Tax Treaty Case Law around the Globe 2012

Finland: The Effect of Losses on the Foreign Tax Credit

23.1. Introduction

The case KHO 2011/1325 (45) concerns the application of the credit method for purposes of eliminating double taxation in a tax treaty situation. The Supreme Administrative Court of Finland (Korkein Hallinto Oikeus, KHO) considered that it is in accordance with Finnish domestic law and the Finland-United States tax treaty article concerning the credit method, to limit the maximum credit to an amount based on foreign-source income reduced by losses from previous years rather than the entire amount of foreign-source income.

23.2. Facts of the case

In 2004 a Finnish resident taxpayer sold his share in two apartments (immovable property) situated in the United States. For US tax purposes, the sale generated a taxable capital gain subject to tax in the United States.

For Finnish tax purposes, capital gains of individuals constitute investment income. Capital gain is calculated by deducting the acquisition cost and the costs of earning the profit from the alienation price. Capital losses are deducted from domestic and foreign-source capital gains. In 2004, capital losses could be deducted in the tax year in which the lo...