Reasoned opinion - tax treatment of cross-border mergers etc.

I. Introduction
Reference is made to the EFTA Surveillance Authority’s reasoned opinion of 2 March 2011 (Event No: 566521) and previous correspondence concerning the tax treatment of cross-border mergers and demergers, relocation of companies, mergers between a Norwegian AS/ASA and a Norwegian SE-company and settling of profit and loss accounts.

As notified in our letter to the EFTA Surveillance Authority of 10 May 2010, the Ministry of Finance has considered amendments with relevance to the questions raised by the EFTA Surveillance Authority, in connection with the follow-up of a public hearing of a discussion paper on the Norwegian tax rules on restructuring of businesses.

We would like to inform you that the Norwegian Government has proposed a number of amendments to the rules on taxation of companies and shareholders when companies are exiting, as well as to the rules on taxation of companies and shareholders in connection with cross-border mergers and demergers, where the acquiring company is resident in another EEA state. The amendments were presented to the parliament on 25 March 2011 in the proposition Prop. 78 L (2010–2011).  The proposition will be processed by the parliament within June 2011. A description of the proposed amendments follows under item II and III below.

Further, the Norwegian Government has decided to propose an amendment to the rules on the settling of profit and loss accounts for companies that are relocating or merged/demerged with acquiring non-resident EEA companies. This amendment will be presented to the parliament on 13 May 2011. The Ministry of Finance assumes that the proposition will be processed by the parliament within June 2011. A description of the amendment follows under item IV below.

On this background, the Ministry of Finance request the EFTA Surveillance Authority for a three-month extension of the deadline to comply with the reasoned opinion of 2 March 2011, in order to allow for the parliament to adopt the mentioned amendments, and for the Government to sanction the parliament’s decisions.

The tax treatment of mergers between Norwegian limited companies and Norwegian SE-companies will be discussed under item V below.

II. Cross-border mergers and demergers
According to the Government’s proposal of 25 March 2011, a cross-border merger or demerger, where the acquiring company is resident in another EEA state, will not entail immediate taxation of unrealised capital gains on the company’s assets or liabilities. Further, the merger or demerger will not entail immediate taxation of unrealised capital gains on the shares owned by shareholders of the transferring company. The tax exemption will follow directly from the Tax Act (section 11-11). However, the transferring company may opt for taxation of the merger/demerger, according to wish.

The conditions for the tax exemption are as follows:

The merger or demerger must take place within the regulation of the Companies Act or the Public Companies Act. The Companies Act and the Public Companies Act regulates cross border mergers and demergers within the EEA, in line with the Merger directive (Directive 2005/56/EC).

In conformity with the conditions for tax free mergers and demergers involving only Norwegian companies, the compensation given to the shareholders of the transferring company, other than shares of companies directly involved in the merger or demerger, must not exceed 20 percent of the total compensation given to the shareholders of the transferring company. The tax exemption does not apply to other forms of compensation than shares of companies directly involved in the merger or demerger.

The principles of fiscal continuity apply to cross-border mergers and demergers in the same way as for purely domestic mergers and demergers. This means that the acquiring company must take over all fiscal values, as well as dates of acquisition for all transferred assets and liabilities. The fiscal values and dates of acquisition of the disposed shares in the transferring company must be relocated to the received shares of the acquiring company. The distribution of fiscal values etc. will be carried out according to the same rules that apply to domestic mergers and demergers.

None of the companies involved in the merger or demerger should be resident in a low- tax jurisdiction within the EEA. A low-tax jurisdiction is defined in the Norwegian Tax Act section 10-63 as a country whose income tax on corporate profits is less than two-thirds of the Norwegian tax that would apply if the company in question was resident in Norway. This condition however, does not apply when the company or companies in question is genuinely established and carries out real economic activity in the other EEA state. 1)

The amendments will take effect as from the income year of 2011.

According to the Tax Act section 9-14, income tax on unrealised capital gains will be triggered when assets and liabilities are moved out of the Norwegian fiscal area. A cross-border merger or demerger may in some cases imply that assets and liabilities are moved out of the Norwegian fiscal area. Obviously, the rules contained in the Tax Act section 9-14 will apply to those cases. The Ministry of Finance take notice that the Tax Act section 9-14 is not comprised by the reasoned opinion delivered by the EFTA Surveillance Authority on 2 March 2011.

