Norwegian taxation of cross-border mergers of mutual funds

The Norwegian Ministry of Finance (MoF) has submitted for consultation a proposed enactment of rules for cross-border mergers of mutual funds. The proposed rules allow for a tax exemption on both an investor and fund level if certain conditions are met. Among other things, the merger must be carried out with continuity on tax values. The proposal is a harmonisation with the current rules applicable to cross-border mergers of Norwegian limited liability companies. It provides clarity and predictability on the tax consequences of cross-border mergers.

Norwegian resident limited liability companies may merge without immediate taxation if certain conditions are met. The rules apply to both domestic mergers and cross-border mergers between entities within the EU/EEA. The main condition is continuity on tax values. For cross-border mergers, continuity on tax values abroad is not required.

Norwegian resident mutual funds may also merge without immediate taxation following the same principles as for limited liability companies. However, this only applies to domestic mergers. A cross-border merger may therefore be taxable for both fund and investors to the extent it is not covered by the Norwegian participation exemption method.

It is possible to apply to the Norwegian MoF for a tax exemption. In numerous cases, tax exemption has been accepted on investor level. There have been conditions that the merger is carried out in accordance with the principles in the prevailing Norwegian tax and legal legislation. Tax continuity on an investor level is required and Norwegian exit-tax rules apply upon emigration from Norway. Applications for tax exemption on fund level have not been accepted.

The proposed new rules allow for cross-border mergers of mutual funds without immediate taxation of either the investors or the fund. The tax exemption only applies to mergers of mutual funds that are UCITS-funds. It is essentially proposed that the cross-border merger rules for limited liability companies shall also apply to mutual funds.

It is required that where the transferring fund is legally established in Norway the merger must be carried out in accordance with the Norwegian Mutual Fund Act (verdipapirfondloven). Mergers where the acquiring fund is legally established in Norway, and mergers between mutual funds legally established abroad, must be carried out in accordance with local legislation which implements the merger provisions of the UCITS-directive.

It follows from the connection to the UCITS-regulations that the mutual funds must be legally established within the EU/EEA. From a Norwegian tax perspective, a mutual fund might be considered tax resident in another state than where it is legally established according to the prevailing legal mutual fund legislation.

In mergers involving a fund that is tax resident in Norway, the other funds must be tax resident within the EU/EEA. If the EU/EEA state is considered a low tax jurisdiction a tax exemption is only accepted if a substance requirement is met. For mergers involving mutual funds tax resident in one or more other states, it is sufficient that the mutual funds are tax resident in a normal tax jurisdiction, or in a low tax jurisdiction within the EU/EEA, if the substance requirement is met.

For tax purposes cross-border mergers of UCITS-funds includes three main types:

• Mergers where the transferring fund is resident in Norway;

• Mergers where both transferring and acquiring fund are resident in Norway; and

• Mergers where the acquiring fund is resident in Norway.

All three types of mergers may entail taxation of Norwegian investors according to the main rule of law.

It is proposed that the new rules shall allow for tax exemptions for Norwegian investors. Continuity on tax values on investor level is a condition (this includes entry values, time of acquisition, among other things). This is in line with the previous tax administrative exemption practice.

The proposal also allows for a tax exemption on a fund level. This is an expansion of previous practice that harmonises with the current rules for cross-border mergers of limited liability companies.

It is a condition that the cross-border merger is carried out with continuity on tax values. The continuity requirement entails that the tax exemption is not definite, but taxation is postponed to a later tax triggering event. However, the participation exemption method may apply on later gains as well.

Exit-tax rules shall apply if assets are transferred out of Norwegian tax jurisdiction. But there is no exit taxation of underlying assets that qualify under the participation exemption method. Exit taxation shall not be considered a breach of the condition of tax continuity.

It is also proposed that merger consideration other than mutual fund units in entities participating in the merger shall be fully taxable. The investor’s right to receive merger consideration other than mutual fund units is significantly limited in Norwegian legislation, which determines that cash consideration may constitute maximum 10% of the share value.

It is proposed that the rules shall take effect as of 2024.