Court of Appeal upholds tax ruling in the Strawberry Fields case

The case concerns Petter Stordalen's acquisition of all shares in Oslo Properties AS (later named Strawberry Fields AS) through an agreement dated 13 September 2013. At the end of the income year of 2012, Strawberry Fields AS had a seller credit on Sech Holding of NOK 400 million, debt to its parent company of just above NOK 200 million, a tax-loss carry-forward of NOK 60 million, and a share capital of NOK 100,000 (written down) but with approximately NOK 3 billion in paid-in capital. 

In accordance with the SPA, Stordalen were to undertake Norwegian Property's receivable on Strawberry Fields, pay NOK 400 million for the shares and the internal loan, and pay NOK 5 million for the tax-loss carry-forward. However, due to the fact that Sech Holding redeemed the seller credit of NOK 400 million, there were adjustments made to the SPA: Strawberry Fields' internal loan to Norwegian Property was settled, and Stordalen paid NOK 189 million for the shares.

In 2014, Strawberry Fields AS made external acquisitions of companies and real estate, which lead to good profitability in the following years. As a result, in the income years of 2014-2022, Strawberry Fields AS paid in total NOK 937 million to its sole shareholder, Stordalen personally. The payment were classified as dividend distributions from a corporate law perspective, while from a tax perspective the payments were classified as repayment of paid-in capital.

The Court of Appeal concluded that there are grounds for using the tax avoidance rule against both Stordalen personally and Strawberry Fields AS. Significantly, the State's derivative appeal succeeded, meaning the tax avoidance rules applies to the entire disposition. Hence, the lapse of the tax position for Stordalen personally means that the distributions shall be considered as taxable dividends, not repayment of paid-in capital, while for Strawberry Fields means that the tax-loss carry-forward, as of the time of transaction, has been disallowed.

A difference from the district court, is that the Court of Appeal states that NOK 184 million of the original paid-in capital position should not be considered retained. By extending the use of the tax avoidance rule to the full NOK 3 billion rather than limiting it to the amount exceeding NOK 184 million, the Court has significantly curtailed the era of acquiring companies primarily for their tax positions.

For Stordalen personally, the decision means payable dividend tax of NOK 228.2 million for the income years of 2014-2021 on distributions of NOK 795.7 million in total, plus approximately NOK 180 million for the income years of 2022-2024 on distributions of NOK 502 million in total.

For Strawberry Fields AS, the company's use of the tax loss carry-forward has been disallowed in accordance with Section 14-90 of the Tax Act (now, Section 13-3).

Tax Motivation as Primary Driver

The Court found that Stordalen saw an intrinsic value in the acquisition of at best around NOK 5 million, whilst he valued the tax position at several hundred million kroner. The Court concluded there was no doubt that the tax position was "the clearly most important motivational factor".

The Court rejected Stordalen's interest rate arbitrage argument, finding that early redemption was an obvious possibility and that he ran significant risk related to interest rate changes.

Contrary to Tax Rules' Purpose

The Court emphasised that the ability-to-pay principle of taxation (Nw. skatteevneprinsippet) justifies that repayment of previously paid-in capital should not be taxed as dividends. The purpose of the exception is to prevent taxation of payments that do not increase the shareholder's ability to pay.

Critically, the Court noted that Stordalen had not himself contributed any part of the NOK 3 billion in capital, and that distributions of many hundred million kroner after acquisition undoubtedly increased his ability to pay.

Full Disallowance, Not Partial

The Court held that application of the tax avoidance rule on the entire tax position of NOK 3, was correct both under uncodified law and by application of Section 13-2 sixth paragraph of the Tax Act. The Court referred to legislative history stating that the tax position shall lapse in its entirety, with no room for partial lapse where the transaction involves improved utilisation opportunities.

If the decision is upheld, it may lead to several critical implications:

1. Clear boundaries for tax planning
   The Court agreed it would be difficult to react with tax avoidance against acquisitions of nearly empty companies with tax positions if Stordalen's utilisation was accepted. The decision thus establishes a stricter line for acceptable tax planning.
    
2. The ability-to-pay principle of taxation as a central criterion
   The Court's emphasis on the ability-to-pay principle of taxation as the purpose behind dividend taxation and paid-in capital rules provides important guidance. If the shareholder has not contributed the capital, distributions will increase their ability to pay and fall outside the exception's purpose.
    
3. Limited scope for partial use of tax avoidance
   The conclusion that piercing results in full disallowance establishes a stricter approach than many practitioners anticipated, with limited room for partial use of the tax avoidance rules in cases involving improved utilisation opportunities.
    
4. Systemic fairness concerns
   The Court quoted Professor Fredrik Zimmer's observation that possibilities for such tax planning are unevenly distributed among taxpayers, undermining both horizontal and vertical fairness. In extreme cases, this can lead to large taxpayer groups losing confidence in the tax system.

If the ruling stands, the Court of Appeal's decision sends a clear signal that acquisitions of shares primarily motivated by tax positions may face strict scrutiny. Some key takeaways to note:

• Corporate transactions must have genuine commercial substance
   
• Tax benefits, whilst legitimate to consider, must not be the dominant driver
   
• Acquisitions of nearly empty companies with significant tax positions face high risk of full disallowance
   
• The ability-to-pay principle of taxation will be central to assessing whether transactions are contrary to tax rules' purpose