The Administrative Court of Helsinki (Helsingin hallinto-oikeus) gave its decision on 7 March 2014 in the case of 14/0213/4 (published on 19 March 2014). Details of the decision are summarized below. (a) Facts. Subsequent to a restructuring within an international group, the shares of a Finnish company (FI Co) were owned by a Danish company (DK Co). In 2006, the group made further restructuring within the group and consequently, DK Co transferred the shares of FI Co to its subsidiary (Sub Co) (the country of residence of Sub Co is not mentioned in the Court's decision). Sub Co attributed the shares to its permanent establishment (PE) in Finland (FI PE). The purchase agreement was concluded between DK Co and FI PE and the sales price of the shares was EUR 600 million out of which EUR 500 million was financed by a loan taken from DK Co. Also, the loan was attributed to FI PE.

Since 2006, FI Co gave group contribution to FI PE. Under Finnish law, a contribution between affiliated companies may be deducted from the taxable profits of the contributing company and added to the taxable income of the recipient company, provided that both companies are resident in Finland. Group contribution to a non-resident subsidiary or to a non-resident parent company is not tax deductible. In the case at hand, the taxable income of FI Co had significantly decreased due to the group contribution given to FI PE. FI PE, on the other hand, did not pay tax on the group contribution received due to the interest expenses allocated to it on the loan taken from DK Co.

(b) Legal background. Under section 28 of the Tax Procedure Law, if there is no or not an adequate business reason underlying a transaction between group companies, the transaction can be considered void for tax purposes and taxed as if the real form had been used.

(c) Issue. The issue was whether the deductibility of interest expenses on an internal loan could be denied based on the general anti-avoidance rule in the domestic law (Domestic GAAR).

(d) Decision. The Court regarded the transaction as a wholly artificial arrangement which did not have any business purpose. The Court pointed out that the restructuring did not have real economical purpose either for FI PE or FI Co unless the tax consequences were taken into account. Transferring the debt within the group did not improve the financial situation of the group. Furthermore, the activities transferred to FI PE were very minor. In reality, there were no substantial changes in the control of FI Co after the arrangement. Both the administrative and economic perquisites and interest were still in Denmark. FI PE had no interest in engaging into such arrangement and it had no possibilities to cope with the loan attributed to it.

Consequently, the Court disregarded the transaction based on the Domestic GAAR and disallowed the deductibility of the interest expenses. It emphasized that the same conclusion could be reached by applying the OECD Transfer Pricing Guidelines. Considering the wholly artificial nature of the arrangement, denying the deductibility was also in line with the freedom of establishment (article 49 Treaty on the Functioning of the EU (TFEU)) under EU law as well as the non-discrimination article (article 27) under the Nordic Convention.