Moving abroad is not as straightforward as it seems

It seems that moving abroad is very much in vogue these days. Hardly a week goes by without reading about Norwegians packing their belongings and relocating overseas. Some are undoubtedly attracted by a warmer climate and a lower cost of living. Others are likely motivated, at least in part, by lower taxes.

Once the decision has been made, it may not take long before a person has physically left Norway and settled into a new home abroad. However, leaving Norway for tax purposes is not something that happens with the snap of a finger.

Tax emigration

To achieve tax emigration from Norway, an individual taxpayer must satisfy three cumulative conditions set out in Section 2-1 of the Norwegian Tax Act:

1. The taxpayer must take up permanent residence abroad

The statutory wording refers to taking up “permanent” residence abroad. In practice, this means that the move must be intended to be lasting rather than temporary.

2. Neither the taxpayer nor related persons may have a dwelling at their disposal in Norway

For these purposes, related persons include the taxpayer’s spouse, cohabiting partner, and minor children.

The concept of having a dwelling “at one’s disposal” is broad. It includes directly or indirectly owning, renting, or otherwise having the right to use residential property in Norway. As a practical matter, this generally means that the taxpayer must dispose of any residential property in Norway. Merely renting out the property is usually insufficient, as the taxpayer will normally retain the ability to terminate the lease and regain access to the property.

The Tax Act also contains a broad definition of what constitutes a dwelling. It includes any residential unit with year-round water and sewage connections unless, at the time of emigration, zoning regulations, municipal planning rules, or other public-law restrictions prevent its use as a residence. Any unit that has in fact been used as a residence is also considered a dwelling.

An exception applies to residential units acquired at least five years before emigration that have not been used as a residence by the taxpayer or related persons during that period. Such units are not regarded as dwellings for these purposes. This exception is particularly relevant for holiday homes.

3. The taxpayer may not spend more than 61 days per income year in Norway

All days of physical presence in Norway count, regardless of the purpose of the stay.

Individuals who have been resident in Norway for more than ten years

Individuals who have been resident in Norway for ten years or more before emigrating must satisfy all three conditions for three consecutive income years before they can claim tax emigration. The year of departure does not count. In practice, this means that tax emigration can normally only take effect from 1 January of the fifth year after departure.

Tax emigration does not happen automatically

The reason for using the expression “claim tax emigration” is that, like most things in life, it does not happen automatically. Ordinarily, one would expect a legal consequence to arise automatically once the statutory conditions are met. Accordingly, one might assume that tax emigration takes effect as soon as the relevant requirements are satisfied. The Norwegian Tax Administration has, however, adopted the position that tax emigration must effectively be “applied for.” There may be grounds for questioning the legal basis for this practice. Nevertheless, it has been applied consistently and uniformly for so long that changing it would likely be difficult.

As a result, many individuals may believe—or mistakenly assume—that they have become tax emigrants simply because they have lived abroad for many years and never looked back. Strictly speaking, however, they may still be regarded as tax residents of Norway under domestic law because they never claimed tax emigration when they were entitled to do so. Many are surprised when they discover that they are still considered resident for tax purposes.

In practice, this may not always have significant consequences. For example, where the taxpayer resides in a country with which Norway has concluded a tax treaty and is considered tax resident in that country under the treaty, the issue may be largely academic. The situation may be different, however, where the relevant tax treaty does not regulate wealth tax and the taxpayer is subject to wealth tax, or where the taxpayer resides in a country with which Norway has no tax treaty at all. In such cases, the question of tax emigration under domestic law can be of considerable importance.

For that reason, tax emigration should be claimed as soon as the taxpayer becomes eligible to do so. In practice, the claim is often made in connection with the tax return for the relevant income year, although it is also possible to submit a separate declaration of emigration. The taxpayer must demonstrate that the statutory conditions are satisfied. Ideally, one should also request written confirmation from the local tax office in order to establish a clear record of the emigration and its effective date. It should be noted that this is different from obtaining confirmation from the National Population Register that one has emigrated from Norway.

“Retroactive" tax emigration

Due to limitation periods in the Tax Administration Act, it was previously difficult to obtain confirmation of tax emigration more than three years after the relevant date, and especially more than five years afterwards. However, following relatively recent guidelines issued by the Directorate of Taxes in September 2022, it has become easier to obtain confirmation of tax emigration with retroactive effect, even for earlier periods. This generally presupposes that the emigration does not require substantial amendments to prior years’ tax assessments. Whether this condition is met must be assessed on a case-by-case basis. In many situations, significant amendments will not be necessary, for example because the taxpayer has resided in a treaty country where the tax treaty would in any event have protected the taxpayer from Norwegian taxation.

Consequences of tax emigration

The most obvious consequence of tax emigration is that the taxpayer ceases to be resident in Norway for domestic tax purposes. As a result, the taxpayer’s general tax liability to Norway on worldwide income and assets under Section 2-1 of the Tax Act comes to an end. The taxpayer may nevertheless remain subject to limited tax liability under Section 2-3 of the Tax Act, for example in respect of employment income derived from work performed in Norway or dividends received from a Norwegian company. The common feature of the rules in Section 2-3 is that they apply to income or assets with a Norwegian source.

Exit tax

Another potential consequence of tax emigration is the application of Norway’s exit tax regime under Section 10-70 of the Tax Act. The rules apply to individuals who own shares or equivalent interests with an aggregate unrealised gain exceeding NOK 500,000. If the unrealised gain at the time of emigration is below this threshold, the emigration is not regarded as tax-motivated.

The exit tax is triggered by the taxpayer’s “exit,” whether through tax emigration under domestic law or through a change of tax residence under an applicable tax treaty. The purpose of the exit tax is to tax gains accrued while the taxpayer was connected to Norway before it becomes too late to do so. Once the taxpayer has emigrated, Norway generally lacks jurisdiction to tax the gain under the ordinary rules applicable to disposals.

Similarly, once the taxpayer becomes resident in another treaty state under a tax treaty, it is often too late to tax the gain because taxing rights over capital gains are typically allocated exclusively to the state of residence. In such circumstances, Norway has relinquished its taxing rights under the treaty.

Deferral of payment

It is possible to obtain a deferral of payment of the exit tax if adequate security is provided for the tax liability. This may, for example, take the form of a pledge over the shares that are subject to the exit tax. Within the EEA, payment may generally be deferred without security where Norway has information-exchange arrangements with the other state.

The former five-year rule

Previously, taxpayers could retain their shares or interests for five years after emigrating and then dispose of them without paying either exit tax or capital gains tax, provided that the holdings had been reported annually to the Norwegian tax authorities throughout the five-year period. However, the current Government abolished the so-called “five-year rule” at the end of November 2022. The rules on payment deferral were left unchanged. As a practical consequence, individuals who emigrated on or after 29 November 2022 may remain subject to exit tax indefinitely. Whether this is fully compatible with EEA law and the principles of free movement remains open to debate.

Although the exit tax can be eliminated by returning to Norway, this often provides little practical benefit. Upon returning, Norway will once again have jurisdiction to tax any gain under the ordinary capital gains tax rules.

After tax emigration

Once a taxpayer has emigrated, the rules governing immigration into Norway determine whether tax residence is re-established. Under Section 2-1, a person becomes tax resident in Norway if they are present in the country for more than 183 days during any twelve-month period or more than 270 days during any thirty-six-month period. The reason for the stay is irrelevant, and all days of physical presence count.

In other words, an individual may generally spend up to an average of 90 days per year in Norway without re-establishing tax residence. It is tempting to assume that John Fredriksen keeps a very precise travel calendar whenever his private jet lands at Oslo Airport.