Must the Losses of a Merging Company be Deductible in the State of Residence of the Receiving Company in EU?

The EU Merger Directive is silent on the question of the extent in which the state of residence of the receiving company must allow a deduction of the losses of a merging company in an intra-EU cross-border merger. The extent to which the losses are decutible depends on the domestic tax laws and the freedom of establishment principle of the Treaty on the Functioning of the European Union (TFEU). The Supreme Administrative Court of Finland considers it to be unclear whether the freedom of establishment principle of the TFEU requires Finland to allow a Finnish receiving company to deduct the losses of a Swedish merging company after a merger in which there will be no permanent establishment left in Sweden. As a consequence, the Court decided to refer a case concerning this issue to the European Court of Justice (ECJ).

The Court considers that it is also unclear as to whether the deductible amount of the Swedish loss should be determined in accordance with the Swedish laws or the Finnish laws, if the ECJ considers that it has to be deductible. In this article, the author discusses the case referred to the ECJ from the perspective of the freedom of establishment principle and concludes that in the case concerned, a deduction should be allowed.