The European Court of Justice has reconfirmed the principle that domestic tax law should not prejudice a company's ability to locate in a Member State of its choosing, but in so doing presented a major obstacle to the Common Consolidated Corporate Tax Base proposals.

The case concerned a Finnish company, Oy AA, and a somewhat unusual tax relief available in Finland. The relief permits the transfer of money between group companies, such that the transferor obtains a tax deduction and the money becomes taxable in the transferee's hands. This is not Group Relief in the sense usually understood in Ireland and the UK, though the net tax effect can be something similar. It happens above the taxable profits line, does not concern the transfer of losses, and the transfer is effected in the accounts of the respective companies. Finland's tax law only permits the relief between Finnish resident companies. Oy AA wanted to carry out a transfer with a group company resident in the UK, hence the challenge.

Following on already decided cases, notably Cadbury Schweppes, the Court found that for Finland to restrict the relief to Finnish resident companies did not sit with the Treaty of Rome – such action does in fact limit the freedom of establishment. However, a restriction on the freedom of establishment is permissible where it can be justified by overriding reasons in the public interest. Here the decision diverged from Cadbury Schweppes, in that the Court felt that there was a public interest reason to allow the Finnish practice to continue.

If groups of companies were permitted to allocate their group profits cross border in any way they might wish, Member States would in effect lose their power to tax. As the Court put it, in the absence of any unifying or harmonising Community measures, Member States retain the power to define, by treaty or unilaterally, the criteria for allocating their powers of taxation. The Finnish residency rule for the relief ensured in a proportionate way that Finland did not lose its power to tax.

Though Oy AA lost its particular case, the Court has taken the opportunity to confirm again the principles in Cadbury Schweppes. It has also presented something of a dilemma to proponents of the Common Consolidated Corporate Tax Base (CCCTB). The Finnish law at issue effectively allows the taxation of corporate groups on a consolidated basis. The ECJ has now confirmed that this cannot be done cross border unless Member States are willing to surrender their powers of taxation. CCCTB cannot be undertaken merely as a simplification measure, or even as a harmonisation measure. It can only be adopted by those Member States who can live without tax sovereignty.