Nyhet

Brexit - tax and VAT implications

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The UK was originally scheduled to withdraw from the EU on 29 March 2019 However, this withdrawal has now been postponed. Such a withdrawal would mean that the UK will no longer be a part of the EEA Agreement. Currently, it is uncertain when the withdrawal will take place and whether it will be done with a withdrawal agreement with the EU. In the absence of new bilateral or unilateral rules, taxpayers will be affected by Brexit. Some of these changes are described below. 

Summary

The immediate tax effects of a withdrawal largely depend upon whether there is a withdrawal agreement between the EU and the UK or not. The main effects can be outlined as follows:

  • If the EU and the UK come to an agreement, all EEA-relevant tax rules will be applicable until and including 31 December 2020. However, tax rules related to existing civil rights will still be applicable from 1 January 2021 and forwards.
  • If there is no agreement between the EU and the UK, only the EEA tax rules related to existing civil rights will continue. Other EEA-based tax rules will expire on the date the UK withdraws without an agreement.

 

The UK and the EU have negotiated an agreement regulating the consequences upon a withdrawal. However, this agreement must be approved in the UK («deal scenario»).

If this agreement takes effect, the UK will be treated as an EU member for a transition period intended to last from the date the UK withdraws until and including 31 December 2020. In this period, the UK will be treated as if it were an EEA member. This transition period may be extended by a maximum of two years.

In addition to the transitional rule, the agreement between the EU and the UK contains provisions deciding which rules are still to apply from 2021 for citizens (and their family members) who have exercised the right of free movement within the end of the transition period. The provisions ensure the right to a continued stay, mainly in accordance with the existing rules applicable to these persons.

If the withdrawal is based upon an agreement between the EU and the UK, the relationship between Norway and the UK will not change significantly at the time of the withdrawal. The changes will then be applicable only as from 1 January 2021, and primarily affect the rules not related to existing civil rights.

Norway's relationship with the EU and the EEA will not change.

If the EU and the UK do not agree upon a withdrawal agreement, leading to a so-called “no-deal” situation without a transition arrangement, the UK will no longer be considered an EEA member from the day after their withdrawal. In Prop. 45 LS (2018-2019), the Government has asked the Norwegian Parliament for consent to enter into an agreement between EEA/EFTA states and the UK on extending current civil rights if the UK exits the EU in a "no deal" situation.

In the income tax regulation, there are several rules that differentiate between foreign companies resident in the EEA and companies resident outside the EEA. Similarly, some rules differentiate between individuals resident in the EEA and residents of third countries. Generally, these regulations will give companies and citizens within the EEA a more favourable taxation in cross border transactions and movements compared to companies and citizens resident outside EEA. The purpose of the rules is to fulfil Norway’s obligations under the EEA Agreement ensuring that Norwegian tax rules are not in danger of being viewed as discriminating and in conflict with the rights related to the four freedoms or state aid rules.

If the UK leaves the EU without a withdrawal agreement, cross-border work, services, transactions, establishments, etc. between Norway and the UK from the time of withdrawal will in general be treated in accordance with the rules that apply to the same transactions, etc. between Norway and states outside the EEA. As previously mentioned, a reservation must be made for citizens who have acquired EEA rights before the UK’s withdrawal. If the Norwegian Parliament consents to the above mentioned agreement between Norway and the UK, EEA tax rules that are deemed to be related to such civil rights, will be applicable after the "no-deal" scenario (in the same way that they will continue after 2021 with a "deal exit"). See below for more information.

Regardless of a transitional period or not, other international agreements between Norway and the UK, such as the tax treaty, will continue to apply. The main purposes of the tax treaty is to avoid double taxation.

To a large extent, the changes in taxation as a result of Brexit will automatically occur due to the fact that the movement of physical/legal persons, capital and services between Norway and the UK, is no longer subject to tax rules conditional upon EEA status. The potential tax effect will mainly appear in the tax assessment for the 2019 income year, an assessment taking place in 2020.

