An individual, K, resident in Finland made a loss on the disposal of real estate in France. As K did not own any other property in France at that time, he was unable to use the loss against a future disposal of other property there. K claimed that under freedom of movement of capital he should be entitled to offset the loss against gains he had made on the disposal of securities in Finland. Had the loss arisen on Finnish property, K would have been allowed to offset the loss against his other gains. However, under the France/ Finland double tax treaty, disposals of real estate are taxed in the country in which the property is situated – in this case France. K claimed that under freedom of movement of capital he should be allowed to offset the losses in Finland.
The ECJ accepted that the investment by an individual in real estate in another Member State did fall within the principle of free movement of capital. Since the Finnish tax treatment was less favourable where the loss arose on property located in another Member State as opposed to in Finland, there was in principle a breach of this freedom.
The ECJ rejected the Finnish Government’s argument that the sale of real estate in France as opposed to Finland by a Finnish resident were not objectively comparable on the basis that the France/ Finland treaty gave the taxing rights to France. However, the court nevertheless ruled that the breach was justifiable in order to ensure a balanced allocation of power to impose taxes between Member States. Absent a double tax treaty with France, Finland would have been entitled to tax French property disposals by a Finnish resident. However, under the treaty Finland cannot tax gains on such disposals so, to preserve symmetry, it should not be obliged to give relief for losses. This symmetry is also required to prevent taxpayers from choosing where to relieve losses. The restriction was also necessary for the cohesion of the Finnish tax system (as in Bachmann). As the double tax treaty prevented Finland from taxing any gains, denying relief for losses was justifiable. The final issue was whether the measure was proportionate. K argued that under the decision in Marks & Spencer, denial of loss relief is not proportionate where the rules deny any possibility of obtaining loss relief in the state of residence. However, the ECJ distinguished the current case from M&S and stated at paragraph 77 of the decision ‘Since the Member State in which the property is situated does not provide for the possibility of losses incurred on the sale of the property being taken into account, such a possibility has never existed.’ So the question of whether the taxpayer has exhausted all possibilities of using the losses in the host country did not arise. This begs the question of what decision the court might have come to had France given some form of loss relief and the “no possibilities” test had been relevant.