The issues of effective place of management – Is euro a foreign currency in Finland?

Supreme Administrative Court (KHO) 2024:88

In recent Finnish case law Supreme Administrative Court of Finland (KHO) examined how unrealized foreign exchange gains and losses from euro-denominated loans granted by a Swedish company, A AB, to its Finnish subsidiary should be taxed, given that A AB was considered generally liable for tax in Finland based on its effective place of management.

From the author’s perspective, the notable aspect of this decision was the interpretation of euro-denominated loans as “foreign currency” when filing corporate income tax return in Finland (Section 26.1 of the Finnish Business Income Tax Act (EVL), even though euros are commonly used in Finland. In practice, the term “foreign currency” was assigned a meaning that differs from its everyday usage. The ruling effectively created a legal interpretation of “foreign currency” that is derived from a systematic reading of the Business Income Tax Act’s internal logic, rather than from common understanding.

A AB, listed on a Swedish marketplace, prepared its financial statements in Swedish kronor (SEK) under Swedish accounting laws in accordance with IFRS standards. The loans granted to its Finnish subsidiary were denominated in euros, and any resulting foreign exchange fluctuations were recorded in A AB’s financial statements as either income or expenses. Thus, A AB fell under the provisions of Sections 26 and 54 of the EVL, meaning that even euro-denominated foreign exchange losses could be recognized for tax purposes.

The decision also confirmed the previously established principle that A AB was not required to prepare its financial statements in euros but could use Swedish kronor as its reporting currency. At the same time, the case raised the question of whether a taxpayer who is generally liable for tax in Finland based on the effective place of management but prepares financial statements in a foreign currency is treated equally to a Finnish company. There was concern that this interpretation might lead to discriminatory treatment of foreign entities, meaning violation of the EU’s principle of freedom of establishment.

KHO emphasized in its ruling that, since A AB was generally liable for tax in Finland, it must be treated in the same manner as a Finnish company for tax purposes. This meant that the provisions of the Business Income Tax Act must be applied to A AB in the same way they would to a Finnish company, even though A AB operated in a different currency. Therefore, according to the court’s reasoning, A AB’s taxation was not in violation of EU law, as it was treated in a tax context similarly to a domestic entity in a comparable situation, albeit using a different currency.

In conclusion, this ruling deviated from the traditional realization principle, which generally only takes into account realized profit or losses in euros for tax purposes.