Although the reasoned opinion of 2 March 2011 does not seem to raise any questions concerning either the tax treatment of cross-border mergers and demergers where the acquiring company is resident in Norway, or the tax treatment of non-domestic mergers and demerges involving companies resident in one or more other EEA states, we mention that the proposal in Prop. 78 L (2010–2011) provides for tax exemption also in connection with those merger/demerger situations.

III. Relocation of companies
According to the Government’s proposal of 25 March 2011, exiting companies and their shareholders will no longer be subject to immediate income tax on unrealised capital gains. This tax exemption will apply to all shareholders and all exiting companies comprised by the current provisions of the Tax Act sections 10-37, 10-71 and 14-26.

The exemption applies unconditionally when the company is relocated to another normal-tax jurisdiction within the EEA. When the company is relocated to a low-tax jurisdiction within the EEA, the exemption applies only when the company in question is genuinely established and carries out real economic activity in the other EEA state.

The changes will take effect as from the date of approval of the amendments to the Tax Act, i.e. presumably within June 2011.

A relocation of a company may in some cases imply that assets and liabilities are moved out of the Norwegian fiscal area. In those cases, income tax on unrealised capital gains will be applied according to the Tax Act section 9-14.

IV. Profit and loss accounts
The Norwegian Government has decided to propose an amendment to the rules on the settling of profit and loss accounts for companies that are exiting or merged/demerged with an acquiring company resident in another EEA state, cf. the Tax Act section 14-48. According to the proposal, which will be presented to the parliament on 13 May 2011, exiting, merging and demerging companies will no longer be required to settle profit and loss accounts, regardless of whether the relocated or acquiring company retains a branch in Norway.

The exemption will not apply to exiting companies that are relocated in low-tax jurisdictions within the EEA, unless the company is genuinely established and carries out real economic activity in the other EEA state. In the case of mergers and demergers, the exemption will not apply if one or more of the companies directly involved in the merger/demerger is resident in a in low-tax jurisdiction within the EEA, unless when the company or companies in question is genuinely established and carries out real economic activity in the other EEA state.

A condition for the exemption is that the relocating or acquiring company is (becomes) resident in an EEA state where Norwegian tax authorities are able to request assistance from that state in the collection of taxes, through a binding treaty. In cases where no such treaty exists, the relocating or acquiring company must provide a guarantee for the tax amount related to the profit and loss account.

The amendment will take effect as from the income year of 2011.

V. Mergers between a Norwegian AS/ASA and a Norwegian SE-company
As mentioned in the EFTA Surveillance Authority’s reasoned opinion of 2 March 2011, the Ministry of Finance, as well as the Directorate of Taxes, has previously stated that a Norwegian AS/ASA and a Norwegian SE-company may not be merged without taxation.

However, the introduction of new legislation on exit taxes has changed the considerations related to the Norwegian tax base in these particular merger situations.

The proposition Prop. 78 L (2010–2011) discusses tax issues concerning incorporation of SE-Companies. In the proposition the Ministry of Finance states (in English translation):

“According to the preparatory works to the Norwegian SE-Company Act and the Norwegian SCE-Enterprise Act, SE-Companies and SCE-Enterprises shall be given the same treatment as public limited companies and co-operative societies, respectively. The Ministry therefore finds it unnecessary to emphasize in the Tax Act that the equal treatment will apply to all provisions of the Tax Act. Reference is made to chapter 11 in Prop. 126 LS (2009–2010).”

Prop. 126 LS (2009–2010) was presented to the parliament on 11 May 2010. Chapter 11 of the proposition deals with the application of the Norwegian participation method for inter alia SE-Companies. The Ministry of Finance states in the proposition (in English translation):

“The Ministry finds it unnecessary to emphasize in the Tax Act that SE-Companies and SCE-Enterprises is to be treated equal to other limited companies and co-operative societies, on the background that equal treatment follows from the preparatory works to the Norwegian SE-Company Act and the Norwegian SCE-Enterprise Act.”

The equal treatment will obviously apply also to section 11-2 of the Tax Act. Therefore, regardless of any previous statements by the Ministry of Finance and the Directorate of Taxes, it is clear that a Norwegian AS/ASA and a Norwegian SE-company may be merged without taxation; within the framework of the section 11-2 et seq.

Yours sincerely,

Bjørn Berre
Deputy Director General
                                                                                                        Hallvard Rue
                                                                                                        Legal adviser

1) These requirements are in line with the requirements established in the European Court of Justice's decision in case C-196/04 Cadbury Schweppes.