Brev | Dato: 17.09.2004 | Nærings- og fiskeridepartementet
Opprinnelig utgitt av: Nærings- og handelsdepartementet
EFTA Surveillance Authority
Rue de Trèves 74
Entra Eiendom AS - Document duties and
Decision to open formal investigation - Norwegian comments
Reference is made to the EFTA Surveillance Authority’s (hereinafter the Authority’s) decision of 16 June 2004 to open formal investigation procedure in accordance with Article 1(2) in part I of Protocol 3 to the Surveillance and Court Agreement (hereinafter the SCA) regarding the exemptions from the document duties and registration fees provided for in the establishment of Entra Eiendom AS.
The Norwegian Government (hereinafter “the Government”) is invited, pursuant to Article 6 in Part II of Protocol 3 to the SCA, to submit its comments on the opening of the formal investigation procedure.
The Government has in several letters submitted information and documentation to the Authority on the establishment of Entra Eiendom AS. Reference is inter alia made to the letter from the Ministry of Trade and Industry of 4 June 2003 regarding stamp duties and registration fees with regard to the establishment of Entra Eiendom AS and the general provisions and practice concerning stamp duty and registration fee and other issues not directly linked to Entra Eiendom AS. The view of the Government is that the Norwegian legislation and practice does not constitute State aid within the meaning of Article 61 of the EEA Agreement.
State aid within the meaning of article 61 EEA
A State tax measure constitutes State aid within the meaning of Article 61 EEA only if the following four criteria are fulfilled:
- First, the measure in question confers on its beneficiaries an advantage, which relieves them of charges normally borne from their budgets.
- Secondly, the advantage is granted by the State or through State resources. A loss of tax revenue is equivalent to consumption of State resources in the form of fiscal expenditure.
- Thirdly, the measure affects competition and trade between Member States.
- Fourthly, the measure is specific or selective in that it favours certain undertakings or the production of certain goods. That selectivity may, however, be justified by the nature or general scheme of the system. Where that occurs, the measure falls outside the designation as aid contained in Article 61 EEA.
In the following observations, the Government will demonstrate that these criteria are not fulfilled in the case at hand.
The measure in question does not constitute an advantage for Entra Eiendom AS
The Government is of the opinion that the measure does not constitute an advantage for Entra Eiendom AS. The measure in question did not change the capital structure, the solidity and the total value of the company. If document duty and registration fee were accrued in the opening balance sheet, there would have been an alternative opening balance. 1Reference is made to the letter from the Ministry of Trade and Industry of 4 June 2004, point 3. It is the Government’s opinion that the tax measure in question should not be distinctly separated from the opening balance of the company. In the interpretation of Article 61 EEA, it is settled case law that the effect and end result of the measure is to be assessed.
The purpose of the main rule on document duty and registration fees is to tax real transfers between different economic entities. Where the transfer is in appearance only and the entities transferring and acquiring are substantially the same, the main principle in Norwegian law would be to let the acquiring undertaking keep the legal position of the transferring undertaking. This principle is called the continuity principle, which also applies in relation to taxes. Entra Eiendom AS has consequently not been relieved from a charge normally borne from their budgets.
A loss of tax revenue is equivalent to consumption of State resources in the form of fiscal expenditure.
According to the Act on Document Duty (Lov om dokumentavgift av 12.12.1975 no 59) § 6 the obligation to pay document duty is released by the fact that the title transfer is registered in the public registry. The transfer of title in the case at hand was done as a name change and not by transfer of title. Thus, the obligation on Entra Eiendom AS to pay document duty was never released.
In the case at hand, there has been no loss of tax revenue and hence, no consumption of State resources.
The measure affects competition and trade between Contracting Parties.
