Government makes proposal on tax exempt cross-border restructuring

Petter Grüner		Janne Omsland

On March 25 2011 the Norwegian Ministry of Finance issued a proposal where they suggest several changes and new rules in the regulations related to tax exempt cross-border restructuring. The legislative proposal in principle follows a discussion paper released on January 18 2010. The proposal includes amendments that would significant increase the opportunity for tax exempt cross-border restructuring.

Today there are limited possibilities for carrying out tax exempt cross-border restructuring. The new proposal will to a large extent increase such possibilities. In general the proposal contains a liberalisation which enables possibilities for tax exempt cross-border reorganisations.

Norwegian tax law only have rules for tax free mergers and demergers if the companies involved are tax resident in Norway.

The Ministry of Finance now proposes that these transactions may take place without immediate taxation:

• A Norwegian limited liability company should be able to merge with another limited liability company tax resident in a jurisdiction within the EEA. If the Norwegian company is the transferor company the tax exemption is conditional upon any Norwegian business operations being continued in a Norwegian branch.

• A Norwegian limited liability company may be subject to a demerger where the surviving company is tax resident in a jurisdiction within the EEA. The tax exemption is conditional upon any business activities in Norway to be continued through a Norwegian branch.

• Companies with limited liability tax resident in other jurisdictions (outside Norway) may upon certain conditions merge or demerge without any Norwegian tax consequences. The tax exemption is conditional upon assets not being transferred out of Norwegian tax jurisdiction.

A condition for tax exemption applicable for all of these transactions, is that neither of the companies may be tax resident in a low tax jurisdiction outside the EEA. If resident in a low tax country within the EEA, the company must be actual established and conduct real economic activities in its state of resident to qualify for tax exemption.

Under Norwegian tax law there are no rules for tax exempt share for share exchange. However, when the conditions for the participation exemption method are met, a corporate shareholder may enter into such transactions with limited taxation (28% taxation of 3% net tax free income).

In the proposal it is suggested that Norwegian corporate and individual shareholders may exchange their shares in a limited liability company for shares in another limited liability company without taxation. The tax exemption is subject to certain conditions and neither of the companies may be resident in a low tax jurisdiction outside the EEA. If resident in a low tax country within the EEA, the company must be actual established and conduct real economic activities in its state of residence to qualify for tax exemption. The exemption does not apply if both companies involved in the share for share exchange are tax resident in Norway.

The Ministry of Finance proposes an exemption for exit taxation when companies are moved to another jurisdiction within the EEA. If the company is transferred to a low tax jurisdiction within the EEA, the exemption is conditional upon the company being actual established and conducting real economic activities in the new resident state. To the extent assets or liabilities are transferred out of Norwegian tax jurisdiction, these will be subject to exit taxation. However it should be noted that the exit taxation regime defers, to some extent, taxation of potential gains until actual realisation takes place, or avoids taxation of the gain if realisation does not take place within five years after end of the year of removal.

Under conditions, the Ministry of Finance also proposes roll-over treatment for some cases of transfer of assets in branches.

The proposal also contains changes related to domestic reorganisations. One of the most significant proposals is the abolition of the conditions that tax-exempt mergers and demergers should be executed in accordance with Norwegian company law and in accordance with Norwegian GAAP.

The proposal suggests that the new rules enter into force with effect from the fiscal year 2011. It is reasonable to assume that the proposal will be adopted by the Norwegian Parliament during summer 2011.

Petter Grüner (pgruner@deloitte.no) and Janne Omsland (jomsland@deloitte.no)

Deloitte

Tel: +47 23 27 96 05; +47 23 27 96 10

Website: www.deloitte.no