On September 22 2021, the Ministry of Finance published a consultation paper proposing amendments to Section 11-11 (fourth, fifth and sixth paragraphs) of the Norwegian Tax Act on cross-border mergers, demergers and share exchanges. It is proposed to remove the condition of tax continuity abroad, making it easier to implement tax neutral cross-border mergers, demergers and share exchanges in Norway.
The consultation deadline is December 22 2021. The new rules are suggested to be implemented with effect from income year 2022.
Current rules
As a starting point, cross-border reorganisations are considered taxable events that may trigger taxation in Norway.
However, Section 11-11 of the Tax Act regulates specific forms of cross-border reorganisations that under certain conditions may be carried out without taxation of the companies and shareholders.
For cross-border mergers, demergers and share exchanges there is a condition that the transaction is carried out in accordance with the principles of tax continuity applicable to such transaction in the state where the transferring company is resident or the transferee company in case of share exchanges.
Thus, there is a requirement that the transferring company’s home state has regulations based on principles of tax continuity at both company and shareholder level and that these regulations are complied with. This means, among others, that the tax positions on all assets, rights and liabilities, etc. must be transferred with continuity from the transferring company to the acquiring company. Furthermore, the shareholders need to continue their tax positions, i.e. the input value and acquisition date on the shares received in connection with the reorganisation.
The requirement of tax continuity abroad at shareholder level has been relaxed over the past years, however the requirement of tax continuity at company level is absolute. Hence, if the transaction is carried out with tax discontinuity in the foreign company's home state at the company level and/or the level of all shareholders, the merger will not be tax-free for Norwegian shareholders, branches, etc.
Proposal
The proposal involves removing the requirement of tax continuity abroad. The condition of tax continuity abroad has forced both Norwegian taxpayers and the Norwegian tax authorities to learn and understand applicable foreign tax law to be able to assess whether the transaction is actually carried out with tax continuity at company and shareholder level abroad. Experience has shown that this has required significant resources.
The condition of tax continuity abroad has been subject to several requests for interpretive statements and binding rulings from the Norwegian tax authorities. Practice has also shown that in certain situations the condition of tax continuity abroad has not been possible to fulfil because other jurisdictions do not have similar tax rules as Norway.
Hence, due to the requirement of tax continuity abroad, transactions have not been completed, or completed transactions have been carried out in an inefficient manner. Transactions have also become taxable in Norway. To avoid the negative consequences of the requirement of tax continuity abroad, the Norwegian Ministry of Finance now proposes to remove this requirement.
Consequences and further considerations
The requirement of tax continuity abroad related to cross-border mergers, demergers and share exchanges has gradually been softened since 2011. On this basis and considering that the proposed changes do not have any impact neither on tax reporting requirements in Norway nor on the amount of tax revenue to the Norwegian state, the proposal seems reasonable and not very surprising.
The proposed rules will simplify existing rules for both Norwegian taxpayers and tax authorities. The proposed rules would make it easier to implement cross-border reorganisations irrespectively of how the transaction is treated for tax purposes abroad.
The transaction must however be completed with tax continuity in Norway for all Norwegian shareholders and (in case of mergers and demergers) for all assets, rights and obligations that are subject to Norwegian tax jurisdiction before and after the transaction.
The choice of implementation with tax continuity in Norway is binding upon all Norwegian shareholders and on all assets, rights and liabilities with Norwegian nexus. The tax positions related to the shares and assets, rights and liabilities, etc. in the transferring company must be transferred at tax continuity.
The proposed change, which is expected to be adopted, will facilitate more efficient international reorganisations of businesses where Norwegian shareholders, branches or companies are involved. The new rules are expected to enter into effect and make it easier for all cross-border mergers, demergers and share exchanges carried out in the income year 2022 and onwards.
Rebecca Hammer
Director, Deloitte