The measure in question will not affect trade between the Contracting Parties. A market survey can show whether the real estate market for urban business premises in Norway is of a purely national character or is subject to cross-border competition. The Authority has merely stated “…the company operates all over Norway in a market open to economic agents from any other EEA State. Consequently, the measure affects or threatens to affect competition and trade between the Contracting Parties.”(page 14)
That Government fails to see that this appreciation is sufficient. One of the main principles of the EEA Agreement is that the markets should be open to agents from other EEA States. The Government is not aware of case law on market definitions that have been limited to the mere fact that the market is open for EEA agents. Case law from both the Court of Justice and the Court of First Instance shows that the Commission (i.e. the Authority) must assess the relevant market in State aid decisions. Reference is made to the Joined cases 296 and 318/82, Kingdom of the Netherlands and Leeuwarder Papierwarenfabriek BV v Commission of the European Communities, para 24:
“Even if in certain cases the very circumstances in which the aid is granted are sufficient to show that the aid is capable of affecting trade between member states and of distorting or threatening to distort competition, the Commission must at least set out those circumstances in the statement of reasons for its decision. In this case it has failed to do so since the contested decision does not contain the slightest information concerning the situation of the relevant market, the place of Leeuwarder in that market, the pattern of trade between member states in the products in question or the undertaking ' s exports.” (Emphasis added)
The Authority must assess the relevant market. 2In addition to the above-mentioned case 296 and 318/82, see Case T-155/98 Société internationale de diffusion et d'édition (SIDE) v Commission of the European Communities Para 71-73: 71 Consequently, the Commission should have examined the effects of the contested aid on competition and trade between the other operators carrying on the same activity as that for which the aid was granted, in this case the handling of small orders of French-language books. In selecting the export market for French-language books in general as the reference market, the Commission was unable to assess the true impact of the aid on competition. Accordingly, the Commission committed a manifest error of assessment as regards the definition of the market. 72 In the light of the foregoing, it is unnecessary to check the data relating to CELF's competitors. If the market definition is regarded as erroneous, CELF's share of the relevant market must also be reassessed. 73 In those circumstances, the first part of the fourth plea, relating to the definition of the market, must be upheld. It follows that the application for annulment of the last sentence of Article 1 of the contested decision must be declared well founded, without there being any need to consider the other pleas and arguments put forward by the applicant. Except for foreign investments in financial institutions, non-Norwegian investors have not operated in the Norwegian real estate market. Domestic players dominate the property market. Foreign investment has been largely discouraged due to expensive hedging costs relating to relatively illiquid currency and relatively small property market, in particular outside Oslo. The lack of large/liquid investment opportunities to justify the expense of learning about Norway has been a major barrier for increased foreign investments. The limited real estate market liquidity increases uncertainty of exit and therefore international investors have not entered Norway in a similar fashion as Sweden, Finland and Denmark. Local investors dominate the real estate market because it is important with local knowledge of the market and about the local legal and tax framework.
The measure is not selective
The measure must favour certain undertakings or the production of certain goods. When applying Article 61(1) EEA on tax measures a two-step procedure has to be followed.
A main criterion in applying Article 61(1) EEA to a tax measure is that the measure provides in favour of certain undertakings in the EFTA State an exception to the application of the tax system. The common system applicable should thus first be determined. If a tax measure derogates from the common system, it must be examined whether the derogation is justified 'by the nature or general scheme' of the tax system. 3See the Authority’s State aid Guidelines, Section 17B.3.1 (4)
As stated in the Government’s letter of 4 June 2003, our view is that the practice with name changes as a procedure for transferring property title does not constitute a derogation from the tax system . Reference is made to the discussion in the previous letter.
However, if the Authority considers the practice to constitute an exemption from the main rule, the derogation is justified by the nature or general scheme of the tax system. Consequently, the selectivity test is not fulfilled in the case at hand. This view is elaborated in detail below.
The nature or general scheme of the tax system
As a point of departure, the differential nature of a measure does not necessarily mean that it should be regarded as State aid. This has repeatedly been stated by both the Court of Justice and the Court of first Instance. In Italy v. Commission, the ECJ held:
“The partial reduction of social charges pertaining to family allowances devolving upon employers in the textile sector is a measure intended partially to exempt undertakings of a particular industrial sector from the financial charges arising from the normal application of the general social security system, without there being any justification for this exemption on the basis of the nature or general scheme of this system."4Case C-173/73, Italy v. Commission,  ECR 709, at recital 15.> (Emphasis added).
The general rule is reiterated in recital 42 in Adria Wien5Case C-143/99 Adria-Wien Pipeline GmbH and others v. Finanzlandesdirektion für Kärnten , ECR I-8365.:
“According to the case-law of the Court, a measure which, although conferring an advantage on its recipient, is justified by the nature of or general scheme of the system of which it is part does not fulfil that condition of selectivity.” (Emphasis added).
