In May 2024, the EFTA Court delivered its judgment in Case E-7/23, ExxonMobile Norway v Norwegian Tax Administration. The case was a request for an advisory opinion under Article 34 SCA from the Borgarting Court of Appeal (Borgarting lagmannsrett) in Norway concerning ‘final losses’ and the freedom of establishment.
In the case, ExxonMobil were seeking to claim a deduction with the Norwegian Tax Administration (Skatteetaten) for a cross-border group contribution from ExxonMobile Norway to ExxonMobile Denmark relating to ‘final losses’ for the fiscal year of 2012.
The issue of ‘final losses’ and its exception was dealt with in part by the Court of Justice of the European Union (CJEU), starting in Case C-446/03, Marks & Spencers, and the EFTA Court dealt with it in part in Case E-15/16, Yara.
The referring court was seeking assistance as to whether the Norwegian measures, in refusing to consent to the tax deduction given the facts at hand, would be contrary to freedom of establishment (Article 31 EEA and Article 34 EEA).
The questions put to the EFTA Court were as follows:
- Is the application of the ‘final losses’ exception as set out in the EFTA Court’s judgment in Case E-15/16 Yara and the case law referred to therein precluded where a subsidiary is in receipt of even minimal income in the fiscal year after the year for which a deduction is claimed, or must a specific assessment be conducted to determine whether the subsidiary’s continued income actually will reduce its losses, or that part of the losses for which a deduction is claimed?
- If the answer to Question 1 is that a specific assessment must be conducted of the subsidiary’s continued income, the EFTA Court is requested to indicate how probable it must be that the income actually will reduce the losses, whether the amount of the reduction is of any significance and which factors will be of particular relevance in the assessment.
- Is it compatible with Articles 31 and 34 of the EEA Agreement to require as a prerequisite for the application of the “final losses” exception that the liquidation process be formally decided on immediately after the end of the fiscal year for which a deduction is claimed?
ExxonMobil Norway was disallowed a deduction for a cross-border group contribution to its Danish subsidiary by the Norwegian Tax Administration on the grounds that the subsidiary’s business activities had continued in the following year, generating income for the company, and that, consequently, there were no ‘final losses’, with reference to the exception set out in the EFTA Court’s judgment in Yara.
In the EFTA Court’s prior judgment in Yara, given the CJEU case-law, it ruled that,
‘even though that restriction is justified in principle, it is disproportionate for the parent company’s State of establishment to preclude the possibility for the parent company to take into account at its level for tax purposes the losses of a non-resident subsidiary that are classified as final. Further, the [EFTA] Court held that in order to assess whether a loss, in this respect, is to be considered final, the existence of two conditions must be verified. First, the non-resident subsidiary has exhausted the possibilities available in its State of residence of having the losses taken into account for the accounting period concerned by the claim for relief and also for previous accounting periods, if necessary, by transferring those losses to a third party or by offsetting the losses against the profits made by the subsidiary in previous periods. Second, that there is no possibility for the foreign subsidiary’s losses to be taken into account in its State of residence for future periods either by the subsidiary itself or by a third party, in particular where the subsidiary has been sold to that third party.’ (summary of Yara provided in para. 21 in ExxonMobil Norway).
In the case at hand in ExxonMobil, and subject to verification by the national court, the EFTA Court ruled that the ‘final losses’ exception cannot be relied upon by a company where a subsidiary is in receipt of even minimal income in the fiscal year after the year for which a deduction is claimed.
In the operative part of the judgment, the EFTA Court ruled that,
‘It is compatible with Articles 31 and 34 EEA to require that the application of the “final losses” exception within the meaning of the Court’s judgment in Case E-15/16 Yara is precluded where a non-resident subsidiary is in receipt of even minimal income in the fiscal year after the year for which a deduction is claimed.
It is compatible with Articles 31 and 34 EEA for an EEA State to require, in order to demonstrate that a loss is final, that a liquidation process be formally decided upon immediately after the end of the fiscal year for which a deduction is claimed.’
A victory for the Norwegian Tax Administration to limit to potential use of the ‘final losses’ exception.
In other words, it is compatible with the freedom of establishment that minimal income in a subsidiary in another EEA state means that a company cannot benefit from the ‘final losses’ exception in the next fiscal year.
The judgment of the EFTA Court delivered in May 2024 in Case E-7/23, ExxonMobile Norway v Norwegian Tax Administration can be read here.