Brexit – tax and VAT implications
The United Kingdom left the European Union with a Withdrawal Agreement on February 1 2020. Consequently, the UK is no longer a party to the EEA Agreement. As Norway is not a member of the EU, Norway is not a party to the withdrawal agreement between the EU and the UK. However, Norway and the other EFTA states (i.e. Iceland and Liechtenstein) has concluded a separate agreement with the UK, which mirrors the EU/UK agreement concerning aspects that are relevant for the cooperation within the EEA.
This agreement includes a transition period that will last until December 31 2020, with the option of an extension. During this transition period, the UK will be treated as if it were a member of the EU and the EEA for tax purposes. This means that the UK's withdrawal from the EU will not have tax related consequences immediately. When the transition period ends, border crossing activities and movements between Norway and the UK will be treated in the same manner as border crossing activities between Norway and third states, i.e. states that are not party to the EEA Agreement. However, tax rules and tax treatment related to current civil rights for UK citizens in Norway will be continued. Which tax rules and taxpayers this applies to, needs to be considered further.
The UK's withdrawal from the EU will not have tax or VAT implications until 2021 at the earliest. When the transition period ends, only tax rules related to the civil rights of UK citizens that have exercised their right to Free Movement before the transition period ends, will be continued. Other tax rules and preferential tax treatment related to the EEA Agreement will no longer apply to UK citizens and companies from January 1 2021, unless the transition period is extended.
Several rules in the Norwegian tax system differentiate between foreign companies resident within the EEA and companies resident outside the EEA. Furthermore, some rules differentiate between individuals resident within the EEA, and individual residents of third countries. These rules and regulations generally bestow a more favourable tax treatment upon companies and individuals resident within the EEA with regard to cross-border transactions and movements, compared to companies and individuals resident outside the EEA. These rules are meant to fulfill Norwegian obligations related to sustaining the single market under the EEA Agreement, as well as ensuring compliance with state aid restrictions.
Because of the UK's withdrawal from the EU and the EEA, British citizens and companies will no longer be entitled to the preferential tax treatment applicable to residents of the EEA. The transition period, however, ensures that this change will not have immediate effect. During this transition period, the UK will be treated as if it were a member of the EU and EEA until December 31 2020, or longer, should the transition period be extended. This means that the UK's withdrawal from the EU will not have any tax or VAT implications until 2021 at the earliest.
Additionally, the UK and the EEA/EFTA States (i.e. Norway, Iceland and Liechtenstein) have concluded an agreement that protects the rights of Norwegian and British citizens that have gained existing rights from the exercise of free movement before the end of the transition period. This agreement has implications for tax rules related to existing civil rights, which means that preferential tax treatment related to such rights, will be continued also after the transition period. Which tax rules and taxpayers this affects, is subject to further consideration in the coming months.
See the drop-down menu below for a more thorough overview of the tax and VAT implications of brexit.
We note that other agreements between Norway and the UK will continue to have effect both during and after the end of the transition period. Norway currently has a tax treaty with the UK. This allocates taxing rights between Norway and the UK, and prevents double taxation for individuals and companies resident in the either state. The treaty is available on the Norwegian Government's websites.
British citizens and their family members, who have exercised their right of free movement of persons under the EEA Agreement before the end of the transition period, will retain their right to stay in Norway, also after the transition period ends. The relationship between civil rights and tax, i.e. which EEA affected tax rules will be continued and how they will be continued, is subject to further consideration at this point.
British citizens and their family members who no do not fulfill the terms for continued stay, will be considered third-country nationals for tax purposes when the transition period ends. The same applies to Norwegian citizens who do not fulfil the terms for continued stay in the UK.
For further information regarding how brexit will affect British citizens living in Norway, see the Norwegian Government's websites.
Employees or self-employed persons who have a limited tax liability to Norway, but who are residents of another EEA state and are in a situation where almost all of their income is liable to tax in Norway, may be entitled to tax deductions in Norway as if they were tax resident in Norway.
British employees and self-employed persons arriving in Norway after the end of the transition period will not be entitled to such deductions unless they become tax residents of Norway.
Individuals who have a limited tax liability in Norway for pensions (i.e. individuals who are liable to Norwegian withholding tax on pensions) and who are resident of another EEA state, may be entitled to be taxed in Norway as if they were residents of Norway if they fulfil certain terms. This may result in a a more favourable taxation than under the withholding tax regime.
