Tolkningsuttalelse | Dato: 22.12.2011 | Finansdepartementet
EFTA Surveillance Authority
Vår referanse: 07/5448 SL
Regarding reasoned opinion - tax treatment of cross-border mergers etc.
Reference is made to the EFTA Surveillance Authority’s reasoned opinion of 2 March 2011 (Event No: 566521) concerning the tax treatment of cross-border mergers etc., and to the Authority’s follow-up letter of 2 December 2011 (Event No: 616200/616046).
As notified in our letter to the Authority of 2 May 2011, the Norwegian Government proposed a number of amendments to the tax rules on cross border mergers etc. during the spring of 2011. The amendments concern the taxation of companies and shareholders when companies are relocating, as well as the taxation of companies and shareholders in connection with cross-border mergers and demergers, where the acquiring company is resident in another EEA state. All of the proposed amendments were adopted by the Parliament and sanctioned by the Government in June 2011.
In the view of the Ministry of Finance, the amendments in the Tax Act sections 10-37, 10-71, 11-11 and 14-48 means that the tax rules concerning companies and shareholders when companies are relocating, as well as the tax rules concerning companies and shareholders in connection with cross-border mergers and demergers, complies with the reasoned opinion of 2 March 2011. The amendments are discussed further under item II-IV below.
On 29 November 2011 the European Court of Justice published its judgment in the case C-371/10 National Grid Indus. The judgment may have implications for the compatibility of exit taxes with EEA-agreement in general. However, in light of the fact that the Norwegian exit taxes for merging, demerging and relocating companies within the EEA have been abolished, it seems that the judgment does not affect the issue of compliance with the Authority’s reasoned opinion of 2 March 2011.
As mentioned in our letter of 2 May 2011, a Norwegian AS/ASA and a Norwegian SE-company may be merged without taxation; within the framework of the Tax Act section 11-2 et seq. The issue of mergers between Norwegian AS/ASA and Norwegian SE-companies is not discussed further in this letter.
Item V below concerns the issue of exit tax on single objects (cf. section 9-14 of the Tax Act).
II. Cross-border mergers and demergers
Following amendments of the Tax Act section 11-11, adopted on 10 June 2011, a cross-border merger or demerger, where the acquiring company is resident in another EEA state, will not entail taxation of unrealised capital gains on the transferring company’s assets or liabilities. Further, the merger or demerger will not entail taxation of unrealised capital gains on shares owned by shareholders of the transferring company. The transferring company may opt for taxation of the merger/demerger, according to wish. The amendments are effective as from the income year of 2011.
As explained in our letter of 2 May 2011, the conditions for the tax exemption are as follows:
• The merger or demerger must take place within the regulation of the Companies Act or the Public Companies Act. The Companies Act and the Public Companies Act regulates cross border mergers and demergers within the EEA, in line with the Merger directive (Directive 2005/56/EC).
• In conformity with the conditions for tax free mergers and demergers involving only Norwegian companies, the compensation given to the shareholders of the transferring company, other than shares of companies directly involved in the merger or demerger, must not exceed 20 percent of the total compensation given to the shareholders of the transferring company. The tax exemption does not apply to other forms of compensation than shares of companies directly involved in the merger or demerger.
• The principles of fiscal continuity apply to cross-border mergers and demergers in the same way as for purely domestic mergers and demergers. This means that the acquiring company must take over all fiscal values, as well as dates of acquisition for all transferred assets and liabilities. For the shareholders, the fiscal values and dates of acquisition of the disposed shares in the transferring company must be relocated to the received shares of the acquiring company. The distribution of fiscal values etc. will be carried out according to the same rules that apply to domestic mergers and demergers.
The merging or demerging company is not required to hold and/or maintain a branch in Norway. For example, a company resident in Norway which does not hold any assets or liabilities within the Norwegian fiscal area, may be merged into a company resident in another EEA state, without taxation of the shareholders of the transferring company.
The amendment of the Tax Act section 11-11, cf. subsection seven; introduced a limitation on the application of the provisions on tax-free cross-border mergers and demergers. The regulations exclude from the tax exemption reorganisations including companies resident in low tax countries, cf. the Tax Act section 10-63. Hence, none of the companies involved in the merger or demerger should be resident in a low-tax jurisdiction within the EEA.
A low-tax jurisdiction is defined in the Norwegian Tax Act section 10-63 as a country whose income tax on corporate profits is less than two-thirds of the Norwegian tax that would apply if the company in question was resident in Norway.
