The HP Malmø case – LB-2021-64263

The judgment of the Borgarting Court of Appeal (LB-2021-64263) can be summarised in the following key points:

• The purchase of the parent company (and not the property-owning company) was an unnecessary step in the acquisition of the property company.
• Borgarting's judgment in the HP Malmø may imply a lower threshold for applying the anti-avoidance rule than what has historically been the case. This will also apply to the new statutory anti-avoidance rule.

On 5 January 2023, Borgarting Court of Appeal published a new judgment regarding the Norwegian anti-avoidance rule. The rule was previously based on case law but is now regulated by statutory law in almost the same form.

The background for the case was Strawberry's utilisation of tax positions following a share purchase of HP Malmø Holding. Due to financial difficulties, the Norwegian Otium group had to sell several subsidiaries involved in the commercial real estate sector. One of the subsidiaries was the company HP Malmø Holding AS, which indirectly (through two subsidiaries) owned the property Malmø Oscar 28 – an office building in the centre of Malmø, Sweden.

The value of the property was agreed to be SEK 208 million. However, Strawberry acquired the property through the purchase of the shares in HP Malmø Holding AB. HP Malmø Holding AB owned the shares of ONL Sweden AB, and a negative interest rate swap and a tax loss carry-forward. The negative interest rate swap resulted in a purchase price of only SEK 2 million.

Following the purchase, Strawberry was contacted by another property group with interest of acquiring the property. As a result, the shares in ONL Sweden AB were sold only four months later for SEK 233 million. HP Malmø Holding AS was still owned by Strawberry.

Strawberry utilised the tax positions in HP Malmø Holding AS through group contributions of approximately NOK 44 million in 2015, NOK 184 million in 2016 and NOK 79 million in 2017. The tax authorities assessed the matter and later decided to change the basis for the tax calculations with reference to the Norwegian anti-avoidance rule, thus denying deductions for the group contributions.

According to Norwegian tax law, the tax positions a company possesses will endure when the shares in the company are sold or transferred. However, if the main purpose of the purchase or transfer of shares is based on utilisation of the tax positions to receive a reduced tax burden, and the disposition and the circumstance in general appears contrary to purposes of the tax law, the tax authorities can amend the basis for the tax calculation with reference to the Norwegian anti-avoidance rule.

The Supreme Court of Norway previously considered a similar case in Rt. 2012 s. 1888 (the Dyvi case). In this case, the tax authorities argued that the tax calculation could be amended with reference to the Norwegian anti-avoidance rule – as in this case. However, the Supreme Court concluded in the Dyvi case that the acquired company constituted a natural entity with the property company, and that the disposition of the taxpayer was not contrary to the purposes of the tax law. The Supreme Court put emphasis on the fact that there were no examples from Supreme Court cases of applying the anti-avoidance rule for transactions that has a certain commercial reality beyond the tax advantages for the seller and acquirer – earlier cases with similar fact patterns had involved "empty" companies. Hence, the Supreme Court ruled that the decision of the tax authorities was invalid.  

The non-statutory anti-avoidance rule, which has been developed in case law and theory, consists of a basic condition and an overall assessment (the overall assessment being the additional condition).

The transaction consisted of several individual elements. The Court of Appeal agreed with the tax authorities that the individual elements of the transaction could be separated and assessed in isolation. The Court of Appeal pointed out that the acquisition of the parent company had very little commercial content, while the tax position was well known to the buyer. The acquisition of the parent company therefore appeared to be an unnecessary intermediary, and mainly tax motivated. The basic condition to set aside the transaction was therefore found to be met.

In order for the anti-avoidance rule to be applicable, it follows from case law that, after an overall assessment, the transaction must appear to be contrary to the purpose of the tax rules. A basic principle of tax law in relation to Section 6-1 of the Tax Act is that deficits and losses must benefit the person who has had the deficit or has suffered the loss. Here, the parent company had suffered the losses, while it was the purchaser of the parent company that generated the income and wanted to benefit from the losses. The purchase of the parent company with subsequent group contributions and utilisation of the tax loss carry-forward was, in the Court of Appeal's view, contrary to the aforementioned allocation principle and the purpose of Section 6-1 of the Tax Act. The additional condition for application of the anti-avoidance rule was therefore also met.

On this basis, the court ruled that the purchase of shares in HP Malmø Holding constituted an unnecessary step in the acquisition of the property Malmø Oscar 28 and that the transaction appeared to be contrary to the purpose of the tax rules, thus justifying the application of the Norwegian anti-avoidance rule on the disposition.

Even though it was assumed that the Dyvi case had significant similarities with the HP Malmø case, the Court of Appeal referred to factual differences between the two cases as well as clarifications of the legal basis in subsequent cases for the Supreme Court regarding the anti-avoidance rule (i.e., the "IKEA case").

However, the HP Malmø case has also significant differences with the IKEA case. The IKEA case concerned an internal reorganisation, which will be a true difference from purchasing a company from a third party.

In addition, the clarifications of the legal basis in the subsequent IKEA case are based on the assessments already made by the Supreme Court in another case (the "Aker Maritime case"). Hence, it is difficult to see how the IKEA case clarifies much compared to what was already stated by the Supreme Court with regards to the legal basis prior to the Dyvi case. This indicates that the court has been too modest in their emphasis on the similarities and the judgment laid out in the Dyvi case.

Furthermore, the threshold for applying the Norwegian anti-avoidance rule on cases where the transaction likely would have been carried out regardless of the tax positions, has historically been high. Much suggests that the purchase of HP Malmø Holding in order to acquire the property Malmø Oscar 28 would have been made regardless of the tax benefits resulting from the utilisation of tax positions through group contributions.

Lastly, the choice of the transaction structure appears natural from a corporate perspective. Based on this, the verdict – although seemingly too strict – may imply a lower threshold for applying the anti-avoidance rule than what has historically been the case. Hence, the result could seem contrary to the threshold previously laid out by Norwegian courts, and thus contrary to the threshold for changing the basis for tax calculations with reference to the Norwegian anti-avoidance rule.

The judgment from the Borgarting Court of Appeal has been appealed to the Supreme Court.