There is no State aid involved if the measure is justified by the nature or general scheme of the tax system. 6See also: Joined Cases C-72/91 and C-73/91 Sloman Neptun  ECR I-887, paragraph 21, Case C-390/98 Banks  ECR I-6117, paragraph 33, and Case C-351/98 Spain v Commission  ECR I-8031, paragraph 43
Thus, the nature or general scheme of the Norwegian tax system regarding duty and transfer taxes has to be determined. The purpose of the main rule on document duty and registration fees is to tax actual transfers between different economic entities.
Where the transfer is in appearance only and the entities transferring and acquiring are substantially the same, the main principle in Norwegian law would be to let the acquiring undertaking retain the legal position of the transferring undertaking. This principle is called the continuity principle, which also applies in relation to taxes. If the above-mentioned transfers should be subject to document duty, socio-economically desirable restructurings would not take place. Thus, such transfers are as a main rule exempted from document duty and registration fees in line with the general logic and nature of the tax system.
In the Government’s previous letter we have described the continuity principle thoroughly and given examples of its application in Norwegian law. The Authority alleges that the scope of the continuity principle is quite restricted, and that it does not cover all types of reorganisations. In the following observations, the Government will show that the principle is not restricted to specific transfers, but is regarded as the main rule where the transferring entity and the acquiring entity substantially is the same.
As shown in sections 4 and 5 of our letter to the Authority of 4 June 2003, there is a range of provisions on mergers, de-mergers and conversions under Norwegian law. Such provisions are enacted with respect to limited companies, public limited companies, savings banks, dairy companies, mutual insurance associations, foundations and state-owned enterprises. The continuity principle is a common basis for these sets of rules. We are not acquainted with any legislation on mergers, de-mergers or conversion proceedings not being founded on the continuity principle. The continuity principle is therefore an overriding principle in Norwegian company law.
Some areas of economic life are not covered by enacted rules on restructuring. The Act of 21 June 1985 no. 83 concerning unlimited liability partnerships and limited partnerships (the Partnerships Act) does not have provisions on mergers, de-mergers or other restructurings. Partnerships falling under the Partnerships Act are therefore not able to restructure on the basis of the continuity principle. A reason for not including such rules in the Act is that it seems not to exist any practical need for restructuring with respect to partnerships and companies covered by the Act.
There is no general act governing cooperatives under Norwegian law. Consequently there are no provisions on restructuring with respect to cooperatives. Recently, however, a law commission set up by the Ministry of Justice, has proposed enactment on cooperatives that includes restructuring rules based on a continuity principle, see NOU 2002: 6 (The draft Chapter 8, 9 and 11). Moreover, both acts on building societies and housing cooperatives include provisions on mergers based on the continuity principle, ref. Acts of 4 February 1960 nos. 1 and 2 Chapters 12 and 13 respectively. The restructuring rules found in these acts are further elaborated in the new acts on housing cooperatives, ref. Acts of 6 June 2003 nos. 38 and 39, Chapters 9 (mergers) and 10 (mergers and de-mergers) respectively. The acts are adopted by the Parliament, but have not yet come into effect.
Partnerships and cooperatives constitute approximately 20 % of all legal persons falling under Norwegian company law (13 % if individual enterprises are counted in). Consequently, a substantial majority of all mergers and de-mergers are covered by rules based on the continuity principle. On these grounds the Authority’s assertion that “the scope of the continuity principle is quite restricted” (page 13) is not adequate.
The Authority states that the law does not exempt from excise duty a registration of a transfer of real estate to a subsidiary organized with a different legal company structure than the former owner has. The main rationale behind this state of legal affairs is that it has not been a practical need for general enacted rules based on continuity in such situations, cf. the comparable situation for partnerships explained above.
Turning now to reorganisations of public enterprises, the enactment of specific restructuring rules in these cases is based on the particular practical need for such rules. These provisions, however, reflect the continuity principle and are in line with the general rules governing restructurings. That the relevant provisions are found in a set of rules enacted for the restructuring in casu and not in a general enactment on restructurings, should not lead to the conclusion that the exemption constitutes a selective measure. The decisive assessment should rather be that the method used in this case is a familiar and widespread method used in restructuring proceedings in the private sector.
