Brexit – tax and VAT implications

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.

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.