Norwegian tax appeals board conclude that conditional options are not subject to exit taxation

The case concerned a person who had been granted options prior to moving to Poland in 2016 that were conditional on continued employment with the employer until February 2017. Thus, at the time of the relocation in 2016, the taxpayer neither had formal property rights nor a real opportunity to utilise the options. 

The tax office believed the value of the options exceeded the threshold amount for exit tax of NOK 500,000, and thus that the options should be taxed in 2016. The taxpayer argued that the options had no value, as long as they were conditional, and therefore should have been taxed as ordinary salary income when exercised in 2017. 

The principal question of the case was whether conditional options, that cannot be exercised at the time of relocation, should be included in the exit tax basis.

Pursuant to section 10-70 of the Norwegian Taxation Act ("Tax Act") taxpayers who move abroad with unrealised gains on shares in Norwegian or foreign companies are liable to pay tax in Norway as if the shares had been sold the day before the taxpayer is deemed to be resident for tax purposes in the new country of residence, either pursuant to domestic law or a tax treaty. This tax liability includes the realisation of financial instruments with shares as the underlying object.  

A conditional option is an option where the right to ownership is linked to the fulfilment of specific terms or conditions that must be met before the option can be realised.

The tax office argued that conditional options should be subject to exit tax. According to the tax office, there was a presumption against the legislator intending to exclude conditional options from the exit tax rules, particularly since most options are conditional at the time of relocation and excluding them would undermine the intended effect of capturing such income through exit tax rules. Further, the tax office argued that if conditional options were not subject to exit tax, it could lead to total non-taxation on exercise of the option after exit from Norway.

The majority of the Tax Appeals Board concluded that the taxpayer could not be considered as owning the subscription right to the options at the time of relocation in 2016, since the conditional options gave the taxpayer neither formal ownership rights nor real opportunity to utilize the options at that time.

The minority disagreed and supported the assessment by the tax office. They emphasized that options in employment relationships are comprised by the option concept in section 10-70 of the Tax Act, even when conditional on continued employment. The minority noted that it was an expressed aim that exit tax should comprise latent gains on options in employment relationships, and that there were no other potential owners of the options for tax purposes.

A prerequisite for exit taxation is that the taxpayer "owns" the assets at the time of relocation, cf. section 10-70 first paragraph of the Taxation Act. 

The Tax Act contains no general definition of the concept of ownership. The Supreme Court has ruled that the concept of ownership for tax purposes is relationship-dependent and may be interpreted differently in different contexts, cf. Rt. 2002 p. 747 (Ptarmigan). A specific assessment must be made of who actually has control over, bears the financial risk for and is entitled to a return from the asset, cf. Rt. 2005 p. 394 (Gloppen).

The Supreme Court has addressed the significance of conditions in the context of timing taxable benefits, emphasising whether the benefit in question was clarified and secured, cf. Rt. 2009 p. 1208 (Hurtigruten). In this case, vesting of the option was conditional on continued employment. If, in relation to the ownership concept in exit taxation, it had been established that non-vested options could result in exit taxation, it could have created uncertainty about when conditional options satisfy the ownership concept. However, the Tax Appeals Board based its decision on a substantive assessment of the conditional options. Where conditions are merely formal and the taxpayer controls the outcome, it is conceivable that the result will be different.

The decision from the tax appeal board solves an issue that holders of unvested options may face when relocating to work in another country, The new country will often tax income on the options when they are exercised, without granting a credit for Norwegian exit tax as the Norwegian exit tax is imposed on a deemed transaction taking place before the employee has become a tax resident of the new country. Following the tax appeal board's decision, such difficulties are somewhat mitigated and taxation of unvested share options in cross border cases will align better with OECD's suggested approach for taxation of employee stock options.