Supreme Administrative Court changed the legal state – more demanding requirements for tax-exempt transfer of fixed-asset shares

Each of the three published preliminary rulings concerned family-owned companies or groups owned by natural persons, but it is probable that they will impact the assessment of tax-exempt transfer of fixed-asset shares on a more general level as well. In two of the cases, the ownership by natural persons had been made indirect through share swaps, and the Supreme Administrative Court also assessed in its decisions whether any business-related reasons had been presented for the share swap or whether the group structure had been formed to manage family wealth and investments. This is relevant because the legislative materials state that the purpose of section 6b of the Business Income Tax Act is not to enable tax-exempt investment activities through holding companies.

The decisions focused on parent companies’ investment activities and intra-group charges

In its previous case law on fixed-asset shares, the Supreme Administrative Court assessed whether there was an administrative and operative link between the seller company and the company that is sold. The Supreme Administrative Court now outlines that this no longer has any significance. Instead, the fixed-asset nature of the shares and the possible tax exemption of their transfer must be assessed based on whether the transferred shares have served purposes promoting the business of the seller company. The particularly decisive factor here seems to be the ratio between the parent company’s investment activities and the turnover from intra-group charges.

In decision KHO 2024:42, for example, the shares in the subsidiary were not considered fixed-asset shares that can be transferred tax-exempt as the parent company’s annual turnover mainly consisted of other profits than service charges made to the subsidiary. This was despite the fact that the parent company had other personnel, in addition to shareholders, providing intra-group services. The Supreme Administrative Court deemed that the group structure was formed mainly to promote the shareholders’ interests and that the purpose of the parent company’s operations was to manage the shareholders’ investments.

In contrast, decision KHO 2024:41 found that the shares in the subsidiary were fixed-asset shares that can be transferred tax-exempt as the parent company had provided the subsidiary with short-term interest-free debt financing in addition to intra-group services. The parent company’s turnover had consisted almost entirely of the service charges made to the subsidiary. The Supreme Administrative Court deemed that the group structure could be justified by business and risk management reasons as well as the arrangement of financing. In addition, a dissenting vote noted that the application for a preliminary ruling did not clarify the composition of the assets in the company’s balance sheet. Despite this, the majority of the Supreme Administrative Court decided that there was no reason to deem that the group structure had only served the management of the shareholders’ investments.

In the third published preliminary ruling KHO 2024:43, the Supreme Administrative Court reinforced the interpretation previously adopted in case law that the shares of a publicly listed company can also be transferred tax-exempt as fixed-asset shares if other group companies have sold the company materials related to its core business and the group has pursued growth in the business area related to the acquisition of the company’s shares in other ways as well. In addition, the Supreme Administrative Court confirmed that selling the shares after holding them for less than two years is not decisive in assessing whether the shares were acquired for permanent use in business.

The new approach is based on the abolition of the division of income sources

According to the Supreme Administrative Court, its new approach is based on the abolition of the division of income sources from 2020 onwards. These new rulings all concern more recent tax years. The government proposal concerning the abolition of the division of income sources (HE 257/2018 vp) states that combining the income sources of companies or a new asset class of other assets would not impact the established interpretation of the content of other asset classes with respect to the business source of income. The proposal also states that previous case law would continue to apply in determining whether shares are fixed assets. In this context, the Supreme Administrative Court’s recent rulings are unexpected and place family-owned companies in a clearly less favourable starting position than others if the tax-exemption status of their capital gains is assessed under generally stricter requirements. The rulings seem to possibly expand the scope of the category of other assets to shares that before the abolition of the division of income sources were considered to belong to the business source of income, as the significance of administrative and operative link is reduced.

The requirements for tax-exempt transfer of shares must be assessed more carefully in future

The rulings cannot be directly applied to non-family-owned companies. For example, the business of a company established in the acquisition structure of an M&A transaction between independent parties as a parent company offering financing and intra-group services is not, in our view, directly comparable to the situations that the rulings concerned. In such cases, the business justifications for the ownership structure are generally stronger.

However, it is clear that in future, all groups must assess whether the requirements for the tax-exempt transfer of shares are met and prepare for potentially lengthy legal proceedings as the Finnish Tax Administration and the Tax Recipients’ Legal Services Unit test the new limits of their discretion. It is a good idea to launch preparatory enquiries well in advance. Our experienced tax experts offer help in planning the group structure and the assessment of the tax effects of a potential exit.