In conclusion: The continuity principle defines a firm basis for mergers and de-mergers in the private sector. The principle is embedded in a range of enactments. The Government is not aware of any legal provision on mergers, de-mergers or conversions not having the principle as legal basis. There would be an unwarranted systematic flaw if provisions dealing with public restructurings were to be based on an altogether different legal regime based on discontinuity with respect to transfer of property. The exemption from the duty to pay excise duties when setting up Entra Eiendom AS is in line with the other statutory rules governing comparable restructuring proceedings and hence does not constitute State aid within the meaning of Article 61 EEA.
Relevant Commission practice
In the preamble to the EEA Agreement, the uniform application of the Agreement and Community legislation is underlined. 7WHEREAS, in full deference to the independence of the courts, the objective of the Contracting Parties is to arrive at, and maintain, a uniform interpretation and application of this Agreement and those provisions of Community legislation which are substantially reproduced in this Agreement and to arrive at an equal treatment of individuals and economic operators as regards the four freedoms and the conditions of competition; The uniform surveillance throughout the EEA is established in Article 109(2) 8“…the EFTA Surveillance Authority and the EC Commission shall cooperate, exchange information and consult each other on surveillance policy issues and individual cases” and 62 (2) EEA 9“With a view to ensuring a uniform surveillance in the field of State aid throughout the territory covered by this Agreement, the EC Commission and the EFTA Surveillance Authority shall cooperate in accordance with the provisions set out in Protocol 27.”.
When confronted with exemptions that are justified because of the nature or general scheme of the system, the Commission has followed the well-established case law that states that such measures should not be deemed as State aid. Reference is made to the Commission Report on the implementation of the Commission notice on the application of the State aid rules to measures relating to direct business taxation. 10C 2004(434), 09.02.2004 The report has been communicated to both the EFTA Surveillance Authority and the EEA EFTA States.
One of the cases mentioned in the report is the Commission decision C 27/99 (Italy) regarding exemptions from transfer taxes in the case of restructuring of certain public undertakings into joint stock companies. In the opinion of the Government, that case is of particular interest to the case at hand.
The contested Italian law provided that the transfer of assets linked to the conversion of special and municipal undertakings into joint stock companies set up under a special law was not subject to the following taxes:(a) registration tax; (b) stamp tax; (c) tax on the increase in value of real estate properties; (d) mortgage tax and cadastral duty; (e) any other transfer taxes.
The Commission initially had doubts regarding the tax exemption and opened the formal investigation procedure. However, in its final decision the Commission concluded that the reasons for the exemption were consistent with the proper functioning and efficiency of the tax system. The exemption was based on the principle of tax neutrality, which is a basic principle of the Italian tax system. According to that principle, simply changing the legal status of a firm is not relevant for tax purposes because it does not confer an advantage to the firm. From an economic viewpoint the entity remains the same, and should not be taxed. 11See para 37). The measure in question was therefore justified by the nature or general scheme of the system and did not constitute State aid within the meaning of Article 87(1) of the Treaty.
Since the Commission has already made a decision in a case with a similar factual situation, is could be useful to compare the two cases to ensure a uniform application of the State aid rules in the field of taxation. In para 76-81 of the decision, the Commission examines whether the tax measure in question could be regarded as falling within the nature or general scheme of the system. Thus, both in the Italian case and in the Entra Case, the nature or general scheme of the system have to be evaluated.
In the Italian case, transfer taxes normally applied to transfer of assets between different economic entities. When municipal undertakings were converted into joint stock companies, it seemed, merely because of the technicalities of the Italian legal system, as if a new economic entity had been created. This, however, was in appearance only: the municipal undertaking and the joint stock company were substantially the same economic entity operating under a different legal form. 1277) In this connection, the Commission notes first that transfer taxes normally apply to the creation of a new economic entity or to the transfer of assets between different economic entities. When a municipal undertaking is converted into a joint stock company under Law No 142/90, it seems, merely because of the technicalities of the Italian legal system, as if a new economic entity has been created. This, however, is in appearance only: the municipal undertaking and the joint stock company are substantially the same economic entity operating under a different legal form.