However, this limitation does not apply if the foreign company resident in a low-tax jurisdiction within the EEA is genuinely established in the other EEA state and carries out real economic activity there, and Norway pursuant to an agreement is able to obtain information from the other state, cf. the tax Act section 10-64 b. These requirements (“genuinely established” and “real economic activity”) are aimed at fictitious arrangements and are framed to prevent tax avoidance. In our view, such measures are in line with the ECJ judgment in C-196/04 Cadbury Schweppes. In assessing whether the requirements are fulfilled, the preparatory works indicate that several criteria may be relevant, for instance whether the company in question has employees, premises etc. However, the relevance and significance of such criteria may vary depending on the character of the company in question and the type of activity carried out.
III. Relocation of companies to other EEA states
According to amendments of sections 10-37 and 10-71 of the Tax Act, adopted on 10 June 2011, companies and their shareholders will no longer be subject to income tax on unrealised capital gains when the company relocates to another EEA state. The changes are effective as from 10 June 2011.
The tax exemption applies unconditionally when the company is relocated to a normal-tax jurisdiction within the EEA. When the company is relocated to a low-tax jurisdiction within the EEA, the tax exemption applies only when the company in question is genuinely established and carries out real economic activity in the other EEA state, and Norway pursuant to an agreement is able to obtain information from the other state, cf. item II.
Up until and including the income year 2007, relocating companies and their shareholders were in some cases taxed according to the non statutory, general anti-avoidance rule. Following the introduction of the general exit tax provisions for companies in 2008, cf. the Tax Act sections 10-37, 10-71 and 14-26, the general anti-avoidance rule is no longer applicable to relocating companies or their shareholders. This is still the case after the 2011 abolishment of the exit tax on companies relocating to normal-tax jurisdictions within the EEA.
IV. Profit and loss accounts
On 13 May 2011, cf. the proposition Prop. 116 LS (2010–2011), the Norwegian Government proposed amendments to the rules on the settling of profit and loss accounts for companies that are relocating or merged/demerged with an acquiring company resident in another EEA state, cf. the Tax Act section 14-48. According to the amendments, relocating, merging and demerging companies will no longer be required to settle profit and loss accounts, regardless of whether the relocated or acquiring company retains a branch in Norway. The amendment is effective as from the income year of 2011.
A condition for the exemption is that the relocating or acquiring company is (becomes) resident in an EEA state where Norwegian tax authorities are able to request assistance from that state in the collection of taxes, through a binding treaty. In cases where no such treaty exists, the relocating or acquiring company must provide a guarantee for the tax amount related to the profit and loss account.
The exemption does not apply to companies that are relocated to low-tax jurisdictions within the EEA, unless the company is genuinely established and carries out real economic activity in the other EEA state and Norway pursuant to an agreement is able to obtain information from the other state, cf. item II.
In the case of mergers and demergers, the exemption will not apply if one or more of the companies directly involved in the merger/demerger is resident in a in low-tax jurisdiction within the EEA, unless when the company or companies in question is genuinely established and carries out real economic activity in the other EEA state, and Norway pursuant to an agreement is able to obtain information from the other state, cf. item II.
V. The Tax Act section 9-14
Although the Tax Act section 9-14 is not comprised by the reasoned opinion delivered by the EFTA Surveillance Authority on 2 March 2011, we would like to make some comments regarding the provision.
According to the Tax Act section 9-14, income tax on unrealised capital gains will be triggered when assets and liabilities are moved out of the Norwegian fiscal area. (For tax treaty reasons, the capital gain is entered as income at the day before the removal from the fiscal area; cf. the Tax Act section 14-27.)
A cross-border merger, demerger or relocation of a company will not in itself imply that assets and liabilities are moved out of the Norwegian fiscal area. However, other circumstances than the merger, demerger or relocation may trigger a disconnection of single objects from the Norwegian fiscal area. The rules contained in the Tax Act section 9-14 will be applied to those cases.
A circumstance resulting in taxation according to the Tax Act section 9-14 may be that objects are physically moved from an enterprise in Norway to an enterprise abroad.
Another example of an event triggering taxation according to the Tax Act section 9-14 is the relocation, merging or demerging of a company that has a permanent establishment in another EEA country, and the double tax agreement with that country applies the credit method for avoidance of double taxation.
The Tax Act section 9-14 makes a distinction between on the one hand tangible assets, financial assets and obligations, and on the other hand intangible assets and inventories. When tangible assets, financial assets and obligations are moved out of the Norwegian fiscal area, the tax payer may opt for a postponed payment of tax. A bank guarantee is not required of EEA-resident tax payers, if mutual assistance and recovery agreements exist between Norway and the state of residence. If the object in question is not disposed of within 5 years, the tax is annulled. Also, the tax is reduced if the object is realized at a lower price than the exit value. If the disposal leads to tax abroad, Norway will provide credit for the tax paid abroad. None of the mentioned exemptions applies to intangible assets and inventories that are moved out of the Norwegian fiscal area.