High Court accepts the Norwegian Tax Administration’s argument on tax-free group transfers
Daniel Herde and Lene Bergersen of Deloitte Norway explain a ruling on whether a gain resulting from an intra-group transfer was taxable and whether the Norwegian rules are in breach of the EEA Agreement.
Background and relevant Norwegian law
A Norwegian High Court judgment in November 2022 concerned whether the Norwegian rules on tax-free intra-group transfers are in breach of the European Economic Area Agreement, because only Norwegian companies, etc. in a group can apply the exemption.
It follows from Section 11-21 of the Norwegian tax act that assets and liabilities may be transferred on a rollover basis without triggering tax, subject to certain requirements. The taxation of the latent gain (claw-back) only occurs when the acquiring company sells the asset, or if the group connection is broken and the asset transferred is still owned at that time.
The facts of the case in Norwegian Air Shuttle (et al.) v Skatteetaten (the Norwegian Tax Administration) were, put simply, that the taxpayers transferred aircraft and intangible assets to Irish subsidiaries. This triggered approximately NOK 3 billion ($300 million) in profit.
The taxpayers invoked the rules on tax-free intra-group transfers combined with the EEA Agreement and argued that the gain should not be taxed (before a possible break-up of the group). The tax authorities disagreed, and won in a judgment delivered on November 4 2022.
Takeaways from the judgment
It was undisputed that the regulation on tax-free intra-group transfers constituted a restriction on the freedom of establishment because it was only possible to transfer, for example, assets tax free between companies that were liable to tax in Norway. The dispute in the case concerned whether the restriction could be justified by the need to safeguard a balanced allocation of taxing rights between EU/EEA member states and whether it was proportionate to fulfil that objective.
The parties agreed that this objective in principle may constitute an overriding reason in the public interest capable of justifying a restriction on the freedom of establishment but disagreed on the application in the case at hand. With reference to similar cases from the Court of Justice of the European Union (ECJ), the High Court concluded that the restriction in the case before the court could be justified by the need to safeguard a balanced allocation of taxing rights.
In line with ECJ case law, it was argued that the tax assessment and payment of emigration tax was appropriate to safeguard a balanced allocation of taxation rights. Nor did the court of appeal find a less intrusive way of securing the right to tax, so that the taxation was also proportionate.
For the operating assets that were transferred, it was the rules on the profit and loss account (20% deferred gain recognition using a declining balance method) that led to deferred taxation. For other assets, it was the tax enforcement authorities that (discretionarily) had admitted deferred payment, disregarding a part that had come directly to taxation because of set-off claims by the state.
The taxpayers had stated that such an arrangement was not in line with the requirements for predictability, etc. that EU/EEA law sets out, since there were no explicit rules under Norwegian law opening for a deferred payment. The court, however, considered that the requirement for deferred payment under EU/EEA law had to be interpreted as part of the Norwegian tax rules (see Section 10-1 of the Tax Payment Act combined with Section 2 of the European Economic Area Act). On this basis, the court viewed the solution to meet the requirement of predictability as within EEA law.
A key question
If the case is appealed, the important question is whether the rules on tax-free intra-group transfers (mainly exempting transferors from taxation) is similar enough to the cases that the ECJ has dealt with so that the jurisprudence on emigration tax on persons or assetsetc. should be decisive. Alternatively, is a different treatment required under EEA law; i.e., ECJ practice on tax advantages (exemptions or deductions) granted in national situations that must be extended to cross-border situations.
The Norwegian rules do generally grant an exemption that becomes permanent for the transferor entity even though the rule is drafted as a conditional exemption.