As described above, the purpose of the main rule on document duty and registration fees is to tax actual transfers between different economic entities. Where the transfer is in appearance only and the entities transferring and acquiring are substantially the same, the main principle in Norwegian law would be to let the acquiring undertaking retain the legal position of the transferring undertaking. When establishing Entra, it was in reality the commercial part of Statsbygg that continued to exist under a new legal form. Technically, this took place by creating a new joint stock company. The new Entra Eiendom AS entered into all legal rights and obligations of the former commercial part of Statsbygg. Thus, Entra Eiendom AS was substantially the same legal entity operating under a different legal form.
The Italian legal system made no provision in its general rules on conversions of the legal form of companies for conversion of a municipal undertaking into a joint stock company. The conversion therefore had to take place by technically winding up the municipal undertaking and setting up a new joint stock company. The upshot was that a new economic entity was apparently created although it was the same economic entity operating under a different legal status. It was thus justifiable that the normal tax rules on transfers of assets for the setting-up of a new economic entity should not apply in that case. 13Para (78)
It is not contested that the Act on Entra Eiendom AS applies only to one company. Norwegian law contains no general provision regulating public restructurings. The practice in Norway has been to specify in the different establishing acts that property transfers should be registered as name changes. Reference is made to the Government’s previous letter dated 4 June 2003 sections 6 and 8, pages 11-13 and 16-18. Similar legal measures have been adopted in relation to reorganisations of entities such as Posten AS, Mesta AS, NSB AS, Avinor AS, Telenor AS and health enterprises. Hence, the exemptions from the document duties and registration fees in question are just a specific application of the continuity principle to this particular case. 14(79) The Italian authorities also claimed that the simple conversion of the legal form of companies is governed by the principle of tax neutrality because the conversion in itself is not an indication of an increase in income or in the capacity to produce income. The transfer tax exemption is therefore a specific application of that principle to this particular case. And indeed, unlike the three-year income tax exemption, the transfer tax exemption applies to any conversion of a special or municipal undertaking into a joint stock company, regardless of the latter's shareholding composition.
In the Italian case it was stated that the conversion could not be treated like the normal incorporation of a company since it is not a transaction that would be carried out by a private investor but a public authority decision regarding the choice of legal instrument for the provision of certain services. 15Para 80
The Government is in a comparable situation when reorganising public entities. At first sight the situation might seem parallel to the situation of a private investor. However, the Government is confronted with a variety of circumstances not faced by private investors. A public entity may have different tasks, some of them administrative and some of them purely commercial. When reorganising the Government often aims to separate between the company’s commercial and non-commercial activities. Thus, this situation is not comparable with a de-merger of a private undertaking only involved in commercial activities. The Commission has established that such conversions cannot be treated as normal incorporations of a company. 16(80) At the same time, it is also clear that the conversion of a special or municipal undertaking into a joint stock company cannot be treated like the normal incorporation of a company since it is not a transaction that would be carried out by a private investor but a public authority decision regarding the choice of legal instrument offered by Law No 142/90 for the provision of certain services at local level.
Based on the appreciation described above, the Commission concluded that the reasons for the Italian exemption where consistent with the proper functioning and efficiency of the tax system. The exemption was based on the principle of tax neutrality, which is a basic principle of the tax system. The measure in question was therefore justified by the nature or general scheme of the system and did not constitute State aid within the meaning of Article 87(1) of the Treaty.
The same considerations could be made in the case at hand. Consequently, the exemption is therefore justified by the nature or general scheme of the system and does not constitute State aid within the meaning of Article 61(1) of the EEA Agreement.
Summary and Conclusion
Article 61 EEA contains four criteria that must be fulfilled to deem a measure as containing State aid.
The Government is of the opinion that none of the criteria are fulfilled. With regard to the selectivity criterion, the practice with name changes as a procedure for transferring property title does not constitute a derogation from the tax system .
Even if the Authority deems the practice to constitute an exemption from the main rule, it is justified by the nature or general scheme of the tax system.
Consequently, the exemption from the document duties and registration fees provided for in the establishment of Entra Eiendom AS does not constitute State aid within the meaning of Article 61(1) of the EEA Agreement.
Assistant Director General