If the UK and the EU enter into a withdrawal agreement, UK citizens and their family members who have exercised their right of free movement under the EEA Agreement before the end of the transitional period (1 January 2021 or at a later date if the transitional period is extended), retain their right to stay also after the end of the transitional period as if they were EEA citizens. The relationship between civil rights and tax, i.e. which EEA tax rules should be continued and how they are to be continued, must be subject to further considerations. 

If the EU and the UK do not enter into a withdrawal agreement, there will be no transitional period. If the Norwegian parliament consents to a «no-deal agreement» between the EEA/EFTA states and the UK, this agreement will ensure that UK citizens and their family members who have exercised their right of free movement of persons before UK’s exit from the EU will be able to continue to stay in Norway and uphold the rules that apply to these persons today. The same applies to Norwegian citizens in the UK who fulfil the same conditions.

UK citizens and their family members who have not exercised their right to free movement before  the withdrawal date, (whether this date occurs after a transitional period or immediately after a no-deal brexit) will from that date be regarded as third-country nationals for tax purposes . The same applies to Norwegian citizens who do not fulfil the conditions for continued stay in the UK after the above mentioned dates. However, states will be able to make adjustments to their tax rules unilaterally or bilaterally to ensure some of the same rights that follow from today’s rules. The rules described below must therefore be read with this in mind.

We refer you to the website Regjeringen.no where you will find an explanation of how Brexit will affect British citizens staying in Norway.

Persons with limited tax liability in Norway for pensions (withholding tax on pensions) and who are resident in another EEA country, may under certain conditions be entitled to instead be as if they were resident in Norway. In certain cases, this may imply a more favourable taxation than under the withholding tax arrangement.

If the UK leaves the EU without an agreement, persons who are resident in the UK after the exit cannot claim tax treatment as if they were residents. Pensions from Norway will be taxed under the general rules for withholding tax on pensions.

For persons who were resident in the UK at the time of the exit (and who have acquired civil rights), it must be considered further whether they are still ensured the same rights that follow from today’s rules.

Persons with limited tax liability in Norway for pensions (withholding tax on pensions) and who are resident in another EEA country, may under certain conditions be entitled to instead be as if they were resident in Norway. In certain cases, this may imply a more favourable taxation than under the withholding tax arrangement.

If the UK leaves the EU without an agreement, persons who are resident in the UK after the exit cannot claim tax treatment as if they were residents. Pensions from Norway will be taxed under the general rules for withholding tax on pensions.

For persons who were resident in the UK at the time of the exit (and who have acquired civil rights), it must be considered further whether they are still ensured the same rights that follow from today’s rules.

The Tax Act contains rules that can limit deductions for debt and debt interest for a person who owns a residential property or a holiday home abroad, and the income from such property is exempt from taxation in Norway in accordance with the relevant tax treaty. The tax treaty with the UK uses the credit method, which means there should not be any limitation in deductions for debt or debt interest for persons resident in Norway with residential properties or holiday homes in the UK today.

The UK’s exit from the EU does not affect Norway’s tax treaty with the UK and will therefore not lead to any change in the right to deductions in these cases.

Pursuant to the Tax Act, donations to voluntary organisations, etc. resident in Norway or another EEA member state are deductible.

If the UK leaves the EU, it will no longer be possible to claim a deduction for donations given to voluntary organisations, when they are resident in the UK. The same will apply after the end of the transitional period in the case of a withdrawal agreement.

Etter skatteloven gis det fradrag for gaver til frivillige organisasjoner mv. der organisasjonen har sete i Norge eller i en annen EØS-stat. Når Storbritannia trer ut av EU, vil det ikke lenger være mulig å få fradrag for gaver gitt til mottaker som nevnt over, når denne er hjemmehørende i Storbritannia. Det samme vil gjelde etter overgangsperiodens utløp dersom Storbritannia og EU blir enige om en utmeldingsavtale.

Upon emigrating from Norway, exit tax must be assessed for shares, etc. if the latent gains exceed NOK 500,000. The tax payment may be postponed until actual realisation if collateral is pledged for the tax claim. Upon moving to another EEA member state from which Norway may request, pursuant to an agreement, information provided by this state about the taxpayer’s income and wealth, in addition to assistance in tax collection, postponement may be given without a pledge of collateral.

