Norwegian government defends legality of exit taxes

Third stage of the infringement procedure

The letter from the Ministry of Finance was made in response to a letter of formal notice by ESA of 10 March 2010, whereby ESA concluded that the current exit-tax rules are in breach with articles 31, 34 and 40 of the Agreement on the European Economic Area (“EEA”). The formal notice is further commented in our Newsletter of 19 March 2010. A formal notice is the second stage in an infringement procedure.  Following this notice, the State has two months to submit observations in a written response. This response was submitted by the Ministry of Finance 10. May 2010. ESA may now issue a reasoned opinion and refer the case to the EFTA Court. 

Current exit-tax rules

The current exit-taxation rules are applicable if a Norwegian tax resident company transfers the effective management (tax residency) to another country, either by relocation or by a crossborder merger. The company’s assets and liabilities are regarded as realised for tax purposes (all hidden reserves are then taxed) and any deferred taxation due to gain and loss accounts rules becomes taxable. The shares of the company are also regarded as realised for the shareholders of the company. To ESA, these rules constitute a non-justifiable restriction. 

Possible amendments 

A discussion paper on the Norwegian tax rules on thereorganisation of businesses is currently on public hearing until 1June 2010. If the proposed amendments are adopted, it will be possible to carry out cross-border mergers within the EEA on a roll-over basis. In their response to ESA, the Ministry states that the formal notice will be taken into account in the follow-up of the hearing, and that ESA will be kept informed on the development of the new rules. If the suggested cross-border merger amendments are adopted, some adjustments to exit-taxation 
rules may be expected as well.

Final remarks

The Ministry offers few new arguments in response to convincing arguments from ESA. Norway has two months following the expected issuance of a reasoned opinion from ESA to amend the exit-taxation rules. If no change is made, ESA will most likely refer the case to the EFTA Court. Sweden has already amended their restrictive exit-tax provisions and other EU countries may follow suit. It remains to see whether the proposed amendments in the discussion paper are adopted, and what effects this will have on Norwegian exit-taxation rules. 

Revised national budget
The Ministry of Finance proposed revised national budget and revised tax rules to the parliament yesterday. An important change from an international tax point of view was the proposed changes to the tonnage tax regime (which will be commented on in a shipping taxation newsletter).

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