Sequential operations in M & A from the point of view of tax authority

The Tax Administration’s line of interpretation has tightened

(Finnish) Tax Administration has sought to tighten the line of interpretation for mergers and acquisitions and, in particular, sequential operations in M & A. The pursuit for tightening has not been fully successful. In recent years, the Supreme Administrative Court has given several decisions about the taxation of M & A, and in particular, the taxation of consecutive mergers and acquisitions.

Some arrangements such as merger, division and business transfer as well as the exchange of shares is possible to implement correctly in a way that there will be no taxable income  and the ownership periods of the shares will not break. However, tax benefits will not materialize if it is obvious that the sole or principal purpose of the arrangements is tax evasion or tax avoidance.

Consecutive operations in M & A mean the implementation of several successive measures. The tax authority has been particularly interested in the combination of several tax-benefiting actions and it has sought to produce case-law that would tighten the earlier line of interpretation.

The tax administration may be interested also in relatively small arrangements if they believe there is material for preliminary ruling that will support their policy. The larger the amount of assets concerning M & A is, the greater the likelihood of ending up to the review of tax authority.

Acquisition after division as an example

The company was divided to architectural design activities (A Oy) and real estate, securities and investment activities (B Oy). B Oy had two shareholders after the division, and several people working in the company became shareholders of A Oy. The other shareholder of B Oy retired and wanted to give away his shares. The Tax Administration considered that the transferring party would have got forbidden advantage in form of tax evasion if the company had acquired his shares when he retired. The Administrative Court agreed. The Supreme Administrative Court considered that there was no tax evasion.

Consider timing carefully

The tax authority reviews arrangements on a case-by-case basis. Because the range of business arrangements is very wide, without the knowledge of the relevant case-law, it is difficult to make measures of merger and acquisitions fiscally advantageous.

Mere achievement of tax advantage is not sufficient as acceptable financial grounds for transactions. Measures taken solely for the purpose of tax exemption, and which cannot be considered to have commercial or other non-taxable grounds, are generally interpreted as tax evasion or are regarded as tax avoidance. The case law has put considerable emphasis on the intervals between different arrangements. They should be taken into account in the planning.

An acceptable financial basis will resolve

Business arrangements can be planned and implemented without immediate tax consequences, i.e. tax neutral, whereby taxation will be postponed to a later date. The acceptability of sequential operations can, however, often be assessed as a whole only after years. Relevant factors in assessing the taxation of sequential mergers and acquisitions are, in addition to the time elapsed between the measures, the company’s interests in this matter. Pointing out an acceptable economic basis is essential. An economic basis is strong evidence against tax evasion, even if the whole would result in a fiscally favorable outcome.

With tax planning you can save thousands of euros

By comparing tax consequences of different arrangements with tax experts, you can achieve appreciable benefits. In addition, you can avoid getting accidentally heavy tax consequences for your shareholders or your business. Once implemented, a valid judicial act may not be legitimately retracted. By consulting our tax experts in good time before the arrangements are implemented, you will secure your fair treatment in taxation best. Together we design the most sensible procedures to reach your goal. If necessary, we ask for a preliminary ruling from the Tax Administration. In this way we will ensure that the tax treatment of the arrangement is known in advance and the Tax Administration is bound by a preliminary ruling.

Sequential operations in M & A were discussed at the morning coffee seminar of South Karelian Entrepreneurs, on October 5th 2017, together with Oy Tuokko Ltd on the topic “Information on mergers and acquisitions”. Numerous decisions of the Supreme Administrative Court were discussed in the presentation.