For taxpayers who move to the UK after the UK leaves the EU without a withdrawal agreement, collateral for the tax claim must be pledged upon moving in order to receive a postponement of the tax payment. A taxpayer who has moved to the UK and received a postponement pursuant to this provision before the UK has left the EU, will still have the right to such a postponement. If the taxpayer moves from the UK to a state outside the EEA within five years after moving from Norway, collateral must be pledged in order for a postponement to be given for the tax payment.

Personal taxpayers resident in the EEA may establish a share savings account (ASK) for listed shares and units in mutual funds. The account can be used to invest in listed shares, equity certificates in companies and units in mutual funds resident in EEA. However, shares and equity certificates are allowed to remain in the account even if the company moves outside the EEA.

Gains on sales of shares, equity certificates and units in funds in the account, are not taxable and losses are not tax deductible. Similarly, dividends on shares, equity certificates and units in funds in the account are not taxable. Taxpayers resident within the EEA are not liable to tax in Norway for gains or losses on shares. For account holders who are resident abroad within the EEA, gains on sales of shares, equity certificates and units in funds in the account are treated as deposits in the account. Similarly, losses reduce the deposit.

Consequences for the share savings account holder

In a "no-deal" scenario the UK will no longer be considered as part of the EEA. Therefore, it will not be possible to use the share savings account to invest in stock-exchange listed shares, equity certificates and shares in mutual funds resident in the UK. This will only pertain to new investments. Existing investments in listed companies, etc. resident in the UK may remain in the account.

Furthermore, a "no-deal" scenario entails that personal taxpayers resident in the UK cannot establish a stock savings account. 

There are a number of tax provisions in the corporate area that provide tax benefits if the investments are within the EEA or the company is resident within the EEA. If the EU and the UK enter into a withdrawal agreement, EEA tax rules will be applicable by companies with cross-border transactions between Norway and the UK for the period leading up to 31 December 2020. In case of a “no-deal" situation, we have described below some key areas that may be useful to be aware of.

The effect of a withdrawal without an agreement is that investments between Norway and the UK will no longer benefit from the favourable tax treatment provided for EEA cases. The effect will mainly be seen in the tax assessment for the 2019 income year, an assessment that first occurs in 2020.

Cross border transfer of assets and liabilities are subject to exit taxation. The exit tax liability is due in the exit year.

A temporary payment deferral is granted to taxpayers resident in Norway or another EEA state. One seventh of the liable exit tax must still be paid every income year, starting from and including the exit year. In the event the taxpayer relocates its tax residency outside the EEA, the remaining exit tax liability becomes payable in full. Furthermore, only losses related to an exit to another EEA country are deductible, and tax credits in Norway are only granted for tax on gains to another EEA state. Tax credits are also given in Norwegian exit tax for exit taxation in another country when the asset has previously been taken into the Norwegian taxation area from that state. Such tax credits are only granted when the asset is relocated to another EEA state upon exit from the Norwegian taxation area, and only when the taxpayer either remains liable to tax in Norway or is or becomes resident for tax purposes in another EEA state.

Upon the UK’s withdrawal from the EU, the benefits provided in these provisions for transactions within the EEA area can no longer be claimed for exit taxation involving the UK.

When relocating a company abroad (the Taxation Act section 10-71), the company’s assets will be taxed as if they were realised the day before the company’s tax liability to Norway ceases, or the day before the company is considered resident in another state according to a tax treaty. This does not apply if the company is relocated to another EEA state. In such a case, the rules for assets and obligations having exited the Norwegian taxation area will apply. After the UK’s withdrawal from EU, these provisions can no longer be claimed when relocating a company from Norway to the UK.

Foreign companies resident within the EEA may render and receive group contributions if the company is comparable to a Norwegian company, is tax liable to Norway (through a branch or similar) and the group contribution is considered taxable income in Norway.

