Overall assessment changes taxation practice related to tax relief for succession

On 29 April, the Supreme Administrative Court (“the SAC”) issued decision 2024:68, which took a position on the application of the tax relief for a succession when gifting shares in a company that trades in securities. Key assessment in the decision concerned whether the company whose shares are gifted fulfils the criteria referred to in the tax relief provisions of the Inheritance and Gift Tax Act. A noteworthy nuance was that the President of the SAC, Kari Kuusiniemi, participated in making this decision that relates purely to questions of tax law.

Pursuant to the SAC decision, the question of whether the company is considered to be a business enterprise within the meaning of the Inheritance and Gift Tax Act needs to be decided on a case-by-case overall assessment. Pursuant to the decision, the overall assessment takes into account factors such as the nature of the business as continuous, active and systematic operations as well as the company’s financial risk-taking and pursuit of profit.

The case concerned a company that trades in securities. According to the SAC, the factors that can be taken into account in the overall assessment of such a company include the number of completed transactions, turnover, quantity and quality of inventories, use of liabilities, and turnover in relation to inventories. In addition to these, the assessment took into account the existence of hired workforce, even though this cannot be deemed a requirement for the application of the tax relief provisions. Previous decisions of the SAC were considered to have the significance that they can be deemed to indicate, by way of example, the scale of operations in situations where the operations were or were not deemed a business enterprise within the meaning of the applicable provisions. The Supreme Administrative Court referred to cases KHO T1488, 13 June 2002, KHO 2006:100 and KHO T3394, 30 November 2009, in its reasoning.

The SAC stated in its overall assessment that factors that support deeming the company a business enterprise within the meaning of Section 55 of the Inheritance and Gift Tax Act include the company’s systematic investment strategy, pursuit of profit, the number of purchases and sales of securities, which indicates active investment activities, and daily contact with the asset manager. The company’s nature as a business enterprise was also supported by the fact that the amounts of the company’s investment assets and turnover were significant and that the company has made occasional investments in non-listed companies as well. What also indicates that the operations are as active and independent as is typical for business enterprises is that the decisions for securities transactions are made by the chairperson of the company’s board or the managing director instead of an external asset manager.

However, the scale of the operations in terms of turnover, purchases, sales and inventories was clearly smaller than in those companies that were considered business enterprises within the meaning of Section 55 of the Inheritance and Gift Tax Act in the case law to which the SAC refers. In addition, in terms of the risk related to investment activities, the SAC deemed that the information provided does not suggest that the investment decisions include a risk that significantly differs from the risk in typical asset management-related investment activity. The fact that the amount of liabilities tied to the company’s operations is small in relation to the amount of inventories does not significantly differ from the risk related to the management of personal investment assets.

The SAC stated in the case that the facts against deeming the company a business enterprise within the meaning of the Inheritance and Gift Tax Act were more substantial than the facts supporting it, and decided to refuse the application of the tax relief provisions.

This new decision by the SAC increases the uncertainty and unpredictability related to succession regulations. It is clear that the current tax practice means that the assessment of the requirements for applying tax relief provisions is becoming more rigorous, and it highlights the need for preliminary assessment of the tax effects in the form of a preliminary ruling. Our tax experts specialised in family-owned companies and owner-entrepreneurship are here to tackle these issues with you.