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If you own shares or equity interests with a total latent gain exceeding NOK 500,000 and plan to move out of Norway, you may become subject to Norway's so-called exit tax. However, even where the latent (unrealized) gain exceeds NOK 500,000, it may be possible to obtain a deferral of payment of the exit tax.
The term latent or unrealized gain refers to the gain that would have arisen had the shares or interests been sold or otherwise realized at the time of emigration. The threshold is NOK 500,000. If the aggregate latent gain is below this amount, the emigration is generally not regarded as tax-motivated, and the exit tax rules do not apply. If the gain exceeds the threshold, the rules become applicable.
Legal starting point
As a general rule under Norwegian domestic tax law, emigration by taxpayers (or the transfer of taxable assets abroad) does not in itself trigger taxation. Consequently, a specific statutory basis is required for the imposition of an exit tax. Such a statutory basis exists for latent gains on shares and equivalent ownership interests.
Section 10-70 of the Norwegian Tax Act – Introduction
Section 10-70 of the Norwegian Tax Act introduces a general exit tax on unrealized gains in shares and equivalent interests. The purpose is to ensure that value appreciation accrued while the taxpayer was resident in Norway remains subject to Norwegian taxation when the taxpayer leaves the country. Under these rules, Norwegian taxpayers who have accumulated but unrealized gains on shares or interests in qualifying entities become taxable on those gains at the time of emigration if they move abroad and subsequently realize the gains.
The rationale for linking taxation to emigration is that gains accrued during Norwegian tax residency should remain taxable in Norway. If taxation were postponed until actual realization, it might be too late, since Norway generally lacks domestic legal authority to tax non-resident (emigrated) individuals on such gains, and tax treaty protections may in many cases prevent Norwegian taxation after change in tax treaty residency status.
Main rule upon emigration: Tax liability arises
For tax purposes, a taxpayer's shares and interests are deemed realized on the day before tax residency in Norway ceases. As a result, tax liability arises before any actual sale takes place. More specifically, Section 10-70(1) of the Tax Act provides:
“Any gain on assets referred to in subsection (2) [shares, ownership interests, etc.] that are owned by the taxpayer at the time Norwegian tax liability ceases pursuant to Section 2-1, third paragraph, or at the time the taxpayer is deemed resident in another state under a tax treaty, shall be taxable as if the share or ownership interest had been realized on the last day prior to that time (...).”
The gain is deemed realized and recognized for tax purposes on that same day. Accordingly, tax liability arises at the time of emigration or change in tax treaty residency status even though the shares or interests may not be sold until a later date. In effect, the legislation creates a deemed or notional realization event upon emigration.
Valuation
The taxable gain and the associated tax are calculated at the time of emigration. Since the shares or interests are not actually sold for consideration, special valuation rules apply. In broad terms, the market value of the shares or interests at the time of emigration serves as the deemed disposal value. A taxable gain arises where the market value at the time of emigration exceeds the acquisition cost, adjusted for any applicable RISK adjustments to the tax basis. Any unused shareholder allowance accumulated up to the deemed realization date is deductible when calculating the gain.
Exceptions
- Gains not exceeding NOK 500,000
As noted above, latent gains on shares and interests that, after offsetting deductible losses, do not exceed NOK 500,000 are not subject to exit taxation under Section 10-70. The rationale is that gains of this magnitude are unlikely to provide sufficient incentive to emigrate for tax reasons.
- Deferral of payment ppon provision of security
A taxpayer may obtain a deferral of payment of the assessed exit tax if adequate security is provided for the tax liability. Where the taxpayer moves to another EEA state, a deferral may be granted without security, provided that Norway, under an international agreement, is entitled to obtain information regarding the taxpayer's income and assets and to receive assistance in the collection of taxes from that state. The deferral is implemented by excluding the assessed exit tax from the tax settlement for the relevant income year.
When the tax becomes payable
The deferred tax becomes payable if the taxpayer disposes of the shares or interests within five years after emigration. The right to defer payment also ceases if the shares or interests are transferred by gift to a person who is not tax resident in Norway.
In addition, regulations issued pursuant to the Tax Act provide that the payment deferral is revoked if the taxpayer fails to submit the required annual information concerning tax residency and confirmation that the shares have not been sold. These disclosures must generally be submitted by 30 April each year. The taxpayer must also report any event triggering taxation within two months of its occurrence.
When the exit tax liability ceases
The obligation to pay exit tax lapses if the taxpayer has not realized the shares or interests within five years after emigration. The reasoning is that, after such a lengthy period, the presumption that the emigration was motivated by tax considerations becomes too weak to justify taxation.
Furthermore, the exit tax liability ceases if the taxpayer once again becomes tax resident in Norway under Norwegian domestic law or an applicable tax treaty. In such circumstances, there is no longer any need for exit taxation, since Norway may tax the taxpayer under its ordinary tax rules or, if relevant, under Section 10-70 should the taxpayer emigrate again in the future.
Prevention of international double taxation
When the shares or interests are eventually sold, the gain may also be taxable in the taxpayer's new country of residence. This may lead to international double taxation if the taxpayer has been assessed exit tax in Norway. To address this issue, the taxpayer is entitled to a credit against Norwegian capital gains tax for any tax paid on the same gain in the country of residence. This mechanism is commonly referred to as a reverse foreign tax credit.
Gifts of shares or interests to a spouse resident abroad
Under Norwegian tax law, a gift is generally not regarded as a realization event. Consequently, the transfer of shares or interests by gift does not ordinarily trigger capital gains taxation for the donor. This principle also applies where the recipient is tax resident in another country.
However, if the recipient spouse is resident abroad, any subsequent sale of the gifted shares will generally fall outside Norwegian tax jurisdiction. For this reason, the exit tax rules apply correspondingly to transfers of shares and interests to a spouse who is tax resident outside Norway. Accordingly, such gifts may trigger exit taxation for the donor. The rationale is to prevent taxpayers from circumventing the exit tax rules in Section 10-70 through intra-family transfers.
Losses
Where a taxpayer emigrates to another EEA state, losses are deductible to the same extent and subject to the same conditions as gains are taxable under Section 10-70. This reflects the principle of symmetry. No deduction is granted for losses that have already been deducted in another country. The loss is determined in the tax assessment for the year of emigration, but the actual utilization of the deduction is deferred until the shares or interests are realized.
