Norwegian parliament ends GAAR discussion regarding pre-transaction reorganisations
Daniel Herde and Oscar Brown of Deloitte present the status of the newly codified general anti-avoidance rule (GAAR) and its applicability on reorganisations in connection with a transaction.
Norway recently codified its general anti-avoidance rule (GAAR). The GAAR had existed for more than a century and had been developed by the Supreme Court through numerous judgments. The provision was intended to codify existing practice, without making any major amendments to the rule itself.
The preparatory work by the Ministry of Finance left it unclear whether the practice regarding GAARs applicability for pre-transaction reorganisations would be continued under the codified GAAR. The Finance Committee in the parliament addressed the question in connecting with the adoption of the law, stating that the existing practice regarding GAAR and pre-transactions reorganisations should be upheld under the codified GAAR.
Short on previous administrative practice of not using the GAAR on pre-transaction reorganisations
Before the codification, assets could be demerged into a single purpose vehicle (SPV) and sold tax exempt through a sale of shares in the SPV, without triggering the GAAR. It was not a problem that the reorganisation was carried out in connection with a transaction with a third party, meaning that a pre-transaction reorganisation could take place e.g. between signing and closing of an agreement.
For real estate, the important precedence was the ConocoPhillips III case from the Norwegian Supreme Court. Following the judgment, the Directorate of Taxes issued a statement regarding the consequences of the ConocoPhillips III case, stating that the reasoning by the Supreme Court should be applied in similar pending cases, irrespective of the asset in question. This resulted in a change in the administrative practice from the Norwegian tax authorities (NTA), in line with the ConocoPhillips III reasoning. This practice gave Norwegian businesses flexibility to organise its assets as best suited, whilst maintaining the possibility to defer capital gain taxation on a sale of the asset equating this with a sale of shares.
The following rematch
In connection with the state budget for 2020 prepared by the Ministry of Finance, it was stated that the remarks by the Finance Committee were ambiguous, arguing that it was uncertain whether the committee had referred to the ConocoPhillips III case concerning real estate or the following administrative practice that covered both real estate and other assets.
The parliament did not flinch: In connection with the adoption of the state budget, the Finance Committee stressed that the existing administrative practice covering real estate and other assets should be continued under the codified GAAR. Further, the committee noted that any additional amendments to the ambit of the GAAR should come through additional legislation and implicitly not through comments made in the state budget.
The state of play
Following the second round in the parliament, the NTA later published a binding ruling on the subject. In the ruling, the NTA stated that the demerger of the operational part of a business into a SPV would not be subject to the GAAR, with reference to the statements made by parliament a month earlier.
The discussion on GAARs applicability on pre-transactions reorganisations therefore seem to have been settled, at least for the moment. The result is that it generally is possible to demerge assets into a SPVs and sell the shares in the SPV tax exempt without triggering the newly codified GAAR.
There are still things to watch out for. The situation is closely monitored by the NTA. Further, it is not to be forgotten that the previous practice also had its limits. For the more complex fact patterns, the risk of GAAR could be higher than previously, and should be subject to a more thorough assessment before implementation. Another important change to the GAAR is that foreign tax savings is no longer a business reason, which was something that could prevent the application of the GAAR under the non-statutory rule. Hence, cross-border planning where the aim is to achieve foreign and Norwegian tax savings could now be captured by the GAAR.
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