Norway proposes important changes to rules on tax-free cross-border reorganizations

By Sander​ Pettersen, Associate, CMS Kluge Advokatfirma AS, Oslo

The Norwegian Ministry of Finance on 3 September released a hearing proposal for changes to the rules on cross-border mergers, demergers and share exchanges. The purpose of the proposal is to simplify the rules and to facilitate better organization of business activities.

The proposal has a consultation deadline of 22 December, and the Ministry of Finance aims for the proposed changes to enter into force with effect from income year 2022.

Under current law, certain forms of cross-border reorganizations can be carried out without taxation. This applies to share exchanges where a Norwegian company is a party; mergers, demergers and share exchanges between foreign companies; and mergers and demergers where a Norwegian company is the acquiring party.

To qualify for tax exemption, a condition is that the transaction is carried out in accordance with the principles of tax continuity for such transactions in the state where the transferring/acquiring company is resident. This means that the transaction must be carried out with tax continuity in the foreign company’s home state at the company and/or shareholder level, for the transaction to be tax-free for any Norwegian shareholder and company. This also applies for assets, rights, and obligations in foreign companies related to the Norwegian tax area, for example through a branch in Norway.

The rules on tax continuity on cross-border transactions presuppose that both the taxpayers and the Norwegian tax administration familiarize themselves with the law of other states to assess whether the transaction entails a tax continuity treatment. Experience shows that this is resource-intensive for both parties. Furthermore, the condition has in practice proven to be difficult to fulfill in certain cases, with the consequence that transactions covered by the provisions have been taxable in Norway. Accordingly, the Norwegian Ministry proposes that the condition of tax continuity abroad be removed.

To be tax-free, any cross-border merger, demerger, and share exchange must be carried out with tax continuity in Norway for all Norwegian shareholders and (by merger and demerger) for all assets, rights, and obligations that are related to the Norwegian tax area both before and after the transaction. The choice of implementation with continuity in Norway is binding for all Norwegian shareholders and for all assets, etc., with connection to the Norwegian tax area before and after the transaction. The tax positions related to the shares and assets, etc., must then be continued unchanged at the transaction.

—Sander​ Pettersen is an Associate with CMS Kluge Advokatfirma AS, Oslo.

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