Final loss of value of shares in income taxation
DOI:
https://doi.org/10.33344/vol13iss2pp76-93Keywords:
tax law, taxation, loss of value, impairment, stock, bankruptcy, worthless share, KHO 2016:49Abstract
According to the Finnish Income Tax Law (1535/1992, with amendments) Section 50, Subsection 3, Paragraph 2, loss of value of a security that can be considered final due to bankruptcy or any other comparable reason shall be treated as deductible capital loss. This provision can be divided into four requirements: First, this regulation applies only to securities. As the article examines the problem of the worthless shares in taxation, this definition is not closely examined. Secondly, the security has to lose its value. There is not a definition for loss of value in the Finnish Income Tax Law or in the preparatory works for the regulation. However, the value of the definition is in that it binds the application of the provision to economic facts. Third requirement is that the loss of value has to be final. The finality is especially a matter of income spreading in taxation, as it defines the correct tax year for the deduction. The emphasis of previous research and case law has been on this question of finality. Fourthly, there is the question of bankruptcy or any other comparable reason. In accordance to the case law, this requirement binds the application of this provision to insolvency procedures.
Mainly, the application of the provision means that the taxpayer can deduct the whole acquisition cost of the security. However, shareholders can also finance their company with subordinated loans. According to the ruling of the Supreme Administrative Court of Finland (KHO 2016:49), subordinated loans are considered as additional investment and as such they can be fully deducted when the shares in the company are considered to lose their value in income taxation.