After the UK’s withdrawal from the EU, this benefit will be reduced and partially lapse for group contributions involving companies resident in the UK. However, the non-discrimination clauses in the tax treaty will still let Norwegian branches of companies resident in the UK render group contributions to companies resident in Norway. The non-discrimination clauses does however not allow for branches of foreign companies to render group contributions between themselves, nor allow for group contributions from a Norwegian company to a branch of a foreign company.

Since the conditions for group contributions must be met by the end of the income year in which the deductions for group contributions are claimed, the UK’s withdrawal from the EU in 2019 will affect the right to render group contributions with tax effect to British companies from 2019 and onwards.

The tonnage tax regime may, in addition to being applicable for Norwegian companies, also apply to companies resident in another EEA state. If the UK withdraws from the EU without an agreement, companies resident in the UK will in general no longer meet the conditions for entering into or remaining within the Norwegian tonnage tax regime.

In order to qualify for the tonnage tax regime a proportion of the fleet that must be registered in within the EEA. Upon the UK's withdrawal from the EU, vessels registered in the UK will no longer count as part of the EEA registered fleet.

If, upon the UK’s withdrawal, the Commission and the ESA take a clear stand regarding practice of the flag requirement in the state aid guidelines for maritime transport with regards to UK-registered vessels, this will be indicative for how this issue should be solved also in the Norwegian tonnage tax regime.

Under the Norwegian CFC rules, Norwegian participants in a Norwegian controlled company resident in a low tax jurisdiction are taxed for a proportional share of the company’s profits on an ongoing basis, irrespective of whether distributions are made from the company. The CFC rules do not apply to Norwegian owners of a company established in an EEA state if the company is genuinely established and carry out genuine economic activity there.

When the UK withdraws from the EU, companies resident in the UK will be treated in the same way as companies resident outside the EEA with regard to whether the Norwegian CFC rules apply. CFC taxation requires that the UK, for the company in question, is considered as a low tax jurisdiction, and that the income is mainly of a passive nature. The UK will be considered a low tax country if the ordinary income tax on the total profits of the company amounts to less than two thirds of the tax that would have been levied if the company were resident in Norway. Presumably, Norwegian owners of companies resident in the UK should normally not be subject to Norwegian CFC taxation.

Upon cessation of tax liability to Norway (for example when relocating a company abroad), the rules regarding dissolution (liquidation) of companies as set out in section 14-48 of the Taxation Act will become applicable. The provisions are however not applicable when relocating a company within the EEA. If the company has been relocated to the UK before brexit, it must settle its tax depreciation account balance according to the main rule when the UK withdraws from the EU (and therefore no longer is part of the EEA).

Under the provision, an exception from settling the tax depreciation account balance exists in case of certain cross-border mergers and demergers. The exception only applies if one or more of the companies taking part in the cross border merger or demerger, are resident in an EEA state. When the UK withdraws from the EU, British companies will no longer be able to benefit from this rule. Such companies must therefore settle their tax depreciation account balances when entering into a merger or demerger with a Norwegian company.

For Norwegian private and public limited companies etc., share dividends and gains realised on shares, units and financial products with shares as an underlying object, are generally tax exempt according to the Norwegian tax exemption method. Accordingly, losses realised on such shares and units are not tax deductible. Whether or not the tax exemption method will apply, depends amongst other on whether the company in which the investment is made is resident in a low tax country and whether it is resident inside or outside the EEA.

Dividends from Norwegian companies to foreign shareholders are generally withholding tax liable. Such dividends may however qualify for reduced withholding tax under a tax treaty, or it may be exempt from withholding tax under the Norwegian tax exemption method if the recipient company is resident within the EEA.

The UK's withdrawal from the EU will affect both Norwegian companies with shares in British companies and British companies with shares in Norwegian companies, with respect to the applicability of the tax exemption method.

Consequences for Norwegian companies with investments in shares and other company interest in the UK

The tax exemption method applies to legitimate dividends, as well as gains and losses realised on shares, etc. in companies resident in another EEA country, that are comparable to Norwegian companies covered by the tax exemption method. The tax exemption method also applies to gains and losses on shares, etc. in companies resident in a low tax jurisdictions within the EEA when the company is genuinely established and carries out genuine economic activity in that state.

