As a rule, corporations are treated as separate legal entities. This means its shareholders, parent or sister companies, subsidiaries or affiliates, are generally not responsible for its debts.
Courts can, however, overrule this by piercing the corporate veil .
While exceptional circumstances are typically required, the Finnish Supreme Court recently issued a controversial precedent that will cost one company millions and shake-up the principle of separateness.
The case involves an Estonian online retailer with close ownership and management ties to a Finnish company in the same business.
Over the years, the majority of the shares of the Estonian online retailer were in the hands of the Finnish company and its majority shareholder.
The Estonian company sold CDs and other products, for which the manufacturer or importer shall pay the private copying levy or blank media tax.
The Estonian company did not pay, and was not liable to pay, a separate levy to the Finnish copyright organization – Teosto. This meant the sale price of the products were essentially media tax-free.
The online arrangement meant Finnish customers could order products from the Estonian company, albeit through the Finnish company’s website.
Various practical details of the Estonian business were, in many respects, remarkably independent to the Finnish company, including supply, logistics, contracts etc.
The Estonian company was by no means a non-operating offshore company. Moreover, there were legitimate business reasons to set up the subsidiary and operations, such as taxation.
The Supreme Court ignored the corporate arrangement and the principle of separateness. It held the Finnish company liable for the private copying levy the Estonian company had not paid.
The court deemed that, in practice, the Finnish company had conducted a major part of its business through its Estonian subsidiary in an attempt to avoid its statutory duties.
The Finnish parent company was ordered to pay several million euros in private copying levies to Teosto.
The precedent is surprising, not least because the representatives of Teosto had accepted the blank media tax-free arrangement before changing its original position years later.
It remains legal to arrange business activities both in Finland and abroad in a low-cost and tax advantageous way.
It is common for companies to be incorporated in a country where production costs are lower and the tax burden is lighter.
But in light of the decision (KKO 2015:17), such corporate structures should be considered very carefully so as to keep the corporate veil intact.
Want to discuss the issues further?
Contact Antti Karanko at Merilampi Attorneys Ltd.
Issues like this and many more are discussed at Amcham Legal Committee meetings.
For more info contact Matthew Wood at Amcham Finland.