The Norwegian Government's proposal for amendments to the rules on exit tax

On 29 November 2022, the Government introduced certain amendments to the exit tax rules; mainly:

• Annulment of the exit tax obligations if shares were not realised within five years following emigration, was removed. Up until then, the tax liability was annulled if the shares were not realised within five years after emigration. Following the amendment, Norwegian individuals could no longer emigrate without paying tax on latent share gains, although the actual payment was deferred until the time of realisation of the shares.

• Prior to the amendment, exit tax was also triggered if a Norwegian resident shareholder gifted shares to a foreign-resident spouse. After the amendment, the scope was extended to include transfers to relatives, either by blood or marriage, up to the level of uncles or aunts.

The Government's latest proposal outlines an option for a 12-year deferral period for payment of exit tax, regardless of whether the shares are realised within this period. Upon realisation of the shares, or upon the emigrated taxpayer's demise within the 12-year period, the deferral will cease, and the exit tax obligations will become due.

The cessation of the deferral upon the taxpayer's demise shall apply even if all heirs are tax resident in Norway, as well as if the taxpayer was within the 12-year period and thus could have moved back to Norway and avoided payment of the exit tax obligation. As a result, this can lead to heirs inheriting an immediate tax liability.

Under the new proposal, the taxpayer can choose to pay the tax (i) immediately upon emigration, (ii) through interest-free instalments over 12 years, or (iii) at the end of the 12-year deadline (but with the addition of accrued interests). Should the taxpayer become tax resident in Norway with the shares intact within the 12-year period, the exit tax will either be waived or refunded.

The proposal specifies that the exit tax should only apply on changes in value that has occurred while the shareholder has been tax resident in Norway. This ensures that exit tax calculations shall exclude gains accrued before a relocation to Norway, as well as subsequent changes in value after emigration.

Furthermore, the proposal expands the scope to encompass share savings accounts and fund accounts. Schjødt has previously requested a guidance statement (No. veiledende uttalelse) from the Norwegian tax authorities, where the tax authorities confirmed that pensions held through a US 401k account would be subject to exit taxation as long as the underlying investments are covered by Section 10-70 (2) of the Tax Act. It is therefore a risk that foreign pension portfolios could be considered covered by the proposal and should be assessed before a pension holder relocates to Norway.

Additionally, the Government has proposed to introduce a lower limit of NOK 100,000 for the transfer of shares as a gift to persons residing outside of Norway. Lastly, it is proposed that the Norwegian tax authorities may demand security for the deferred exit tax payment based on an assessment of future payment risk.

The Government's proposal to further amend the rules on exit tax has been submitted for consultation with a deadline of 21 May 2024.

On 11 January 2024, Bundesfinanzhof (the “German Federal Fiscal Court”) published a decision dated 6 September 2023 regarding exit taxation of latent capital gains on shares upon relocation from Germany to Switzerland. The question was whether the German exit tax rules violated the existing agreement on the free movement of persons entered into between the EU and Switzerland. The agreement between the EU and Switzerland is based on the same rights and principles as the EEA-agreement Norway has entered into with the EU.

The German Federal Fiscal Court concluded that taxation of latent gains on shares upon emigration to Switzerland would constitute a violation of the agreement on the free movement of persons and the right of establishment. Consequently, the German exit tax in the case of departures to Switzerland must be deferred permanently, and interest-free, until the underlying shares are disposed of. No amendments to the German tax law have been made after the recent decision. However, it is expected that the German Federal Fiscal Court will demand a permanent and interest-free deferral for all EU/EEA and relocation cases.

The Government's proposal for limited deferral and addition of interest is not in accordance with the decision from the German Federal Fiscal Court. Through the EEA Agreement, Norway must adhere to similar requirements regarding free movement of persons and freedom of establishment. Hence, the Government's proposal may be in violation with the EEA Agreement, similarly as the German exit tax rules. The ruling from the German Federal Fiscal Court has not been mentioned or assessed in the consultation paper.