When the company is not considered as genuinely established in the EEA state where it is resident, dividends and gains will be taxable. However, losses on shares, units, etc. in such companies are not deductible.

Dividends and gains on shares, etc. in companies, etc. resident in low tax jurisdictions outside the EEA, are not covered by the tax exemption method. If dividends and gains arise on shares, etc. in companies resident in jurisdictions outside the EEA that are not considered low tax jurisdictions, the tax exemption method will apply only when the taxpayer for a continuous period of two years has owned at least 10 percent of the capital, and have had 10 percent or more of the available votes in the company’s general meeting. Accordingly, losses realised on shares, etc. in companies, etc. resident in jurisdictions outside the EEA that are not low tax jurisdictions, are covered by the tax exemption method if the taxpayer or related parties at any time during the last two years has owned 10 percent or more of the capital, or have had 10 percent or more of the available votes in the company’s general meeting.

In a "no deal" scenario, the UK will no longer be in the EEA and the rules regarding dividend and gains/losses outside the EEA will, as mentioned above, become applicable with effect from the time of withdrawal. Norwegian company investors who own shares, units, etc. in UK companies must therefore ascertain whether dividends received or gains realised are to be considered as stemming from a low tax jurisdiction. This low tax jurisdiction analysis entails a further evaluation of whether the ordinary income tax on the total profit of the British company or entity amounts to less than two thirds of the tax that would have been levied had the company or entity been resident in Norway. In any case, portfolio investments (less than two years/10 percent) in the UK will not be covered by the tax exemption method.

Consequences for British investments in shares and company interests in Norway

Dividends from Norwegian companies to foreign shareholders are generally withholding tax liable at a rate of 25 percent. Such dividends may however qualify for reduced withholding tax under a tax treaty, or may be exempt from withholding tax under the Norwegian tax exemption method, if the recipient company is resident within the EEA.

Since the UK will be considered outside the EEA in a "no deal" scenario, dividends paid to companies resident in the UK will not be exempt from withholding tax under the tax exemption method. The tax treaty between Norway and the UK stipulates a reduced withholding tax rate of 15 percent in most cases. For companies resident in the UK, holding a direct or indirect ownership of at least 10 percent of the capital in the Norwegian company paying the dividend, the withholding tax rate is reduced to zero.

Some specific questions regarding this type of enterprises may arise. Please consult the websites of the Financial Supervisory Authority of Norway (Finanstilsynet) og the Government (Regjeringen) for further information in this regard.

Abolishment of the exception from the duty representative requirement

The UK’s withdrawal will affect British enterprises that carry out vatable activity in Norway without having a place of business here. Generally, such enterprises must be registered in the VAT Register with a representative, but this rule does not apply to an enterprise from an EEA state with which Norway has entered into an agreement regarding exchange of information and assistance for collection of VAT. This applies to all EEA countries. If such an enterprise still chooses to have a representative, the general requirement for joint and several liability from the representative will not apply.

When the UK is no longer a member of the EU, this exception is no longer applicable for British enterprises. They must then appoint a representative with joint and several liability for the VAT along with the British business.

Any benefits related to excise duties may be reviewed regarding whether a measure is in accordance with the EEA rules on state aid. Likewise, the rules on excise duties cannot be drafted in such a way that they interfere with the free movement of people, goods, services or capital.

Generally, the aid schemes in the Excise Duty Regulations will be applicable for all parties, no matter the country of origin. As long as a party fulfils the conditions set in the relevant regulation, the party may be entitled to the duty benefit. The planned withdrawal of the UK from the EU will therefore not affect the British enterprises that carry out activity that is covered by the present aid schemes in the Excise Duty Regulations.

According to the Excise Duty Regulations, there is an exemption for the basic fee on mineral oil for vessels that for business purposes are used in freight and/or passenger transport, and that are registered in Norwegian ship registers or registers of other EEA countries. If British vessels used in freight and/or passenger transport are not registered in one of these registers, the conditions regarding the exemption for the basic fee on mineral oil will not be fulfilled, and the basic fee will accrue.