in another member state through a permanent establishment. The ECJ
considered that this was against the freedom of establishment under Article 49 of the Treaty of the
Functioning of the European Union. This indicates that when it comes to exit tax, the Finnish rules
need to be revised, as the court stated that the Finnish exit tax rules go beyond what is necessary
to preserve the allocation of powers of taxation between the member states. This opinion seems to
be in line with previous ECJ case law regarding exit taxation. Article 49 of the TFEU does not
restrict the final confirmation of the amount of tax, but levying the tax immediately was
considered to be in conflict with the article and the principle of proportionality.

In any case, Finland should renew its exit tax rules when implementing article 5 of the EU Anti Tax
Avoidance Directive (ATAD). The deadline for this is 1.1.2020, but considering the current state of
the Finnish exit tax rules, the relevant issues should be addressed earlier than this to allow
Finland to continue taxing certain assets. It is also worth noting that the ATAD does not solve the
issues of EVL 52e.3 §, as it contains mostly exit tax rules that cannot yet be found in Finnish
law.