Legal certainty & currency losses (individual taxation)

The Finland’s tax authorities have published the guidelines (”Profits and losses of property in the taxation of individuals” D:nro A192/200/2016, 27.12.2016) according to which the losses resulted from the exchange of currency are not deductible in the taxation of individuals. The Supreme Administrative Court created this standpoint in its judgement KHO 2015:178. The Court interpreted the Income Tax Act 54b § comprehensively and declared that a currency exchange loss of foreign currency account is not deductible in the taxation of individuals.  

Case KHO 2015:178

In May 2010, A had invested 460.000 euro into a USD currency account. A had withdrawn his investments in September 2010 and terminated the USD account. When the US dollars were exchanged, a loss of 31.026 euro was caused to A. A demanded that the currency loss must be deducted from his capital gains. The Supreme Administrative Court stated that currency losses are not deductible according to the Income Tax Act 54 b §, and the loss caused by the currency account investment is not deductible in A’s personal taxation. (Tax year 2010.)

There is another interesting Supreme Court decision KHO 1993 B 515:

The currency profit or currency loss is realized when the foreign currency is being exchanged into Finnish marks. In September 1991, A made an investment into a fixed-term currency account to be matured in March 1992. The depositor had given the currency account as a gift before the due day. The calculated profit earned during the period starting from 9-1991 till 3-1992 was not taxable capital gains to the depositor because he had donated it before the D-day. (Tax year 1992.)

The Income Tax Act came into force on 1 January 1993 and the act did not include a specific rule of law concerning currency profits and currency losses as the previous act had included. A forgotten detail? Perhaps they thought that the rules concerning capital gains and losses were adequate. 

Another way to see it is unscrupulous: the two successive devaluations of Finnish currency in the spring 1991 lead to destructive consequences. Those who had had loans in foreign currency suffered great losses. The political decision makers wanted to cast the economic burden on the shoulders of businessmen – without any tax relief.  

In the name of the legal certainty and the predictability of taxation, the taxation praxis should had continued consistently as aligned by KHO 1993 B 515. The Income Tax Act did still include sections concerning sales profits and losses, and monetary assets can be regarded as property.  

In 1994, the Supreme Administrative Court made an epoch-making decision KHO 1994 B 529 (23.8.1994/3579): 

The largest shareholder (A) of a company had acquired shares of the company by using foreign currency (DEM) loans. The company paid salary payments and dividends to A.        If A paid back the DEM loans in the current situation, he would suffer a loss more than 4 billion Finnish marks. A asked for a preliminary ruling about the taxation and whether he is entitled to deduct the losses caused by currency loans from the capital gains. The Supreme Administrative Court stated that the Income Tax Act does not consist any specific paragraph about the losses incurred in connection with repayment of foreign currency loans, and the Income Tax Act 58 § cannot be applied to currency losses. (Tax years 1993-1994.) 

According to the government’s bill (HE 354/1994) introducing the Income Tax Act 54 b §, the decision KHO 1994 B 529 lead to the situation where a specific paragraph dealing with currency losses was demanded to be added into the act.   

After KHO 1994 B 529 decision, a section was added the Income Tax Act and currency losses related to loans for income earning purposes became deductible. The right to deduct currency losses does not concern mortgage, study loan or any corresponding household-loan. 

The reasoning written in the government’s bill HE 354/1994 does not bring forth anything citing that the Income Tax Act 54 b § is exhaustive but the case KHO 1994 B 529 is highlighted. This bill is an example of a hastily drafted legislative proposal written in a negligent way. Only one judicial case is recognized. There is nothing about foreign currency investments and losses caused by currency exchange. 

The government’s bills HE 200/1992 and HE 354/1994 as well as the Income Tax Act TVL 54 b § must be understood in the light of the economic chaos of the early 1990’s. Great losses and a wave of bankruptcies were caused by the two successive devaluations of Finnish currency in the spring 1991.  

The symmetrical treatment of deductions related to capital gains and losses is the most important feature of Finnish income tax system (ref. HE 200/1992) so that unfounded tax sanctions (non-deductible costs) and tax arbitrage (non-assessment) can be prevented. Considering this point, the case KHO 2015:178 and its reasons seem to be tendentious and contrary to the law.  

The Deputy Chancellor of Justice has emphasized the importance of good statute drafting for the sake of legal certainty (eg. Decision OKV/2/50/2008).  According to the Deputy Chancellor of Justice, the predictability of legislation is weak, and the public has lost their confidence in the fairness of taxation system because many legislative changes have been done only after individuals have litigated and taken their case to the court. 

This article is based on a text written by Anne Nikula and published in on 29 March 2018.     

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