Background and starting points
Section 26(2) of the Finnish Act on Taxation Procedure provides regulation on the protection of taxpayer’s trust, in other words, the so-called principle of protection of legitimate expectations. The provision stipulates the conditions in which the taxpayer may be entitled to protection of legitimate expectations, and how the protection is provided. The intention of the principle is to increase the predictability and legal safety of taxation. From the taxpayer’s point of view, the principle of the protection of legitimate expectations means that where a disputed tax matter is unclear, or there is room for interpretation, and if a taxpayer has acted in good faith abiding by and adhering to guidelines or practices of tax authority, the disputed matter should be resolved in taxpayer’s favour.
Supreme Administrative Court’s decision 2012:69, included in the Yearbook
The Supreme Administrative Court’s decision in questions referred to a situation where it was unclear, according to the interpretation of the Income Tax Act, whether the premiums and trade expenses paid on taxpayer A’s options are included in the acquisition costs of the shares acquired on the basis of the options or whether they constitute a capital loss deductible in the taxation of 2007.
Taxpayer A had paid premiums in total of approx. EUR 8.4 million and trade expenses approx. in total of EUR 100,000 on call options. Taxpayer A had exercised the options by redeeming the shares in the form of underlying assets by the amount of less than EUR 3,000. A capital loss in total of EUR 8.5 million from the premiums and trade expenses was adopted in the taxation.
Since there are no specific regulations regarding the expense spreading of a paid premium, call options’ premiums with their trade expenses shall not be deducted at the time of using the options, but instead the premium with its trade expenses shall be included in the acquisition cost of the shares which are acquired on the basis of the options.
The statements presented in the Tax Administration’s Reference Book of Personal Taxation regarding the tax year 2007 recommended that paid options are not treated as a part of the shares’ acquisition cost. The expense spreading of the premium and trade expenses paid on the options had been open to interpretation in 2007 when Taxpayer A had exercised the options by redeeming the shares in the form of underlying assets. Taxpayer A had acted in good faith abiding by and adhering to guidelines of the tax authority given in the Reference Book of Personal Taxation. Since there were no such specific reasons which had lead to another result, protection of legitimate expectations had to be granted to Taxpayer A and the matter had to be solved in Taxpayer A’s favour.
The Supreme Administrative Court’s decision emphasizes that the Tax Administration’s publications and instructions are considered particularly significant if the legislation does not refer to the matter. The taxpayer’s trust in the Tax Administration’s statements presented in their publications is protected, provided that also other preconditions for protection legitimate expectations are fulfilled.