For individuals resident in the UK who have acquired civil rights when the transition period ends, it is yet to be considered whether or not they will still be entitled to the same rights as mentioned above.
The Norwegian Tax Act may limit deductions for debt and debt interest for persons owning a residential property or a holiday home abroad, if the income from such property is exempt from taxation in Norway in accordance with the relevant tax treaty. The tax treaty with the UK is based on the credit method. Consequently, there are no limitations 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 withdrawal from the EU does not affect the tax treaty between Norway and the UK. This means that brexit will not lead to any changes in this regard.
Pay-out of life insurance (endowment insurance) from an insurance company resident in the EEA is not considered taxable income pursuant to the Norwegian Tax Act.
When the transition period ends, such payments from insurance companies resident in the UK will be liable to tax for recipients who are residents in Norway.
Donations to voluntary organisations etc. that are resident in Norway or another EEA state are deductible under the Norwegian Tax Act. After the transition period, donations to such organisations resident in the UK will not be deductible in Norway. Organisations resident in the UK who are approved under the deduction scheme will lose its approval when the transition period ends.
Upon emigrating from Norway, exit tax must be assessed for shares etc. if the latent gains exceed NOK 500 000. The payment of the tax may be postponed until actual realisation if collateral is pledged for the tax claim. Upon moving to another EEA member state from which Norway, pursuant to an agreement, may request information provided by this state about the taxpayer's income and wealth and assistance in tax collection, postponement is given without a pledge of collateral.
For taxpayers who move to the UK after the transition period, a collateral for the tax payment must be pledged upon moving in order to recieve a postponement of the tax payment. The Norwegian Tax Administration considers that taxpayers who have moved to the UK and been given a postponement before the end of the transition period, are entitled to a continuation of the postponement when the transition period ends. 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 to retain a continued postponement for the tax payment.
Individual taxpayers resident within the EEA may establish a share savings account (ASK) for listed shares and units in mutual funds. The account may be used to invest in listed shares, equity certificates in companies and units in mutual funds resident in the EEA. However, shares and equity certificates may remain in the account even if the company moves outside the EEA.
Gains from sales of shares, equity certificates and units in funds in the account are not taxable, and losses are non-deductible. Similarly, dividens 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
When the transition period ends, the UK will no longer be considered to be a part of the EEA. It will therefore not be possible to use the share savings account to invest in listed shares, equity certificates and shares in mutual funds resident in the UK. This will only apply to new investments. Existing investments in listed companies etc. resident in the UK, may remain in the account.
Furthermore, individual taxpayers resident in the UK cannot establish a share savings account in Norway after the end of the transition period.
A number of tax provisions applicable to corporations provide tax benefits if the investments are within the EEA or the company is resident within the EEA. Until the end of the transition period, companies are entitled to such tax benefits for border crossing transactions between Norway and the UK.
These tax benefits will no longer be applicable for investments between Norway and the UK when the transition period ends. This will primarily have effect for the income year 2021, for which the tax assessment will happen in 2022.
Cross border transfer of assets and liabilities are subject to exit taxation, see the Norwegian Tax Act section 9-14. The exit tax 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 that the taxpayer relocates its tax residency to a state outside the EEA, the remaining exit tax becomes payable in full. Furthermore, only losses related to an exit to another EEA state 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 state 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, a resident for tax purposes in another EEA state.
When the transition period ends, the benefits provided in the relevant provisions for transactions within the EEA can no longer be claimed for exit taxation involving the UK.
When relocating a company abroad (cf. the Norwegian Tax 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 a resident of another state according to a tax treaty. This does not apply if the company is relocated to another EEA state. If the company is relocated to another EEA state, the exit rules for assets and obligations will apply. When the transition period ends, the beneficial provisions will no longer be applicable 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 liable to tax in Norway (through a branch or similar) and the group contribution is considered taxable income in Norway.
When the transition period ends, this benefit will be reduced and partially lapse for group contributions involving companies resident in the UK. However, the non-discrimination article in the tax treaty will still allow Norwegian branches of companies resident in the UK to render group contributions to companies resident in Norway.
The non-discrimination article does 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 transition period will affect the right to render group contributions with tax effect to British companies from 2021 onwards.
