On April 10 2019, Norway's Ministry of Finance (MoF) published the proposal for a new statutory general-anti-avoidance-rule (GAAR).
Norway's tax authorities have used the rule to target mainly tax driven transactions that have been deemed contrary to a specific tax rule. In Norway, the GAAR is non-statutory, and the rule has been largely developed by the Supreme Court.
The main reason for the proposed rule was that the MoF disagreed with some of the assessments that were made by the Supreme Court in anti-avoidance cases regarding three particular judgments: Telenor, Hydro Canada, and ConocoPhillips III.
Telenor – assessment of intent
The main objection against the Telenor case was that the Supreme Court, when assessing whether the transaction was mainly tax driven, adjusted the assessment of intention(s) from an objective test deducing intent from documents, to a subjective one, where the decisive is subjective motivation of the taxpayer in question.
The MoF has proposed that this subjective test will be replaced by an objective motive test (i.e. an assessment of the motives of a hypothetically rational person in the same situation, with respect to tax and other effects). If the transaction is mainly tax driven, the first of two conditions for applying the GAAR is fulfilled. The threshold for being mainly tax driven is not 51%, but probably around 70%, which means that a transaction should not be captured if non-tax reasons for carrying out the transaction is 35% or higher.
Hydro Canada – foreign taxes
The second condition for applying the GAAR is a concrete overall assessment of certain criteria mentioned in the law and preparatory works in order to decide whether the GAAR shall be applied (previously often referred to as the disloyalty condition).
Under the current GAAR, discerning whether the taxation applied is contrary to the tax provision is the most important criteria in the overall assessment. Under the new GAAR, non-tax business reasons should be a more important factor in the overall assessment.
In the Hydro Canada case, foreign tax consequences were considered business legitimate reasons to prevent the application of the non-statutory GAAR. Even though non-tax effects will have a more provident position under the new GAAR, foreign tax effects will no longer be deemed a business reason and will thus be disregarded under the GAAR.
The MoF is of the opinion that the same should apply for other Norwegian indirect taxes and duties, which means that saving stamp duty on real estate transfers cannot be regarded as a business effect under the new rule.
ConocoPhillips III – relevance of preparatory work statements
In ConocoPhillips III, the taxpayer de-merged real estate (tax free) in a real estate company and sold the shares utilising the participation exemption method. A direct transfer of the real estate would have triggered a taxable capital gain.
The Supreme Court accepted the transaction for tax purposes because the use of real estate companies and a tax exempt sale of shares was mentioned in the preparatory works. The risk had been implicitly accepted by Parliament because no changes were made to the rules to prevent it. In addition, the taxation was deemed to be in accordance with the de-merger and participation exemption rules.
The latter rule is called the 'tool rule' to achieve tax avoidance and is used to circumvent the more burdensome capital gains rule in the ConocoPhillips III case.
Both the mention of possible avoidance schemes in preparatory works and that the transaction is in accordance with the objectives behind a tool (to achieve tax avoidance) shall not in itself prevent the use of the new GAAR.
Application for VAT
The new GAAR will also apply for VAT in addition to social security, payroll, income and net wealth taxes. In Norway, the non-statutory GAAR has not been applied by the Supreme Court in VAT cases, and it will be interesting to see whether the VAT authorities will build on guidance found in income tax cases or VAT anti-avoidance case law from the Court of Justice of the European Union (CJEU).
The Supreme Court loses in the aforementioned cases resulted in fewer cases where the GAAR was applied by the tax authorities.
It will be interesting to see whether the use of the GAAR will increase when the new GAAR becomes effective from January 1 2020.
It is stated in the preparatory works that the proposal is not expected to raise any significant revenues compared to the current GAAR. However, the reduced threshold for using the GAAR could entail that the statement in the preparatory works is not accurate.
By making non-tax effects and other criteria more important, this makes GAAR decisions more concrete, and the relevance for other cases more limited than under the current GAAR.
Consequently, this will make it necessary to carry out a more detailed GAAR assessment when tax benefits are involved in transactions and the outcome of other cases are of less helpful to the assessment.