The Norwegian tonnage tax regime may, in addition to being applicable for Norwegian companies, also apply to companies resident in another EEA state. When the transition period ends, companies resident in the UK will no longer meet the criteria 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 within the EEA. When the transition period ends, vessels registered in the UK will no longer count as part of the EEA registered fleet.
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 the company makes actual distributions or not. The CFC rules do not apply to Norwegian owners of a company established in an EEA state if the company is genuinely established and carries out genuine economic activity there.
When the transition period ends, 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 a low tax jurisdiction and that the company's 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 was a tax resident of Norway.
Presumably, Norwegian owners of companies resident in the UK will normally not be subject to Norwegian CFC taxation.
Upon cessation of tax liability to Norway (e.g. when relocating a company abroad), the rules regarding dissolution (liquidation) of companies as set out in section 14-48 of the Norwegian Tax Act apply. These provisions are, however, not applicable when relocating a company within the EEA. If a relocated company later becomes a tax resident of a state outside the EEA, the tax depreciation account balance must ble settled. Thus, if a company is relocated to the UK, the tax depreciation account balance must be settled when the transition period is over.
Under the provision in section 14-48 of the Tax Act, there is an exception from settling the tax depreciation account balance in cases concerning certain cross-border mergers and demergers. This exception only applies if one or more of the companies taking part in the cross-border merger or demerger are residents of an EEA state. When the transition period ends, British companies will no longer be able to benefit from this rule. Such companies must therefore settle their tax depreciation accounts 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. Likewise, 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 a resident of a low tax country and whether it is a resident of a state within or outside the EEA.
Dividends paid from Norwegian companies to foreign shareholders are generally liable to withholding tax. Such dividends may, however, qualify for a reduced withholding tax rate 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.
When the transition period ends, this will affect Norwegian companies with shares in British companies and British companies with shares in Norwegian companies, with regard to the applicability of the tax exemption method.
Consequences for Norwegian companies with investments in shares and other company interests 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 state 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 jurisdiction within the EEA when the company is genuinely established and carries out genuine economic activity in that state.
When the company is not considered 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 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 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.
When the transition period ends, the rules regarding dividends and gains/losses outside the EEA will become applicable. Norwegian company investors owning 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 a resident of 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 paid from Norwegian companies to foreign shareholders are generally liable to a withholding tax rate of 25 percent. Such dividends may however qualify for reduced withholding tax rate under a tax treaty, or may be exempt from withholding tax under the Norwegian tax exemption method, if the recipient company is a resident within the EEA.
The UK will no longer be considered as an EEA state when the transition period ends. Therefore, 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 the Financial Supervisory Authority of Norway and the Government for further information in this regard.
The exception from the requirement for a VAT representative
The UK’s withdrawal will affect British enterprises that carry out vat liable activity in Norway without having a place of business here. Generally, such enterprises must be registered in the Value Added Tax 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 states. If such an enterprise still chooses to have a representative, the general requirement for joint and several liability for the representative will not apply.
From the beginning of next year, entities that are liable to pay value added tax and that have a place of business or domicile in the United Kingdom of Great Britain and Northern Ireland will, as a rule, no longer have the right to register directly in the Value Added Tax Register. This is because the right to register without a representative is limited to EEA entities that are liable to pay value added tax , see section 2-1, subsection 6, of the Value Added Tax Act. After the transition period, which expire at the end of the year, the UK will no longer be considered an EEA state. The transition period’s expiry date follows from section 2 of the Act of 29 March 2019 no. 8 on a transition period upon UK's withdrawal from the European Union.
A new regulation (in Norwegian only) has been adopted to ensure that British VAT payers who are already directly registered may remain directly registered after the turn of the year. The ministry of Finance will also consider legal amendments to ensure that the UK can be treated in the same way as EEA states when it comes to new registrations, even after the transition period has expired.
See the news article from the Norwegian government (in Norwegian only)
Norwegian regulations on tax exemptions and reduced rates for excise duties, generally apply to all undertakings who fulfill the relevant conditions, regardless of the undertakings' place of business. The UK's withdrawal from the EU will therefore not affect British undertakings encompassed by the Excise Duty Regulations' area of application.
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 registered in Norwegian ship registers or registers of other EEA countries. British vessels used in freight and/or passenger transport, that are not registered in one of these registers, will not fulfill the conditions of the exemption, and the obligation to pay the basic fee will arise.